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 collected 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 of this nature. (See "Legal Proceedings")
Management intends to continue in business and has no intention to liquidate the Company. The Company has considered various business alternatives including the possible acquisition of an existing business, but to date has found possible opportunities unsuitable or excessively priced. The Company is also considering developing a business itself, believing that start up costs may be preferable to the premiums required to purchase a going concern. The Company does not contemplate limiting the scope of its search to any particular industry. Management has invested considerable time evaluating and eliminating numerous proposals for possible acquisition or combination developed by management or presented by investment professionals, the Company's advisors and others. The Company believes that present valuations of existing entities are generally inflated partly due to sellers' expectations being impacted by generally high stock market valuations. The Company continues to consider possible acquisitions, business combinations, or start up proposals, which could be advantageous to shareholders. No assurance can be given that any such project, acquisition or combination will be concluded.
During the past two years the Company has focused on the acquisition, improvement and resale of real property and management will continue to pursue attractive real estate opportunities. The Company does not preclude the possibility of becoming involved in the future with additional businesses in other areas. On June 13, 1996 the Company purchased a property located in the Embassy section of Washington, D.C. After limited improvements the property was sold October 20, 1997 and the Company experienced a loss of $151,000 on this project. The Company presently owns one residential property located in Washington, D.C. The Company is improving the property and the process and is expected to be completed during fiscal 1999. At September 30, 1998 the Company's total investment in this property was approximately $893,000 which management believes is approximately equal to net market value.
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 fluctuations. 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 futures 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. During fiscal 1998 the nominal value of the Company's exposure to financial derivatives averaged less than $150,000 per month.
During fiscal 1998, the Company repurchased a total of 1,084,000 shares at $1.20 per share for a total of $1,300,800. A total of 138,211 shares were repurchased from two unrelated parties and 945,789 shares were repurchased from Company President John H. Michael. The purchases were made at or below the prevailing market price and about 20% below the net asset value per share. The Company may repurchase additional shares during the coming fiscal year but it has no specific plans to do so. At September 30, 1998 the Company had a total of 4,080,000 shares outstanding.
At September 30, 1998, over 75% 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 risk no more than 15% of net worth in trading or investment activities.
Employees
The Company has one full time officer employee. It also utilizes consultants, specialists and temporary employees as required. At the present time the Company is heavily dependent on the skills of John H. Michael, the Company's President, who is 55 years old and a graduate of Georgetown University School of Foreign Service and Harvard Business School.
Item 2
Item 2 - Properties
The Company maintains an office in West Milford, New Jersey at a nominal cost. The Company's address is P.O. Box 5310, Parsippany, New Jersey 07054. The Company also has an address at 1810 24th Street, N.W., Washington, D.C. The Company owns the Washington, D.C. property and is presently improving the property with the intention to offer it for sale.
Item 3
Item 3 - Legal Proceedings
The Company is the defendant in one lawsuit filed in August 1997 claiming $49,000 for the alleged partial non-payment of a supplier in 1992. In the opinion of management the suit is totally without merit.
Item 4
Item 4 - Submission of Matters to a Vote of Security Holders
Not Applicable.
PART II
Item 5
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 National Association of Securities Dealers OTC "Bulletin Board System" under the symbol PERS. 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 1997. 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 - --------------- --------- 1997 High Low ---- ---- ---
December 31, 1996 (First Quarter) 15/16 25/32
March 31, 1997 (Second Quarter) 15/16 7/8
June 30, 1997 (Third Quarter) 1 7/8
September 30, 1997 (Fourth Quarter) 1 15/16
1998 High Low ---- ---- ---
December 31, 1997 (First Quarter) 1-1/8 15/16
March 31, 1998 (Second Quarter) 1-3/16 1
June 30, 1998 (Third Quarter) 1-3/8 1-1/8
September 30, 1998 (Fourth Quarter) 1-5/16 1-1/8
1999 High Low ---- ---- ---
December 15, 1998 (First Quarter) 1-3/16 1
(b) Holders
As of December 15, 1998 there were approximately 470 record holders of the Company's Common Stock.
