Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
Commission file number 1-11394
EDITEK, INC.
(Exact name of Registrant as specified in its charter)
Delaware 95-3863205
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1238 Anthony Road, Burlington, North Carolina 27215
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (910) 226-6311
Securities registered pursuant to Section 12(b)
of the Act:
Common Stock, par value $.15 per share
(Title of Class)
Securities registered pursuant to Section 12(g) of the Act: None
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 __
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (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. [X]
The aggregate market value of Common Stock of the Registrant, $.15 par value
("Common Stock"), held by non-affiliates of the Registrant is approximately
$15,866,288, as of March 14, 1997, based upon a price of $.38 which price is
equal to the closing price for the Common Stock on the American Stock Exchange.
The number of shares of Common Stock outstanding as of March 14, 1997, was
48,692,775.
This document contains 58 pages and the Exhibit Index appears at page 31 hereof.
EDITEK, INC.
FORM 10-K ANNUAL REPORT
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
Table of Contents
ITEM NO. PAGE
Part I
1. Business. . . . . . . . . . . . 4
2. Properties. . . . . . . . . . . . . . . . 14
3. Legal Proceedings . . . . . . . . . 14
4. Submission of Matters to a Vote of
Security Holders . . . . . . . . . . . . . . . 15
Part II
5. Market for the Registrant's Common Equity
and Related Stockholder Matters. . . . . . . 16
6. Selected Financial Data . . . . . . . . . . . . . 18
7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations. . . . . . . . . .. . . 18
8. Financial Statements and Supplementary
Data . . . . . . . . . . . . . . 25
9. Changes in and Disagreements With
Accountants on Accounting
and Financial Disclosure . . . . 25
Part III
10. Directors and Executive Officers
of the Registrant. . . . . . . . 26
11. Executive Compensation. . . . . . 26
12. Security Ownership of Certain Beneficial
Owners and Management. . . . . . 26
13. Certain Relationships and Related
Transactions . . . . . . . . . .. . 26
Part IV
14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K. . . . .. 27
Signatures. . . . . . . . . . . . . . . . 32
PART I
CAUTIONARY STATEMENT IDENTIFYING IMPORTANT FACTORS
THAT COULD CAUSE THE COMPANY'S ACTUAL RESULTS TO DIFFER
FROM THOSE PROJECTED IN FORWARD LOOKING STATEMENTS
In connection with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, readers of this document and any
document incorporated by reference herein, are advised that this document and
documents incorporated by reference into this document contain both statements
of historical facts and forward looking statements. Forward looking statements
are subject to certain risks and uncertainties, which could cause actual results
to differ materially from those indicated by the forward looking statements.
Examples of forward looking statements include, but are not limited to (i)
projections of revenues, income or loss, earning or loss per share, capital
expenditures, dividends, capital structure and other financial items, (ii)
statements of the plans and objectives of the Company or its management or Board
of Directors, including the introduction of new products, or estimates or
predictions of actions by customers, suppliers, competitors or regulatory
authorities, (iii) statements of future economic performance, and (iv)
statements of assumptions underlying other statements and statements about the
Company or its business.
This document and any documents incorporated by reference herein also
identify important factors which could cause actual results to differ materially
from those indicated by the forward looking statements. These risks and
uncertainties include price competition, the decisions of customers, the actions
of competitors, the effects of government regulation, possible delays in the
introduction of new products, customer acceptance of products and services, the
possible effects of the MEDTOX acquisition and its related financings and other
factors which are described herein and/or in documents incorporated by reference
herein.
The cautionary statements made pursuant to the Private Litigation
Securities Reform Act of 1995 above and elsewhere by the Company should not be
construed as exhaustive or as any admission regarding the adequacy of
disclosures made by the Company prior to the effective date of such Act. Forward
looking statements are beyond the ability of the Company to control and in many
cases the Company cannot predict what factors would cause results to differ
materially from those indicated by the forward looking statements.
ITEM 1. BUSINESS.
1. General.
EDITEK, Inc., a Delaware corporation, was organized in
September, 1986 to succeed the operations of a predecessor California
corporation. EDITEK, Inc. and its subsidiaries are referred to herein as "the
Company". The Company currently operates a toxicology laboratory which provides
forensic toxicology, clinical toxicology, and heavy metals analyses. The Company
also develops, manufactures and markets on-site diagnostic and screening tests
which are used to detect substances in humans, foodstuffs, animals, feed and the
environment.
The Company entered the laboratory business on February 11,
1994 when it completed the acquisition of Princeton Diagnostic Laboratories of
America, Inc. ("PDLA"). On January 30, 1996, the Company acquired the assets and
certain liabilities of another laboratory, MEDTOX Laboratories, Inc. ("MEDTOX").
MEDTOX is now a wholly owned subsidiary.
For the fiscal year ended December 31, 1996, sales from
laboratory services accounted for 88% of the Company's revenues.
Revenue from the sale of the Company's on-site diagnostic and
screening tests and other products, including contract manufacturing services,
accounted for 11% of the total revenues of the Company for the year ended
December 31, 1996.
The balance of the Company's revenues are from work performed
for the U.S. Department of Defense including product sales as well as royalties,
fees and other income. This represented approximately 1% of the revenues of the
Company for the year ended December 31, 1996.
2. Principal Services, Products, and Markets.
General. The Company's principal sources of revenues come from
the sale of laboratory testing services in forensic toxicology, clinical
toxicology, and heavy metal analyses as well as from manufactured products
including a variety of on-site screening products.
A. Drug Abuse Laboratory Testing Services. The primary source
of revenues of the Company is the provision of laboratory testing services for
the identification of drugs of abuse. These tests are conducted using
methodologies such as various immunoassays, gas liquid chromatography, high
pressure liquid chromatography and gas chromatography/mass spectrometry. The
Company has pioneered security and chain of custody procedures, including sample
bar coding as well as stereospecific confirmation methods, to help maintain the
integrity of the specimens and the confidentiality of the test results.
