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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934
For the fiscal year end September 30, 1995
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OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF
1934
Commission File Number: 0-10128
PERSONAL DIAGNOSTICS, INCORPORATED
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(Exact name of registrant as specified in its charter)
NEW JERSEY 22-2325136
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
P.O. Box 5310, Parsippany, New Jersey 07054
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (201) 952-9000
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Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of each exchange
on which registered
None None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in part
III of this Form 10-K or any amendment to this Form 10-K. / /
The aggregate market value of the voting stock held by non-affiliates
of the registrant was approximately $1,875,000 based upon the average closing
bid and ask price for the Company's Common Stock, $.01 par value, as reported
by the National Association of Securities Dealers Automated Quotation System on
December 15, 1995.
Indicate the number of shares outstanding of each of the registrants
classes of common stock, as of the latest practicable date.
Class Outstanding at December 15, 1995
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Common Stock, $.01 par value 4,864,000
DOCUMENTS INCORPORATED BY REFERENCE: NONE
Page 1 of 17
Exhibit Index on Page 18
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1995 Annual Report on Form 10-K
TABLE OF CONTENTS
PART 1 Page
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Item 1 Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2 Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Item 3 Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Item 4 Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . 6
PART II
Item 5 Market for the Registrant's Common Stock and Related Security Holder Matters . . . . . 6
Item 6 Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations . 8
Item 8 Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . 9
Item 9 Disagreements on Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . 9
PART III
Item 10 Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . 9
Item 11 Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Item 12 Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . 15
Item 13 Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . 16
PART IV
Item 14 Exhibits, Financial Statements Schedules and Reports on Form 8-K . . . . . . . . . . . 16
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ITEM 1 BUSINESS
GENERAL
Prior to May 15, 1995, Personal Diagnostics operated a contract
manufacturing business primarily devoted to the production of orthopedic
products and the assembly of various medical systems. During early fiscal
1995, the company essentially completed its assembly operations and on May 15,
1995, concluded the sale of its manufacturing plant and equipment to EBI
Medical Systems, Inc. for 4.4 million dollars.
Subsequent to May 15, 1995 the Company retained ownership of
receivables which it focused on collecting and other miscellaneous assets which
it sold. Management continued to work diligently to assure that the Company's
obligations to customers, employees and others were honored completely. The
Company has continuing potential product liability exposure for equipment
manufactured over the years. The Company has maintained product liability
insurance and knows of no present or threatened claim.
Management intends to continue in business and has no intention to
liquidate the Company. The Company is considering various alternatives
including the possible acquisition of an existing business, but to date, has
found possible opportunities unsuitable or excessively priced. Frankly,
management believes that patience may bring about a more favorable climate for
acquisition or other business arrangement. The Company is also considering
developing a business itself, believing that the start up costs may be
preferable to the premiums required to purchase a going concern. Management
intends to continue this review process over the coming months. The Company
does not contemplate limiting the scope of its review of potential business
opportunities to any particular industry, but will assess the merits of a
potential transaction in any industry or business in which the Company believes
it can maximize value for its shareholders. No assurance can be given that any
transaction will occur.
The Company intends to continue its investing and trading activities
and as a consequence the future financial results of the Company may be subject
to substantial fluctuation. Mr. Michael, the President of the Company is a
graduate of Harvard Business School (MBA). As part of the Company's investment
activities the Company may buy and sell a variety of equity, debt or derivative
securities including market index options and future contracts. Such
investments often involve a high degree of risk and must be considered
extremely speculative. Futures Contracts are particularly risky since a
relatively small amount of capital controls a large nominal market value thus
greatly exaggerating the exposure to potential losses.
At September 30, 1995, more than 80% of total Company assets were held
in U.S. Government Treasury Bills. The Company had no other trading or
investment positions. Since it is the intention of the Company to acquire or
develop an operating business, the Company presently intends to limit its
trading and investment positions to no more than approximately one-quarter of
its total assets.
EMPLOYEES
The Company currently has one full time and three part-time employees
including officers. The Company intends to develop and implement a new
corporate strategy. At the present time the Company is heavily dependent on
the skills of John H. Michael, the Company's president, who is 52 years old and
a graduate of Georgetown University School of Foreign Service and Harvard
Business School.
Background of the Company and Reason for the Sale of Assets
The Company was organized in September 1980 under the laws of New
Jersey primarily to engage in the development, production and marketing of
proprietary medical devices for the invitro diagnostic field. Following the
acquisition of Lydo Precision Products, Inc. ("Lydo") in February 1984, the
Company became a vertically integrated contract manufacturer of medical
diagnostic equipment and in the years that followed extended its contract
manufacturing operations to a broad array of medical instrumentation and
surgical and orthopedic products.
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During the past five years, the Company became almost exclusively a
contract manufacturer. During 1994, due to a lack of business, the Company
ceased contract instrumentation assembly activities. The Company continued to
provide contract precision machining service to several clients including
Implex Corp., Biometrix Corporation, Site Microsurgical, Lepton Corporation,
Kirschner Orthopedics and Cross Medical. The Company provided various surgical
devices and tools as well as a variety of parts for orthopedic hips, knees and
other medical implants.
During the 18-month period ended December 31, 1994, the Company
experienced a severe decline in both the number of its clients and in the
continuing revenue contributions from its remaining client base. Osteonics
Corp., which contributed approximately 46%, 33% and 5% of total Company revenues
in fiscal 1992, 1993 and 1994, respectively, ceased placing sales orders with
the Company. Similarly, Cirrus Diagnostics, which contributed approximately 7%,
28% and 33% of the Company's revenues in fiscal 1992, 1993 and 1994,
respectively, ceased its business relationship with the Company. Further, Baxter
Healthcare, which accounted for approximately 8%, 10% and less than 1% of the
Company's revenues in fiscal 1992, 1993 and 1994, respectively, ended its
business relationship with the Company. Management believes the termination of
these major business relationships resulted principally from internal
developments at each of these clients. These developments included management
changes at Osteonics Corp. and the development of internal domestic and
overseas manufacturing capability by Cirrus Diagnostics subsequent to its
acquisition by Diagnostics Products.
In an effort to increase business activity and revenues during the
18-month period ended December 31, 1994 the Company aggressively attempted both
to renew old business relationships and establish new clients but was not
sufficiently successful. As business volume declined, the Company reduced
staff and reduced expenses. In November 1993, the number of employees was
reduced to approximately 85 from over 120 in June 1993. During March and April
of 1994, the staff was again reduced to approximately 65. Additionally, pay
levels were essentially frozen or reduced with a ceiling of $5,000 per month
established on cash compensation to any employee or executive. During this
period, members of the Company's Board frequently discussed on an informal
basis the Company's efforts in building sales, reducing costs, and its
prospects for profitable operations. The Board's approach was to continue the
Company's efforts to preserve and enhance its existing customer relationships
and develop new clients to absorb the excess capacity at its Premises.
The continuing decline in revenues during the third and fourth quarter
of fiscal 1994 resulted in the Company again reducing its staff to
approximately 32 employees. Notwithstanding the staff reductions, the Company
continued to pursue increased business with existing and prospective customers.
This effort continued actively into January 1995 until the Company's
discussions with Biomet/EBI. During this period the Board familiarized itself
with the value of the Company's manufacturing assets through informal valuation
assessments from real estate professionals, through available information
concerning the sales price of similar area facilities and through the Company's
routine purchase and sale of manufacturing equipment during the normal course
of business operations. While the sale of the Company's manufacturing assets
was an alternative available to the Board during this period of declining
revenues and losses, the Board, through numerous informal discussions,
preferred to attempt to continue the business, reduce costs and rebuild
revenues in an effort to return to profitable operations.