(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
Item 6 - Selected Financial Data
Item 7
Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations
Liquidity and Capital Resources
At September 30, 1998 the Company had a cash and Treasury bill balance of $5,386,000 which represented a $731,000 decrease from $6,117,000 at September 30, 1997. This $731,000 decrease results from an increase in cash flow from operations of $464,000 offset by a decrease of $1,195,000 required for financing activities. The cash flow from operations results from net proceeds of $768,000 primarily on sale of property held for development and sale offset by a net loss of $215,000 and changes in operating assets and liabilities in the amount of $89,000. The funds used for financing activities of $1,195,000 results from the purchase and retirement of stock for $1,300,800 offset by funds received for exercise of stock options in the amount of $105,000. The Company's working capital position at September 30, 1998 was $6,145,000 as compared to the prior year-end balance of $7,555,000.
During fiscal 1998 the Company repurchased a total of 1,084,000 shares at $1.20 per share for a total of $1,300,800. A total of 138,211 shares were repurchased from two unrelated parties and 945,789 shares were repurchased from Company President John H. Michael. The purchases were made at or below prevailing market and about 20% below the net asset value per share. At September 30, 1998 the Company had a total of 4,080,000 shares outstanding.
Management intends to continue in business and has no intention to liquidate the Company. The Company has considered various business alternatives including the possible acquisition of an existing business, but to date has found possible opportunities unsuitable or excessively priced. The Company is also considering developing a business itself, believing that start up costs may be preferable to the premiums required to purchase a going concern. The Company does not contemplate limiting the scope of its search to any particular industry. Management has considered the risk of possible opportunities as well as their potential rewards. Management has invested considerable time evaluating and eliminating numerous proposals for possible acquisition or combination developed by management or presented by investment professionals, the Company's advisors and others. The Company believes that present valuations of existing entities are inflated partly due to sellers' expectations being impacted by generally high stock market valuations. During the past two years the Company has focused on the acquisition, improvement and resale of real property and management will continue to pursue attractive real estate opportunities. The Company does not preclude the possibility of becoming involved in the future with additional businesses in other areas.
On June 13, 1996 the Company purchased a property located in the Embassy section of Washington, D.C. After limited improvements the property was sold October 20, 1997 and the Company experienced a loss of $151,000 on this project. The Company presently owns one residential property located in Washington, D.C. The Company is improving the property and the process is expected to be completed during fiscal 1999. At September 30, 1998 the Company's total investment in this property was approximately $893,000 which management believes is approximately equal to net market value.
The Company continues to consider possible acquisitions, business combinations, or start up proposals, which could be advantageous to shareholders. No assurance can be given that any such project, acquisition or combinations will be concluded.
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 fluctuations. 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 a 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. During fiscal 1998 the nominal value of the Company's exposure to financial derivatives averaged less than $150,000 per month.
At September 30, 1998, over 75% 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 risk no more than 15% of net worth in trading or investment activities.
Results of Operations
Fiscal Year 1998 Compared to 1997 Income Loss From Continuing Operations
Net income consists of interest and trading gain and losses and general and administrative expenses. The Company incurred a net loss of $215,000 in the current year versus income of $53,000 in the prior year. Interest income increased $17,000 to $319,000 primarily due to more invested funds. Trading losses of $349,000 were realized versus trading gains of $705,000 in the prior year. General and administrative expenses of $185,000 were $769,000 lower than the prior year period due primarily to decreased compensation paid to President John H. Michael, decreased costs and expenses associated with real estate activities and lower insurance and professional fees. During fiscal 1998, the Company has not recorded an income tax benefit because tax losses can not be utilized.
