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, 2000
Commission File No. 0-21816
PML, INC.
(Name of small business issuer in its charter)
Delaware 93-1089304
(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: $14,001,938
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 July 31,
2000 was approximately $151,400.
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 July 31, 2000, there were 1,785,441 shares of Class A 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 7
Item 3. Legal Proceedings 7
Item 4. Submission of Matters to a Vote of Security Holders 7
Part II
-------
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 8
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Item 7. Financial Statements and Supplementary Data 12 & 18
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 12
Part III
--------
Item 9. Directors, Executive Officers, Promoters and Control Personnel;
Compliance with Section 16(a) of the Exchange Act 13
Item 10. Executive Compensation 14
Item 11. Security Ownership of Certain Beneficial Owners and Management 14
Item 12. Certain Relationships and Related Transactions 16
Item 13. Exhibits, Financial Statement Schedules and Reports on Form 8-K 16
2
<PAGE>
PML, INC.
1999 FORM 10-KSB ANNUAL REPORT
PART I
Item 1. Description of Business
General
-------
PML Microbiologicals, Inc. is the sole operating subsidiary of PML, Inc.
and consequently any reference herein to "PML" or "the Company" are used
interchangeably. PML, which has been in business since 1969, markets to the
clinical market (diagnosis of diseases in humans), to the industrial market
(environmental and sterility testing), and to the original equipment
manufacturers (OEM) market (private label clinical products). Typical customers
for PML's clinical products are hospitals, clinics, and wholesalers that market
to hospitals and clinics. Industrial customers include pharmaceutical companies,
biotech research facilities, and food and water testing enterprises. The OEM
market includes companies in the medical device industry.
In September 1991, the Company entered into a transaction with Monogenesis
Corporation, in which it purchased a non-operating subsidiary of Monogenesis
Corporation named Meda, Inc. This entity was subsequently renamed PML, Inc.,
which became the parent organization of Prepared Media Laboratory, Inc. and was
later renamed PML Microbiologicals, Inc.
PML, Inc. shares have been listed on the NASDAQ Electronic Bulletin Board
since January 1993 under the symbol "PMLI".
Products
--------
The Company's product line consists of diagnostic products and supporting
materials used by both clinical and industrial microbiologists. Clinical
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. The Company also offers a
complete line of irradiated media used for environmental monitoring and
sterility testing by the pharmaceutical, biotechnology and food and beverage
industries. 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 quality control organisms for
gas generating systems, for providing the proper gaseous environment for
culturing organisms; swabs for collecting specimens; and various fixatives and
preservatives.
The majority of the Company'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."
3
<PAGE>
Marketing
---------
The Company markets its products primarily in the United States and Canada
through its internal sales organization and through a growing network of major
distributors. Customers include both clinical and industrial microbiology
laboratories. Hospital and private medical laboratories, as well as doctor's
offices and clinics make up most of our 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
management expects to grow rapidly, includes companies manufacturing medical
devices or industrial equipment requiring media based suppliers. The veterinary
market also appears to be a potential growth segment.
Based upon management's research and information derived from sources which
management believes to be reliable, the clinical microbiology market exceeds $1
billion annually in the United States. The Company estimates the industrial
market to be in excess of $100 million and growing. The prepared culture media
segment of the clinical microbiology market is similarly 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. The Company maintains a strong presence in this
product line because of its overwhelming importance to microbiologists and the
proven value of the Company's service philosophy in gaining and keeping
customers. The Company'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 for the Company.
In addition, the Company has increased its focus on the industrial
microbiology market and OEM market, which appear to be growing at a faster pace
than the clinical market. In Fiscal 2000, the Company's sales in the industrial
segment continued to increase, and the Company is optimistic about further
increases in Fiscal 2001.
Distribution of Products
------------------------
To address service, shipping, and shelf life requirements, the Company has
established distribution centers in or near the following metropolitan areas;
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. The Company typically ships a complete customer order within twenty-four
to forty-eight hours of receipt of the order. Depending on the size of the
order, customer requirements and distance, shipments are made by local courier,
international package delivery service (e.g. UPS, Federal Express) or an over
the road common carrier.
Manufacturing
-------------
At present, the majority of the Company's sales consist of products it
manufactures; primarily 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
4
<PAGE>
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, the Company 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.
The Company 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, the Company 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 PML 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. The Company hires licensed hazardous
waste disposal companies for the disposal of these materials at a nominal cost.
See "Governmental Regulation."
Suppliers
---------
The Company's largest suppliers provide Petri dishes, blood, agar and
plastic packaging material which are available from a number of sources in the
United States and Canada. Several manufacturers and distributors of glassware,
chemicals and packaging materials exist in the United States and Canada.
Competition
-----------
The Company operates in three distinct markets, Clinical, Industrial and
Original Equipment Manufacturing (OEM), with each containing different customers
and competitive forces.
In the clinical market, the Company's primary customers are hospital and
clinical laboratories. In the United States, most hospitals have become members
of buying groups known as Group Purchasing Organizations (GPOs), which have
negotiated single supplier contracts for prepared media from only one supplier.
Under these agreements, the Company's principal competitor, Becton Dickinson
Microbiology Systems (BDMS), a subsidiary of Becton Dickinson & Co. has obtained
sole source supplier status to approximately 85% of the U.S. market. In the
Canadian clinical market, normal nonrestrictive competitive conditions exist,
and the Company has historically outperformed all of its competitors and has
continually increased its market share.
In the industrial market, the key competitive factors are product features,
quality and service. The Company has only one other significant competitor in
this market, which it competes favorably against.
In the OEM market, the Company is one of very few companies supplying
media-based products. Product quality and customer responsiveness are the
primary factors for success in this market. The Company has been successful in
expanding this market against its competitors.
5
<PAGE>
Research and Development
------------------------
The Company 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 the Company's product line, and to develop new products for addition to its
line. R & D functions are presently performed by multiple departments within the
Company and by independent researchers and scientists that have been retained by
the Company.
Patents and Licenses
--------------------
The Company owns a number of patents, trademarks and licenses. No
individual patent, trademark, or license is material or critical to the Company
or any particular product line that the Company maintains. All such agreements
or rights are considered to be standard for companies operating in our industry.
