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, 1998
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: $13,935,858
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 31,
1998 was approximately $676,000.
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 No X
--- ---
As of August 31, 1998, there were 1,780,441 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 3
Item 2. Description of Properties 8
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 8
Part II
-------
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 9
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 7. Financial Statements and Supplementary Data 15 &
F1-F19
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 15
Part III
--------
Item 9. Directors, Executive Officers, Promoters and Control Personnel;
Compliance with Section 16(a) of the Exchange Act 16
Item 10. Executive Compensation 17
Item 11. Security Ownership of Certain Beneficial Owners and Management 18
Item 12. Certain Relationships and Related Transactions 19
Item 13. Exhibits, Financial Statement Schedules and Reports on Form 8-K 20
2
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PML, INC.
1998 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.
On December 13, 1996, the name of the operating company was changed from
Prepared Media Laboratory, Inc. to PML Microbiologicals, Inc., and on February
24, 1997 the name of the parent company was changed from Meda, Inc. to PML, Inc.
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 the clinical market (diagnosis of diseases in humans),
to the industrial market (environmental and sterility testing), and to the OEM
market (private label clinical products). 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. The OEM market includes
companies in the medical device industry.
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.
3
<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 one year 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 OEM market, which is a new fast growing market, includes
companies manufacturing medical devices requiring media based suppliers. 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 and OEM market, which are growing at a faster pace than the
clinical market. In Fiscal 1998, the Company's sales in the industrial segment
increased substantially, and the Company is optimistic about further increases
in Fiscal 1999.
Distribution of Products
- ------------------------
To address service, shipping, and shelf life requirements, PML has
established distribution centers in or near the following metropolitan areas of
the United States and Canada: Portland, Oregon; 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
4
<PAGE>
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.
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 70% 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.
5
<PAGE>
In addition to BDMS, there is only one other significant competitor in North
America. Two to three other very small competitors are located in Canada and the
United States. 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. Competition in the OEM market is also very limited due to
the relatively few companies able to produce culture media.
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, 1998 the Company had approximately 160 full time equivalent
employees, compared with approximately 162 at May 31, 1997. This decrease was
due primarily to consolidating three Oregon facilities into one and closing the
Sacramento, California distribution center. These two cost reduction actions
more than offset the additional employees needed to accommodate the company's
increased sales. 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.
6
<PAGE>
Liability Insurance
- -------------------
The Company maintains product liability insurance in the amount of $3
million and will increase this to $11 million in FY 1999. 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 paid a
product liability claim. The Company is currently engaged in discussions with
one purchaser concerning product quality and has notified its product liability
insurance carrier of these discussions.
7
<PAGE>
Item 2. Description of Properties
PML currently operates from five leased locations in two countries. A
sixth lease location in Sacramento, California was closed in February 1998. 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>
1. Wilsonville, Oregon 9,000 34,000 June 2004
2. Mississauga, Ontario 16,000 3,000 November 2000
3. Mississauga, Ontario 4,000 - May 2000
4. Richmond, British Columbia 2,000 3,100 June 2001
5. Providence, Rhode Island - 12,000 April 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 facility produces and distributes 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 arising in the ordinary course of its business. The Company is not aware
of any pending or existing material lawsuits.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its annual meeting on November 6, 1997 at its
Wilsonville, Oregon facility. Four members of the Board of Directors were
elected and Price Waterhouse, LLP was ratified as independent auditors. The
directors elected and the votes cast for all matters are as follows:
Votes For Votes Against Abstain
--------- ------------- -------
Kenneth L. Minton 1,046,455 250 2,875
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
Ratification of auditors 1,261,006 125 0
8
<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, 1998 $1.25000 $0.87500
February, 1998 $2.62500 $1.25000
November, 1997 $2.37500 $1.31250
August, 1997 $1.37500 $0.59375
May, 1997 $0.59375 $0.59375
February, 1997 $0.59375 $0.59375
November, 1996 $0.62500 $0.62500
August, 1996 $0.53125 $0.37500
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%. May
31, 1998 accreted dividends totaled $196,060. See Note 8 of Notes to
Consolidated Financial Statements. Approximately 1,150 record holders of Common
Stock existed as of May 31, 1998.
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 operating
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.
Year 2000 Issue
- ---------------
The Company recognizes the importance to its operations and reporting
systems of Year 2000 issues and is addressing this issue to ensure that the
reliability of its operations as well as the availability and integrity of its
financial systems will not be adversely impacted by Year 2000 computer
technology software failures.
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<PAGE>
In that regard the Company is attempting to identify all internal information
technology ("IT") and non-IT systems which may be affected by the Year 2000
issues as well as trying to assess third party IT and non-IT that the Company
relies upon and the third parties' Year 2000 readiness.
Between September 1996 and March 31, 1998 the Company evaluated,
selected, and appointed a task team to upgrade and install a completely new MIS
system which the vendor represents to be fully Year 2000 compliant. This system
is now operational in all but one of the Company's locations and is expected to
be fully operational throughout the Company by May 31, 1999. This new IT
software package controls major operational systems including purchasing,
scheduling, inventory control, sales and distribution as well as providing the
Company's new financial systems. The financial impact for the new MIS system was
about $350,000 for capital and $70,000 for excess labor and other expenses in
fiscal 1998.
The Company is currently developing a plan to identify Year 2000
readiness issues pertaining to internal and external communication systems and
desk top systems as well as developing a questionnaire to aid in assessing Year
2000 readiness of its third party providers including those third parties who
provide financial, payroll, communications and component services to the
Company. This plan is expected to be ready by December 1998 and the Company
expects to substantially complete its evaluations of these remaining Year 2000
issues by the end of its fiscal 1999 year. The financial impact of future
required system improvements is not anticipated to be material. The Company will
also be working on contingency plans for material IT and third party providers
that the Company relies upon, but at this time it is too soon for the Company to
determine if these contingency plans will be needed.
The above statements contain certain risks and uncertainties. Although
the Company is continuing to thoroughly examine its Year 2000 readiness, there
is no assurance that it can identify all Year 2000 issues. These risks and
uncertainties could include the risk of unidentified bugs in the source code of
packaged or custom software, misrepresentations by third party vendors,
unidentified dependency upon a system that is not Year 2000 ready, unidentified
non-IT systems, or misdiagnosed Year 2000 readiness in current systems.
Results of Operations
- ---------------------
Fiscal 1998 was targeted by the management of the Company as an
"investment year for the future." Management devoted a substantial amount of
time, and of the Company's resources, to updating manufacturing facilities that
were outdated, information systems that would not take the Company into the year
2000, establishing product distribution channels, developing new products, and
determining a new strategic sales and marketing direction.
Most of the Company's resources and earnings this year were used to
launch the Company on its new path of growth and increased profitability. During
the fiscal 1998 year, the Company made over $600,000 in internal investments in
several areas which are expected to substantially improve its long-term growth
and profitability. These investments, which increased both Cost of Goods Sold
(COGS) and Selling, General, and Administrative (SG&A) expenses, have already
started to benefit operational efficiencies, sales growth, and the strategic
re-direction of the Company. Management anticipates that many of these increases
will not recur in future periods, resulting in reduced expense levels in the
future. In addition, over $60,000 in Canadian exchange loss was incurred which
may or may not be incurred in the future.