On January 19, 1995, Mr. Michael was contacted by representatives of
Kirshner Medical, which entity had been recently acquired by Biomet in November
1994. Mr. Michael was asked if he would welcome a visit from a representative
of Biomet and whether the Company's business might be available for purchase.
Mr. Michael indicated that he would entertain general discussions concerning
the possible sale of the Company's manufacturing assets and it was agreed that
a visit with representatives of Biomet would occur the following week.
In response to Biomet inquiry, the Board of Directors convened a
special meeting on Friday, January 20, 1995 to discuss the possible interest of
Biomet in acquiring the Company's manufacturing assets and to address
generally, in the context of a formal meeting of the Board, increasing concern
about the competitive environment in which the Company was operating and the
increasing drain on the Company's cash reserves required to maintain its
present operations. At the meeting, the Company's status and future were
reviewed by the Board of Directors in view of the Company's inability to
maintain competitive standing in the marketplace. In evaluating strategic
alternatives, the Company's Board and Management considered a number of
options, including the continued operation of its current business, combining
with a stronger partner and the sale and/or lease of all or a portion of its
manufacturing assets. Recognizing that the Company had been unsuccessful in
replacing lost sales volume and
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was continuing to deplete its cash reserves, as well as Management's belief
that the prospects for achieving profitable operations in the near future were
remote, the Board assessed the feasibility of continuing to operate the
Company's current business. On balance, the Board determined that the sale
and/or lease of all or a portion of the Company's manufacturing assets
presented the best opportunity to maximize shareholder value. While no formal
valuation of the Purchased Assets was prepared and no financial advisor
consulted or retained to assist the Board in assessing the merits of a proposed
sale and/or lease transaction, as discussed in detail below, the Board had
assimilated sufficient information concerning the value of the Purchased Assets
in order to properly assess the fairness of a proposed transaction.
Accordingly, the Board authorized Mr. Michael to negotiate with Biomet for the
purpose of reaching agreement on the sale and/or lease of all a portion of the
Company's manufacturing assets. Mr. Michael's grant of authority from the
Board was sufficiently broad to enable Mr. Michael to negotiate the terms of a
proposed sale and/or lease of all or a portion of the Company's manufacturing
assets, subject to final approval and ratification of such terms by the Board.
On Wednesday, January 25, 1995, two representatives of Biomet met with
Mr. Michael and toured the Company's manufacturing operation. On Friday,
January 27, 1995, Mr. Michael, responding to a second request from Biomet,
provided several additional executives of Biomet and its subsidiary EBI, with a
tour of the Company's Premises. During the course of this meeting, EBI
expressed specific interest in acquiring the Purchased Assets and after
negotiations with Mr. Michael, the parties agreed in principle on a purchase
price of $4,400,000, contingent on the satisfaction of certain conditions. On
January 31, 1995, the Board of Directors of the Company held a special
telephonic meeting during which the terms and provisions of a draft of the
Letter of Intent prepared to memorialize the purchase and sale transaction were
reviewed and discussed. During the course of such meeting the Board
unanimously approved the Letter of Intent, and the actions of Mr. Michael in
negotiating the Letter of Intent were ratified and affirmed. On February 1,
1995, the definitive Letter of Intent was executed by EBI and the Company and
EBI deposited $500,000 with the Company to be applied to the purchase of the
Purchased Assets.
While the parties did not rely on a formal valuation of the Purchased
Assets in determining the purchase price, Management and the Board of Directors
had substantial knowledge of the values involved in determining a fair purchase
price. With respect to the Premises, the Board and Management had an active
current knowledge of local real estate values resulting from the fairly recent
acquisition of the Premises and the cost of capital improvements, as well as
its familiarity with the sales price of similar neighboring properties and
informal real estate appraisals received by the Board during the third and
fourth quarter of fiscal 1994. Additionally, the Board and Management had
substantial knowledge as to the value of the Company's machinery, equipment
and related assets as a result of their efforts to modernize the Company's
Premises and operation during which time Management actively bought and sold
new and used manufacturing equipment. Management was also familiar with
original equipment and previously-owned equipment markets and was knowledgeable
concerning principal, agent, and end-user values for the Company's machinery,
equipment, tools, gauges and fixtures.
On March 17, 1995, the Purchase Agreement was executed by EBI and the
Company. The Board of Directors believes that the Company's exit from its
business as a contract manufacturer pursuant to the sale of the Company's
manufacturing assets will serve to maximize shareholder value and was in the
best interest of the Company and its shareholders. The Board of Directors
unanimously approved the sale of the Purchased Assets as provided in the Letter
of Intent with EBI.
In reaching its conclusions, the Board of Directors considered the
following material factors:
1. The Company incurred losses of approximately $1,300,00
conducting contract manufacturing operations during the fiscal
year ended September 30, 1994 and despite aggressive cost
reduction and sales efforts continued to incur losses.
2. There were increasing competitive pressures in the contract
manufacturing segment of the healthcare industry, including
intense price competition and cost reduction efforts by
customers.
3. Costs associated with complying with more stringent
manufacturing standards were increasing.
4. The Company would experience a continuing drain on its cash
reserves should it pursue its efforts to continue as a
contract manufacturer.
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5. The Board believed that the sale of the Company's
manufacturing assets would ultimately create greater value for
shareholders than the continuing operation of these assets.
ITEM 2 PROPERTIES
At present the Company maintains offices at 3 Entin Road, Parsippany,
New Jersey for nominal rent. The Company is now in the process of relocating
its operations. The Company does not immediately expect to require more than
1500 square feet or pay more than $2,500 per month rent.
ITEM 3 LEGAL PROCEEDINGS
Not Applicable.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable.
PART II
ITEM 5 MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
SECURITY HOLDER MATTERS
(a) Market Information
The Company's Common Shares are traded on the "Bulletin Board System"
under the symbol PERS.U. The following table sets forth the high and low bid
prices of the Common Shares as reported for each quarter, as stated below since
the beginning of fiscal 1994. The quotations represent prices between dealers
without adjustment for retail mark ups, mark downs, or commissions and may not
represent actual transactions.
Trading Quarter Bid Price
- --------------- ---------
1994 High Low
---- ---- ---
December 31, 1993 (First Quarter) 2 1-3/8
March 31, 1994 (Second Quarter) 1-1/2 1-1/8
June 30, 1994 (Third Quarter) 1-7/16 7/8
September 30, 1994 (Fourth Quarter) 1-1/16 5/8
1995
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December 31, 1994 (First Quarter) 7/8 9/16
March 31, 1995 (Second Quarter) 1-5/32 9/16
June 30, 1995 (Third Quarter) 13/16 5/8
September 30, 1995 (Fourth Quarter) 7/8 11/16
1996
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December 15, 1995 (First Quarter) 7/8 3/4
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(b) Holders
As of December 15, 1995 there were approximately 510 record
holders of the Company's Common Stock. Included are shares held in "nominee"
or "street name."
(c) Dividends
The Company has paid no cash dividends on its Common Shares
and has no intention of paying cash dividends in the foreseeable future. It is
the present policy of the Board of Directors to retain all earnings to provide
for the growth of the Company. Payment of cash dividends in the future will
depend, among other things, upon future Company earnings and future Company
policy.