Employees
---------
On May 31, 2000 and 1999, the Company had approximately 170 and 166,
respectively, full time employees. Minor increases and decrease to the number of
employees occurs in the ordinary course throughout the year as manufacturing
demand changes. The Company's employees are located throughout North America
with the heaviest concentrations in Wilsonville, Oregon (a suburb of Portland,
Oregon), and Mississauga, Ontario (a suburb of Toronto, Ontario), Canada.
The Company's employees are not covered by a collective bargaining
agreement, and the Company considers its employee relations to be satisfactory.
Government Regulation
---------------------
As a manufacturer of medical devices, the Company 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 these government
agencies inspect the Company's products, facilities, and manufacturing
processes. The Company's facilities, processes and products have received all of
the required approvals, and the Company believes that it is in compliance with
all relevant FDA and HPB requirements.
In addition, the Company 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 the Company's business. Management believes that the Company's
business is operated in compliance with applicable laws and regulations.
Liability Insurance
-------------------
The Company maintains product liability insurance in the amount of $2
million dollars, supported by a $10 million dollar umbrella policy. Product
liability insurance is limited in availability and restrictive in cost. Based on
the essentially confirmatory nature of the majority of the Company's diagnostic
products, the Company's management believes that the Company is not subject to
significant product liability risk with its present product line. To date, the
Company has never paid a product liability claim.
6
<PAGE>
Item 2. Description of Properties
In March 2000 the owner of the Mississauga, Ontario facility informed the
Company that he was going to sell the property. In May 2000 the Company
purchased the property (after obtaining financing through KeyBank) and
consolidated the manufacturing operations of its second Mississauga, leased
facility, into this one facility. The Company currently operates from three
other leased locations, one in Wilsonville, Oregon, one in Providence, Rhode
Island and one in Richmond, British Columbia. The Company does not expect
substantial difficulty in extending its leases as they come due. Each facility
has extensive leasehold improvements and equipment. The following chart
summarizes the significant facilities which the Company owns and leases.
<TABLE>
<CAPTION>
Approximate Approximate
Square Footage Square Footage Lease
Location Manufacturing Admin & Distribution Expiration
-------- -------------- -------------------- ----------
<S> <C> <C> <C>
OWNED:
Mississauga, Ontario 16,000 3,000 N/A
LEASED:
Wilsonville, Oregon 9,000 34,000 June 2004
Providence, Rhode Island - 12,000 April, 2004
Richmond, British Columbia 2,000 3,100 June, 2001
</TABLE>
The Wilsonville facility houses all corporate administrative functions, a
manufacturing unit and a distribution center. The manufacturing production unit
supplies conventional culture media to the western United States and Canadian
regions and provides specialty products to all other locations. Equipment for
the production of PML's PHASE2 blood culture system, DUOTEK sterility testing
system, MIC panels, and dehydrated media are also located in Wilsonville.
The Mississauga manufacturing plant produces mostly high volume culture
media for eastern Canada and for the eastern United States regions, much of the
Company's industrial contact plate product line and assembly of parasitology
kits on a contract basis for various Canadian accounts.
Item 3. Legal Proceedings
The Company occasionally has been made a party to incidental suits or other
legal actions arising in the ordinary course of its business. To the best
knowledge of Management, the Company is not currently subject to any pending
litigation that would have a material adverse effect upon its operations. The
Company was engaged in discussions with one purchaser concerning product quality
and had notified its product liability insurance carrier of those discussions.
To date, the Company has never paid a product liability claim.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its annual meeting on November 16, 1999 at its
Wilsonville, Oregon facility. Four members of the Board of Directors were
elected and Moss-Adams LLP was ratified as independent accountants. The
directors elected and the votes cast for all matters are as follows:
<TABLE>
<CAPTION>
Votes For Votes Against Abstain
--------- ------------- -------
<S> <C> <C> <C>
Kenneth L. Minton 1,381,920 128,618 26,500
Arthur R. (Ron) Torland (CLASS B) 211,511 0 0
Craig S. Montgomery (CLASS B) 211,511 0 0
Douglas C. Johnson (CLASS B) 211,511 0 0
Ratification of independent accountants 1,747,889 125 31,750
</TABLE>
7
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's common stock commenced trading on the NASDAQ 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, 2000 $1.43750 $0.75000
February, 2000 $1.75000 $0.51000
November, 1999 $1.03125 $0.15625
August, 1999 $0.53125 $0.25000
May, 1999 $0.53125 $0.53125
February, 1999 $0.75000 $0.43750
November, 1998 $0.75000 $0.37500
August, 1998 $1.12500 $0.87500
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 its lender. The Class A convertible preferred shares have a
provision, which calls for the accretion of dividends annually at a rate of
prime plus 1.5%. As of May 31, 2000 accreted dividends totaled $292,644. See
Note 9 of Notes to Consolidated Financial Statements. Approximately 1,085 record
holders of Common Stock existed as of May 31, 2000.
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 various 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 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. Moreover, forward-looking
statements are intended to provide the reader with meaningful insight about
management's plans and expectations about future events; these events are
inherently difficult to predict, and our actual performance may vary materially
and adversely from the expectations presented here. In addition to the factors
discussed in this paragraph and elsewhere in this report, a non-exclusive list
of elements that could adversely affect our performance include competitive
pressures and other factors listed from time to time in the Company's reports to
the Securities and Exchange Commission.
8
<PAGE>
Canadian Exchange
-----------------
PML is a US incorporated company but also has several significant operating
locations in Canada and significant Canadian revenue. Since management has
previously determined that the functional currency of the Canadian operations is
the US dollar, it must consolidate its foreign operations by using the
appropriate foreign exchange rate in accordance with generally accepted
accounting principles applied on a consistent basis. Unlike most of our US
competitors, the Company is in a somewhat unique position in that it
manufactures in both the US and Canada and regularly receives approximately 40%
of its revenues from Canadian sales. In the five fiscal years ending in 1998,
the exchange rate between Canadian and US currency had been stable and did not
fluctuate more than about 3% from its "normal" trading range of about $.72 to
$.73 (US $ equivalent rate).