Some of the more significant investments are summarized below:
Year 2000 Information Systems - A new fully integrated computer
information system was installed
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<PAGE>
during the year and launched in April 1998. While this does not resolve all of
the Company's Year 2000 issues, it is expected to eliminate most of them The
cost to this year's operations, due mainly to excess labor expenses, is
estimated at $70,000.
Oregon Facility Consolidation - During the first quarter of fiscal
1998, the Company successfully completed a major consolidation of its three
Portland, Oregon manufacturing, distribution, and headquarter facilities into
one combined state-of-the-art corporate headquarters, distribution, and
manufacturing facility in Wilsonville, Oregon. This new facility has more square
footage, two and one-half times the manufacturing capacity, and costs less per
month to operate than the old facilities. The "one time" cost to this year's
operations is estimated at more than $100,000.
Vancouver, B.C. Manufacturing Closure - Because of the expanded
manufacturing capacity in the new Oregon facility, the need for the Vancouver
manufacturing facility was no longer required. All costs associated with the
July 1998 planned closure were accrued into fiscal 1998. The cost to this year's
operations was approximately $30,000.
New Product Launch - Several new products and OEM prototype
development, validation, and set-up costs were incurred this fiscal year.
Management anticipates significant future revenue from these products. The cost
incurred in this year's operations is estimated at nearly $200,000.
Sales and Marketing Support - Substantial investments were made during
fiscal 1998 to turn around the multi-year sales decline that the Company has
been incurring for the past three years. A strong push to develop new
distribution channels, new marketing material, and a totally new strategic sales
direction was accomplished. The estimated cost for all these efforts is
estimated at nearly $160,000.
Employment Lawsuit - The Company vigorously defended itself against a
lawsuit brought by a former employee alleging several employment violations. The
Company was successful in having all counts dismissed. The cost of defending
this lawsuit was approximately $40,000.
Canadian Exchange Loss - The Company has significant Canadian
operations that have been negatively affected by the decline in the US/Canadian
exchange rate. The effect on this fiscal year amounted to a sales decrease in US
dollars of about $200,000 and exchange loss of more than $61,000.
It is management's opinion that the significant investments outlined
above have positioned the Company for the stable, profitable path on which the
Company has now embarked.
The Company had its third successive profitable year in fiscal 1998,
earning net income of $38,930 but a ($0.01) per share basic loss for the year
after accretion of preferred stock dividends, compared with a net income of
$669,371 or $0.31 per share basic earnings the prior year. However, net sales
improved to $13,935,858 in fiscal 1998 which represents a 4.6% increase over net
sales of $13,319,120 for fiscal 1997. Gross profit decreased to 38.3% of sales
down from 39.1% in the prior year. This decrease was due mainly to expenses
associated with combining three Oregon locations into one new facility at the
beginning of fiscal 1998. Operating ( selling, general and administrative)
expenses increase to 35.3% of sales in 1998 compared to 33.5% in 1997. The
increase was due mainly to wage and salary increases and higher depreciation
from leasehold improvements and other capital investments.
11
<PAGE>
The following table presents the percentage relationship that certain
items in the Company's Consolidated Statements of Operations bear to sales for
the period indicated.
Percent of Sales
Year Ended May 31,
----------------------
1998 1997
----- -----
Net Sales 100.0% 100.0%
Cost of Goods Sold 61.7 60.9
------ ------
Gross Profit 38.3 39.1
Selling, general and administrative expenses 35.3 33.5
------ ------
Operating Income 3.0 5.6
Other expense 2.4 2.2
------ ------
Income before income taxes 0.6 3.4
Income tax expense (benefit) 0.3 (1.6)
------ ------
Net income 0.3% 5.0%
====== ======
12
<PAGE>
Year Ended May 31, 1998 compared With Year Ended May 31, 1997
- -------------------------------------------------------------
Sales in fiscal 1998 totalled $13.9 million, an increase of $617,000 or
4.6% year-over-year. This increase was mainly in the industrial sector and was
due primarily to the full year impact of the Company's distribution agreement
with VWR.
Gross profit decreased to 38.3% of sales down from 39.1% in the prior
year. The decrease in fiscal 1998 was mainly due to expenses at the beginning of
the fiscal year associated with combining three Oregon facilities into one new
Oregon facility and expenses associated with new product launch. Management
believes that there have been no other changes in its sales or operations that
would materially affect gross profit.
Operating (selling, general and administrative) expenses increased to
35.3% of sales in 1998 compared to 33.5% in 1997. The increase was due mainly to
wage and salary increases, marketing investments, MIS new system expenses, and
higher depreciation from leasehold improvements and other capital investments.
QUARTERLY FINANCIAL INFORMATION (Unaudited)
- -------------------------------------------
The following is a summary of unaudited operating results by quarter
for the fiscal years ended May 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Total
<S> <C> <C> <C> <C> <C>
Net sales $3,430,884 $3,534,612 $3,472,101 $3,498,261 $13,935,858
Gross profit 1,358,058 1,315,353 1,379,064 1,283,013 5,335,488
Net income (loss) 32,708 (3,101) 24,043 (14,720) 38,930
Basic earnings (loss) per share 0.01 (0.01) 0.01 (0.01) (0.01)
Diluted earnings (loss) per share* 0.01 (0.01) 0.01 (0.01) (0.01)
1997 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Total
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
Basic earnings per share 0.00 0.05 0.04 0.22 0.31
Diluted earnings per share* 0.00 0.05 0.04 0.20 0.30
</TABLE>
* Where the effect of the diluted earnings (loss) per share calculation would
have been anti-dilutive, the diluted earnings (loss) per share have been
restated to be the same as the basic earnings (loss) per share.
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, 1998, the Company had negative working capital of approximately $114,000
compared with positive working capital of about $99,000 at May 31, 1997. Much of
the decrease in the current year was due to the internal investments previously
discussed. In addition, fiscal 1997 was favorably impacted by eliminating the
Company's deferred tax valuation reserve which increased current assets last
year by $220,000 partially offset by an increase in the Company's bank line of
credit of
13
<PAGE>
about $140,000. The ratio of current assets to current liabilities was .98 at
May 31, 1998 compared to 1.03 at May 31, 1997. Quick liquidity (current assets
less inventories to current liabilities) was .57 at May 31, 1998 and .62 at May
31, 1997. The twelve-month average collection period for trade receivables was
52.1 days at May 31, 1998 compared with 49.4 days at May 31, 1997.
Net cash used by operating activities was $164,898 in fiscal 1998
compared with $404,915 provided by operations in fiscal 1997. The negative cash
this year was mainly from building inventory to support anticipated sales
growth. Net cash used in investing activities was $374,629 in fiscal 1998
compared with $637,316 used by the Company in investing activities in fiscal
1997. The Company spent $414,158 on the purchase of plant, property and
equipment during fiscal 1998, compared with $659,982 in fiscal 1997. Financing
activities provided cash of $628,622, primarily from an increase in the bank
line of credit and a long term lease on the Company's new MIS reporting system,
compared with $296,924 provided by the bank line of credit and long term bank
loans from the Company's new lender in fiscal 1997.
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 in future 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 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 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 2.0%
and will decrease next 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.