Fiscal Year 1997 Compared to 1996 Income (Loss) from Continuing Operations
Income (loss) from continuing operations consists of interest and trading gains and losses and general and administrative expenses and in 1996 an income tax credit. The Company realized income from continuing operations of $53,000 in the current year versus a loss of $149,000 in the prior year. Interest income declined $88,000 to $302,000 primarily due to less invested funds. Trading gains of $705,000 were realized versus trading losses of $82,000 in the prior year. General and administrative expenses of $954,000 were $495,000 higher than the prior year period of $459,000 due primarily to increased compensation paid to President John H. Michael and increased costs and expenses associated with real estate activities. During fiscal 1997, the Company did not record an income tax provision due to available tax carry forwards.
Inflation
The Company believes that inflation does not have a material adverse effect on the results of its operations at the present time.
Computer Year 2000 Issue ("Y2K")
Many existing computer programs use only two digits to identify a year in the date field. These programs were designed and developed without considering the impact of the upcoming change in the century. If not corrected, many computer applications could fail or create erroneous results by or at the year 2000. Management believes that the Company and its important business and professional counterparties have prepared adequately for this event. The Company expects no material adverse impact from the year 2000 computer issue.
Item 8
Item 8 - Financial Statements and Supplementary Data
The response to this item is submitted as a separate section of this Report commencing on page.
Item 9
Item 9 - Disagreements on Accounting and Financial Disclosure
Not applicable.
PART III
Item 10
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.
Item 11
Item 11 - Executive Compensation
The following table sets forth a summary for the fiscal years ended September 30, 1998, 1997 and 1996 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. In January 1997 the Company's Board of Directors approved a modification to Mr. Michael's Employment Agreement providing for annual performance compensation equal to no more than 60% of net trading profits in addition to his salary. During fiscal 1998 Mr. Michael elected to accept only 75% of the compensation provided by his employment agreement. The balance of $43,875 was waived.
SUMMARY COMPENSATION TABLE
(1) Represents contributions to the Company's 401(k) plan on behalf of Mr. Michael to match pre-tax elective deferral compensation (included under the salary column) made to such plan.
(2) Of this amount $105,000 was required to be utilized during January 1997 to pay for the exercise of 150,000 incentive stock options
(3) During fiscal 1998 Mr. Michael elected to accept only 75% of the compensation provided by his employment agreement. The balance of $43,875 was waived.
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"). 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. Because the Company sold its manufacturing assets in 1995 and is gradually resuming active operations, no relevant comparison to peer issuers can be made or shall be contained herein. The price of each investment unit has been set at $100 on September 30, 1993 for purposes of preparing this graph.
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURNS
Personal Diagnostics, Incorporated NASDAQ Stock Market (US Companies)
x 200 x
150 x x 100 ox x
50 o o o o o
0 1993 1994 1995 1996 1997 1998
o Personal Diagnostics, Incorporated x NASDAQ Stock Market (US Companies)
Notes:
A. The lines represent monthly index levels derived from compounded daily returns that include all dividends. B. The indexes are reweighed 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 09/30/93.
Savings and Benefit Plans
The Company had a 401k savings/retirement plan under which all the Company's eligible employees including executive officers were entitled to benefits. The plan allowed for the employee contributions to be matched by the Company on a pro rata basis. Contributions made by the Company amounted to $4,200, $0 and $0 for the fiscal years ended September 30, 1996, 1997 and 1998 respectively. Executive officers who qualified were also permitted to participate in the Company's Stock Option plans as well as the 401k plan. Executive officers participate in group life and medical plans, which are available generally to all employees. At December 31, 1995 the Company terminated the 401k retirement plans.
Directors
The Company's outside Directors, of which there are none at this time, are reimbursed for their out-of-pocket expenses incurred in connection with their attendance at each Board meeting. In late fiscal 1997 Director Alphonso Espinosa died reducing the Board to one member, John H. Michael. The Company hopes during fiscal 1999 to increase the Board of Directors to three members including at least one unaffiliated individual.
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 terminated in 1996, options to purchase no more than 150,000 Common Shares could be granted. Under the 1988 Plan, which terminated in 1998, options to purchase no more than 450,000 Common Shares could 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 September 17, 1990, 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 were then essentially identical. Outstanding options to purchase 150,000 Common Shares were exercised June 6, 1998. There remain 300,000 options available for grant under the 1990 Plan. At September 30, 1998 no options were outstanding under any of the Plans.