In April 1998, the Canadian/US exchange rate started an unusually sharp
decline and reached as low as the $.63 range before stabilizing at about $.67 in
May 1999. This decline is unprecedented in PML's history and whether the rate
continues to decline, remains the same, or starts to recover is unpredictable.
However, since the Company's Canadian operations represent a significant part of
its total operations, the adverse condition of the Canadian currency market is
expected to continue to have an adverse impact on the consolidated financial
results of the Company.
For the year ended May 31, 2000 and May 31, 1999, the exchange rate was
$.6680 and $.6784, respectively. This decline during Fiscal 2000 resulted in a
Balance Sheet write down of approximately $17,000.
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 reported amounts of revenues and expenses during the reporting
periods. Actual results often will differ from such accounting estimates.
9
<PAGE>
Results of Operations
---------------------
Year Ended May 31, 2000 Compared With Year Ended May 31, 1999
-------------------------------------------------------------
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,
------------------
2000 1999
---- ----
Net Sales 100.0% 100.0%
Cost of Goods Sold 61.2 63.6
------ ------
Gross Profit 38.8 36.4
Operating Expense 32.9 36.0
------ ------
Operating Income 5.9 0.4
Other expense 1.8 2.3
------ ------
Income (Loss) before income taxes 4.1 (1.9)
Income tax expense (benefit) 1.3 (0.4)
------ ------
Net income (Loss) 2.8% (1.5)%
====== =======
Sales in Fiscal 2000 totaled $14.0 million, an increase of $183,000 or 1.3%
over Fiscal 1999. Income before taxes for the twelve months ended May 31, 2000
showed an increase in pre-tax profits of $837,351 over the twelve-month period
ended May 31, 1999.
Cost of Goods Sold decreased as a percentage of sales by 2.40%. This
significant improvement is a result of across-the-board cost savings in most
cost-of-goods areas such as inventory outdates, manufacturing rejects, material
usage, etc.
Operating expenses (selling, general and administrative) decreased as a
percentage of sales by 3.1%. This improvement is attributed to management's
priority in making the best use of operating expenses, improving and
streamlining all functions that occur in all categories of operating expenses.
The Company anticipates operating expenses, as a percent of sales, will remain
constant; however, they may increase when appropriate to support higher company
sales.
10
<PAGE>
QUARTERLY FINANCIAL INFORMATION (Unaudited)
-------------------------------------------
The following is a summary of unaudited operating results by quarter for
the fiscal years ended May 31, 2000 and 1999:
<TABLE>
<CAPTION>
2000 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Total
<S> <C> <C> <C> <C> <C>
Net sales $3,540,405 $3,442,638 $3,511,846 $3,507,049 $14,001,938
Gross profit 1,324,881 1,367,300 1,348,813 1,385,312 5,426,306
Net income (loss) before tax 81,415 121,065 190,482 180,290 573,252
Net income (loss) 52,919 70,596 120,122 148,442 392,079
Basic earnings (loss) per share 0.02 0.03 0.05 0.07 0.17
Diluted earnings (loss) per share* 0.02 0.03 0.05 0.06 0.16
1999 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Total
Net sales $3,597,242 $3,310,997 $3,352,728 $3,557,596 $13,818,563
Gross profit 1,454,325 1,194,481 1,079,397 1,302,029 5,030,232
Net income (loss) before tax 13,908 (219,826) (82,906) 24,725 (264,099)
Net income (loss) 6,698 (128,847) (49,442) (42,010) (213,601)
Basic earnings (loss) per share 0.00 (0.07) (0.03) (0.03) (0.13)
Diluted earnings (loss) per share* 0.00 (0.07) (0.03) (0.03) (0.13)
</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, 2000,
the Company had positive working capital of $30,465 compared with negative
working capital of ($645,406) at May 31, 1999. This improvement in the current
year is due to the continued significant cash provided by operating activities
and the restructuring of the current portion of long-term debt to related
parties and, their acceptance and signing, of new long-term notes. The ratio of
current assets to current liabilities is 1.01 at May 31, 2000 compared to .863
at May 31, 1999. Quick liquidity (current assets less inventories to current
liabilities) is .63 at May 31, 2000 and .51 at May 31, 1999. The twelve-month
average collection period for trade receivables was 53.7 days at May 31, 2000
compared with 55.1 days at May 31, 1999.
Net cash provided by operating activities was $1,175,834 in Fiscal 2000
compared with $599,428 provided by operations in Fiscal 1999. Net cash used in
investing activities was ($886,244) in Fiscal 2000 compared with ($112,573) used
by the Company in investing activities in Fiscal 1999. The Company spent
$696,485 on the purchase of the Mississauga, Ontario, Canada building and
property and $189,759 on equipment and building improvements during Fiscal 2000,
compared with $113,723 spent on equipment and building improvements in Fiscal
1999. Financing activities provided cash of $8,221, primarily from increases in
long-term debt, compared with the consumption of cash of ($649,789) in 1999 from
decreases in short-term and long-term debt.
The Company has a line of credit that has a current maturity date of
November 30, 2000. This line of credit is secured substantially by 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. This loan will be
repaid primarily out of the Company's receivable collections and other cash
provided by operating activities.
11
<PAGE>
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 financing will be available with terms acceptable to the Company. Without
such future financing, the Company's ability to finance its growth will be
limited.
<TABLE>
<CAPTION>
The Company's total debt structure at May 31, 2000 is as follows:
Long-Term Current-Portion
--------- ---------------
<S> <C> <C>
Revolving credit at prime plus 2.0%, due November 30, 2000 $ 0 $ 1,597,618
Note payable at prime plus 2.0%, due November 30, 2000 0 58,306
Note payable at 12%, due April 2001 0 45,052
Capital Lease obligations, due January 2001 0 52,145
Note payable at 6%, due May 2005 40,000 10,000
Note payable at prime less .25%, due May 2010 532,088 28,005
Trade A/P converted to notes payable at 6%, due February 2001 0 149,855
-------------- --------------
Total Bank and Term debt $ 572,088 $ 1,940,981
Notes payable to related parties 237,266 90,949
-------------- --------------
Total long and short term debt $ 809,354 $ 2,031,930
============== ==============
</TABLE>
Item 7. Financial Statements and Supplementary Data
The information required by this item starts on page 18 of this report.