14
<PAGE>
The Company's total debt structure at May 31, 1998 was as follows:
<TABLE>
<CAPTION>
Long-Term Current-Portion
-------------- -------------
<S> <C> <C>
Revolving credit at prime plus 2.0%, due November 30, 2000 $ 0 $ 1,987,548
Note payable at prime plus 2.0%, due November 30, 2000 158,314 100,008
Note payable at prime plus 1.25%, due November 1998 0 6,383
Note payable at 10%, due January 1999 0 10,000
Note payable at prime plus 1%, due December 1999 35,821 11,679
Note payable at 8%, due May 2000 27,873 25,737
Capital Lease obligations, due January 2001 122,197 90,731
Note payable at 6%, due May 2005 60,000 10,000
Note payable at 12%, due April 2000 64,770 17,498
Trade A/P converted to notes payable at 6%, due February 2001 368,397 140,220
-------------- -------------
Total long debt $ 837,372 $ 2,399,804
Total Notes payable to related parties 0 247,551
-------------- -------------
Total long and short term debt $ 837,372 $ 2,647,355
============== =============
</TABLE>
Item 7. Financial Statements and Supplementary Data
The information required by this item is included on pages F-1 to F-19
of this report.
Item 8. Changes in and Disagreements with Accountants on Accounting Disclosure
PML's independent accountants, PricewaterhouseCoopers LLP, (formerly
Price Waterhouse, LLP) were engaged on May 21, 1996 and have been re-engaged for
each year since that date. There have been no disagreements with the accountants
on any matter of accounting principles or practices, financial statement
disclosures, or auditing scope or procedures.
15
<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 1998
Kenneth L. Minton President and
Chief Executive Officer
Director 1998
James N. Weider Chief Financial Officer,
Vice President-Finance,
Secretary, Treasurer N/A
Douglas C. Johnson Director 1998
Craig S. Montgomery Director 1998
A. Ron Torland, age 51, 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 48, 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 55, 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 42, 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. four years ago after nine years in Europe.
16
<PAGE>
Craig S. Montgomery, Ph.D., 44, 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, 1998 and 1997, who
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 1998 150,026 None None
1997 150,023 66,389 None
Woody Streb, VP Marketing 1998 103,025 8,000 None
1997 92,447 25,000 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.
17
<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, 1998:
Amount and
Name and Address Nature of Percent
Title of of Beneficial Beneficial of
Class Owner Ownership Class
- ------------- ----------------------------- ------------- -------
Common Shares A. Ron Torland 157,381 (1) 8.8%
10595 SW Kiowa Street
Tualatin, OR 97062
Common Shares Arthur N. Torland 146,392 8.2%
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 240,832 (2) 13.5%
8728 SW Pamlico Court
Tualatin, OR 97062
Common Shares Craig S. Montgomery 141,243 (3) 7.9%
12600 SE Rachella Court
Boring, OR 97009
Common Shares Marcia & Stan Drake 95,243 5.3%
28890 S. Beavercreek Rd.
Mulino, OR 97042
Common Shares Mary Lou Ham 141,243 (4) 7.9%
3363-B Blaine Rd.
Moscow, ID 83843
- --------
1 Includes 1,000 shares owned by Janice Torland, Ron Torland's wife. Also
includes 23,500 shares owned by Kris Torland, Ron Torland's daughter. Kris
Torland lives at home but is an adult and Ron Torland disclaims any beneficial
interest in these shares.
2 Includes 70,743 shares owned by Joanne Johnson, Doug Johnson's wife. Includes
70,500 shares owned by the Johnson children.
3 Includes 70,500 shares owned by the Montgomery children.
4 Includes 70,500 owned by the three Ham children. However, one of the Ham
children is an adult who owns 23,500 of these 70,500 shares and Mary Lou Ham
disclaims any beneficial interest in these shares.
18
<PAGE>
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
The directors and officers of the Company, as a group, own 539,456
common shares, representing 30.3% 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.
Itwm 12. Certain Relationships and Related Transactions
The Company currently leases equipment and formerly leased laboratories
and 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 three operating leases. Total rental expense
incurred under these four operating leases was approximately $80,500 and
$150,000 in fiscal 1998 and 1997, 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 $11,403 were incurred in fiscal 1998 and $28,855 in fiscal 1997.
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. In fiscal 1996 this group of shareholders paid off a small group of
the Company's Accounts Payable vendors who would not accept the Company's offer
to exchange these liabilities for five year notes. Instead the Company issued
these notes to this group of shareholders and the notes now have a balance of
$71,212 at May 31, 1998.
19
<PAGE>
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. Employment Agreement with Kenneth L. Minton
* c. Incentive Plan for VP Sales/Marketing
d. 1994 Stock Option Plan for Non-employee Directors.
e. 1994 Stock Option Plan
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)
23 * Consent of independent accountants
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.
- -------------------------
None.
20
<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 Wilsonville, State of Oregon, on
September 4, 1998.
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 September 4, 1998, 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
21
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of PML, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of cash flows and of changes in
stockholders' equity present fairly, in all material respects, the financial
position of PML, Inc. (formerly MEDA, Inc.) and its subsidiary at May 31, 1998
and 1997, 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 audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audits 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 audits provide a reasonable basis for the opinion expressed
above.
/s/PricewaterhouseCoopers LLP
- -----------------------------
PRICEWATERHOUSECOOPERS LLP
Portland, Oregon
August 21, 1998
F-1
<PAGE>
<TABLE>
<CAPTION>
PML, INC.
CONSOLIDATED BALANCE SHEETS
May 31, May 31,
Assets 1998 1997
---------------- ----------------
<S> <C> <C>
Current Assets:
Cash $ 163,505 $ 74,410
Trade accounts receivable, less allowance for doubtful 2,145,257 1,773,446
accounts of $30,000 and $81,609
Inventories 1,916,818 1,460,064
Deferred income taxes 276,604 318,854
Prepaid expenses and other current assets 113,931 70,669
---------------- ----------------
Total Current Assets 4,616,115 3,697,443
---------------- ----------------
Property, plant and equipment - net 1,754,993 1,717,951
Intangible assets - net 20,928 14,990
Other assets 126,453 133,365
---------------- ----------------
Total Assets $ 6,518,489 $ 5,563,749
================ ================
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 1,505,707 $ 1,054,462
Accrued salaries and wages 256,027 375,249
Accounts payable - related parties - 2,174
Other accrued liabilities 321,415 364,076
Notes payable - related parties 247,551 247,551
Bank line of credit 1,987,548 1,248,928
Current portion capital lease obligations 90,731 40,143
Current portion of borrowings - related parties 73,507 69,073
Current portion of borrowings 248,018 196,574
---------------- ----------------
Total Current Liabilities 4,730,504 3,598,230
---------------- ----------------
Capital lease obligations, less current portion 122,197 40,246
Borrowings - related parties less current portion 115,197 164,958
Borrowings, less current portion 599,978 850,507
---------------- ----------------
Total Borrowings. less current portion 837,372 1,055,711
---------------- ----------------
Commitments and contingencies - -
---------------- ----------------
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 691,060 641,561
Common stock, $.01 par value; authorized 2,500,000 shares,
issued and outstanding 1,780,441 and 1,776,816 shares respectively 17,804 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 146,540 144,701
Retained Earnings 93,093 103,662
---------------- ----------------
Total Stockholders' Equity 950,613 909,808
---------------- ----------------
Total Liabilities and Stockholders' Equity $ 6,518,489 $ 5,563,749
================ ================
</TABLE>
The accompanying notes are an integral part of these statements.