ITEM 6 SELECTED FINANCIAL DATA
Year Ended September 30,
OPERATING RESULTS 1995 1994 1993 1992 1991
----------------- ---- ---- ---- ---- ----
(Dollars in thousands except per share amount)
Investment Income (Loss) ($241) $215 $1,268 $452 $757
Income (Loss) From Continuing Operations (352) 69 689 200 382
Income (Loss) From Discontinued Operations (751) (1,329) 45 1,443 (2,752)(2)
Net Income (Loss) (1,103) (1,260) 734 1,643 (2,370)(2)
Per Share Data:
Income (Loss) From Continuing Operations (.07) .01 .14 .04 .08
Income (Loss) From Discontinued Operations (.09) (.27) .01 .29 (.60)(2)
Loss on Sale of Discontinued Operations (.07) - - - -
Net Income (Loss) (.23) (.26) .15 .33 (.52)(2)
Average Number of Shares Outstanding 4,864 4,864 4,941 4,935 4,564
FINANCIAL POSITION
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Working Capital $7,546 $6,785 $7,528 $7,450 $6,110
Total Assets 7,921 12,738 15,656 12,240 9,765
Long-Term Debt - 3,104 3,203 1,479 1,092
Accumulated Deficit (1) (5,819) (4,716) (3,456) (4,190) (5,833)
Total Stockholders' Equity 7,546 8,649 9,909 8,733 7,090
NOTES:
(1) No dividends have been paid since incorporation.
(2) Includes the write-off of goodwill of $2,778,000 or $.61 per share.
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ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1995, the Company had a cash and Treasury Bill
balance of $7,757,000 which represents a $2,203,000 increase from the
$5,554,000 balance at September 30, 1994. This $2,203,000 increase results
from cash flow from operations of $228,000 which represents the result of a net
loss of $1,103,000 offset by depreciation of $302,000 and loss on sale of
discontinued operations of $336,000, and changes principally in operating
assets and liabilities of $693,000. In addition, investing activities added
$4,591,000 attributable to proceeds from disposal of property and the sale of
the Company's manufacturing (discontinued) operations. Financing activities
required $3,646,000 represented by the complete payoff of the Company's term
loan and lease obligations. The Company's working capital position at
September 30, 1995 was $7,546,000 as compared to a September 30, 1994 balance
of $6,785,000.
Since the Company has ceased manufacturing operations, it has elected
not to renew its $2.5 million revolving credit line. Management believes that
the present cash and Treasury Bill balances will be sufficient to satisfy both
the Company's operating and capital needs for the foreseeable future.
A detailed description of the sale of the Company's manufacturing
operations can be found in Note 2 to the financial statements entitled
"Discontinued Operations."
The Company presently intends to acquire or develop an operating
business to create further shareholder value. Management has begun an active,
general review of acquisition possibilities and business opportunities.
Management will, of course, proceed with deliberation and prudence.
At September 30, 1995, more than 80% of total Company assets were held
in U.S. Government Treasury Bills. The Company had no other trading or
investment positions. Since it is the intention of the Company to acquire or
develop an operating business, the Company presently intends to limit its
trading and investment positions to no more than approximately one-quarter of
its total assets.
RESULTS OF OPERATIONS
As a result of the sale of the Company's manufacturing assets, the
financial results of the Company's manufacturing operation have been reported
as "Discontinued Operations" in accordance with Accounting Principles Board
Opinion No. 30. The prior years' results have been restated to conform to the
new reporting format.
FISCAL YEAR 1995 COMPARED TO 1994
Income (Loss) from Continuing Operations
Income from continuing operations consists of interest and trading
gains and losses, general and administrative expenses and an income tax credit.
The Company incurred a $352,000 loss from continuing operations in the current
year versus earnings of $69,000 in the prior year. Interest income increased
$136,000 to $317,000 due to more invested funds and higher interest rates. The
Company experienced trading losses of $558,000 substantially attributable to
losses on Standard & Poor's 500 index contracts. For the comparable prior year
period the Company experienced trading gains of $34,000.
During the current year the Company's income tax benefit of $14,000
related to its remaining loss carrybacks.
Discontinued Operations
During the current year, the Company incurred a $415,000 loss from
discontinued operations versus a loss of $1,329,000 in the prior year. Net
sales in the current year were $1,907,000 versus $6,278,000 in the prior year.
This decline in sales of $4,371,000 or 70% results from a decline of business
with major customers and the sale of the manufacturing assets
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on May 15, 1995. The operating loss for both years results from the Company's
inability to lower fixed costs and expenses in proportion to the sales decline.
In addition to its operating loss, the Company incurred a loss on the
sale of its manufacturing operations of $336,000. See Note 2 to the Company's
financial statements for a description of the sale transaction.
Fiscal Year 1994 compared to 1993
Income (Loss) from Continuing Operations
Income from continuing operations consists of interest and trading
gains and losses offset by general and administrative expenses and income
taxes. In 1994 the Company experienced income from continuing operations of
$69,000 versus $689,000 in the prior year. Interest income increased by
$63,000 due to higher invested funds. The net trading gains of $34,000
experienced in 1994 were $1,116,000 lower than the $1,150,000 gains achieved by
the Company for the prior year. General and administrative expenses of
$120,000 were the same as the prior year.
Discontinued Operations
During 1994 the Company incurred a loss from discontinued operations
of $1,329,000 versus income of $45,000 in the prior year. Net sales in the
current year were $6,278,000 versus $15,160,000 or a decline of $8,882,000 or
59%. This decline in revenue reflects an overall deterioration of business in
the current year resulting from internal changes at key customers as well as
changes within the healthcare industry overall. The operations loss in the
current year reflects the Company's inability to lower fixed costs and expenses
in proportion to the sales decline.
Inflation
The Company believes that inflation does not have a material adverse
effect on the results of operations at the present time.
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The response to this item is submitted as a separate section of this
Report commencing on page F-1.
ITEM 9 Disagreements on Accounting and Financial Disclosure.
Not applicable.
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Mr. Michael has served as a director of the Company since 1980. In
1986 he was appointed Chairman of the Board of Directors and Chief Executive
Officer and in 1987 he was named President. Mr. Michael graduated from
Georgetown University School of Foreign Service in 1964 (BSFS) and Harvard
Business School (MBA) in 1969. Mr. Michael is a Director and member of the
Executive Committee of Noxso Corporation, a public company engaged in the
development and testing of a process to remove from flue gas those pollutants
which cause "acid rain." Mr. Michael is the brother-in-law of William P.
Oberdorf who is also a member of the Board of Directors of the Company.
R. Gale Rhodes, Jr. is an attorney-at-law in the State of New Jersey.
Mr. Rhodes is patent counsel to the firm of Evans, Osborne & Kreizman located
in Little Silver, New Jersey. Mr. Rhodes is patent counsel to the Company and
has been a member of the Board of Directors of the Company since 1980. He has
practiced law for over twenty-five years.
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William P. Oberdorf has been a partner in the law firm of Robinson,
St. John & Wayne since October 1990. He was a partner in the law firm of St.
John, Oberdorf, Williams, Edington & Curtin from September 1987 until October
1990. Mr. Oberdorf is corporate counsel to the Company and has served as a
member of the Company's Board of Directors since April 1989. Mr. Oberdorf is
the brother-in-law of John H. Michael.
Directors of the Company are elected by the Company's shareholders and
serve in such capacity until the Company's next annual meeting, and until their
successors are elected and qualified. Officers of the Company serve at the
pleasure of the Board of Directors.
ITEM 11 EXECUTIVE COMPENSATION
The following table sets forth a summary for the fiscal years ended
September 30, 1995, 1994 and 1993, of the cash compensation paid by the
Company, as well as certain other compensation paid or accrued for those years,
to the Company's Chief Executive Officer. No disclosure is provided as to the
cash compensation paid by the Company to other executive officers of the
Company since the compensation paid to each such executive officer was less
than $100,000 in the fiscal year ended September 30, 1995.