Item 8. Changes in and Disagreements with Accountants on Accounting Disclosure
PML's independent accountants, MOSS-ADAMS LLP, were engaged in April 1999.
There have been no disagreements with the accountants on any matter of
accounting principles or practices, financial statement disclosures, auditing
scope or procedures.
12
<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 at May 31, 2000 are
as follows:
Term as
Name Position Director Expires
---- -------- ----------------
A. Ron Torland Chairman of the Board 2000
Secretary, Treasurer
Kenneth L. Minton President and
Chief Executive Officer
Director 2000
Douglas C. Johnson Director 2000
Craig S. Montgomery Director 2000
A. Ron Torland, age 53, 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 50, 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.
Douglas C. Johnson, age 44, 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.
Craig S. Montgomery, Ph.D., 46 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.
13
<PAGE>
Significant Employees
---------------------
There are no significant employees as defined by the SEC 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 information required in response to Item 10 shall appear in our definitive
proxy statement to be filed pursuant to Regulation 14A of the Securities
Exchange Act of 1934 in connection with PML's 2000 Annual Meeting, and it shall
be incorporated herein by reference when filed.
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 July 31, 2000:
<TABLE>
<CAPTION>
Amount and
Name and Address Nature of Percent
Title of of Beneficial Beneficial of Class
Class Owner Ownership
-----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A Common Shares A. Ron Torland 183,381 (a) 10.3%
10595 SW Kiowa Street
Tualatin, OR 97062
Class A Common Shares Julian G. Torland 144,705 (e)(f) 8.1%
11100 SW North Dakota Street
Tigard, OR 97223
Class A Common Shares Douglas C. & Joanne E. Johnson 266,832 (b) 14.9%
8728 SW Pamlico Court
Tualatin, OR 97062
Class A Common Shares Craig S. Montgomery 167,243 (c) 9.4%
12600 SE Rachella Court
Boring, OR 97009
Class A Common Shares Marcia & Stan Drake 121,243 6.8%
28890 S. Beavercreek Rd.
Mulino, OR 97042
Class A Common Shares Mary Lou Ham 167,243 (d) 9.4%
3363-B Blaine Rd.
Moscow, ID 83843
Class B
Common Shares A. Ron Torland 142,902 67.5%
10595 SW Kiowa Street
Tualatin, OR 97062
14
<PAGE>
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
</TABLE>
--------------------------------------------------------------------------------
(a) 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.
(b) Includes 96,743 shares owned by Joanne Johnsonn, Doug Johnson's wife.
Includes 70,500 shares owned by the Johnson children.
(c) Includes 70,500 shares owned by the Montgomery children.
(d) Includes 70,500 shares owned by the three Ham children. However, two of the
Ham children are adults who own 47,000 and Mary Lou Ham disclaims any
beneficial interest in these shares.
(e) Due to an addition error in 1998 and 1999 Julian G. Torland's Common Shares
were reported at 267,900, that included 199,241 of Common and 68,649 Common
Class B shares, but should have been reported at 199,330 and 144,705
respectively of Common, without Common Class B shares. In June 1998 Mr.
Torland gifted 54,625 Common shares to his children and 15,000 Common
shares to his wife, and Julian G. Torland disclaims and beneficial interest
in these shares.
(f) Includes 15,000 shares owned by Mary H Torland, Julian Torland's wife.
The directors and officers of the Company, as a group, own 355,213 common
shares, representing 19.9% of that class, and 142,902 shares of Class B common
shares, representing 67.5% of that class, and 1,500 shares of Class A
convertible preferred, representing 30.3% of that class.
There are no arrangements which may result in a change of control of the
Company.
Item 12. Certain Relationships and Related Transactions
The Company currently leases equipment 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 two operating leases. Total
rental expense incurred under these two operating leases was approximately
$78,000 in both Fiscal 2000 and 1999. (See Note 12 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 expires in
July 2002, the Company manufactures and markets product developed by DDI and
pays a royalty based upon the number of units sold. Total royalties of $19,901
were incurred in Fiscal 2000 and $11,414 in Fiscal 1999. 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.
15
<PAGE>
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 $23,164 at May 31, 2000.
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
10 Material contracts
a. Employment Agreement with Kenneth L. Minton
b. 1994 Stock Option Plan for Non-employee Directors
c. 1994 Stock Option Plan
16 Letter on changes and certifying accountants
18 Letter on change in accounting principles
21 Subsidiaries of Registrant
23 Consent of independent accountants
Each of the above exhibits except as otherwise indicated, is
incorporated by reference to the exhibit filed by the Company with its previous
filings to the SEC.
16
<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 August
18, 2000.
PML, INC.
By: /s/ Kenneth L. Minton
-------------------------------
Kenneth L. Minton, Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below
by the following persons on August 18, 2000, on behalf of the Company and in the
capacities indicated.
Signatures Title
---------- -----
/s/ Kenneth L. Minton President and Chief Executive Officer
------------------------------- (Principal Executive and Accounting
Kenneth L. Minton Officer), Director
/s/A. Ron Torland Chairman of the Board, Secretary
------------------------------- Treasurer
A. Ron Torland
/s/Doug C. Johnson Director
-------------------------------
Doug C. Johnson
/s/Craig S. Montgomery Director
-------------------------------
Craig S. Montgomery
17
<PAGE>
PML, INC.
---------------------------
INDEPENDENT AUDITOR'S REPORT
AND
FINANCIAL STATEMENTS
---------------------------
MAY 31, 2000 AND 1999
18
<PAGE>
CONTENTS
--------------------------------------------------------------------------------
Page
----
INDEPENDENT AUDITOR'S REPORT 20
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated balance sheets 21
Consolidated statements of operations 22
Consolidated statement of changes in stockholders' equity 23
Consolidated statements of cash flows 24
Notes to financial statements 25 - 39
19
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
PML, Inc.