F - 2
<PAGE>
PML, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Years Ended
May 31,
1998 1997
---------------------------------
Net sales $ 13,935,858 $ 13,319,120
Cost of goods sold 8,600,370 8,110,381
--------------- --------------
Gross profit 5,335,488 5,208,739
Operating expenses 4,914,652 4,453,954
--------------- --------------
Operating income 420,836 754,785
Other expense:
Interest expense 334,299 282,016
Other 586 13,612
--------------- --------------
Total other expense 334,885 295,628
--------------- --------------
Income before income taxes 85,951 459,157
Income tax expense (benefit) 47,021 (210,214)
--------------- --------------
Net income $ 38,930 $ 669,371
=============== ==============
Basic (loss) income per share $ (0.01) $ 0.31
=============== ==============
Diluted (loss) income per share $ (0.01) $ 0.30
=============== ==============
The accompanying notes are an integral part of these statements.
F - 3
<PAGE>
<TABLE>
<CAPTION>
PML, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Class A Class B Retained
Convertible Common Common Additional Earnings
Preferred Shares Shares Shares Paid-in (Accumulated
----------------- --------------------- --------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT Capital Deficit) Total
------ ------ ------ ------ ------ ------ --------- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, May 31, 1996 4,950 $ 592,974 1,776,816 $ 17,768 211,551 $ 2,116 $ 144,701 $ 517,122) $ 240,437
Preferred Stock dividends accreted 48,587 - - - (48,587) -
Net income - - - - 669,371 669,371
-----------------------------------------------------------------------------------------------
Balance, May 31, 1997 4,950 $ 641,561 1,776,816 $ 17,768 211,551 $ 2,116 $ 144,701 $ 103,662 $ 909,808
===============================================================================================
Balance, May 31, 1997 4,950 $ 641,561 1,776,816 $ 17,768 211,551 $ 2,116 $ 144,701 $ 103,662 $ 909,808
Preferred Stock dividends accreted 49,499 - - - (49,499) -
Common Stock returned and canceled - (125) (1) - 1 - -
Stock options exercised - 3,750 37 - 1,838 - 1,875
Net income - - - - 38,930 38,930
-----------------------------------------------------------------------------------------------
Balance, May 31, 1998 4,950 $ 691,060 1,780,441 $ 17,804 211,551 $ 2,116 $ 146,540 $ 93,093 $ 950,613
===============================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
F - 4
<PAGE>
<TABLE>
<CAPTION>
PML, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Years Ended
May 31,
1998 1997
---------------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 38,930 $ 669,371
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Depreciation and amortization 361,247 279,275
(Gain) loss on sale of equipment (19,297) 3,449
Changes in:
Accounts receivable (371,811) (121,528)
Inventories (456,754) (37,315)
Deferred income taxes 42,250 (220,854)
Other assets (46,650) (97,202)
Accounts payable and accrued liabilities 287,187 (70,281)
-------------------- ---------------------
Total adjustments (203,828) (264,456)
-------------------- ---------------------
Net cash (used in) provided by operating activities (164,898) 404,915
Cash Flows from Investing Activities:
Proceeds from sale of assets 39,529 22,666
Purchase of property, plant and equipment (414,158) (659,982)
-------------------- ---------------------
Net cash used in investing activities (374,629) (637,316)
Cash Flows from Financing Activities:
Net proceeds of bank credit line 738,620 142,167
Proceeds from issuance of notes payable - related parties - 169,596
Repayment of notes payable - related parties - (108,453)
Proceeds from issuance of capital lease obligations 220,000 -
Repayment of capital lease obligations (87,461) (54,921)
Proceeds from issuance of long-term debt - 501,120
Repayment of long-term debt (244,412) (352,585)
Proceeds from issuance of common stock 1,875 -
-------------------- ---------------------
Net cash provided by financing activities 628,622 296,924
-------------------- ---------------------
Increase in cash 89,095 64,523
Cash at beginning of period 74,410 9,887
-------------------- ---------------------
Cash at end of period $ 163,505 $ 74,410
==================== =====================
Supplemental Disclosures:
Interest paid $ 342,631 $ 264,776
Income tax paid 10,117 5,503
Non Cash Items:
Preferred stock dividends accreted 49,499 48,587
Accounts payable exchanged for long-term debt and notes payable - 5,981
Common Stock returned and canceled 1 -
</TABLE>
The accompanying notes are an integral part of these statements.
F - 5
<PAGE>
PML, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
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, costs in excess of fair value of assets acquired, and
patents. 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-
F-6
<PAGE>
line method over five years. Both the covenant not to compete and
customer lists are now fully amortized. Accumulated amortization at May
31, 1998 and 1997, was $244,862 and $240,499, respectively.
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 $4,819 of profit sharing expense in fiscal 1998 and a
profit sharing expense in fiscal 1997 of $4,971.
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. See Note 12.
Net Income (Loss) Per Common Share - In February 1997, the Financial
Accounting Standards Board issued SFAS No. 128 "Earnings Per Share." In
accordance with this pronouncement, the Company adopted the new standard
for periods ended after December 15, 1997 and restated previous periods'
earnings per share. The table showing the effect of this standard on the
reported earnings per share is displayed in Note 13.
Fair Value of 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, 1998.
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.
New Accounting Pronouncements:- Between June 1997 and June 1998, the FASB
issued three pronouncements. Statements of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income," (FAS 130), Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information," (FAS 131), and Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," (FAS 133), which will be effective
in future reporting periods. Management has evaluated the provisions of
these pronouncements and expects that their adoption will have no effect
on results of operations or the financial position of the Company.
F-7
<PAGE>
Concentration of Credit Risk:- Financial instruments that potentially
subject the Company to concentration of credit risk consist primarily of
trade receivables. The Company sells to both clinical and industrial
customers who traditionally pay in the 60 to 90 day range. However, this
customer base is very stable and the Company has experienced a very low
level of uncollectible accounts in the past. Concentration of credit risk
with respect to trade receivables is limited because a relatively large
number of customers are spread throughout the United States and Canada.
The Company controls credit risk through credit approvals, credit limits,
and monitoring procedures. The Company performs credit evaluations for
all new customers and requires advance payments if deemed necessary.
Reclassifications - Certain prior year amounts have been reclassified to
conform to the current year presentation. Such reclassifications did not
have any effect on previously reported net income or stockholder's
equity.
3. INVENTORIES
Inventories consisted of the following:
May 31,
-----------------------------
1998 1997
Raw materials $ 982,159 $ 756,388
Work-in-process 31,013 4,583
Finished goods 903,646 699,093
------------ ------------
Total inventories $ 1,916,818 $ 1,460,064
============ ============
4. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consisted of the following:
May 31,
-----------------------------
1998 1997
Prepaid expenses and deposits $ 109,363 $ 70,622
Other receivables 4,568 47
------------ ------------
Total prepaid expenses and other
current assets $ 113,931 $ 70,669
============ ============
F-8
<PAGE>
5. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment consisted of the following:
<TABLE>
<CAPTION>
May 31,
-----------------------------
1998 1997
<S> <C> <C>
Manufacturing equipment $ 2,549,702 $ 2,409,482
Office furniture and equipment 1,189,254 1,049,809
Service vehicles 19,756 57,522
Leasehold improvements 738,464 660,581
----------- -------------
Subtotal 4,497,176 4,177,394
Less accumulated depreciation and amortization (2,742,183) (2,459,443)
----------- -----------
Property, plant, and equipment - net $ 1,754,993 $ 1,717,951
=========== ===========
</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 both May 31, 1998 and 1997) totaling $247,551
at both May 31, 1998 and 1997.