The Company's customers for abused substance testing include
public and private corporations. Among this customer base are Fortune 500
companies. In addition to public and private corporations, abused substance
testing is also conducted on behalf of service firms such as financial
institutions, drug treatment counseling centers and hospitals.
B. Clinical Toxicology. The Company has a fully certified
clinical toxicology reference laboratory specializing in esoteric therapeutic
drug monitoring and emergency toxicology. The tests performed in the clinical
laboratory are conducted using methodologies such as radio immunoassay, gas
liquid chromatography, high performance liquid chromatography and gas
chromatography/mass spectrometry. The Company performs the analyses on many
classes of drugs including: analgesic, antianxiety, anticholinergic,
antocoagulant, anticonvulsant, antidepressant, antidiabetic, antiemetic,
antihistamine, antiinflammatory, antimicrobial, antipsychotic, bronchodilotar,
cardiovascular, stimulant, decongestant, immunosuppressant, local anesthetic,
muscle relaxant, narcotic analgesic, and sedative medications.
The Company's clients for this market consist of hospitals,
clinics and other laboratories.
C. Heavy metal, trace element, and solvent analyses. The
Company also operates a laboratory in which blood and urine are tested for heavy
metals, trace elements, and solvents. The tests are performed using the
methodologies such as Flame and Flameless Atomic Absorption and the Inductively
Coupled Plasma-Mass Spectrometry.
The Company's clients for this market are occupational health
clinics and companies which need to test patients or employees monitored for
excess exposure to hazardous materials.
D. Products. The Company's test products, which were adapted
from assay technologies previously developed in the 1970's for human medical
diagnostics, are easy to use, inexpensive, on-site tests. The tests are capable
of rapidly detecting the presence of a number of substances in human urine or
blood samples, foodstuffs, animals, feed and the environment without the
necessity of instruments or technical personnel. The Company's diagnostic tests
and the disposable devices used in connection therewith are marketed under the
names EZ-SCREEN(R), QUIK-CARD(R), VERDICT(R), PROFILE(R), RECON(R), and
EZ-QUANT(R), which are registered trademarks of the Company. A QUIK-CARD
together with the necessary reagents, comprise an EZ-SCREEN test. EZ-SCREEN and
VERDICT tests are utilized in agricultural diagnostics (which includes mycotoxin
detection, drug residue surveillance, feed analysis, and regulatory compliance)
and clinical diagnostics (which includes drugs of abuse testing). VERDICT and
RECON are "self-performing", one-step tests marketed, respectively, to the drugs
of abuse and Department of Defense testing markets. The EZ-QUANT tests are
microtiter, ELISA-based, quantitative assays utilized in agricultural
diagnostics.
The EZ-SCREEN tests are used in clinical diagnostics to detect
the presence of certain drugs of abuse in humans. The Company now has received
clearance from the Food and Drug Administration ("FDA") for EZ-SCREEN tests for
six of the most commonly abused substances: cannabinoids, cocaine, opiates,
barbiturates, amphetamines, and PCP. The Company markets this product line, both
domestically and internationally, to law enforcement agencies, industrial
companies for pre-employment screening, physicians' offices, hospitals, clinics
and drug abuse counseling and treatment centers.
VERDICT tests are used to detect the presence of certain drugs
of abuse in humans. The Company is now marketing the one-step VERDICT tests for
cocaine, THC, opiates, barbiturates and PCP, all of which have received 510(k)
premarket clearance from the FDA.
The Company distributes on-site tests for the detection of
alcohol with the EZ-SCREEN Breath Alcohol Test. The test consists of a small
tube containing chemically treated crystals that change color in the presence of
alcohol. The Company purchases these products through a distribution agreement.
The EZ-SCREEN and EZ-QUANT tests are used in agricultural
diagnostics to detect, among other things, mycotoxins, which are hazardous
substances produced by fungal growth. Mycotoxins frequently contaminate corn,
wheat, rye, barley, peanuts, tree nuts, cottonseed, milk, rice, and livestock
feeds. The EZ-SCREEN agridiagnostic tests are marketed to regulatory authorities
and producers of foodstuffs and feeds.
3. Marketing and Sales.
The Company believes that the combined operations of the
laboratory operations and the on-site test kits manufactured by the Company have
created synergy in the marketing of comprehensive, on-site and laboratory
testing programs to a common customer base. The Company is in a position to
offer a full line of products and services for the substance abuse testing
marketplace, including (1) on-site tests for the detection of substance of abuse
drugs (EZ-SCREEN and VERDICT); (2) on-site qualitative and quantitative
determination of alcohol intoxication (both disposable and electronic instrument
detection devices); (3) SAMHSA certified laboratory testing (screening and
confirmation); (4) accessory items (gloves, specimen containers, permanent
recording temperature strips); (5) consultation; and (6) coordination of
collection site services.
The Company currently markets these products and services
through its dedicated sales force, through independent third party
administrators and through occupational health clinics.
Through most of the year ended December 31, 1996, the Company
sold its agricultural diagnostic products through its wholly owned subsidiary,
DIAGNOSTIX, Inc., which consisted primarily of the former operations of Bioman
Products which the Company acquired in June, 1995. In order to reduce its
overall operating costs and focus its attention on the laboratory sales effort,
the Company, in September of 1996, sold certain assets and the operations of
DIAGNOSTIX, Inc., including the trade name DIAGNOSTIX, to a company headed by
certain former employees of DIAGNOSTIX, Inc. The Company continues to sell its
agridiagnostic products direct or through the use of certain distributors.
Major Customers. The Company had no single customer whose
sales amounted to more than 10% of its total revenues during the year ended
December 31, 1996. One customer's sales amounted to approximately 6% of the
Company's laboratory revenues while sales to the United States government and
its agencies, primarily the United States Department of Agriculture ("USDA"),
amounted to approximately 9% of the Company's revenues from product sales. Sales
to foreign customers, primarily distributors, amounted to approximately 10% of
the Company's revenues from product sales. No one foreign customer represented
more than 5% of the Company's revenue from product sales.