We have audited the accompanying balance sheet of PML, Inc. as of May 31, 2000
and 1999, and the related consolidated statements of operations, changes in
stockholder's equity, and cash flows for the years then ended. 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 audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of PML, Inc. as of May 31, 2000
and 1999, and the results of its operations and its cash flows for the years
then ended, in conformity with generally accepted accounting principles.
/s/ Moss Adams LLP
------------------
MOSS ADAMS LLP
Beaverton, Oregon
July 18, 2000
20
<PAGE>
PML,INC.
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
<TABLE>
MAY 31,
----------------------------------
2000 1999
--------------- ---------------
ASSETS
------
<S> <C> <C>
CURRENT ASSETS
Cash $ 298,382 $ 571
Trade accounts receivable, net 1,871,058 2,106,210
Inventories 1,510,136 1,670,459
Prepaid expenses and other 29,979 74,675
Deferred income tax asset 316,000 209,000
--------------- ---------------
Total current assets 4,025,555 4,060,915
--------------- ---------------
PROPERTY, PLANT, AND EQUIPMENT, net 1,980,909 1,453,222
INTANGIBLE ASSETS, net 30,650 27,469
DEFERRED INCOME TAX ASSET - 136,000
OTHER ASSETS 33,296 104,768
--------------- ---------------
$ 6,070,410 $ 5,782,374
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Bank line of credit $ 1,597,618 $ 1,714,450
Accounts payable 1,196,487 1,596,512
Accrued salaries and wages 416,461 312,964
Other accrued liabilities 350,212 300,948
Current portion of capital lease obligations 52,145 70,153
Current portion of long-term debt - related parties 90,949 325,442
Current portion of long-term debt 291,218 355,852
--------------- ---------------
Total current liabilities 3,995,090 4,676,321
--------------- ---------------
CAPITAL LEASE OBLIGATIONS, less current portion - 52,145
--------------- ---------------
LONG TERM DEBT, related parties less current portion 237,266 58,985
--------------- ---------------
LONG TERM DEBT, less current portion 572,088 257,911
--------------- ---------------
DEFERRED INCOME TAX LIABILITY 135,000 -
--------------- ---------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 per share; 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 787,644 738,296
Common stock, $.01 par value; authorized 2,500,000
shares, issued and outstanding 1,785,441 shares 17,854 17,804
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 148,365 146,540
Retained earnings (deficit) 174,987 (167,744)
--------------- ---------------
1,130,966 737,012
--------------- ---------------
$ 6,070,410 $ 5,782,374
=============== ===============
</TABLE>
See accompanying notes. 21
<PAGE>
PML,INC.
CONSOLIDATED STATEMENT OF OPERATIONS
--------------------------------------------------------------------------------
Year ended May 31,
----------------------------------------
2000 1999
------------------ ------------------
NET SALES $ 14,001,938 $ 13,818,563
COST OF GOODS SOLD 8,575,632 8,788,331
------------------ ------------------
GROSS PROFIT 5,426,306 5,030,232
OPERATING EXPENSES 4,604,006 4,975,232
------------------ ------------------
OPERATING INCOME 822,300 55,000
OTHER EXPENSE
Interest expense, net 265,702 310,755
Miscellaneous (16,654) 8,344
------------------ ------------------
249,048 319,099
------------------ ------------------
NET INCOME (LOSS) BEFORE INCOME
TAX PROVISION 573,252 (264,099)
INCOME TAX EXPENSE (BENEFIT) 181,173 (50,498)
------------------ ------------------
NET INCOME (LOSS) $ 392,079 $ (213,601)
================== ==================
NET INCOME (LOSS) PER COMMON SHARE
Basic $ 0.17 $ (0.13)
================== ==================
Diluted $ 0.16 $ (0.13)
================== ==================
See accompanying notes.
22
<PAGE>
PML,INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Class B Additional Retained
Convertible Common Common Paid-in Earnings
Preferred Shares Shares Shares Capital (Deficit) Total
------------------- ------------------- ---------------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, MAY 31, 1998 4,950 $ 691,060 1,780,441 $ 17,804 211,551 $ 2,116 $ 146,540 $ 93,093 $ 950,613
Preferred stock dividends accreted - 47,236 - - - - - (47,236) -
Net income - - - - - - - (213,601) (213,601)
-------- --------- --------- -------- ------- ------- --------- --------- ----------
BALANCE, MAY 31, 1999 4,950 738,296 1,780,441 17,804 211,551 2,116 146,540 (167,744) 737,012
-------- --------- --------- -------- ------- ------- --------- --------- ----------
Preferred stock dividends accreted - 49,348 - - - - - (49,348) -
Common stock issued - - 5,000 50 - - 1,825 - 1,875
Net income - - - - - - - 392,079 392,079
-------- --------- --------- -------- ------- ------- --------- --------- ----------
BALANCE, MAY 31, 2000 4,950 $ 787,644 1,785,441 $ 17,854 211,551 $ 2,116 $ 148,365 174,987 $1,130,966
======== ========= ========= ======== ======= ======= ========= ========= ==========
</TABLE>
See accompanying notes.
23
<PAGE>
PML,INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended May 31,
----------------------------
2000 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 392,079 $ (213,601)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 355,376 408,451
Deferred income taxes 164,000 (68,396)
Gain on disposition of assets - (648)
Changes in:
Accounts receivable 235,152 39,047
Inventories 160,323 246,359
Other assets 116,168 60,941
Accounts payable and accrued liabilities (247,264) 127,275
------------ ------------
Net cash provided by operating activities 1,175,834 599,428
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of assets - 1,150
Purchase of property, plant and equipment (886,244) (113,723)
------------ ------------
Net cash used in investing activities (886,244) (112,573)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net payments on line of credit (116,832) (273,098)
Principal payments on notes payable - related parties (56,212) (51,828)
Proceeds from issuance of capital lease obligations - -
Principal payments on capital lease obligations (70,153) (90,630)
Proceeds from long-term borrowings 560,093 -
Principal payments on long-term debt (310,550) (234,233)
Proceeds from issuance of common stock 50 -
------------ ------------
Net cash provided by (used in) financing activities 6,396 (649,789)
------------ ------------
NET INCREASE (DECREASE) IN CASH 295,986 (162,934)
CASH AND CASH EQUIVALENTS, beginning of year 571 163,505
------------ ------------
CASH AND CASH EQUIVALENTS, end of year $ 296,557 $ 571
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Interest paid $ 266,034 $ 315,670
Income tax paid $ 4,613 $ (9,792)
Non-cash items:
Preferred stock dividends accreted $ 49,348 $ 47,236
</TABLE>
See accompanying notes.