These related party notes are due upon demand based upon the original
promissory notes, and are therefore classified within current
liabilities. However, the Company does not anticipate paying these notes
in fiscal 1999 as they are subordinated to the debt of the Company's
primary lender.
7. BORROWINGS
The Company has a $2,500,000 revolving line of credit with its primary
lender which is due November 20, 2000. The line is at prime rate plus
2.0% or 10.5% at May 31, 1998 and is collateralized by accounts
receivable and inventory. The line is treated as current because we pay
down and borrow against it almost on a daily basis. The amount borrowed
was $1,987,548 and $1,248,948 at May 31, 1998 and 1997, respectively.
F-9
<PAGE>
<TABLE>
<CAPTION>
Borrowings consisted of the following:
May 31,
---------------------------------
1998 1997
<S> <C> <C>
Norwest Business Credit, Inc.:
Note payable through November 2000 in monthly installments of
$8,334 plus interest of prime plus 2.0% (10.5% at May 31,
1998) and 2.5% (11% at May 31, 1997) collateralized
by substantially all of the Company's equipment. 258,322 358,330
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. 82,268 97,798
Les Leno:
Note payable through May 2005 in yearly principal installments of
$10,000, interest at 6% related to
termination settlement with former president. 70,000 80,000
Various Vendors:
Unsecured notes payable with 6% interest
due in installments through February 2001. 437,406 510,953
------- -------
847,996 1,047,081
Less current portion of borrowings 248,018 196,574
------- -------
Total long term borrowings, less current portion 599,978 850,507
======= =======
Borrowings - related parties consisted of the following:
Various - Related parties:
Unsecured notes payable with 6% interest
due in installments through February 2001. 71,211 82,788
Ethel Wildt:
Unsecured note payable with interest at prime plus 1% (9.5% at May
31, 1998) due November 1998
to related party. 6,383 18,277
Mary Brown:
Unsecured note due in installments of $2,425, including
interest at 8% through May 2000 related to repurchase 53,610 75,466
of common stock.
Ronald Torland:
Unsecured demand note with interest at 10% due
January 1999 to a related party. 10,000 10,000
Ronald Torland:
Unsecured note payable with interest at prime plus 1% (9.5% at May
31, 1998) due December 1999 to a
related party. 47,500 47,500
------- -------
188,704 234,031
Less current portion of borrowings - related parties 73,507 69,073
------- -------
Total long-term borrowings-related parties, less current portion $ 115,197 $ 164,958
========= =========
</TABLE>
F-10
<PAGE>
Aggregate maturities of borrowings for the years ending subsequent to May
31, 1998 are as follows:
1999 $ 2,309,073
2000 419,061
2001 244,955
2002 21,159
2003 10,000
Thereafter 20,000
Total $ 3,024,248
===========
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 and net income. 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
Class A convertible 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 Common Shares at a
rate of one Common Share for each $2.80 of preferred share stated value.
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 thereof
available for distribution to stockholders of $100 per share plus all
accrued and
F-11
<PAGE>
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
is 10 years or less as determined by the Plan administrator. Options
granted under the Plans generally vest over four to five years beginning
one year after the date of grant, and expire ten years or less after the
date of the grant. During fiscal 1998 and 1997, the Company granted
80,000 and 70,000 options, respectively, expiring within ten years or
less, depending on the specific agreements, at option prices of $0.3125
to $0.625 per share . Only 3,750 of all options granted to date have been
exercised.
A summary of the status of the options granted under the Plans at May 31,
1998 and 1997, together with changes during the periods then ended, are
represented below. Options exercisable at May 31, 1998 and 1997 were
173,179 and 161,180, respectively.
F-12
<PAGE>
<TABLE>
<CAPTION>
Weighted Average
Options Exercise Price
------------- ----------------
<S> <C> <C>
Outstanding at May 31, 1996 370,000 0.68
Options granted at market price 70,000 0.49
Options exercised - -
Options canceled or expired (89,286) 0.99
------------- -------------
Outstanding at May 31, 1997 350,714 0.62
Options granted at market price 80,000 0.62
Options exercised (3,750) 0.50
Options canceled or expired (42,857) 1.03
------------- -------------
Outstanding at May 31, 1998 384,107 0.58
</TABLE>
The Company applies APB Opinion 25 and related interpretations in
accounting for the Option Plans. Accordingly, no significant compensation
cost has been recognized in the financial statements 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:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
(in thousands)
<S> <C> <C>
Net income, as reported $38,930 $669,371
Net income, pro forma $2,067 $643,265
Basic earnings (loss) per share, as reported $(0.01) $0.31
Diluted earnings (loss) per share, as reported $(0.01) $0.30
Basic earnings (loss) per share, pro forma $(0.02) $0.30
Diluted earnings (loss) per share, pro forma $(0.02) $0.29
</TABLE>
The effects of applying SFAS 123 to pro forma disclosures for 1998 and
1997 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 1998 and 1997: expected
volatility of 144% and 114%, respectively; expected dividend yield of 0%;
risk-free rate of return of 5.6%; and expected lives of five years.
Total fair value of options granted was computed to be $45,301 and
$32,317 for the years ended May 31, 1998 and 1997, respectively.
F-13
<PAGE>
The following table summarizes information about options outstanding at
May 31, 1998.
Weighted Average
Exercise Number Weighted Remaining
Price Range of Shares Average Price Contractual Life
$0.3125-$0.625 359,107 $0.49 2.95
$1.50 25,000 $1.50 6.32
Stock Bonus - No stock bonuses were accrued or paid in the fiscal years
ended May 31, 1998 or May 31, 1997.
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 $593,786 and
$578,101 in fiscal 1998 and 1997 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, 1998 are as follows:
Years Ending Capital Operating
May 31, Leases Leases
1999 $ 110,460 $ 487,380
2000 81,358 370,770
2001 55,471 336,503
2002 - 278,656
2003 - 271,080
Thereafter - 22,590
----------- -----------
Total 247,289 $ 1,766,979
===========
Less amount representing interest 34,361
-----------
Present value of capital lease obligations 212,928
Less current portion 90,731
-----------
Long-term portion $ 122,197
===========
F-14
<PAGE>
10. INCOME TAXES
Deferred income taxes are provided for temporary differences between the
financial reporting bases and the tax bases 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,
------------------------------
1998 1997
Federal statutory expense at 34% $ 29,223 $ 156,114
Tax effect of:
Change in valuation allowance - (414,636)
Nondeductible permanent differences 12,194 16,547
State income taxes and other, net 5,604 31,761
------------- -------------
Total $ 47,021 $ (210,214)
============= =============
The components of the Company's income tax expense (benefit) are as
follows:
Years Ended May 31,
------------------------------
1998 1997
Current $ 4,771 $ 10,640
Deferred 42,250 (220,854)
------------- -------------
Total $ 47,021 $ (210,214)
============= =============
The domestic and foreign components of income (loss) before income taxes
were as follows:
Years Ended May 31,
------------------------------
1998 1997
Domestic $ (152,602) $ 87,612
Foreign 238,553 371,545
------------- -------------
Income before income
taxes $ 85,951 $ 459,157
============= =============
F-15
<PAGE>
At May 31, 1998 and 1997, the significant components of the Company's
deferred tax assets and liabilities are as follows:
1998 1997
Deferred tax assets:
Vacation accrual $ 76,944 $ 70,988
Allowance for doubtful accounts 11,580 31,502
Net operating loss carryforwards 266,189 303,485
Other 39,175 18,836
------------- -------------
Total deferred tax assets 393,888 424,811
------------- -------------
Deferred tax liabilities:
Excess tax depreciation (117,284) (105,957)
------------- -------------
Net deferred tax asset $ 276,604 $ 318,854
============= =============
The Company files US and Canadian tax returns on the results of its
operations conducted in each country. At May 31, 1998, the Company has
available approximately $677,246 of unused operating loss carryforwards,
to offset domestic taxable income, which expire in 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 seven years from the original date, the
Company manufactures and markets the products developed by DDI and paid a
royalty of $.50 per unit through May 31, 1997. Effective June 1, 1997,
royalties range from $.15 to $.35 per unit until $500,000 has been paid,
and then will be $.00 to $.15 per unit for the remaining life of the
agreement. Total royalties of $11,403 and $28,855 were incurred in fiscal
1998 and 1997, respectively.
