Item 1 - Business
General - ------- Prior to May 15, 1995, Personal Diagnostics, Inc. (the "Company") 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. 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 inflated partly due to sellers' expectations being impacted by generally high stock market valuations. During the past three years the Company has limited its activity to 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. 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 2000. At September 30, 1999 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 a suitable candidate for any such acquisition or combination could be identified or, if identified, whether such a transaction could be consummated on terms favorable to the Company.
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. The extent to which the Company may sustain losses is dependent upon management's best judgement. During fiscal 1999 the nominal value of the Company's exposure to financial derivatives averaged less than $200,000 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. The purchases were made at or below the prevailing market price and about 20% below the net asset value per share. No shares were repurchased during fiscal 1999. The Company may repurchase additional shares during the coming fiscal year but it has no specific plans to do so. At September 30, 1999 the Company had a total of 4,080,000 shares outstanding net of 784,000 Treasury Shares.
At September 30, 1999, approximately 70% of total Company assets were held in U.S. Government Treasury Bills. The Company had no other trading or investment positions. It continues to be the intention of management to acquire or develop an operating business.
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 56 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. Management believes the suit to be without merit. However, subsequent to fiscal year-end September 30, 1999, the Company agreed to an arbitrated settlement of $24,500 to avoid costly litigation and this amount has been accrued in the financial statements at September 30, 1999.
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 1998. 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 - --------------- ---------
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 31, 1998 (First Quarter) 1-3/16 1
March 31, 1999 (Second Quarter) 1-1/16 15/16
June 30, 1999 (Third Quarter) 1-3/16 15/16
September 30, 1999 (Fourth Quarter) 1-1/8 1
2000 High Low - ---- ---- --- December 15, 1999 (First Quarter) 1-5/16 1
(b) Holders
As of December 15, 1999 there were approximately 460 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
Notes: - ----- (1) No dividends have been paid since incorporation.
Item 7
Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations
Liquidity and Capital Resources - -------------------------------
At September 30, 1999 the Company had a cash and Treasury bill balance of $5,694,000 which represented a $308,000 increase from the $5,386,000 at September 30, 1998. This $308,000 increase results entirely from cash flow from operations. The cash flow from operations results from net income of $221,000 coupled with the waiver of officers' salary of $135,000 offset by changes in operating assets and liabilities in the amount of $48,000. The Company's working capital position at September 30, 1999 was $6,501,000 as compared to the prior year-end balance of $6,145,000.
During fiscal 1998 the Company repurchased a total of 1,084,000 shares at $1.20 per share for a total of $1,300,000. The purchases were made at or below prevailing market and about 20% below the net asset value per share. No shares were repurchased during fiscal 1999. The Company may in the future repurchase additional shares but at the present time has no specific plans to do so. At September 30, 1999 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 three 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. 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 2000. At September 30, 1999 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. Mi. 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. The extent to which the Company may sustain losses is dependent upon management's best judgement. During fiscal 1999 the nominal value of the Company's exposure to financial derivatives averaged less than $200,000 per month.
At September 30, 1999, approximately 70% of total Company assets were held in U.S. Government Treasury Bills. The Company had no other trading or investment positions. It continues to be the intention of management to acquire or develop an operating business.
Results of Operation - --------------------
Fiscal Year 1999 Compared to 1998 Income (Loss) from Continuing Operations
Net income consists of interest and trading gains and losses and general and administrative expenses. The Company realized income from continuing operations of $221,000 in the current year versus a loss of $215,000 in the prior year. Interest income decreased $77,000 to $242,000 primarily due to lower interest rates. Trading gains of $242,000 were realized versus trading losses of $349,000 in the prior year. General and administrative expenses of $263,000 were $78,000 higher than the prior year's period due primarily to increased compensation recorded to President John H. Michael and higher insurance costs offset by reduced costs associated with real estate activities. During fiscal 1999, the Company did not record an income tax provision due to available tax carryforwards.