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation
------------------- ----------------------
Name and Principal Fiscal Other Annual Options(# All Other
Position Year Salary Bonus Compensation(2)($) of Shares) Compensation(4)($)
-------- ---- ------ ----- ------------------ ---------- ------------------
John H. Michael, 1995 $135,000 [of which - - 1,300
Chairman, Chief $75,000 was deferred]
Executive Officer,
President, 1994 $135,000 - - 300,000(3) 1,700
Treasurer,
and Secretary 1993 135,000 $441,962(1)(5) $319,823(1) - 2,700
10,000
__________________________
(1) of the $761,785 of supplemental compensation received by Mr. Michael in
fiscal 1993 (representing the aggregate of the "Bonus" and "Other Annual
Compensation" columns), $441,962 was immediately returned to the Company upon
the exercise of certain stock options to acquire stock in the Company and the
balance of $319,823 was a reimbursement for resulting tax liabilities.
(2) Represents a reimbursement to Mr. Michael for the tax liability arising
from the bonus payments to Mr. Michael in fiscal 1993, which bonus payments
were used entirely for the exercise of outstanding stock options to purchase
the Company's common stock.
(3) On August 8, 1994, 312,500 incentive stock options granted to Mr. Michael
under the Company's 1986 Stock Option Plan and 112,900 incentive stock options
granted to Mr. Michael under the Company's 1988 Stock Option Plan were
surrendered and cancelled in exchange for 300,000 incentive stock options
granted under the Company's 1988 Stock Option Plan, each having an exercise
price of $.70 per share. The new options are exercisable in 100,000 share
increments on each of September 15, 1994, January 1, 1995 and January 1, 1996.
(4) Represents contributions to the Company's 401(k) Plan on behalf of Mr.
Michael to match pre-tax elective deferral contributions (included under the
salary column) made to such Plan.
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(5) The bonus of $441,962 paid to Mr. Michael in fiscal 1993 was used in its
entirety to exercise outstanding stock options to purchase the Company's common
stock as follows: (a) $155,250 dedicated to the exercise of (i) 75,000
incentive stock options at an exercise price of $1.60 per share and (ii) 25,000
non-qualified stock options at an exercise price of $1.41 per share; and (b)
$286,712 dedicated to the exercise of (i) 175,200 non-qualified stock options
at an exercise price of $1.41 per share and (ii) 24,800 incentive stock
options at an exercise price of $1.60 per share.
PERFORMANCE GRAPH
The following graph provides a comparison on a cumulative basis of the
yearly percentage change over the last five fiscal years in (a) the total
shareholder return on the Company's Common Stock with (b) the total return on
the NASDAQ Stock Market of all domestic issues traded on the NASDAQ's NMS and
Small-Cap Market ("NASDAQ Stock Market Index") and (c) the total return of
domestic issuers having the same Standard Industrial Classification Industry
Group Number as the Company (SIC 3840) and traded on the Small- Cap Market (the
"Industry Index"). Such yearly percentage has been measured by dividing (i)
the sum of (A) the amount of dividends for the measurement period, assuming
dividend reinvestment, and (B) the difference between the price per share at
the end and at the beginning of the measurement period, by (ii) the price per
share at the beginning of the measurement period. The NASDAQ Stock Market
Index has been selected as the required broad equity market index. The
Industry Index consists of publicly traded companies in a business similar to
that of the Company. The price of each investment union has been set at
$100.00 on September 30, 1989 for purposes of preparing this graph.
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURNS
-11-
12
1989 1990 1991 1992 1993 1994
Personal Diagnostics, Incorporated 100.0 46.7 39.3 78.5 57.9 20.6
NASDAQ Stock Market (US Companies) 100.0 74.4 117.0 131.1 171.7 172.2
NASDAQ Stocks (SIC 3840-3849 US Companies) 100.0 98.8 185.3 161.4 148.4 155.2
Surgical, Medical, and Dental Instruments and
Supplies
Notes:
A. The lines represent monthly index levels derived from compounded
daily returns that include all dividends.
B. The indexes are reweighted daily, using the market capitalization
on the previous trading day.
C. If the monthly interval, based on the fiscal year-end, is not a
trading day, the preceding trading day is used.
D. The index level for all series was set to $100.0 on 09/29/89.
EMPLOYMENT AGREEMENT
John H. Michael is presently employed pursuant to an employment
agreement effective as of April 1, 1990, which provides that Mr. Michael will
serve as the Company's President and Chief Executive Officer. Pursuant to the
agreement, Mr. Michael's annual base salary is $135,000 subject to increase
upon review by the Board of Directors of the Company. The agreement does not
require that Mr. Michael devote a minimum amount of time to the affairs of the
Company, however, it is anticipated that Mr. Michael will devote a majority of
his business time and efforts to the Company. Mr. Michael is also restricted
from disclosing, disseminating or using for his personal benefit or the benefit
of others information deemed "Confidential" as defined in the agreement. The
agreement does not restrict Mr. Michael's ability to work for a competitor of
the Company.
In September 1992, the Board of Directors and John Michael concluded
an extension of his employment agreement from March 31, 1993 to March 31, 1996.
In conjunction with this extension the Board awarded Mr. Michael supplemental
compensation grossed up for state and federal income taxes and payable in each
of three years to exercise 100,000 existing stock options each year. Mr.
Michael agreed to simultaneously cancel an additional 150,000 existing
non-qualified stock options in the amount of 50,000 stock options in each of
the three years. The supplemental compensation paid to Mr. Michael net of
income taxes was immediately returned to the Company to purchase the stock
option shares.
In December 1992 the Company paid Mr. Michael the first installment
pursuant to this agreement. In June 1993, the Company and Mr. Michael revised
this agreement and accelerated the two remaining installments which were paid
during June 1993. As part of this revision, Mr. Michael agreed to be liable for
certain federal and state taxes beyond the rate of 40% on this supplemental
compensation. In addition, no additional stock options would be canceled beyond
the 50,000 canceled in December 1992. After giving effect to the tax benefits
to the Company and the immediate reinvestment by Mr. Michael of the net
supplemental compensation, the overall cash cost to the Company was immaterial.
In August 1994, the Company and Mr. Michael further modified his
Employment Agreement. Pursuant to the terms of the Amendment, Mr. Michael
agreed to defer until January 1, 1996 his cash compensation in excess of $5,000
per month for the period commencing April 1, 1994 through December 31, 1995.
Mr. Michael also agreed to surrender and cancel his existing Incentive Stock
Options to purchase up to 425,400 shares in the Company's Common Stock. In
consideration for these actions, the Company granted to Mr. Michael Incentive
Stock Options to purchase 300,000 shares of the Company's Common Stock at an
exercise price of $.70 per share. See "Option Grants in Last Fiscal Year."
-12-
13
SAVINGS AND BENEFIT PLANS
The Company has a 401(k) savings/retirement plan under which all the
Company's eligible employees including executive officers are entitled to
benefits. The plan allows for the employee contributions to be matched by the
Company on a pro-rata basis. Contributions made by the Company amounted to
$58,000, $37,000 and $11,000 for the fiscal years ended September 30, 1993,
1994 and 1995, respectively. Executive officers who qualify will also be
permitted to participate in the Company's Stock Option Plans as well as the
401(k) plan. Executive officers participate in group life, and medical plans
which are available generally to all employees.
DIRECTORS
The Company's outside Directors are reimbursed for their out-of-pocket
expenses incurred in connection with their attendance at each Board meeting.
STOCK OPTION PLAN AND WARRANTS
On April 23, 1986 and April 28, 1988, the Board of Directors adopted
Employee Stock Option Plans which were approved by the Company's shareholders.
Under the 1986 Plan, which terminates in 1996, options to purchase no more than
150,000 Common Shares may be granted. Under the 1988 Plan, which terminates in
1998, options to purchase no more than 450,000 Common Shares may be granted.