24
<PAGE>
PML, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
PML Microbiologicals, Inc. is the sole operating subsidiary of PML,
Inc., and any reference herein to "PML" or "the Company" are used
interchangeably when referring to either entity. PML, which has been in
business since 1969, markets to the clinical market (diagnosis of
diseases in humans), to the industrial market (environmental and
sterility testing), and to the Original Equipment Manufacturing (OEM)
market (private label clinical products). The Company produces and
sells throughout the United States and Canada. Typical customers for
PML's clinical products are hospitals, clinics, and wholesalers that
market to hospitals and clinics. Industrial customers include
pharmaceutical companies, biotech research facilities, and food and
water testing. The OEM market includes companies in the medical device
industry.
In September 1991, the Company entered into a transaction with
Monogenesis Corporation, in which it purchased a non-operating
subsidiary of Monogenesis Corporation named Media, Inc. This entity was
subsequently renamed PML, Inc., which became the parent organization of
Prepared Medical Laboratory, Inc., which was later renamed PML
Microbiologicals, Inc.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation - The accompanying consolidated financial
statements include the accounts of PML and its wholly-owned subsidiary,
PML Microbiologicals, Inc. 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.
Cash and cash equivalents - For the purpose of the statement of cash
flows, the Company considers highly liquid investments with a maturity
of three months or less to be cash equivalents. The Company places its
cash and cash equivalents with high quality financial institutions.
Accounts receivable - The Company generally does not require collateral
or other security to support accounts receivable. Management
periodically assesses the collectibility of accounts receivable. This
assessment provides the basis for the allowance for doubtful accounts
and related bad debt expense. An allowance for doubtful accounts of
$50,482 and $50,414 was recorded at May 31, 2000 and 1999,
respectively.
Inventories - Inventories are stated at the lower of cost or market.
Cost is determined by the first-in first-out method.
25
<PAGE>
PML, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (continued)
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 39 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 are comprised of patents in
process. Patents are amortized over the life of the patent as they are
received.
Income taxes - The Company accounts for income taxes on the liability
method. The liability method recognizes the amount of tax payable at
the date of the financial statements as a result of all events that
have been recognized in the financial statements, as measured by the
provisions of currently enacted tax laws and rates. The accumulated tax
effect of all temporary differences is presented as deferred federal
income tax assets and liabilities within the balance sheet.
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 changed its profit sharing
plan for its eligible Canadian employees effective March 1, 2000. Under
the old plan, the Company was required to fund out of profits, a
minimum contribution of $100 (CDN) per participant. The new profit
sharing plan for the eligible Canadian employees is similar to the plan
for eligible U.S. employees, which qualifies under Section 401(k) of
the Internal Revenue Code. Under the new plan, Canadian employees may
contribute up to 18% of their compensation or $18,500 (CDN), whichever
is higher. The Company does not currently match for the eligible
Canadian and U.S. employees.
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 Statements of Financial Accounting Standards (SFAS) No.
52. Non-monetary balance sheet items are remeasured at historical
exchange rates. Revenue and expenses are remeasured at the average
exchange rate for each fiscal year.
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, 2000.
26
<PAGE>
PML, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (continued)
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 45 to 70 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.
Use of estimates - The preparation of the Company's financial
statements in conformity with generally accepted accounting principles
(GAAP) requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reported periods. Actual results may differ from such estimates.
Reclassifications - Certain reclassifications were made to the May 31,
1999 balance sheet in order to conform to the May 31, 2000
presentation. These reclassifications had no effect on net income.
NOTE 3 - INVENTORIES
Inventories consist of:
May 31,
------------------------------
2000 1999
------------- -------------
Raw materials $ 884,887 $ 875,434
Work-in-process 30,065 55,388
Finished goods 595,184 739,637
------------- -------------
$ 1,510,136 $ 1,670,459
============= =============
27
<PAGE>
PML, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of:
May 31,
------------------------------
2000 1999
------------- -------------
Land $ 98,541 $ -
Building 597,943 -
Manufacturing equipment 2,753,916 2,628,236
Office furniture and equipment 1,251,229 1,211,889
Service vehicles 17,754 17,754
Leasehold improvements 763,655 743,120
------------- -------------
5,483,038 4,600,999
Less accumulated depreciation and
amortization 3,502,129 3,147,777
------------- -------------
$ 1,980,909 $ 1,453,222
============= =============
NOTE 5 - LINE OF CREDIT
The Company has a $2,500,000 revolving line of credit with its primary
lender, which is due November 20, 2000. The line of credit is at prime
rate plus 1.5% or 11.00 % at May 31, 2000, and is collateralized by
accounts receivable and inventory. The amount borrowed was $1,597,618
and $1,714,450 at May 31, 2000 and 1999, respectively.