4. New Products.
During 1996 the primary research and development efforts of
the Company focused on the development of tests to extend the product offerings
in each of the immunoassay product lines produced by the Company. These product
lines consist of the VERDICT/RECON "self-performing" immunochromatographic
assays, the EZ-SCREEN membrane-based enzyme immunoassays, and the EZ-QUANT
microtiter immunoassays.
VERDICT Tests for Drugs of Abuse - During 1996 research and
development efforts were directed to continued support and refinement of the
currently marketed VERDICT one-step tests for the detection of cocaine, THC
(marijuana), and opiate metabolites and to the development of additional VERDICT
tests for the detection of phencyclidine (PCP), amphetamines and barbiturates.
The Company received 510(k) premarket clearance for the VERDICT THC (marijuana),
barbiturates, and phencyclidine (PCP) tests from the U.S. Food and Drug
Administration (FDA) in 1996. In 1997, efforts will be directed to the
development of a VERDICT amphetamine test kit as well as designing and
developing a test device which would permit simultaneous testing of a sample for
five different drugs of abuse on a one-step format.
RECON Tests for Agents of Biological Origin - In 1991 the
Company successfully completed a "proof of principle" study under contract with
the U.S. Department of Defense (DOD) to develop rapid, on-site tests for the
detection of certain biological materials. From September 1991 to September 30,
1996, the Company had a contract to develop tests on the EZ-SCREEN format as
well as on a one-step format (RECON test kits). The Company successfully
developed a total of 14 tests during the contract.
EZ-SCREEN Tests for Drugs of Abuse - In 1996, the Company
completed the development of, and received FDA 510(k) premarket clearance for
the EZ-SCREEN PROFILE drugs of abuse test. This product permits simultaneous
testing of a single urine sample for THC, cocaine, opiates, amphetamines and
PCP. The Company is also working on the development of a test for LSD (lysergic
acid diethylamide) and testing of meconium specimens on the EZ-SCREEN format.
EZ-QUANT Tests for Mycotoxins and Antibiotic Residues - In
1996, the Company completed development of the EZ-QUANT Chloramphenicol test. No
additional test development is planned for 1997.
Biosensors - In March, 1995 the Company entered into a
Research Collaboration Agreement with Battelle Memorial Institute ("Battelle")
to explore the commercial feasibility of utilizing the Company's immunoassay
reagents with a novel, state-of-the-art biosensor instrument developed by
Battelle under contract with the Department of Defense. During 1996, the project
was completed and a final report has been prepared by Battelle. The report shows
that the biosensor instrument coupled with the Company's immunoassay reagents
generated results that looked promising. The Company has not yet decided whether
to pursue additional development with Battelle.
Laboratory Services - The research and development department
of MEDTOX develops new assays for new drug entities, develops new assays for
existing metabolites of drugs and other toxins, and improving existing assays
with the goals of improving the assays' robustness, sensitivity, accuracy,
precision, specificity, and cost. Historical R&D activities at MEDTOX have used
the primary technologies of liquid chromatography (LC), gas chromatography (GC),
gas chromatography with mass spectrometry (GC/MS), and atomic absorption. During
1996, MEDTOX switched most of the activities in the atomic absorption area, for
the measurement of metals and other elements, to the innovative technology of
inductively coupled plasma mass spectrometry (ICP/MS). ICP/MS was used in 1996
both for the development of assays for elements that had not been previously
analyzed by MEDTOX, and for the development of improved and less expensive
assays for elements previously measured at MEDTOX by atomic absorption. In 1997,
MEDTOX will attempt to attain improved results using the new technology of
tandem mass spectrometry coupled with both gas chromatography and liquid
chromatography (GC/MS/MS and LC/MS/MS). These new technologies should allow
MEDTOX to compete more successfully in our markets due to decreased assay
development time, reduced cost, enhanced sensitivity, and enhanced specificity.
The Company believes that these technologies will improve our laboratory
services in clinical toxicology, forensic toxicology and pharmaceutical research
analysis. The Company also believes that the technologies of LC/MS/MS and
GC/MS/MS will replace our current dependence on LC, GC and simple GC/MS as
ICP/MS has now largely replaced our previous dependence on atomic absorption.
5. Research and Development.
The markets for laboratory testing and clinical diagnostic
products are highly competitive, and innovations and technological changes occur
frequently. For these reasons, the Company has devoted substantial funds to
research and development of its products and services. During the fiscal years
ended December 31, 1996, 1995 and 1994, the Company incurred expenses of
$1,280,000, $920,000, and $729,000 respectively, for research and development.
As of December 31, 1996, the Company employed 12 people in research and
development, 9 of whom hold Ph.D.'s.
6. Raw Materials.
The raw materials required by the laboratory for urine drug
testing consist primarily of two types: specimen collection supplies and
reagents for laboratory analysis. The collection supplies include Drug Testing
Custody and Control Forms that identify the specimen and the client, as well as
document the chain-of-custody. Collection supplies also consist of specimen
bottles and shipping boxes. Reagents for drug testing are primarily immunoassay
screening products and various chemicals used for confirmation testing. The
Company believes all of these materials are available at competitive prices from
other suppliers.
The primary raw materials required for the immunoassay-based
test kits produced by the Company consist of antibodies, antigens and other
reagents, plastic injection-molded devices, glass fiber, nitrocellulose filter
materials, and packaging materials. The Company maintains an inventory of raw
materials which, to date, has been acquired primarily from third parties.
Currently, most raw materials are available from several sources. The Company
possesses the technical capability to produce its own antibodies and has
initiated production of antibodies for certain tests. However, if the Company
were to change its source of supply for raw materials used in a specific test,
additional development, and the accompanying costs, may be required to adapt the
alternate material to the specific diagnostic test.
7. Patents, Trademarks, Licensing and Other Proprietary Information.
The Company holds nine issued United States patents, eight of
which generally form the basis for the EZ-SCREEN and one-step technologies.