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 did not record an income tax benefit because tax losses could not be utilized.
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. The Year 2000 issue affects virtually all companies and organizations. Although the Company feels that the Year 2000 issue will not have a material impact on its internal operations, there can be no assurance that the Company's financial service organizations may not be adversely affected by the Year 200 issue and as a result, there can be no assurance as to the impact of the Year 2000 issue on the Company. Management believes that the Company and its important business and professional counter parties have prepared adequately for this event.
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 F- 1.
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, 1999, 1998 and 1997 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 $175,000 annual compensation provided by his employment agreement. The balance of $43,875 was waived. During fiscal 1999 Mr. Michael elected to accept total cash compensation of $40,000. The balance of $135,000 was waived. On September 24, 1999, as provided for in his employment agreement, Mr. Michael elected to extend the agreement for a period of 3 years from September 25, 1999 to September 24, 2002.
SUMMARY COMPENSATION TABLE
(1) During fiscal 1998 Mr. Michael elected to accept only 75% of the $175,000 annual compensation provided by his employment agreement. The balance of $43,875 was waived.
(2) During fiscal 1999 Mr. Michael elected to accept total cash compensation of $40,000. The balance of $135,000 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, 1994 for purposes of preparing this graph.
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURNS
Personal Diagnostics, Incorporated NASDAQ Stock Market (US Companies)
300 -
250 -
200 -
150 -
100 -
50 -
0 -
1994 1995 1996 1997 1998 1999
Personal Diagnostics, Incorporated 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 September 30, 1994.
Savings and Benefit Plans - -------------------------
Executive officers who qualify are permitted to participate in the Company's Stock Option plans. Executive officers participate in group life and medical plans which are available generally to all employees. At December 31, 1995 the Company terminated the 401(k) 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 number of directors serving on the Board to one, John H. Michael. The Company intends to increase the Board of Directors to three members including at least one outside director during fiscal 2000.
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 are now 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, 1999 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 - ----------------------------------------------------------------------
No options were exercised during fiscal 1999. At September 30, 1999 no options were outstanding.
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 Mr. Michael who serves as Chairman of the 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 1999.
Compensation Committee Interlocks and Insider Participation - -----------------------------------------------------------
The Company's Board of Directors determined the compensation paid to the sole executive officer during fiscal 1999. 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 1999 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, 1999.
- ----------------
(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. 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 F- 1.
(a)(2) Inapplicable
(a)(3) List of Exhibits
PERSONAL DIAGNOSTICS, INCORPORATED
INDEX
Page
Independent Auditors' Report
Balance Sheets as of September 30, 1999 and 1998
Statements of Operations for the Years Ended September 30, 1999, 1998 and 1997
Statements of Changes in Stockholders' Equity for the Years Ended September 30, 1999, 1998 and 1997
Statements of Cash Flows for the Years Ended September 30, 1999, 1998 and 1997
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 at September 30, 1999 and 1998 and for each of the three years in the period ended September 30, 1999 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 audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides 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, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 1999 in conformity with generally accepted accounting principles.
WISS & COMPANY, LLP
Livingston, New Jersey November 17, 1999
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, 1999, 1998 AND 1997
See accompanying notes to financial statements
Personal Diagnostics, Incorporated
STATEMENTS OF CASH FLOWS
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.
Investment Securities - The Company's investments in securities are classified as held-to-maturity and consist of U.S. Treasury Bills which the Company has the positive intent and ability to hold to maturity. The investments are reported at cost, adjusted for amortization of premiums and accretion of discounts which are recognized in interest income using the interest method over the period to maturity.
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 cash equivalents and trading securities. Cash and cash 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 cash 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
Personal Diagnostics, Incorporated
Notes to Financial Statements
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 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, 1999, 1998 or 1997 and accordingly, no proforma disclosure has been provided.