Currently, the Company has one employee 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 subdivision of combination of the Company's Common Shares. Any moneys received by the Company from the exercise of options will be used for working capital.
AGGREGATE OPTION EXERCISE IN LAST FISCAL YEAR AND FY-END OPTION VALUES
(1) Options were exercised on 150,000 shares at an exercise price of $.70 per share on June 6, 1998. No options are presently outstanding.
(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
The Board of directors has appointed a Stock Option Committee consisting of John H. Michael. Mr. Michael is Chairman of the Stock Option Committee. The Committee determines the individuals who will be granted options, the number of options each individual will receive, the option price and the exercise period of each option. No grants were made during fiscal year 1998.
Compensation Committee Interlocks and Insider Participation
The Company's Board of Directors determined the compensation paid to the sole executive officer during fiscal 1998. Mr. Michael is the Chairman of the Board of Directors, Chief Executive Officer, President, Treasurer and Secretary of the Company.
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 1998 its officers, directors and ten percent (10%) beneficial owners complied with all Section 16(a) filing requirements.
Item 12
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 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, 1998.
Name and Address of Amount and Nature Percent Beneficial Owner (1) of Beneficial Ownership of Class - -------------------- ----------------------- --------
John H. Michael 3,060,543 75.0% 1810 24th Street N.W. Washington, D.C.
All Officers and Directors 3,060,543 75.0% as a Group
- --------------
(1) Unless otherwise indicated each person has sole voting and investment powers with respect to the shares specified opposite his name.
Item 13
Item 13 - Certain Relationships
During fiscal 1998, Mr. Michael had a secured loan outstanding in the amount of $750,000 from Riggs National Bank. The primary security for this loan was 1,012,500 shares of Personal Diagnostics common stock owned by Mr. Michael. The Company was a guarantor of this loan. The loan was repaid in full in fiscal 1998. Also, during fiscal 1998 the Company repurchased a total of 945,789 shares of its common stock at $1.20 per share from Company President John H. Michael.
PART IV
Item 14
Item 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.
(a)(2) Inapplicable
(a)(3) List of Exhibits
Exhibit Location ------- -------- 3.1 Articles of Incorporation Filed Form S-1 October 7, 1983 File No. 2-86991
3.2 Bylaws of the Corporation Filed Form S-1 October 7, 1983 File No. 2-86991
10.1 Employment Agreement between Page E-1 1996 Form 10K John H. Michael and the Company dated September 25, 1996
(b) Reports on Form 8-K
Date Filed Transaction Reported ---------- -------------------- September 24, 1998 Company share repurchase reduces outstanding common stock to 4,080,000 shares.
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 December 28, 1998 - ----------------------------------------- John H. Michael, Chief Executive Officer, Chairman of the Board, President, Treasurer and Secretary
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.
PERSONAL DIAGNOSTICS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
FINANCIAL REPORT SEPTEMBER 30, 1998
PERSONAL DIAGNOSTICS, INCORPORATED
INDEX
Page
Independent Auditors' Report
Balance Sheets as of September 30, 1998 and 1997
Statements of Operations for the Years Ended September 30, 1998, 1997 and 1996
Statements of Changes in Stockholders' Equity for the Years Ended September 30, 1998, 1997 and 1996
Statements of Cash Flows for the Years Ended September 30, 1998, 1997 and 1996
Notes to Financial Statements -
All 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.
INDEPENDENT AUDITORS' REPORT
Board of Directors Personal Diagnostics, Incorporated
We have audited the financial statements of Personal Diagnostics, Incorporated as of September 30, 1998 and 1997 and for each of the three years in the period ended September 30, 1998 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, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 1998 in conformity with generally accepted accounting principles.
WISS & COMPANY, LLP
Livingston, New Jersey December 9, 1998
PERSONAL DIAGNOSTICS, INCORPORATED
BALANCE SHEETS
See accompanying notes to financial statements.