Additionally, the Company has one patent which relates to methods of utilizing
whole blood as a sample medium on its immunoassay devices. The Company also
holds various patents in several foreign countries. The Company also holds two
United States patents which it acquired in the acquisition of Granite
Technological Enterprises, Inc. in 1986.
Of the eight U.S. patents mentioned above which generally form
the basis for the EZ-SCREEN and one-step technologies, one expires in 2000, one
expires in 2004, five expire in 2007, and one expires in 2010. The patent which
relates to the methods of utilizing whole blood as a sample medium expires in
2012.
There can be no guarantee that there will not be a challenge
to the validity of the patents. In the event of such a challenge, the Company
might be required to spend significant funds to defend its patents, and there
can be no assurance that the Company would be successful in any such action.
The Company believes that the basic technologies requisite to
the production of antibodies are in the public domain and are not patentable.
The Company intends to rely upon trade secret protection of certain proprietary
information, rather than patents, where it believes disclosure could cause the
Company to be vulnerable to competitors who could successfully replicate the
Company's production and manufacturing techniques and processes.
The Company holds approximately 15 registered trade names
and/or trademarks in reference to its products and corporate names. The trade
names and/or trademarks of the Company range in duration from 10 years to 20
years with expiration dates ranging from 2001 to 2008. Applications have also
been made for additional trade names.
8. Seasonality.
The Company believes that the laboratory testing business is
subject to seasonal fluctuations in pre-employment screening which has low
points in July and December annually. The Company does not believe that
seasonality is a significant factor in sales of its on-site immunoassay tests.
However, the Company believes that sales of certain of its tests for the
agricultural markets such as its EZ-SCREEN:AFLATOXIN test coincide with the
harvesting of crops meant for human and animal consumption.
9. Backlog.
At December 31, 1996, the Company did not have any significant
backlog and normally does not have any significant backlog. The Company does not
believe that recorded sales backlog is a significant factor in its business.
10. Competition.
Laboratory Services. Competition in the area of drugs of abuse testing is
intense. Competitors and potential competitors include forensic testing units of
large clinical laboratories, such as Laboratory Corporation of America Holdings,
Quest Diagnostics, Inc. and SmithKline Laboratories, Inc. and other independent
laboratories, other specialized laboratories, and in-house testing facilities
maintained by hospitals.
Competitive factors include reliability and accuracy of tests,
price structure, service, transportation collection networks and the ability to
establish relationships with hospitals, physicians, and users of drug abuse
testing programs. It should be recognized, however, that many of the competitors
and potential competitors have substantially greater financial and other
resources than the Company.
The industry in which the Company competes is characterized by
service issues including, turn-around time of reporting results, price, the
quality and reliability of results, and an absence of patent or other
proprietary protection. In addition, since tests performed by the Company are
not protected by patents or other proprietary rights, any of these tests could
be performed by competitors. However, there are proprietary assay protocols for
the more specialized testing that are unique to the Company.
Some specific segments of the laboratory testing business are
price competitive with low margins. Other segments, which place a premium on
quality, constitute a large part of the business of MEDTOX, where, to date,
quality service has been a more important competitive factor than price. This
has allowed MEDTOX to generate positive gross margins. The Company's ability to
successfully compete in the future and maintain it margins will be based on its
ability to maintain its quality and customer service strength while maintaining
efficiencies and low cost operations. There can be no assurance that price
competitiveness will not increase in importance as a competitive factor in the
business of MEDTOX.
Immunoassay Tests. The diagnostics market has become highly
competitive with respect to the price, quality and ease of use of various tests
and is characterized by rapid technological and regulatory changes. The Company
has designed its on-site tests as inexpensive, on-site tests for use by
unskilled personnel, and has not endeavored to compete with laboratory-based
systems. Numerous large companies with greater research and development,
marketing, financial, and other capabilities, as well as government-funded
institutions and smaller research firms, are engaged in research, development
and marketing of diagnostic assays for application in the areas for which the
Company produces its products.
The Company has experienced increased competition with respect
to its immunoassay tests from systems and products developed by others, many of
whom compete solely on price. As the number of firms marketing diagnostic tests
has grown, the Company has experienced increased price competition. A further
increase in competition may have a material adverse effect on the business and
future financial prospects of the Company.
11. Government Regulations.
The products and services of the Company are subject to the regulations of
a number of governmental agencies as listed below. It is believed that the
Company is currently in compliance with all regulatory authorities. The Company
cannot predict whether future changes in governmental regulations might
significantly increase compliance costs or adversely affect the time or cost
required to develop and introduce new products. In addition, products of the
Company are or may become subject to foreign regulations.
1. United States Food and Drug Administration (FDA). Certain tests for
human diagnostic purposes must be cleared by the FDA prior to their marketing
for in vitro diagnostic use in the United States. The FDA regulated products
produced by the Company are in vitro diagnostic products subject to FDA
clearance through the 510(k) process which requires the submission of
information and data to the FDA that demonstrates that the device to be marketed
is substantially equivalent to a currently marketed device. This data is
generated by performing clinical studies comparing the results obtained using
the Company's device to those obtained using an existing test product. Although
no maximum statutory response time has been set for review of a 510(k)
submission, as a matter of policy the FDA has attempted to complete review of
510(k) submissions within 90 days. To date, the Company has received 510(k)
clearance for 11 different products and the average time for clearance was 72
days with a maximum of 141 days and a minimum of 20 days. Products subject to
510(k) regulations may not be marketed for in vitro diagnostic use until the FDA
issues a letter stating that a finding of substantial equivalence has been made.
As a registered manufacturer of FDA regulated products, the Company is
subject to a variety of FDA regulations including the Good Manufacturing
Practices (GMP) regulations which define the conditions under which FDA
regulated products are to be produced. These regulations are enforced by FDA and
failure to comply with GMP or other FDA regulations can result in the delay of
premarket product reviews, fines, civil penalties, recall, seizures, injunctions
and criminal prosecution.