On September 17, 1990 the Board of Directors adopted the 1990 Stock Option Plan
which terminates in the year 2000, and authorizes the granting of options to
purchase no more than 300,000 common Shares. The 1990 Stock Option Plan was
approved by the Company's shareholders at their annual meeting on September 12,
1991. (Hereinafter the 1986, 1988 and 1990 Plans shall be collectively referred
to as the "Plans")
The Plans authorized the granting of either "incentive stock options,"
as defined in Section 422 of the Internal Revenue Code of 1986, as amended, or
"non-qualified stock options" to acquire the Company's Common Shares. On April
28, 1988, the Board of Directors amended and restated the Company's 1986 and
1988 Plans such that with the exception of the term of the Plans and the number
of shares that may be granted pursuant to the Plans, the Plans are now
essentially identical. Outstanding options to purchase 300,000 Common Shares
have been granted as of September 30, 1995.
Currently, the Company has one employee and two non-employee directors
eligible to participate in the Plans. The shares available for issuance will be
increased or decreased according to any reclassification, recapitalization,
share split, share dividend or other such sub-division or combination of the
Company's Common Shares. Any moneys received by the Company from the exercise
of options will be used for working capital. Additionally, the Company has
granted registration rights to John H. Michael, on his outstanding options to
purchase 300,000 Common Shares.
-13-
14
AGGREGATE OPTION EXERCISE IN LAST FISCAL YEAR
AND FY-END OPTION VALUES
TO BE COMPLETED
Number of Value of
Securities underlying unexercised
unexercised in-the-money
options at fiscal options at
year-end fiscal year-end
(#) ($)
Shares
acquired on Value Exercisable/ Exercisable/
Name exercise (#) Realized ($) Unexercisable Unexercisable
John H. Michael(1) 0 0 200,000/100,000 $20,000/$10,000
- -----------
(1) On August 8, 1994, 312,500 incentive stock options granted to Mr. Michael
under the Company's 1986 Stock Option Plan and 112,900 incentive stock options
granted to Mr. Michael under the Company's 1989 Stock Option Plan were
surrendered and cancelled in exchange for 300,000 incentive stock options
granted under the Company's 1988 Stock Option Plan, each having an exercise
price of $.70 per share. The new options are exercisable in 100,000 share
increments on each of September 15, 1994, January 1, 1995 and January 1, 1996.
(2) The exercise price may be paid in cash, in shares of Common Stock valued at
fair market value on the date of exercise, or through a combination of such
methods. The exercise price equals 110% of the fair market value of the shares
of the Company's Common Stock on the date of grant. The above-market exercise
price of the options at the date of grant is required under the regulations
promulgated under Section 422 of the Internal Revenue Code of 1986, as amended
for the grant of incentive stock options to an optionee owning in excess of 10%
of the Company's voting stock at the date of grant.
ELIGIBILITY
Any person who is employed by the Company shall be eligible to receive
incentive stock options under the Plans. The Plans permit non-qualified stock
options to be granted to directors and consultants, as well as employees. Any
employee who already owns 10 percent or more of the total combined voting power
of all classes of the Company's stock shall be eligible to receive incentive
stock options only under certain limited circumstances.
EXERCISE PRICE OF OPTIONS
Options granted pursuant to the Plans must have an exercise price no
less than the fair market value of the Company's Common Shares at the time the
option is granted, except that in the case of an incentive stock option the
price shall be at least 110 percent of the fair market value when the option is
granted to an employee who owns more than 10 percent of the combined voting
power of all classes of the Company's voting stock at the date of grant. Under
the terms of the Plans, the aggregate fair market value of the stock with
respect to which incentive stock options are exercisable for the first time by
such individual during any calendar year shall not exceed $100,000.
AMENDMENTS AND DISCONTINUANCE
The Plans can be amended, suspended, or terminated at any time by
actions of the Company's Board of Directors except that no amendment to the
Plans can be made without prior shareholder approval where such amendment would
(i) increase the total number of shares of stock which may be purchased under
the Plans; (ii) materially modify the eligibility requirements of the Plans; or
(iii) materially increase the benefits accruing to the participants under the
Plans.
ADMINISTRATION
-14-
15
The Board of Directors has appointed a Stock Option Committee
consisting of William P. Oberdorf and R. Gale Rhodes, Jr. Mr. Rhodes is the
Chairman of the Stock Option Committee. The Stock Option Committee determines
the individuals who will be granted options, the number of options each
individual will receive, the option price per share and the exercise period of
each option.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Board of Directors determines the compensation paid to
the executive officers of the Company and consisted of John H. Michael, R. Gale
Rhodes, Jr. and William P. Oberdorf during fiscal 1995. Mr. Michael is the
Chairman of the Board of Directors, Chief Executive Officer, President,
Treasurer and Secretary of the Company. Mr. Rhodes, who has been a member of
the Board of Directors since 1980, is a partner in the law firm of Evans,
Osborne & Kreizman, which has been retained as the Company's patent counsel.
The amount of fees paid by the Company to Evans, Osborne & Kreizman did not
exceed 5% of the firm's total revenues for its last fiscal year. Mr.
Oberdorf, who became a member of the Board of Directors of the Company in
April, 1989, is a partner in the law firm of Robinson, St. John & Wayne, which
has been retained as the Company's general counsel. The amount of fees paid by
the Company to Robinson, St. John & Wayne do not exceed 5% of the firm's total
revenues for its last fiscal year.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's officers and directors, and persons who own more than
10% of a registered class of the Company's equity securities, to file reports
of ownership and changes in ownership with the Securities and Exchange
Commission and NASDAQ, copies of which are required by regulation to be
furnished to the Company.
Based solely on review of the copies of such forms furnished to the
Company, the Company believes that during fiscal 1995 its officers, directors
and ten percent (10%) beneficial owners complied with all Section 16(a) filing
requirements.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Set forth below is information concerning the beneficial ownership of
the Company's Common Stock by each Director, by all Directors and Officers of
the Company as a group and by each person known to the Company to be the
beneficial owner of more than 5% of the outstanding shares of the Company's
Common Stock based upon the number of shares of Common Stock outstanding on
December 15, 1995.
Name and Address of Beneficial Amount and Nature
Owner (1) of Beneficial Ownership Percent of Class
------------------------------ ----------------------- ----------------
John H. Michael
1810 24th Street N.W.
Washington, D.C. 2,898,189(2) 56.12%
R. Gale Rhodes, Jr. - -
6 Broadmoor Drive
Rumson, New Jersey
-15-
16
William P. Oberdorf 33,000 0.64%
59 Wardell Avenue
Rumson, New Jersey
All Directors and Officers as - -
a group (3 persons)
- ------------
(1) Unless otherwise indicated each person has sole voting and investment
powers with respect to the shares specified opposite his name.
(2) Includes 300,000 Common Shares which Mr. Michael has the right to
acquire within 60 days upon the exercise of incentive stock options
granted pursuant to the 1988 Plan.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The law firm of Robinson, St. John & Wayne received legal fees from
the Company for services rendered during the 1995 fiscal year. William P.
Oberdorf, is a Partner in the firm of Robinson, St. John, & Wayne and is a
member of the Board of Directors of the Company.
R. Gale Rhodes, Jr., patent counsel to the firm of Evans, Osborne &
Kreizman, patent counsel for the Company, received legal fees from the Company
for services rendered during the 1995 fiscal year. Mr. Rhodes is a member of
the Board of Directors of the Company.
PART IV
ITEMS 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
The response to this portion of Item 14 is submitted
as a separate section of this Report Commencing on
page F-1.
(a)(2) Inapplicable
(a)(3) List of Exhibits
The exhibits which are filed with this Report or which
are incorporated herein by reference are set forth In
Exhibits Index which appears at page 18 hereof.
-16-
17
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized.