PERSONAL DIAGNOSTICS, INCORPORATED
STATEMENTS OF OPERATIONS
See accompanying notes to financial statements.
PERSONAL DIAGNOSTICS, INCORPORATED
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
See accompanying notes to financial statements.
PERSONAL DIAGNOSTICS, INCORPORATED
STATEMENTS OF CASH FLOWS
See accompanying notes to financial statements.
PERSONAL DIAGNOSTICS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies:
Nature of the Business - Personal Diagnostics, Incorporated ("the Company") is pursuing various business alternatives including possible acquisition of an existing business. It is currently engaged in the acquisition, improvement and resale of real estate.
Cash Equivalents - The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents.
Net Income (Loss) Per Share - The Company calculates earnings per share in accordance with Statement of Financial Accounting Standard (SFAS) No. 128, "Earnings per Share" which was issued in February 1997 and is effective for periods ending after December 15, 1997. SFAS No. 128 replaces the presentation of primary and fully diluted earnings per share with basic and diluted earnings per share. The Company uses the weighted-average number of common shares outstanding during each period to compute basic earnings per common share. When not anti-dilutive, diluted earnings per share are computed using the weighted-average number of common shares and dilutive potential common shares outstanding. Dilutive potential common shares are additional common shares assumed to be exercised.
Concentration of Credit and Off-Balance-Sheet Risk - Financial instruments that are potentially subject to credit risk consist of cash and equivalents and trading securities. Cash and equivalents and principally all trading securities are placed with financial institutions.
Estimates and Uncertainties - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results, as determined at a later date, could differ from those estimates.
Financial Instruments - Financial instruments include cash and equivalents, securities, accounts payable and accrued expenses. The amounts reported for financial instruments are considered to be reasonable approximations of their fair values, based on market information available to management. The use of different market assumptions and/or estimation methodologies could have an effect on the estimated fair value amounts.
Stock Compensation - Statement of Financial Accounting Standards ("SFAS) No. 123, "Accounting" for Stock-Based Compensation," requires companies to measure employee stock compensation plans based on the fair value method
PERSONAL DIAGNOSTICS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
of accounting. However, the statement allows the alternative of continued use of Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," with pro forma disclosure of net income and earnings per share determined as if the fair value based method had been applied in measuring compensation cost. The Company has determined it will continue to apply APB Opinion No. 25 in accounting for its stock options plans. No options were granted during the years ended September 30, 1998, 1997 or 1996 and accordingly, no proforma disclosure has been provided.
Note 2 - Investments:
At September 30, 1998 and 1997, cash and equivalents include approximately $5,088,000 and $5,738,000 respectively of U.S. Treasury Bills purchased with maturities of three months or less.
The Company periodically enters into futures contracts for commodities or stock indexes. The Company considers these investments to be trading securities.
Note 3 - Property Held for Development and Sale:
The Company owned two properties in Washington D.C. which it acquired with the intention to improve and sell. One property, carried at a net cost of approximately $810,000 at September 30, 1997, was sold on October 20, 1997. For the year ended September 30, 1997, the Company provided an allowance of $151,000 for loss on the sale of this property. The other property, carried at a cost of $893,000 at September 30, 1998, is in the process of renovation.
Note 4 - Other Current Liabilities:
Other current liabilities consist of:
September 30, ------------------------------ 1998 1997 ---- ----
Legal fees $ 25,000 $ 25,000 Audit fees 20,000 20,000 Annual meeting 15,000 30,000 Relocation - 10,000 Other 10,000 8,000 ---------- ----------- $ 70,000 $ 93,000 ========= =========
Current liabilities of discontinued operations at September 30, 1998 and 1997, consist of the estimated costs for product liability insurance.