2. Health Care Financing Administration (HCFA). The Clinical Laboratory
Improvement Act (CLIA) introduced in 1992 requires that all in vitro diagnostic
products be categorized as to level of complexity. A request for CLIA
categorization of any new clinical laboratory test system must be made
simultaneously with FDA 510(k) submission. The EZ-SCREEN and VERDICT drugs of
abuse tests currently marketed by EDITEK have been categorized as moderately
complex. The complexity category to which a clinical laboratory test system is
assigned may limit the number of laboratories qualified to use the test system
thus impacting product sales. The MEDTOX laboratory is a CLIA licensed
laboratory.
3. United States Department of Defense (DOD). As a result of the Company's
contract with the DOD being classified as Secret, it has been necessary to
establish the appropriate security procedures and facilities, including
designation of a Facility Security Officer who is responsible for overseeing the
security system, including conduct of periodic security audits by appropriate
defense agencies. Additionally, the Company is now subject to periodic audits of
its accounting systems and records by the Defense Audit Agency.
4. Drug Enforcement Administration (DEA). The primary business of the
Company involves either testing for drugs of abuse or developing test kits for
the detection of drugs/drug metabolites in urine. MEDTOX is registered with the
DEA to conduct chemical analyses with controlled substances. The EDITEK facility
in Burlington, N.C. is registered by the DEA to manufacture and distribute
controlled substances and to conduct research with controlled substances.
Maintenance of these registrations requires that the Company comply with
applicable DEA regulations.
5. Substance Abuse and Mental Health Services Administration (SAMHSA).
MEDTOX has been certified by SAMHSA since 1988. SAMHSA certifies laboratories
meeting strict standards under Subpart C of Mandatory Guidelines for Federal
Workplace Drug Testing Programs. Continued certification is accomplished through
periodic inspection by SAMHSA to assure compliance with applicable regulations.
6. Additional Laboratory Regulations. The MEDTOX laboratories and certain
of the laboratory personnel are licensed or otherwise regulated by certain
federal agencies, states, and localities in which MEDTOX conduct business.
Federal, state and local laws and regulations require MEDTOX, among other
things, to meet standards governing the qualifications of laboratory owners and
personnel, as well as the maintenance of proper records, facilities, equipment,
test materials, and quality control programs. In addition, both laboratories are
subject to a number of other federal, state, and local requirements which
provide for inspection of laboratory facilities and participation in proficiency
testing, as well as govern the transportation, packaging, and labeling of
specimens tested by either laboratory. The laboratories are also subject to laws
and regulations prohibiting the unlawful rebate of fees and limiting the manner
in which business may be solicited.
MEDTOX receives and uses small quantities of hazardous chemicals and
radioactive materials in their operations and are licensed to handle and dispose
of such chemicals and materials. Any business handling or disposing of hazardous
and radioactive waste is subject to potential liabilities under certain of these
laws.
12. Product and Professional Liability.
Manufacturing and marketing of products by the Company entail
a risk of product liability claims. In August, 1993, the Company procured
insurance coverage against the risk of product liability arising out of events
after such date, but such insurance does not cover claims made after that date
based on events that occurred prior to that date. Consequently, for uncovered
claims, the Company could be required to pay any and all costs associated with
any product liability claims brought against it, the cost of defense whatever
the outcome of the action, and possible settlement or damages if a court
rendered a judgment in favor of any plaintiff asserting such a claim against the
Company. Damages may include punitive damages, which may substantially exceed
actual damages. The obligation to pay such damages could have a material adverse
effect on the Company and exceed its ability to pay such damages. No product
liability claims are pending.
The Company's laboratory testing services are primarily
diagnostic and expose the Company to the risk of liability claims. The Company's
laboratories have maintained continuous Professional and General Liability
insurance since 1985. To date, the Company has not had any substantial product
liability and no material professional service claims are currently pending.
13. Employees.
As of December 31, 1996, the Company had a total of 320 full
time employees as compared to a total of 106 full time employees at December 31,
1995. Of the 320 full time employees, 292 work at and for MEDTOX, while the
remaining 28 work at the Company's facility in Burlington, N.C.
Of the 292 full time employees of MEDTOX, 223 were involved in
laboratory operations, 11 were involved in sales and marketing, 7 were involved
in research and development, and 22 were involved in administrative and clerical
functions at December 31, 1996. In addition 6 of the full time employees at
MEDTOX hold doctorate degrees.
Of the 28 full time employees at the Company's facility in
Burlington, N.C. 16 were involved in manufacturing and distribution, 5 were
involved in research and product development, and 7 in administrative and
clerical functions at December 31, 1996. Additionally, 4 of the employees in
Burlington, N.C. hold doctorate degrees.
The Company's employees are not covered by any collective
bargaining agreements, and the Company has not experienced any work stoppages
and the Company considers its relations with its employees to be good.
ITEM 2. PROPERTIES.
The Company leases approximately 33,000 square feet in
Burlington, North Carolina, where it maintains its executive offices, research
and development laboratories, production operations, and warehouse. The total
rent paid by the Company for this site during the fiscal year ended December 31,
1996 was approximately $122,000. These facilities are currently leased from Dr.
Samuel C. Powell, a member of the Board of Directors of the Company, at a rental
of approximately $10,000 per month, plus a pro rata share of utilities and
certain other expenses. The Company is currently leasing the space on a
month-to-month basis. The Company intends to negotiate a new lease with Dr.
Powell in the future. The Company believes it is renting these facilities on
terms as favorable as those available from third parties for equivalent
premises. The Company also holds certain rights of first refusal to lease
additional space in the building if it becomes available (the building contains
a total of 42,900 square feet). In the opinion of management, comparable
alternative facilities could be obtained without disruption of its business if a
new lease with Dr. Powell is not negotiated. See "Item 13 -Certain Relationships
and Related Transactions."