The Company also has related party debt which is separately disclosed in
the balance sheet and in Notes 6 and 7. In addition to the specific notes
identified by related party name, the Company has $71,211 of notes
payable with a group of shareholders. When the Company had a cash
shortage in fiscal 1996, a group of shareholders bought out some accounts
payable liabilities for the Company and then accepted five year notes at
6% interest due in installments through February 2001.
F-16
<PAGE>
The Company leases laboratories, office facilities and equipment from
stockholders under three operating leases. The monthly obligations under
the leases were $5,000 per month on a month-to-month basis which was
discontinued in June 1997, $5,500 per month, expiring May 31, 1999; and
$1,000 per month expiring May 31, 2000.
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 in
1999, the Company may renew the lease at $5,500 per month for 12 months
or purchase the equipment at its fair market value. DDI is owned 51% by
shareholder A. Ron Torland and 49% by shareholder Arthur N. Torland.
The Company's formerly 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 paid rent in 1997 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 $80,500 and
$150,000 in fiscal 1998 and 1997 respectively.
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 1998 and 1997.
1998 1997
Net sales:
United States $ 8,223,118 $ 7,867,023
Canada 5,712,740 5,452,097
------------- -------------
Total net sales $ 13,935,858 $ 13,319,120
============= =============
Operating income:
United States $ 74,073 $ 271,526
Canada 346,763 483,259
------------- -------------
Total operating income $ 420,836 $ 754,785
=============== =============
Identifiable assets:
United States $ 4,649,983 $ 3,695,665
Canada 1,868,506 1,868,084
------------- -------------
Total identifiable assets $ 6,518,489 $ 5,563,749
============== =============
F-17
<PAGE>
Net currency transactions losses from Canada were $61,086 and $10,214 in
1998 and 1997, 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 estimate
of total operating income on a segment basis.
13. EARNINGS PER SHARE CALCULATIONS
Information Needed to Calculate Basic Earnings Per Share
For The Years Ended
May 31,
1998 1997
------------------------------
Numerator
- ---------
Net income $ 38,930 $ 669,371
Preferred stock dividends accreted (49,499) (48,587)
------------- -------------
Net (loss) income after accretion of dividends $ (10,569) $ 620,784
============= =============
Denominator
- -----------
Average number of common shares outstanding 1,778,822 1,776,816
Average number of Class B common stock outstanding 211,551 211,551
------------- -------------
Average shares used in basic EPS calculation 1,990,373 1,988,367
============= =============
Basic (loss) income per share $ (0.01) $ 0.31
F-18
<PAGE>
Information Needed to Calculate Diluted Earnings Per Share
For The Years Ended
May 31,
1998 1997
------------------------------
Numerator
Basic income $ (10,569) $ 620,784
Add back preferred stock dividends accreted* - 48,587
------------- -------------
Diluted (loss) income after add back of
accreted dividends $ (10,569) $ 669,371
============= =============
Denominator
Average number of common shares outstanding 1,778,822 1,776,816
Average number of Class B common stock outstanding 211,551 211,551
Effect of common stock equivalents* - 71,890
Effect of preferred convertible stock* - 176,786
------------- -------------
Average shares used in diluted EPS calculation 1,990,373 2,237,043
============= =============
Diluted (loss) income per share $ (0.01) $ 0.30
* To the extent that the effect of preferred stock dividends accreted, common
stock equivalents, and the preferred convertible stock are anti-dilutive, they
are not included in the diluted earnings per share calculation. In fiscal 1998
amounts excluded were $49,499 of accreted dividends, 71,890 shares of common
stock equivalents and 176,786 shares of preferred convertible stock.
* * * * * *
F-19
<PAGE>
PML, INC.
Exhibit 23
Consent of Independent Accountants
- --------------------------------------------------------------------------------
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-38903) of PML, Inc. of our report dated August
21, 1998 appearing on page F-1 of this Annual Report on Form 10-KSB.
/s/PRICEWATERHOUSECOOPERS LLP
- -----------------------------
PricewaterhouseCoopers LLP
Portland, Oregon
September 3, 1998
Exhibit 10.b
EMPLOYMENT AGREEMENT
Between
KENNETH L. MINTON
and
PML MICROBIOLOGICALS, INC. and PML, INC.
The purpose of this Agreement is to confirm the terms of the employment
relationship between PML Microbiologicals, Inc. and PML, Inc. (hereinafter
referred to as "Employer" or "PML"), and Kenneth Minton (hereinafter referred to
as the "Employee").
I. Term of Agreement. Employer and Employee agree that the term of this
Agreement shall be from the day of execution by all parties until May 31, 2002,
unless employment is sooner terminated as provided herein.
1.1. Position and Duties.
1.1.1 Employer and Employee agree that Employee will be employed
as the President and CEO of PML and that in this capacity, Employee's
responsibilities will include, but are not limited to those described in Exhibit
A, attached hereto and incorporated herein by this reference. It is understood
that from time to time Employee may be assigned other duties in addition to
those described in Exhibit A. It is further agreed and understood that as the
President/CEO of Employer, the hours which Employee is required to work, will
vary considerably and will sometimes be more and sometimes less than forty (40)
hours per week. It is understood and agreed that Employee's pay will not be
affected by the number of hours worked in a given week; Employee is not eligible
for overtime compensation nor subject to deductions from compensation due to any
variance in the number of hours worked.
1.1.2 Unless agreed otherwise, Ron Torland will meet with the
Employee on Wednesdays at 3:00 p.m. in the conference room at PML.
1.1.3 Employee's obligation to devote his full-time, attention
and energy to the business of Employer shall not be construed as preventing
Employee from investing his assets so long as any such investment will not
require any services on the part of Employee in the operation of the affairs of
the company(ies) or business(es) in which such investment(s) is (are) made.
2. Employee shall have the authority to hire and fire other employees of
Employer under his supervision.
3 . Employer's Covenants.
3.1 Employer agrees to reimburse Employee for all reasonable
business expenses incurred by Employee while on Employer's business. Employee
shall maintain such records as will be necessary to enable Employer to properly
deduct such items as business expenses when computing Employer's federal income
tax.
3.2 Employer agrees to conduct performance reviews of Employee on
a periodic basis during Employee's first six months of employment and on an
annual basis thereafter.