PERSONAL DIAGNOSTICS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
Note 5 - Income Taxes:
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, -------------------------- 1998 1997 ---- ---- Deferred tax assets: Tax credit carryforwards $ 290,000 $ 290,000 Net operating loss carryforwards 580,000 534,000 Other items 159,000 109,000 ----------- ----------- 1,029,000 933,000 Valuation allowance (1,029,000) (933,000) ----------- ----------- Net asset $ -- $ -- =========== ===========
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 losses, that a full valuation allowance is appropriate at September 30, 1998 and 1997. During fiscal 1998 and 1997 the valuation allowance increased $96,000 and decreased $19,000, respectively.
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) before income taxes is as follows:
At September 30, 1998, the Company had net operating loss carryforwards of approximately $1,453,000 for regular tax purposes and $1,809,000 for alternative minimum tax (AMT) which can be used to offset future taxable income. The Company also
PERSONAL DIAGNOSTICS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
has research and development credits of approximately $168,000, investment tax credits of approximately $52,000 and AMT credits of approximately $70,000 which can be used to offset future income taxes for federal income tax purposes. The net operating loss carryforwards expire, if not used, as to $1,250,000 in 2009, $112,000 in 2011 and $91,000 in 2018. The research and development and investment tax credits expire, if not used, over the period 1999 to 2002.
The AMT credits are available for an indefinite period.
Note 6 - Commitments and Contingencies:
Employment Contract - At September 30, 1998, the Company has an employment contract with an officer which provides for an annual salary of not less than $175,000 until September 24, 1999 with the right of the employee to extend the agreement for an additional three year term with annual compensation of not less than $175,000. The contract also provided for a bonus to the officer of $150,000 that was paid in January 1997.
In January 1997, the Board of Directors approved the modification of this agreement to provide for additional annual performance compensation up to 60% of net gains produced by the President's trading and investment activities on behalf of the Company. In addition, the Board further modified the agreement to guarantee up to $750,000 of personal loans obtained by the President, provided the President provide a minimum of 1,000,000 of his shares in the Company as collateral on such loan. The loan was repaid during fiscal 1998.
Product Liability - The Company has continuing potential product liability exposure for equipment manufactured in prior years. The Company has maintained product liability insurance and knows of no present or threatened claim.
Note 7 - Stock Options:
During September 1990, the Board of Directors adopted the 1990 Stock Option Plan (the "Plan"). The Plan authorizes 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. Under the Company's 1990 Stock Option Plan, incentive stock 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 exercise price of the non-qualified options shall be determined at the discretion of the Board of Directors.
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.
The Company has made no charge to income in connection with the grant of options under any plan.
The Plan allows for a maximum of 300,000 shares subject to options terminating in 2000.
Changes in the Company's stock option plans were as follows:
Note 8 - Statements of Cash Flows:
PERSONAL DIAGNOSTICS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
Note 9 - Related Party Transactions:
In June 1998 and September 1998, the Company purchased from its President - Principal Stockholder (the President) 598,389 and 347,400 shares respectively, of its common stock for $1.20 per share.
On October 2, 1996, the Company purchased real estate owned by the President for $818,000.
For the years ended September 30, 1997 and 1996, the Company leased office space on a month to month basis from the President for $7,500 and $27,500, respectively.
The Company had guaranteed a $750,000 personal loan received by the President from a financial institution. The loan was collateralized by 1,012,500 shares of common stock of the Company owned by the President. This loan was repaid during fiscal 1998.
During the year ended September 30, 1996 the Company incurred legal fees approximating $19,000, from a law firm, a partner of which was also a member of the Company's Board of Directors and from another member of its Board of Directors.
Note 10 - New Accounting Standards:
New Accounting Pronouncements - In June 1997, the Board issued SFAS No. 130, Reporting Comprehensive Income, which establishes standards for reporting and displaying comprehensive income and its components as part of a full set of financial statements, and SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. In February 1998, the Board issued SFAS No. 132, Employers' Disclosures about Pension and Other Postretirement Benefits. The aforementioned pronouncements were effective for years beginning after December 15, 1997. In addition, the Board issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities in June 1998 for years beginning after June 15, 1999.