The administrative offices and laboratory operations of MEDTOX
are located in a 41,017 square foot facility in St. Paul, Minnesota. The
facility is rented under a lease which expires in March 1998. The current annual
rent, excluding operating costs, for the facility is $330,000 per year.
The Company leases administrative offices and laboratory facilities in an
approximately 22,000 square foot facility in South Plainfield, New Jersey. The
rent payment, excluding operating costs, is $170,345 per year. The Company is
currently utilizing approximately 10% of the existing facility in New Jersey for
a courier system and as a collection site. The remaining 90% of the facility is
idle and has been considered in the Company's restructuring charge. See Note 8
to the Notes of the Consolidated Financial Statements contained herein.
The Company believes that its existing facilities are adequate
for the purposes being used to accommodate its product development, and
manufacturing and laboratory testing requirements.
ITEM 3. LEGAL PROCEEDINGS.
The Company was sued in Federal District Court for the Southern District of
New York in five separate lawsuits commenced by holders of EDITEK Series A
Convertible Preferred Stock. The lawsuits allege breach of
contract with respect to conversion of the Preferred Stock and certain
plaintiffs have also alleged misrepresentation and securities laws violations in
connection with the sale of the Preferred Stock. In December 1996, the Company's
shareholders approved an increase in the authorized shares of common stock of
the Company. Subsequently, four of the five lawsuits have been settled. The
remaining lawsuit, Everest Capital Investments, Ltd. and Everest Capital
International, Ltd. v. EDITEK, Inc. alleges breach of contract and fraud in
connection with the Company's inability to convert preferred stock into common
stock due to the previous unavailability of sufficient common shares. The common
stock has subsequently been delivered, but plaintiffs continue to assert claims
of money damages resulting from alleged delays in effecting the conversions. The
Company intends to vigorously contest the matter.
The Company is a defendant to claims of patent infringement
asserted on August 20, 1996 by United States Drug Testing Laboratories, Inc. It
is alleged that the Company infringes two patents allegedly owned by United
States Drug Testing Laboratories relating to forensically acceptable
determinations of gestational fetal exposure to drugs and other chemical agents.
The Company has answered the complaint denying any infringement and has
counterclaimed for a declaratory judgment that the patents are invalid,
unenforceable, and not infringed. It also has counterclaimed for unfair
competition under federal and state law, requesting money damages as well as
injunction relief. The Company intends to vigorously pursue its defense of the
claims of United States Drug Testing Laboratories and to vigorously prosecute
its counterclaims.
On January 31, 1997, the Company filed suit in Federal
District Court in Minnesota against Morgan Capital LLC, David Bistricer and Alex
Bistricer alleging violation in Section 16b of the Securities and Exchange Act
of 1934 and seeking recovery of more than $500,000 in short-swing profits.
Messrs. David and Alex Bistricer are directors of the Company. No answer to the
Company's complaint has yet been received from the defendants.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.
The Annual Meeting (the "1995 Annual Meeting") of the
stockholders of EDITEK was held on December 20, 1996. The following individuals
were elected to serve on the Board of Directors of EDITEK, Inc. for the ensuing
year and until their respective successors are duly elected and qualified: Harry
G. McCoy, PharmD, Samuel C. Powell, Ph.D., Richard A. Braun, Alex Bistricer,
David Bistricer, Louis Perlman and James W. Hansen. Also by a vote of 16,672,341
shares in favor and 3,071,985 shares against, at the 1995 Annual Meeting, the
stockholders of EDITEK approved the adoption of an amendment to the Certificate
of the Corporation to increase the number of authorized shares of the stock of
EDITEK. Also, by a vote of 17,488,947 shares in favor and 2,377,790 shares
against, at the 1995 Annual Meeting, the stockholders of EDITEK approved the
adoption of certain amendments to the Qualified Employee Stock Purchase Plan.
During the year ended December 31, 1996, no other matters were submitted to a
vote of securities holders.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Common Stock
Since September 27, 1993, the Common Stock has been listed on
the American Stock Exchange trading under the symbol "EDI". From September 16,
1992 to September 26, 1993 the Common Stock was traded in and quoted in the
Emerging Company Marketplace of the American Stock Exchange ("ECM") under the
trading symbol "EDI.EC". The Common Stock had historically been traded in the
over-the-counter market and was quoted in the National Association of Securities
Dealers Automated Quotation System ("NASDAQ"). On June 5, 1992 the Common Stock
was delisted from NASDAQ as a result of non-compliance with revised listing
requirements. As a result, from June 8, 1992 through September 15, 1992 the
Common Stock was traded on and quoted in the Non-NASDAQ Over-The-Counter
Bulletin Board. As of March 14, 1997, the number of holders of record of the
Common Stock was 3,114. The following tables set forth, for the calendar
quarters indicated, the high and low closing price per share for the Common
Stock, as reported by the American Stock Exchange or the high and low bid prices
per share for the Common Stock as reported by NASDAQ. The quotations shown
represent inter dealer prices without adjustment for retail markups, markdowns
or commissions, and do not necessarily reflect actual transactions:
1997: (through March 14, 1997) High Low
First Quarter............... .... 11/16 3/8
1996:
First Quarter................ ... 3-11/16 2-7/8
Second Quarter............... 2-3/8 5/8
Third Quarter.................. 1-3/8 13/16
Fourth Quarter................ 1-3/8 7/16
1995:
First Quarter........ 3-5/16 2-9/16
Second Quarter..... 3-5/8 2-1/2
Third Quarter................. 3-9/16 2-11/16
Fourth Quarter...... 3-13/16 2-11/16
On March 14, 1997, the closing price of the Common Stock as
reported by the American Stock Exchange was $.38.
No dividends have been declared or paid by the Company since
its inception.
The Company's loan agreements prohibit cash dividends on the
Common Stock of the Company and limit the Company's ability to pay dividends on
the Series A Preferred Stock of the Company to dividends paid after February 1,
1997 that do not exceed one third of the excess cash flow of the Company for the
previous year as defined in the loan agreement.