4 . Compensation.
<PAGE>
4.1 For all services rendered by Employee under this Agreement
(exclusive of stock options and bonus, if any), Employer shall pay Employee a
base salary of One Hundred Fifty Thousand Dollars ($150,000) per year, until May
31, 1999 and then increased to $175,000 effective June 1, 1999. Employee shall
be paid this salary on PML's regular pay days, minus all lawful and agreed upon
payroll deductions.
4.2 Unpaid compensation due to short-term cash flow
considerations shall be accrued by Employee without payment of interest if not
paid when due.
5 . Bonuses.
5.1 Goal. To maximize shareholder value. The Board of Directors
of PML proposes the following plan for the term of the contract with the
understanding that the bonus after that period will likely be based upon
Economic Value Added (EVA) according to a formula yet-to-be determined.
5.2 Basis. Fifty percent of pre-tax profits above the base of
$360,000, with a maximum bonus of $100,000. Employer profit sharing
contributions, 401(k) matching contributions and expenses resulting from
issuance of non-qualified stock options are added back to pre-tax profits for
calculations of bonus amount.
5.3 Term. There will be no bonus paid for the fiscal year ending
May 31, 1996. Any bonus for any other fiscal year in which Employee is employed
under the terms of this Agreement shall be calculated as set forth herein.
5.4 Calculation. Pre-tax profits - Less debt forgiveness, if any
- - Less base ($360,000) = Profits to be used for base calculation
Example: $750,000 Pre-tax profits
(100,000) Debt forgiveness
(360,000) Base
= $290,000 Profits for base calculation
$145,000 50% of applicable profits
$100,000 Bonus paid (Bonus is based upon 50%
of profits over $360,000
up to a maximum bonus of
$100,000)
5.5 Earning and Payment of Bonus. Two-thirds of the bonus for any
fiscal year (other than fiscal year 1996, which will have no bonus) will be
earned at the close of the fiscal year for which the pre-tax profits were at
least $360,000, as certified by the auditors. Said earned portion of the bonus
will be paid within ten days of the certification of the annual audit results
for the fiscal year for which the bonus is being calculated.
One-third of the bonus will be earned at the close of the fiscal
year immediately following the fiscal year for which the bonus is being
calculated, providing that the pre-tax profits are at least $360,000 for that
fiscal year. That earned portion of the bonus will be paid within ten days of
the certification of the annual audit results for the fiscal year for which the
bonus is being calculated.
If PML's pre-tax profits are less than $360,000 in any fiscal
year, any bonus payment or portion of bonus payment unpaid from the prior fiscal
year will be deemed unearned and will not be paid.
5.6 Forfeiture of Bonus. No unearned bonus or portion of bonus
will be paid if any of the following circumstances exist:
<PAGE>
5.6.1 Employee quits PML at any time other than at the expiration
of the contract.
5.6.2 Employee is fired for cause, as that term is defined in
paragraphs 10.1.1 through 10.1.4.
5.7 Payment of Bonus in Event of Termination Without Cause.
5.7.1 If Employee is terminated at the close of any fiscal year
without "cause" as that term is defined in Paragraphs 10.1.1 and 10.1.4, and if
the terms and conditions of Paragraphs 5.2, 5.3, 5.4 and 5.5 are met, Employee
will receive payment of his bonus, if any, for his last fiscal year of
employment subject to and under the terms and conditions contained herein.
5.7.2 If Employee is terminated at any other time without "cause"
as that term is defined in Paragraph 10.1, and if the terms and conditions of
Paragraphs 5.2, 5.3, 5.4 and 5.5 are met, Employee will receive a pro rata share
of his bonus, if any, for whatever portion of the last fiscal year of employment
and subject to and under the terms and conditions contained herein.
Example. If Employee is terminated without cause on
November 1, 1997, and if the pre-tax profits of the
Employer were greater than $360,000 in fiscal year
ending May 31, 1998, then Employee shall receive a
bonus equal to 5/12ths of whatever bonus he would
have been entitled to had he worked the entire
1997-1998 fiscal year. Two-thirds of the pro rata
bonus shall be paid ten (10) days after the audit
results are certified for fiscal year ending May 31,
1998 (approximately August, 1998) and one-third ten
days after the audit results are certified for the
following fiscal year (approximately August, 1999),
assuming the pre-tax profits for the fiscal year
ending May 31, 1999, are greater than $360,000.
Payment of any bonus under Paragraph 5.7 will be subject to the
provisions of Paragraph 11.4.
6 . Stock Options.
6.1 Employee will be eligible for a total of 140,000 shares over
a period of six years.
Shares Price Date of vesting
20,000 Fair market value,
date of grant 4/8/96
20,000 Same 5/31/97
20,000 Same 5/31/98
20,000 Same 5/31/99
20,000 Same 5/31/00
20,000 Same 5/31/01
20,000 Same 5/31/02
6.2 Except as to those options which have already vested and
subject to the provisions of paragraph 6.3, Employee's rights to any stock
option cease on the date of Employee's termination. Employee must be employed on
the date of vesting in order to receive his option.
6.3 In the event of a termination without cause, as defined in
paragraphs 10.1.1-10.1.4, or a sale of a controlling interest in PML during
Employee's employment, all options vest immediately.
<PAGE>
6.4 Employee agrees to be bound by the terms and conditions of
the MEDA, Inc. 1994 Stock Option Plan.
7 . Fringe Benefits.
7.1 Fringe Benefits. Employer and Employee agree that during the
term of this Agreement, Employee shall be entitled to participate in all fringe
benefits as may be authorized and adopted from time to time by Employer and for
which Employee is eligible.
7.2 Miscellaneous Expense. Employer shall pay for Employee's
membership dues in professional organizations and reimbursement for courses up
to a reasonable annual amount and as Employer's finances permit, provided that
the benefit to Employer of such organization or course can be demonstrated.
8 . Vacation and Sick Leave. Employee shall be entitled to four (4)
weeks paid vacation per year. Vacation is earned based on Employee's anniversary
date. Employee shall earn sick leave pursuant to the policies generally
available to PML's employees.
8.1 Carryover Unused Vacation. Employee may accrue a maximum of
240 hours. No further vacation will accrue beyond 240 hours until Employee uses
some accrued vacation time.
8.2 Scheduling. Vacation shall be scheduled by Employer at a time
mutually convenient to both Employer and Employee.
8.3 Accrued and Unused Vacation at Termination. In the event this
Agreement is terminated before its expiration date by either Employer or
Employee, Employee shall be paid for all previously accrued and unused vacation
time.
9 . Confidential Information and Non-Solicitation.
9.1 It is understood and agreed that as a result of Employee's
employment with PML, Employee will be acquiring and making use of confidential
information about Employer's business as well as financial information about
PML. Employee agrees that he will respect the confidences of Employer and will
not at any time during or after his employment with PML, directly or indirectly
divulge or disclose for any purpose whatsoever or use for his own benefit, any
confidential information that has been obtained by or disclosed to Employee as a
result of his employment with PML.
9.2 Employee agrees that during his employment with PML, and for
a period of two years after termination of his employment, he will not directly
or indirectly solicit for employment any employee of PML.