Income Taxes - The Company's income is derived principally from its investment activity. Accordingly, the Company is taxed as a personal holding company for federal tax purposes, which requires a tax on undistributed personal holding company income at an effective rate of 39.6%. Deferred income taxes result primarily from net operating losses, capital loss carryforwards and business tax credit carryforwards. As a result of these temporary differences, the Company has recorded a deferred tax asset with an offsetting valuation allowance for the same amount.
NOTE 2 - INVESTMENTS:
At September 30, 1999 and 1998, cash and cash equivalents include approximately $3,988,000 and $5,088,000 respectively of U.S. Treasury Bills purchased with maturities of three months or less.
The Company's derivative exposure has consisted primarily of short sales of Standard & Poors 500 futures.
The amortized cost and estimated market value of securities held-to-maturity are as follows:
September 30, 1999 ----------------------------------------------- Gross Estimated Amortized Unrealized Fair Cost Gains (Losses) Value --------- -------------- --------- U.S. Treasury Bills $596,000 $ - $596,000 ========= ============= =========
Personal Diagnostics, Incorporated
Notes to Financial Statements
The amortized cost and estimated market value of investment securities, at September 30, 1999, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without prepayment penalties.
Estimated Amortized Fair Cost Value --------- ---------- One year or less $596,000 $596,000 ======== ========
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, 1999 and 1998, has been renovated for sale.
NOTE 4 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consist of:
September 30, --------------------------- 1999 1998 ------------ -------- Legal fees $33,000 $25,000 Audit fees 20,000 20,000 Annual meeting 5,000 15,000 Other 5,000 24,000 ------- ------- $63,000 $84,000 ======= =======
Current liabilities of discontinued operations at September 30, 1999 and 1998, 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:
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, 1999 and 1998. During fiscal 1999 and 1998 the valuation allowance decreased $188,000 and increased $96,000, respectively.
A reconciliation of the provision 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:
Personal Diagnostics, Incorporated
Notes to Financial Statements
At September 30, 1999, the Company had net operating loss carryforwards of approximately $1,364,000 for regular tax purposes and $1,730,000 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 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 $1,161,000 in 2009, $112,000 in 2011 and $91,000 in 2018. The research and development credits expire, if not used, over the period 2001 to 2002.
The AMT credits are available for an indefinite period.
NOTE 6 - COMMITMENTS AND CONTINGENCIES:
Employment Contract - At September 30, 1999, the Company has an employment contract with an officer which provides for an annual salary of not less than $175,000 until September 24, 2002. The contract also provides additional annual performance compensation up to 60% of net gains produced by the President's trading and investment activities on behalf of the Company.
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.
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.
Personal Diagnostics, Incorporated
Notes to Financial Statements
The Company has made no charge to income in connection with the grant of options under any plan.
The 1990 Plan provided for a maximum of 300,000 shares, all of which are available for grant as of September 30, 1999.
Changes in the Company's stock option plans were as follows:
NOTE 8 - STATEMENTS OF CASH FLOWS:
Non-cash Investing and Financing Activities - At September 30, 1999, the president of the Company waived $135,000 due to him per the employment contract. The transaction resulted in an increase to general and administrative expense and additional paid-in capital.
During the year ended September 30, 1999, the Company retired 300,000 shares of common stock which were held in the treasury.
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.
Personal Diagnostics, Incorporated
Notes to Financial Statements
On October 2, 1996, the Company purchased real estate owned by the President for $818,000.
For the year ended September 30, 1997, the Company leased office space from the President for $7,500.
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.
NOTE 10 - NEW ACCOUNTING STANDARDS:
In June 1998, the Financial Accounting Standards Board ("the Board") issued Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities for years beginning after June 15, 1999. Subsequently, the Board deferred the effective date of this pronouncement through the issuance of SFAS No. 137.
The Company does not expect the previously mentioned pronouncement to significantly impact its financial statements.
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: 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.
By: John H. Michael December 27, 1999 ------------------------------- John H. Michael, Chairman of the Board, Chief Executive Officer, 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.