Series A Preferred Stock
To help finance the acquisition of MEDTOX and provide working
capital, the Company issued 407 shares of Series A Preferred Stock. There are
currently 9 shares of Series A Preferred Stock outstanding.
The Series A Preferred Stock is convertible into shares of
Common Stock, at any time from March 30, 1996, the 60th day after the shares of
Series A Preferred Stock were first issued by the Company (the "Initial
Conversion Date"), until January 30, 1998, the second anniversary of the Initial
Preferred Issuance Date, at which time all conversion rights terminate and any
remaining shares of Series A Preferred Stock will be automatically converted, at
a rate determined by a formula based on a discount from the market price of the
Common Stock at the time of conversion, unless the holder of such Series A
Preferred Stock notifies the Company not to convert such shares. The Series A
Preferred Stock has no voting power and has certain liquidation preference and
dividend rights. The number of shares of Common Stock issuable upon conversion
of a share of Series A Preferred Stock will equal the number derived by dividing
(i) the purchase price of the Series A Preferred Stock ($50,000 per share) by
the lesser of (i) $2.775 or (ii) 75% of the Market Price of the Common Stock on
the day the shares of Series A Preferred Stock are converted into Common Stock.
"Market Price" is defined for this purpose as the daily average of the closing
bid prices quoted on the American Stock Exchange or other exchange on which the
Common Stock is traded for the five trading days immediately preceding the date
the shares are converted.
The Series A Preferred Stock will accrue an annual dividend of
Four Thousand Five Hundred ($4,500) Dollars per share (the "Preferred
Dividend"). Such Preferred Dividend shall be payable when and as declared by the
Board of Directors in its sole discretion. The Preferred Dividend is cumulative
until December 31, 1997. Dividends accruing after December 31, 1997 will not be
cumulative. No dividend shall be payable on shares of Common Stock of the
Company until all accrued cumulative unpaid dividends are paid to holders of the
Series A Preferred Stock.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data are derived from
financial statements of the Company and should be read in conjunction with the
financial statements, related notes, and other financial information included
herein.
Years Ended December 31
1996 1995 1994 1993 1992
----- ------ -------- ----- ------
(in thousands, except per share amounts)
Net revenues $26,726 $7,526 $6,593 $2,633 $2,989
Net loss (12,809) (7,285) (3,546) (3,066) (1,292)
Net loss per share (.38) (.77) (.49) (.56) ( .35)
Total assets 24,079 3,938 7,378 4,005 3,188
Long term debt -0- -0- 63 -0- 113
Cash dividends -0- -0- -0- -0- -0-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
General
The Company commenced operations in June 1983 and until 1986
was a development stage company. The Company became engaged in the manufacture
and sale of culture media, animal blood products, customer antisera, and other
Conventional Biodiagnostic Products as a result of its acquisition of Granite
Technological Enterprises, Inc. in June 1986. The Company began the manufacture
and sale of its EZ-SCREEN diagnostic tests in 1985 and introduced its patented
one-step assay, VERDICT and RECON, in 1993. In February 1994, the Company
completed the acquisition of PDLA. In June 1995, the Company completed the
acquisition of Bioman Products and in January 1996, the Company completed the
acquisition of MEDTOX. The results of operations for the year ended December 31,
1996 include the results of operations of MEDTOX for the period January 30, 1996
through December 31, 1996. Since inception, the Company has financed its working
capital requirements primarily from the sale of equity securities.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Total revenues for the year ended December 31, 1996 were
$26,726,000 as compared to $7,526,000 for the year ended December 31, 1995. The
increase was attributable to the increase in revenues from products and
services. These revenues totaled $26,498,000 for the year ended December 31,
1996 as compared to $7,037,000 for the prior year.
Laboratory service revenues were $23,541,000 for the year
ended December 31, 1996, compared to $4,312,000 for the year ended December 31,
1995. This increase was due to the revenues contributed by the MEDTOX customer
base. The revenues generated by MEDTOX for the period February 1, 1995 through
December 31, 1995 were $18,791,000 providing for pro forma comparable laboratory
service revenues for the year ended December 31, 1995 of $23,103,000 as compared
to the $23,541,000 of revenues realized from the sales of laboratory services
for the year ended December 31, 1996.
Included in product sales are the sales generated from
substance abuse testing products, which incorporates the EZ-SCREEN and VERDICT
on-site test kits and other ancillary products for the detection of abused
substances. Sales from these products were $1,471,000 for the year ended
December 31, 1996 compared to $1,180,000 recorded for the year ended December
31, 1995. This increase of 25% was primarily the result of sales of the
EZ-SCREEN PROFILE test kits which were introduced in May of 1996, as well as
increased sales of the VERDICT test kits.
Product sales also include sales of diagnostic products for
the agricultural market. Sales of these products were $1,110,000 for the year
ended December 31, 1996 as compared to $1,090,000 for the year ended December
31, 1995.
Sales of other products, including contract manufacturing
services were $301,000 for the year ended December 31, 1996. Sales of these
products and services were $393,000 for the year ended December 31, 1995. The
decrease of 23% was primarily the result of the Company's decision not to market
these products. Accordingly, the Company closed down the operations of its farm
facility during 1996. While the closure will decrease the amount of revenues
generated from these sales, the elimination of the costs of the farm facility
are expected to improve the overall gross margin. The Company does, however,
intend to pursue additional contract manufacturing contracts.
Revenues generated from the shipments of products to the U.S.
Department of Defense were $75,000 for the year ended December 31, 1996 as
compared to $62,000 for the year ended December 31, 1995.
Revenues from royalties and fees during the year ended
December 31, 1996 were $90,000, compared to $300,000 for the year ended December
31, 1995. This decrease was primarily due to lower royalties from American
Medical Laboratories, Inc. ("AML"), as AML lost accounts that required payment
of royalties to the Company.