PERSONAL DIAGNOSTICS, INCORPORATED
By: /s/ John H. Michael
---------------------------
John H. Michael
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of
1934, this Report is signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ John H. Michael Chairman of the Board, December 28, 1995
- ------------------------------ Chief Executive Officer,
John H. Michael President, Treasurer and
Secretary
/s/ R. Gale Rhodes, Jr. Director December 28, 1995
- ------------------------------
R. Gale Rhodes, Jr.
/s/ William P. Oberdorf Director December 28, 1995
- ------------------------------
William P. Oberdorf
The Company has not furnished an annual report or proxy materials
to security holders to date, but plans to distribute an Annual Report and Proxy
Statement subsequent to the filing of this Form 10-K and the Company will
furnish copies of such material to the Commission when they are sent to
security holders.
-17-
18
EXHIBITS
INCORPORATED DOCUMENTS SEC DOCUMENT OR EXHIBIT NO.
---------------------- ---------------------------
1. Articles of the Corporation To be filed by amendment
2. Bylaws of the Corporation Filed Form S-1 October 7, 1983
File No. 2-86991
3. Proxy dated April 4, 1995 Filed April 6, 1995
4. Report on Form 8-K dated May 15, 1995 Filed May 18, 1995
File No. 1-10128
5. Amended and Restated 1986 Employee's Filed Form 10-K December 29, 1988
Stock Option Plan of the Company File No. 1-10128
6. 1988 Employees Stock Option Plan of Form 10-K filed December 29, 1988
the Company File No. 10128
7. 1990 Employees Stock Option Plan of Form 10-K filed December 24, 1990
the Company File No. 10128
8. Employment Agreement between Form 10-K
John H. Michael and the Company Filed December 24, 1990
dated April 1, 1990 File No. 1-10128
9. Addendum to Employment Agreement Form 10-K filed December 19, 1992
between John H. Michael and the Company File No. 1-10128
10. First Addendum to Employment Agreement Form 10-K filed December 29, 1993
with John H. Michael dated July 16, 1993 File No. 10128
11. Further Modification of Mr. Michael's Form 10-K filed December 28, 1994
Employment Agreement dated August 1994 File No. 1-10128
12. EBI Asset Sale Agreement Proxy filed April 6, 1995
27. Financial Data Schedule Filed herewith
All other schedules are omitted because they are not applicable or
required information is shown in the financial statements or related notes
thereto.
-18-
19
PERSONAL DIAGNOSTICS, INCORPORATED
INDEX
PAGE
Independent Auditors' Report .................................... F-2
Balance Sheets as of September 30, 1995 and 1994................. F-3
Statements of Operations for the Years Ended
September 30, 1995, 1994 and 1993.............................. F-4
Statements of Changes in Stockholders' Equity for the
Years Ended September 30, 1995, 1994 and 1993.................. F-5
Statements of Cash Flows for the Years Ended
September 30, 1995, 1994 and 1993.............................. F-6
Notes to Financial Statements ................................... F-7 - F-12
Schedule VIII - Valuation and Qualifying Accounts................ F-13
All other schedules are omitted since the required information is not present or
is not present in amounts sufficient to require submission of the schedules, or
because the information required is included in the financial statements and
notes hereto.
F-1
20
INDEPENDENT AUDITORS' REPORT
Board of Directors
Personal Diagnostics, Incorporated
We have audited the financial statements of Personal Diagnostics, Incorporated
as of September 30, 1995 and 1994 and for each of the three years in the period
ended September 30, 1995 as listed in the accompanying index. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with 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 audits 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 Personal Diagnostics,
Incorporated at September 30, 1995 and 1994, and the results of its operations
and its cash flows for each of the three years in the period ended September 30,
1995 in conformity with generally accepted accounting principles.
As discussed in Note 1 to the financial statements, the Company changed its
method of accounting for equity securities in 1995 and for income taxes in 1994.
WISS & COMPANY, LLP
Livingston, New Jersey
October 16, 1995
F-2
21
PERSONAL DIAGNOSTICS, INCORPORATED
BALANCE SHEETS
September 30,
----------------------------
ASSETS 1995 1994
------------ ------------
CURRENT ASSETS:
Cash and equivalents $ 2,794,000 $ 5,554,000
U.S. Treasury Bills 4,963,000 --
Marketable securities -- 1,030,000
Current assets of discounted operations 148,000 730,000
Other current assets 16,000 456,000
------------ ------------
Total Current Assets $ 7,921,000 7,770,000
ASSETS OF DISCONTINUED OPERATIONS- NON CURRENT -- 4,968,000
------------ ------------
$ 7,921,000 $ 12,738,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 12,000 $ --
Accrued payroll 143,000 --
Current Liabilities of discontinued operations 150,000 915,000
Other current liabilities 70,000 70,000
------------ ------------
Total Current Liabilities 375,000 985,000
------------ ------------
LIABILITIES OF DISCONTINUED OPERATIONS -
NON-CURRENT -- 3,104,000
------------ ------------
COMMITMENTS
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; authorized,
25,000,000 shares; issued and outstanding,
4,864,000 in 1995 and 199449,000 49,000
Capital in excess of par value 13,316,000 13,316,000
Accumulated deficit (5,819,000) (4,716,000)
------------ ------------
Total Stockholders' Equity 7,546,000 8,649,000
------------ ------------
$ 7,921,000 $ 12,738,000
============ ============
See accompanying notes to financial statements.
F-3
22
PERSONAL DIAGNOSTICS, INCORPORATED
STATEMENTS OF OPERATIONS
Year Ended September 30,
----------------------------------------
1995 1994 1993
----------- ----------- ----------
INCOME:
Interest $ 317,000 $ 181,000 $ 118,000
Trading gains (losses) (558,000) 34,000 1,150,000
----------- ----------- ----------
(241,000) 215,000 1,268,000
EXPENSES:
General and administrative 125,000 120,000 120,000
----------- ----------- ----------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES (366,000) 95,000 1,148,000
PROVISION FOR INCOME TAXES (BENEFIT) (14,000) 26,000 459,000
----------- ----------- ----------
INCOME (LOSS) FROM CONTINUING
OPERATIONS (352,000) 69,000 689,000
----------- ----------- ----------
INCOME (LOSS) FROM DISCONTINUED
OPERATIONS, NET OF TAXES:
Income (loss) from operations (415,000) (1,329,000) 45,000
Loss on sale (336,000) -- --
----------- ----------- ----------
(751,000) (1,329,000) 45,000
----------- ----------- ----------
NET INCOME (LOSS) $(1,103,000) $(1,260,000) $ 734,000
=========== =========== ==========
NET INCOME (LOSS) PER COMMON AND
COMMON EQUIVALENT SHARES
OUTSTANDING:
Income (loss) from continuing operations $ (.07) $ .01 $ .14
Discontinued operations (.09) (.27) .01
Loss on sale (.07) -- --
----------- ----------- ----------
Net income (loss) $ (.23) $ (.26) $ .15
=========== =========== ==========
AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING 4,864,000 4,864,000 4,941,000
=========== =========== ==========
See accompanying notes to financial statements.
F-4
23
PERSONAL DIAGNOSTICS, INCORPORATED
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993
Capital in
Common Stock Excess of Accumulated
--------------------
Shares Par Value Par Value Deficit
--------- ------- ----------- -----------
BALANCES, SEPTEMBER 30, 1992 4,564,000 $46,000 $12,877,000 $(4,190,000)
EXERCISE OF STOCK OPTIONS 300,000 3,000 439,000 --
NET INCOME -- -- -- 734,000
--------- ------- ----------- -----------
BALANCES, SEPTEMBER 30, 1993 4,864,000 49,000 13,316,000 (3,456,000)
NET LOSS -- -- -- (1,260,000)
--------- ------- ----------- -----------
BALANCES, SEPTEMBER 30, 1994 4,864,000 49,000 13,316,000 (4,716,000)
NET LOSS -- -- -- (1,103,000)
--------- ------- ----------- -----------
BALANCES, SEPTEMBER 30, 1995 4,864,000 $49,000 $13,316,000 $(5,819,000)
========= ======= =========== ===========
See accompanying notes to financial statements.