28
<PAGE>
PML, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 6 - LONG-TERM DEBT
Borrowings consisted of the following:
<TABLE>
<CAPTION>
May 31,
-----------------------------
2000 1999
------------ ------------
<S> <C> <C>
Keybank National Association:
Note payable through May 2010 due in monthly
principal installments of $2,334 plus interest
of 8.75% for 119 months and unpaid balance
due May 1, 2010; collateralized by land and
buildings. $ 560,093 $ -
Wells Fargo Business Credit, Inc.:
Note payable through November 2000 in monthly
installments of $8,334 plus interest of prime
plus 2%; collateralized by substantially all
of the Company's equipment. 58,306 158,314
Les Leno:
Note payable through May 2005 in yearly
principal installments of $10,000, interest
at 6% related to termination settlement
with former president. 50,000 60,000
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, 2001. 45,052 64,770
Various vendors:
Unsecured notes payable with 6% interest due
in installments through February 2001. 149,855 330,679
------------ ------------
863,306 613,763
Less current portion (291,218) (355,852)
------------ ------------
$ 572,088 $ 257,911
============ ============
</TABLE>
Maturities of long-term debt, including the long-term debt due related
parties disclosed in Note 7, are as follows:
Years ending May 31,
2001 $ 382,167
2002 136,758
2003 147,369
2004 67,153
2005 38,004
Thereafter 420,070
---------------
$ 1,191,521
===============
29
<PAGE>
PML, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 6 - LONG-TERM DEBT - (continued)
The various debt agreements with Wells Fargo 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 in compliance with all debt
covenants.
NOTE 7 - LONG-TERM DEBT DUE RELATED PARTIES Long-term debt due related
parties consisted of the following:
<TABLE>
<CAPTION>
May 31,
-----------------------------
2000 1999
------------ ------------
<S> <C> <C>
The Torland Trust
Unsecured note payable with 9.5% interest due
in installments through October 2003.
Principal payments of $6,000 may begin
December 2000 provided the Company
meets certain net income criteria. $ 247,551 $ 247,551
Ronald Torland:
Unsecured note payable with 9.5% interest due
in installments through October 2003.
Principal payments of $1,400 may begin
December 2000 provided the Company
meets certain net income criteria. 57,500 57,500
Various - Related parties:
Unsecured notes payable with 6% interest due
in installments through February 2001. 23,164 51,503
Mary Brown:
Unsecured note due in installments of $2,425
including interest through May 2000,
related to purchase of common stock. - 27,873
------------ ------------
328,215 384,427
Less current portion (90,949) (77,891)
------------ ------------
$ 237,266 $ 306,536
============ ============
</TABLE>
30
<PAGE>
PML, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 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 - Redeemable 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
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 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
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.
31
<PAGE>
PML, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 8 - STOCKHOLDERS' EQUITY - (continued)
Stock Option Plans - Effective September 6, 1994, the Board of
Directors adopted the "1994 Stock Option Plan" and the "1994 Stock
Option Plan for Non-employee 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 2000, the
company granted 40,000 stock options expiring within 10 years or less,
depending on the specific agreements, at option prices of $0.50 per
share. During fiscal 1999, the Company did not grant any options. Only
8,750 of all options granted to date have been exercised.
A summary of the status of the options granted under the Plans at May
31, 2000 and 1999, together with changes during the periods then ended,
are following. Options exercisable at May 31, 2000 and 1999 were
237,107 and 229,357, respectively.
Weighted
Average
Options Exercise Price
-------------- --------------
Outstanding at May 31, 1998 384,107 0.53
Options granted at market price - -
Options exercised - -
Options canceled or expired - -
-------------- --------------
Outstanding at May 31, 1999 384,107 0.53
Options granted at market price 40,000 0.50
Options exercised (5,000) (0.38)
Options canceled or expired (40,000) (0.50)
-------------- --------------
Outstanding at May 31, 2000 379,107 0.54
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:
32
<PAGE>
PML, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 8 - STOCKHOLDERS' EQUITY - (continued)
<TABLE>
<CAPTION>
2000 1999
---------- ----------
<S> <C> <C>
Net income (loss), as reported $ 392,079 $ (213,601)
Net income (loss), pro forma $ 362,149 $ (310,998)
Basic earnings (loss) per share, as reported $ 0.17 $ (0.13)
Diluted earnings (loss) per share, as reported $ 0.16 $ (0.13)
Basic earnings (loss) per share, pro forma $ 0.16 $ (0.18)
Diluted earnings (loss) per share, pro forma $ 0.15 $ (0.18)
</TABLE>
The effects of applying SFAS 123 to pro forma disclosures for 2000 and
1999 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 grant in 2000 and 1999: expected
volatility of 196% and 144% respectively, expected dividend yield of
0%; risk-free rates of return ranging from 5.68% to 7.63%; and expected
lives ranging from 5 to 10 years .
Total fair value of options granted was computed to be $19,107 for the
year ended May 31, 2000. No options were granted for the year ended May
31, 1999.
The following table summarizes information about options outstanding at
May 31, 2000.
Weighted
Weighted Average
Exercise Number of Average Remaining
Price Range Shares Price Contractual Life
---------------- -------------- -------------- -----------------
$0.3125 - $0.625 354,107 $ 0.47 2.05
$1.50 25,000 $ 1.50 4.32
Stock Bonus - No stock bonuses were accrued or paid in the fiscal years
ended May 31, 2000 or May 31, 1999.
33
<PAGE>
PML, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 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
2005. Generally, such operating leases include renewal options ranging
from one to seven years. Rental expense for operating leases was
$438,931 and $563,148 in fiscal 2000 and 1999, respectively. Certain of
the operating leases represent related party transactions. See note 11.
The future expected rental commitments as of May 31, 2000, for all
long-term noncancellable operating and capital leases are as follows:
<TABLE>
<CAPTION>
Years ending Capital Operating
May 31, Leases Leases
-------------- ----------- -----------
<S> <C> <C>
2001 $ 54,370 $ 453,687
2002 - 448,960
2003 - 394,556
2004 - 380,167
2005 - 57,721
Thereafter - -
----------- -----------
Total 54,370 $ 1,735,091
===========
Less amount representing interest (2,225)
-----------
Present value of capital lease obligations 52,145
Less current portion (52,145)
-----------
Long-term portion $ -
===========
</TABLE>
NOTE 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.