9.3 If Employee violates any of the provisions of these
subparagraphs, Employer shall be entitled to receive from Employee reimbursement
for any and all damages caused by such breach, as liquidated damages and not as
a penalty (both Employer and Employee realizing the difficulty in establishing
the amount of actual damages incurred by PML as the result of such a breach), an
amount equal to fifty percent (50%) of Employee's then current yearly base
salary if still employed by PML, or if no longer employed by Employer, the
amount of Employee's yearly base salary at the time of his termination. It is
understood and agreed that this remedy is in addition to, and not a limitation
on, any injunctive relief for other rights or remedies to which PML is or may be
entitled to under the law.
9.4 If any provisions of these subparagraphs are held to be
invalid or unenforceable, the remaining provisions shall, nevertheless, continue
to be valid and enforceable as though the invalid or unenforceable parts had not
been included.
<PAGE>
10 . Termination.
10.1 Either Employee or Employer may terminate this Agreement at
any time with or without cause. For purposes of paragraph 10.1 only, "cause" is
defined as any one or more of the following:
10.1.1 Dishonesty that materially impairs the interest of PML
10.1.2 Refusal to follow a lawful direction of the Board.
10.1.3 Conviction of a crime that is classified as either a
misdemeanor or a felony.
10.1.4 Personal or professional conduct which injures or tends to
injure the reputation of Employer or otherwise significantly adversely affects
the interests of Employer.
10.1.5 Failure to reach mutually agreed performance targets.
10.1.6 Deterioration of the financial condition of Employer which
makes it impossible to continue.
10.1.7 Death of Employee, other than death caused primarily by
Employee's performing duties on behalf of Employer.
10.1.8 Disability of Employee for a cumulative period of more
than twelve weeks in any one-year period other than any disability caused
primarily by Employee's performing duties on behalf of Employer. "Disability"
means being unable to perform the essential functions of the job with or without
reasonable accommodation.
10.2 Effect of Termination. Upon termination of Employee's
employment with PML, Employer agrees to pay Employee all salary due and owing to
Employee as of the date of termination, less legal deductions or offsets
Employee may owe to Employer for such items as salary advances or loans.
Employee agrees that his signature on this Agreement constitutes his
authorization for all such deductions. Employee agrees to return to PML all of
Employer's property of any kind which may be in Employee's possession. In the
event of termination of this Agreement, the terms and provisions of this
Agreement shall also terminate, with the exception of the confidentiality
provisions provided in the paragraphs above.
10.3 Employee's compliance with the terms and conditions of the
Support Agreement dated November 25, 1996 and signed by PML Microbiologicals,
Inc., Norwest Business Credit, Inc. and Kenneth L. Minton shall not be construed
as a termination of this Agreement ("the Support Agreement"). The terms and
conditions of the Agreement shall remain in full force and effect during
Employee's compliance with the terms of the Support Agreement. By way of
example, but not as a limitation, Employee's employment may still be terminated
according to the terms of the Agreement, and Employee will still be eligible for
any stock option and/or bonus, providing he otherwise qualifies pursuant to
terms and conditions contained in the Agreement.
11 . Severance.
11.1 If termination is for "cause" (as defined in paragraph
10.1), no severance will be paid.
11.2 If termination is for reasons other than for "cause" (as
defined in Paragraph 10.1) or the expiration of the contract, severance will
equal all base salary payable under the remaining term of the contract (through
May 31, 2002), and any bonus pursuant to Paragraph 5.7. The severance will be
paid on regularly scheduled pay dates or in one lump sum, at Employer's option.
<PAGE>
11.3 If Employee quits at any time before the contract expires,
he will receive no severance.
11.4 Severance paid pursuant to paragraph 11 will be paid only in
exchange for a mutual release of all claims.
12 . Family Position. The terms and conditions of the document entitled
"Family Position," attached hereto as Exhibit B, are incorporated herein by this
reference.
13 . Construction of Agreement.
13.1 Superseding Agreement. This Agreement supersedes any prior
Agreements, written or oral, including without limitation the Employment
Agreement entered into on April 4, 1996.
13.2 Essential Terms and Modification of Agreement. It is
understood and agreed that the terms and conditions described in this Agreement
constitute the essential terms and conditions of the employment arrangement
between Employer and Employee, all of which have been voluntarily agreed upon.
Employer and Employee agree that there are no other essential terms or
conditions of the employment relationship that are not described within this
Agreement, and that any change in the essential terms and conditions of this
Agreement will be written down in a supplemental agreement which shall be signed
by both Employer and Employee before it is effective.
13.3 Severability. If any term, covenant, condition or provision
of this Agreement or the application thereof to any person or circumstance
shall, at any time, or to any extent, be determined invalid or unenforceable,
the remaining provisions hereof shall not be affected thereby and shall be
deemed valid and fully enforceable to the extent permitted by law.
13.4 Notices. Any notice hereunder shall be sufficient if in
writing and delivered to the party or sent by certified mail, return receipt
requested and addressed as follows:
a. If to Employer: Ron Torland
10595 SW Kiowa Street
Tualatin, OR 97062
b. If to Employee: Kenneth L. Minton
2390 Michael Court
West Linn, OR 97068
Either party may change the address herein specified by giving to the other.
Notice shall be effective on the day of mailing.
13.5 Governing Law and Venue. This Agreement is made and shall be
construed and performed under the laws of the State of Oregon. In the event of
any dispute between Employer and Employee, venue shall be in Washington County,
Oregon.
13.6 Waiver of Agreement. The waiver by Employer of a breach of
any provision of this Agreement by Employee shall not operate or be construed as
a waiver by Employer of any subsequent breach by Employee.
13.7 Captions. The captions and headings of the paragraphs of
this Agreement are for convenience and reference only and are not to be used to
interpret or define the provisions hereof.
13.8 Assignment and Successors. The rights and obligations of
Employer under this Agreement shall inure to the benefit of and be binding upon
the successors and assigns of Employer. The rights and obligations of Employee
hereunder are nonassignable. Employer may assign its rights and obligations to
any entity in which Employer or a company affiliated to Employer, has a majority
ownership interest.
13.9 Notice of Intent Not to Renew. Employee and Employer both
agree to provide the other with no less than 90 days prior written notice of
their intent not to renew the contract and/or to continue employment beyond the
term of the contract.
DATED this day of , 1997.
EMPLOYEE: EMPLOYER:
KENNETH L. MINTON PML MICROBIOLOGICALS, INC.
and PML, INC.
By
Its
Exhibit 10.c
V.P. SALES/MARKETING
Fiscal 1998 Incentive Plan
INCENTIVE
POTENTIAL
---------
DISCRETIONARY $ 8,000
At the discretion of the CEO. Based upon effort, dedication,
creativity, management support, etc. Earned completely independent of
objective awards, if any.
OBJECTIVE
PML Profits $12,000
PML pretax profits in excess of $460,000 will be used as an
incentive base. A 10% bonus will be earned on pretax profit in
excess of $460,000. The maximum bonus that can be earned is
$12,000.
PML Sales and Gross Profit $30,000
PML net sales in excess of $13.5 million will be used as the
incentive base. A 3.75% (.0375) bonus will be paid on net
sales in excess of $13.5 million. The maximum bonus that can
be earned is $30,000. To the extent that standard gross profit
(net sales standard cost) is maintained at 40.2%, the earned
bonus is not affected. For each tenth of 1% (.001) lower than
40.2%, the bonus will be decreased by $10,000.
-------
Total Potential Incentive $50,000
=======
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