F-5
24
PERSONAL DIAGNOSTICS, INCORPORATED
STATEMENTS OF CASH FLOWS
Year Ended September 30,
-----------------------------------------
1995 1994 1993
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(1,103,000) $(1,260,000) $ 734,000
Adjustments to reconcile net income (loss) to
net cash flow from operating activities:
Depreciation and amortization 302,000 657,000 576,000
Deferred income taxes (benefit) -- (80,000) 80,000
Provision for losses on accounts receivable -- 3,000 --
Loss (gain) on disposal of property
and equipment (19,000) (122,000) 437,000
Loss on sale of discontinued operations 336,000 -- --
Gain on investments -- (34,000) (1,150,000)
Changes in assets and liabilities:
Trading securities (3,933,000) -- --
Accounts receivable - net 392,000 904,000 828,000
Inventories (70,000) 363,000 1,374,000
Accounts payable and accrued liabilities (168,000) (1,478,000) 317,000
Other current assets 558,000 (115,000) (92,000)
----------- ----------- -----------
Net cash flows from operating activities (3,705,000) (1,162,000) 3,104,000
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment -- (168,000) (3,589,000)
Proceeds from disposal of property
and equipment 29,000 307,000 29,000
Net proceeds from sale of discontinued operations 4,562,000 -- --
Purchases of marketable securities -- (4,723,000) (856,000)
Proceeds from the sale of marketable securities -- 4,012,000 5,242,000
Other current assets -- (250,000) 388,000
----------- ----------- -----------
Net cash flows from investing activities 4,591,000 (822,000) 1,214,000
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options -- -- 442,000
Proceeds from borrowings -- 670,000 2,250,000
Principal payments on borrowings (2,451,000) (198,000) (270,000)
Principal payments for equipment notes
payable and capital lease obligations (1,195,000) (572,000) (490,000)
----------- ----------- -----------
Net cash flows from financing activities (3,646,000) (100,000) 1,932,000
----------- ----------- -----------
INCREASE (DECREASE) IN CASH
AND EQUIVALENTS (2,760,000) (2,084,000) 6,250,000
CASH AND EQUIVALENTS,
BEGINNING OF YEAR 5,554,000 7,638,000 1,388,000
----------- ----------- -----------
CASH AND EQUIVALENTS, END OF YEAR $ 2,794,000 $ 5,554,000 $ 7,638 000
=========== =========== ===========
See accompanying notes to financial statements.
F-6
25
PERSONAL DIAGNOSTICS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH EQUIVALENTS - The Company considers all highly liquid investments
purchased with a maturity of three months or less to be cash equivalents.
INVESTMENTS - Effective October 1, 1994, the Company adopted statement of
financial Accounting Standards No. 115 (SFAS 115) "Accounting for Certain
Investments In Debt and Equity Securities." This standard requires that
investments generally be classified in one of three categories. Certain
debt securities will be reported at amortized cost. Other debt and equity
securities will be reported at fair value with unrealized gains and losses
included in earnings in the case of trading securities or reported in a
separate component of stockholders' equity in the case of
available-for-sale securities. The Company considers its investments as
trading securities. The effect of initially applying SFAS 115 is to be
reported as a change in accounting principle at the time of adoption.
There was no effect upon adoption of SFAS 115.
The Company periodically enters into futures contracts for commodities or
stock indexes. The Company considers these investments to be trading
securities.
INCOME TAXES - Effective October 1, 1993, the Company adopted Statement of
Financial Accounting Standards No. 109 (SFAS 109) "Accounting for Income
Taxes." SFAS supersedes SFAS 96 "Accounting for Income Taxes" which the
Company had adopted effective October 1, 1987, and amends other
pronouncements. SFAS 109 requires an asset and liability approach for
financial accounting and reporting for income taxes. The Company adopted
SFAS 109 on a prospective basis and as permitted under the new rule, prior
years' financial statements have not been restated. There was no
cumulative effect of adopting this Statement as of October 1, 1993.
NET INCOME (LOSS) PER SHARE OF COMMON STOCK - Net income (loss) per share
of common stock is based on the weighted average number of common shares
and common share equivalents outstanding during each year when the effect
is not anti-dilutive. Common share equivalents consist of outstanding
options and warrants using the treasury stock method.
CONCENTRATION OF CREDIT AND OFF-BALANCE-SHEET RISK - Financial instruments
that are potentially subject to credit risk consist of cash equivalents
and trading securities. Cash equivalents and principally all trading
securities are placed with financial institutions.
NOTE 2 - DISCONTINUED OPERATIONS:
On May 15, 1995 the Company completed the sale of certain assets to EBI
Medical Systems, Inc., a subsidiary of Biomet, Inc. The assets sold
consisted of (i) the land, building and improvements comprising the
Company's executive offices and manufacturing facility located in
Parsippany, New
F-7
26
PERSONAL DIAGNOSTICS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
Jersey, (ii) all the Company's manufacturing equipment and machinery, and
(iii) certain office equipment and manufacturing-related items
(collectively, the "Purchased Assets"). The purchase price for the
Purchased Assets was $4,400,000. Certain additional items, including
miscellaneous inventory, were purchased separately.
The sale resulted in a pre-tax loss of $336,000, which included both a
loss on the sale of assets and accruals for other estimated costs to be
incurred in connection with the sale. The results of the Company's
manufacturing operations have been reported separately as a component of
discontinued operations in the Statements of Operations. Prior year
Statements of Operations have been restated to present the Company's
manufacturing operations as a discontinued operation Summary operating
results of the manufacturing operations for each of the three fiscal years
ended September 30, 1995 follow:
1995 1994 1993
----------- ----------- ------------
Net sales $ 1,907,000 $ 6,278,000 $ 15,160,000
Loss before income taxes (415,000) (1,566,000) (123,000)
Provision (benefit) for income areas -- (237,000) (168,000)
Net income (loss) (415,000) (1,329,000) 45,000
Net assets sold have been separately classified in the accompanying balance
sheet at September 30, 1994
Assets and liabilities of discontinued operations are comprised of the
following:
September 30,
-----------------------
CURRENT ASSETS 1995 1994
---------- ----------
Accounts receivable, less allowance for doubtful
accounts of $50,000 in 1995 and 1994 $ 148,000 $ 540,000
Inventories, at lower of cost (first-in, first-out) or
market -- 141,000
Other -- 49,000
---------- ----------
$ 148,000 $ 730,000
========== ==========
NONCURRENT ASSETS:
Property, plant and equipment, at cost less
accumulated depreciation of $2,544,000 $4,895,000
Other 73,000
----------
$4,968,000
==========
CURRENT LIABILITIES:
Accounts payable and accrued expenses 221,000
Current portion of long-term debt 592,000
Other liabilities $ 150,000 102,000
---------- ----------
$ 150,000 $ 915,000
========== ==========
NONCURRENT LIABILITIES - LONG-TERM DEBT $3,104,000
==========
F-8
27
PERSONAL DIAGNOSTICS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
NOTE 3 - INVESTMENTS:
At September 30, 1995, the Company's investments consisted of U.S. Treasury
Bills purchased with maturities of more than three months. At September 30,
1994, marketable equity securities which had a cost of $1,097,000 were
carried at a market value of $1,030,000. To reduce the carrying amount of
the marketable securities to market value, the Company recorded a valuation
allowance of $67,000 with a corresponding charge to income.
For the year ended September 30, 1995, the Company included a credit to
earnings of $67,000 representing the change in the net unrealized holding
loss on its trading securities. No valuation allowance was recorded in 1993.