34
<PAGE>
PML, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 10 - INCOME TAXES (continued)
A reconciliation between the statutory federal income tax (benefit)
expense and effective federal income tax (benefit) expense is as
follows:
<TABLE>
<CAPTION>
May 31,
-------------------------------------------------
2000 1999
----------------------- -----------------------
Amount % Amount %
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Federal statutory expense at 34% $ 194,906 34% $ (89,794) 34%
Increase (decrease) in tax resulting from:
Nondeductible permanent differences 6,984 1% 4,539 -2%
Reversal of deferred tax items at rates
different than the effective tax rates
used to establish the deferred tax
assets and liabilities (43,647) -8% - 0%
State and Canadian income taxes 22,930 4% 34,757 -13%
---------- ---------- ---------- ----------
$ 181,173 31% $ (50,498) 19%
=========== ========== ========== ==========
</TABLE>
The components of the Company's income tax expense (benefit) are as
follows:
May 31,
---------------------------
2000 1999
------------ ------------
Current tax expense $ 17,173 $ 17,898
Deferred tax expense 164,000 (68,396)
------------ ------------
$ 181,173 $ (50,498)
============ ===========
The domestic and foreign components of income (loss) before income
taxes are as follows:
May 31,
---------------------------
2000 1999
------------ ------------
Domestic $ 377,446 $ (118,009)
Foreign 195,806 (146,090)
------------ ------------
Income before income taxes $ 573,252 $ (264,099)
============ ============
35
<PAGE>
PML, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 10 - INCOME TAXES (continued)
At May 31, 2000 and 1999, the significant components of the Company's
deferred tax assets and liabilities are as follows:
May 31,
----------------------------
2000 1999
------------ ------------
Current deferred tax assets:
Vacation accrual $ 49,749 $ 35,600
Allowance for doubtful accounts 19,183 17,100
Net operating loss carryforwards 178,054 102,000
Other 69,014 54,300
------------ ------------
$ 316,000 $ 209,000
============ ============
Non-current deferred tax asset:
Net operating loss carryforwards $ - $ 257,000
Alternative minimum tax carryforward 7,000 -
------------ ------------
$ 7,000 $ 257,000
============ ============
Non-current deferred tax liability:
Depreciation differences between
financial and tax accounting (142,000) (121,000)
------------ ------------
$ (135,000) $136,000
============ ============
Management periodically assesses the need for valuation allowances as
they relate to deferred tax assets. Management has concluded that a
valuation allowance is not necessary given the estimates of future
earnings and the expected timing of temporary difference reversals.
The Company files U.S. and Canadian tax returns on the results of its
operations conducted in each country. At May 31, 2000, the Company has
available approximately $436,000 of unused operating loss
carryforwards, to offset domestic taxable income, which expire in 2010
and 2019.
36
<PAGE>
PML, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 11 - RELATED PARTY TRANSACTIONS
The Company has a Technology License Agreement with Definitive
Diagnostics, Inc. ("DDI"). Certain stockholders and officers of the
Company are also stockholders and officers of DDI. The agreement, which
began on June 1, 1992, and was modified on February 28, 1997, extends
over a ten year period (including option years) from the original date.
The Company manufactures, markets and sells products originally
developed by DDI and pays royalties based upon the number of units
sold, with certain limitations on the total royalties paid. Total
royalties of $19,901 and $11,414 were incurred in fiscal 2000 and 1999,
respectively.
The Company also has related party debt, which is separately disclosed
in the balance sheet and in Note 7. In addition to the specific notes
identified by related party name, the Company has $23,164 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.
The Company leases equipment from stockholders under two operating
leases. The monthly obligations under the leases total $6,500 per
month. Total rental expense paid to stockholders for all leases was
$78,000 in both fiscal 2000 and 1999.
NOTE 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 2000 and 1999.
2000 1999
------------ ------------
Net sales:
United States $ 8,641,648 $ 8,263,747
Canada 5,360,290 5,554,816
------------ ------------
Total net sales $ 14,001,938 $ 13,818,563
============ ============
Operating income:
United States $ 557,419 $ 88,576
Canada 297,938 (33,576)
------------ ------------
Total operating income $ 855,357 $ 55,000
============ ============
Identifiable assets:
United States $ 3,646,950 $ 3,975,425
Canada 2,411,460 1,738,553
------------ ------------
Total identifiable assets $ 6,058,410 $ 5,713,978
============ ============
37
<PAGE>
PML, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 12 - FOREIGN OPERATIONS (continued)
Net currency transaction losses from Canada were $16,677 and $30,512 in
2000 and 1999, respectively.
Sales between geographic areas and export sales are not material.
The Company maintains separate accounting ledgers 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.
NOTE 13 - EARNINGS PER SHARE CALCULATIONS
Information needed to calculate basic earnings per share:
For the year ended May 31,
2000 1999
---------- ----------
Numerator:
Net income $ 392,079 $ (213,601)
Preferred stock dividends accreted (49,348) (47,236)
---------- ----------
$ 342,731 $ (260,837)
========== ==========
Denominator:
Average number of common shares
outstanding 1,785,441 1,780,441
Average number of Class B common
stock outstanding 211,551 211,551
---------- ----------
Average shares used in basic EPS calculation 1,996,992 1,991,992
========== ==========
Basic (loss) income per share $ 0.17 $ (0.13)
========== ==========
38
<PAGE>
PML, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 13 - EARNINGS PER SHARE CALCULATIONS (continued)
Information needed to calculate diluted earnings per share:
For the year ended May 31,
2000 1999
---------- ----------
Basic income (loss) $ 342,731 $ (260,837)
Add back preferred stock dividends accreted* - -
---------- ----------
Diluted (loss) income after add back of
accreted dividends $ 342,731 $ (260,837)
========== ==========
Denominator
Average number of common shares outstanding 1,785,441 1,780,441
Average number of Class B common stock
outstanding 211,551 211,551
Effect of common stock equivalents* 102,636 -
Effect of preferred convertible stock* - -
---------- ----------
Average shares used in diluted EPS calculation 2,099,628 1,991,992
========== ==========
Diluted (loss) income per share $ 0.16 $ (0.13)
========== ==========
*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 2000, amounts excluded were $49,348 of accreted
dividends, 99,117 shares of common stock equivalents and 176,786 shares
of preferred convertible stock. In fiscal 1999, amounts excluded were
$47,236 of accreted dividends, 99,117 shares of common stock
equivalents and 176,786 shares of preferred convertible stock.
39