NOTE 4 - INCOME TAXES:
The provision (benefit) for income taxes for continuing operations consists
of the following:
Year Ended September 30,
------------------------------------
1995 1994 1993
-------- ------- --------
Current:
Federal $(14,000) $17,000 $356,000
State -- 9,000 103,000
-------- ------- --------
Income tax provision (benefit) $(14,000) $26,000 $459,000
======== ======= ========
Deferred income taxes reflect the net effects of temporary differences
between the amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Principal items
comprising net deferred income tax assets and liabilities are:
September 30,
--------------------------
1995 1994
--------- ---------
Deferred tax assets:
Tax credit carryforwards $ 293,000 $ 300,000
Net operating loss carryforwards 453,000 400,000
Other items 57,000 75,000
Deferred tax liabilities -
Depreciation -- (270,000)
--------- ---------
803,000 505,000
Valuation allowance (803,000) (505,000)
--------- ---------
Net liability $ -- $ --
========= =========
A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax asset will not be realized. The Company has
determined, based on the Company's recent net
F-9
28
PERSONAL DIAGNOSTICS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
losses, that a full valuation allowance is appropriate at September 30,
1995. During 1995 the valuation allowance increased $298,000.
A reconciliation of the provision (benefit) for income taxes computed at the
federal statutory rate of 34% and the effective tax rate on income (loss)
from continuing operations before income taxes is as follows:
Year Ended September 30,
-----------------------------------
1995 1994 1993
--------- -------- --------
Computed tax at federal
statutory rate (124,000) $ 32,000 $390,000
State income taxes, net of federal
income tax benefit -- (6,000) 69,000
Net operating loss and tax credit
limitations 110,000 -- --
--------- -------- --------
Provision (benefit) for income
taxes $ (14,000) $ 26,000 $459,000
========= ======== ========
At September 30, 1995, the Company had net operating loss carryforwards of
approximately $1,150,000 for regular tax purposes and $1,500,000 for
alternative minimum tax (AMT) which can be used to offset future taxable
income. The Company also has research and development credits of
approximately $168,000, investment tax credits of approximately $52,000 and
AMT credits of approximately $73,000 which can be used to offset future
income taxes for federal income tax purposes. The net operating loss
carryforwards expire, if not used, in 2009. The research and development and
investment tax credits expire, if not used, over the period 1999-2002 and
the AMT credits are available for an indefinite period.
NOTE 5 - COMMITMENTS:
EMPLOYMENT CONTRACT - At September 30, 1995, the Company had an employment
contract with an officer which calls for aggregate annual salary of not less
than $135,000 until March 31, 1996.
NOTE 6 - STOCK OPTIONS AND WARRANTS:
Stock Options - Under the Company's 1986 and 1988 Stock Option Plans,
options may be granted to employees at prices not less than the fair market
value at the dates of grant. The price shall be 110 percent of the fair
market value when the option is granted to an employee who owned more than
ten percent of the Company's common stock at the date of grant. The Plans
authorize the granting of either "incentive stock options", as defined in
Section 422A of the Internal Revenue Code of 1986, as amended, or
"non-qualified stock options" to acquire shares of the Company's common
stock.
F-10
29
PERSONAL DIAGNOSTICS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
The term of each option is ten years from the date of grant thereof or such
shorter term as may be provided in the stock option agreements. However, in
the case of an incentive stock option granted to an employee who,
immediately before the incentive stock option is granted, owns stock
representing more than ten percent of the voting power of all classes of
stock of the Company, the term of the incentive stock option shall be five
years from the date of grant thereof or such shorter time as may be provided
in the stock option agreements. During September 1990 the Board of Directors
adopted the 1990 Stock Option Plan. Terms of the 1990 Plan are the same as
the prior year Plans, except that the exercise price of non-qualified
options shall be determined at the discretion of the Board of Directors.
The Company has made no charge to income in connection with the grant of
options under any plan.
Maximum shares subject to options and plan termination dates are as follows:
Maximum Shares
Plan Subject to Options Year of Termination
---- ------------------ -------------------
1986 150,000 1996
1988 450,000 1998
1990 300,000 2000
-------
900,000
=======
Changes in the Company's stock option plans were as follows:
Number of Shares
------------------------------------
1995 1994 1993
-------- -------- ----------
Outstanding at October 1
($1.41-$2.00 per share) 344,000 542,000 1,042,000
Granted ($.70 per share) -- 300,000 --
Exercised ($1.41-$1.60 per share) -- -- (300,000)
Canceled ($.70-$2.00 per share) (44,000) (498,000) (200,000)
-------- -------- ----------
Outstanding at September 30,
($.70-$2.00 per share) 300,000 344,000 542,000
======== ======== ==========
At September 30, 1995, options were exercisable to purchase 200,000 shares
of common stock.
NOTE 7 - EMPLOYEE BENEFIT PLAN:
The Company has a 401(k) savings/retirement plan for all of its eligible
employees. The plan allows for employee contributions to be matched by the
Company on a pro-rata basis. Contributions made
F-11
30
PERSONAL DIAGNOSTICS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
by the Company for fiscal 1995, 1994 and 1993 amounted to $11,000, $37,000
and $58,000, respectively.
NOTE 8 - STATEMENTS OF CASH FLOWS:
Fiscal Years Ended in
--------------------------------------
1995 1994 1993
----------- ----------- --------
Supplemental disclosure of
cash flows information -
interest paid $ 210,000 $ 346,000 $215,000
=========== =========== ========
Income taxes paid (refunded) $ (126,000) $ (97,000) $480,000
=========== =========== ========
Supplemental schedule of non-
cash investing and financing
activities:
Equipment purchased under
equipment notes payable
and capital leases $ -- $ -- $353,000
=========== =========== ========
NOTE 9 - RELATED PARTY TRANSACTIONS:
The Company has incurred legal fees from law firms of which a partner is on
the Company's board of directors. The Company also has incurred legal fees
from another member of its board of directors. The total of these fees was
$107,000, $22,000 and $93,000 for 1995, 1994 and 1993, respectively.
F-12
31
Schedule VIII
PERSONAL DIAGNOSTICS, INCORPORATED
VALUATION AND QUALIFYING ACCOUNTS
Deductions
------------------------
Balance at Additions Written Balance
Beginning Charged to Costs Off Against Reversed at End
of Year and Expenses the Reserve to Income of Year
------- ------------ ----------- --------- -------
ALLOWANCE FOR
DOUBTFUL
ACCOUNTS:
1995 $ 50,000 $ -- $ $ -- $ 50,000
======== ======== ======== ===== ========
1994 $ 50,000 $ 3,000 $ 3,000 $ -- $ 50,000
======== ======== ======== ===== ========
1993 $ 50,000 $ -- $ -- $ -- $ 50,000
======== ======== ======== ===== ========
F-13
32
EXHIBIT 11(a)
PERSONAL DIAGNOSTICS, INCORPORATED
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
September 30
-----------------------------------------
1995 1994 1993
----------- ----------- -----------
A. Net Income (loss) $(1,103,000) $(1,260,000) $ 734,000
=========== =========== ===========
B. Average shares of common stock
and equivalents outstanding $ 4,864,000 4,864,000 4,941,000
=========== =========== ===========
Earnings (loss) per common share
outstanding $ (.23) $ (.26) $ .15
=========== =========== ===========
Computation of earnings per share
assuming conversation of dilutive
stock options and warrants:
Average shares outstanding 4,864,000 4,864,000 4,710,000
Average shares under dilutive options
and warrants -- -- 842,000
Less: Number of shares of
treasury stock that could be
purchased assuming that the
proceeds from sales of
unexercised options and
warrants were invested in
treasury stock -- -- (611,000)
----------- ----------- -----------
C. Adjusted average shares 4,864,000 4,864,000 4,941,000
=========== =========== ===========
F-14