Revenues from interest and other income for the year ended
December 31, 1996 were $138,000 compared to $189,000 for the year ended December
31, 1995. The $189,000 in 1995 included the recovery of debts owed by a customer
of laboratory services which had been written off, as well as a payment made to
the Company by the landlord of the facility in New Jersey for renewing the lease
for that facility. During 1996, there was no such payment or recovery of such
debts.
The gross margin from the revenues generated from the
laboratory services was 35% for the year ended December 31, 1996 an increase
compared to 1995, when the gross margin was 9%. The improvement in the gross
margin was primarily due to the operations of MEDTOX and the consolidation of
the laboratory operations of PDLA into the laboratory operations of MEDTOX.
Gross margins from the sales of both manufactured products and
products purchased for resale for the year ended December 31, 1996 were 27%
compared to 18% of sales of these products during the year ended December 31,
1995. This increase in gross margin from product sales is primarily the result
of the increased sales of contract manufacturing services, sales of the
EZ-SCREEN PROFILE test kits, as well as sales of the agricultural products sold
through DIAGNOSTIX.
Selling, general and administration expenses for the year
ended December 31, 1996 were $11,725,000, compared to $4,630,000 for the year
ended December 31, 1995. Of the $7,095,000 increase, MEDTOX related expenses
totaled $6,568,000. Net of MEDTOX, there was an increase of $527,000 compared to
the same period in 1995. This increase is primarily due to $1,161,000 of
amortization expense related to goodwill resulting from the MEDTOX acquisition.
In addition, the Company has expensed in excess of $1,000,000 for legal fees
during the year ended December 31, 1996. These legal fees are primarily for
expenses relating to the Company's inability to issue shares to certain of the
Series A Preferred Shareholders.
Research and development expenses incurred during the year
ended December 31, 1996 were $1,280,000 as compared to $920,000 for the same
period in 1995. This increase of $360,000 was primarily the result of $398,000
of research and development expenses from MEDTOX as well as increases in
personnel costs.
For the year ended December 31, 1996, EDITEK incurred interest
expense of $469,000, compared to interest expense of $23,000 incurred during the
year ended December 31, 1995. This increase was the result of the funds borrowed
by the Company to complete the financing for the acquisition of MEDTOX.
In connection with the acquisition of MEDTOX, the Company
determined that it would be beneficial to consolidate the laboratory operations
of PDLA into the laboratory operations at MEDTOX as well as to down size certain
administrative positions at both PDLA and MEDTOX in order to eliminate
duplicative functions. The Company also determined that to improve the operating
results of the Company, it would be necessary to sell the former operations of
Bioman, close its farm facility and reduce its work force at its Burlington,
North Carolina location. As a result of these restructuring steps, the Company
has taken charges of $2,449,000 during the year ended December 31, 1996 to cover
certain costs of the restructurings, including $907,000 related to certain
severance payments (see Note 8 of the Financial Statements). The Company had no
such charge during the year ended December 31, 1995.
As previously reported, the Company has undertaken a review of
the value of the goodwill associated with the acquisition of MEDTOX in 1996. The
purpose of the review was to determine if the value of the goodwill, generated
as a result of the price paid by the Company for MEDTOX, was in fact supported
by the projected future benefit to the Company as measured by generated cash
flow.
Given the highly competitive nature of the testing
marketplace, the industry is undergoing, and MEDTOX has begun to experience, a
declining average selling price. The Company expects this trend to continue. In
addition, the Company expects that alternative testing methods, including
on-site testing, are available or may become available in future years that may
make the current forms of laboratory testing less competitive. While the Company
expects to continue to develop and/or evaluate new testing technologies, the
current form of laboratory testing at MEDTOX could not support the carrying
value of the goodwill from the sale of that laboratory to the Company.
Utilizing an undiscounted cash flow analysis, the Company
determined that the carrying value of the remaining goodwill associated with the
MEDTOX acquisition exceeded the estimated cash flows. Accordingly, the Company
recorded a write-off of $6,016,000 at December 31, 1996. The noncash write-off
of the goodwill will reduce the future amortization expense of the Company by
$317,000 per year. At December 31, 1995, the Company recorded a write-off of
$3,073,000 of the goodwill associated with the acquisition of PDLA.
As a result of the above, the net loss for the year ended December 31, 1996
was $12,809,000 compared to the net loss of $7,285,000 for the year ended
December 31, 1995.
Management believes the acquisition of MEDTOX and the
restructuring of the laboratory operations will significantly improve the
operating results of the Company although there can be no assurance of the
success of the consolidation of the laboratory operations in reducing costs and
improving efficiencies. Management expects net sales to grow through both the
addition of new accounts as well as the introduction of new products as well as
additional strategic acquisitions.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Total revenues for year ended December 31, 1995 increased 14%
to $7,526,000, compared to $6,593,000 for the prior year. This increase is
primarily fully attributable to the increase in revenues from sales of products
and services for 1995. These revenues totaled $7,037,000, an increase of 14%
compared to $6,183,000 for the prior year.
Laboratory Service Revenues for the year ended December 31,
1995 were $4,312,000, an 18% increase compared to $3,647,000 for the prior year.
This increase was due primarily to the efforts of a full sales and marketing
force for the laboratory services of PDLA. During the year ended December 31,
1994, the company realized sales of $566,000 from laboratory services that were
transferred to American Medical Laboratories, Inc. ("AML") in January 1995 and,
as such, are not included in the sales for the year ended December 31, 1995.
Accordingly, the increase in Laboratory Service revenue excluding those sales
transferred to AML was actually $1,231,000.
Product sales include the sales generated from substance abuse
testing products, which incorporates the EZ-SCREEN and VERDICT on site tests and
other ancillary products for the detection of abused substances. Sales from
these products were $1,180,000, down 9% compared to $1,293,000 for the prior
year. The Company believes this decrease was primarily due to increased
competition. This competition was caused by the introduction of several products
by competitors which compete with the products of the Company. The decrease was
also affected by the lack of a complete product line of the VERDICT products.
Product sales also include sales of agricultural diagnostic
products which are marketed through diAGnostix, inc. Sales of these products
were $1,090,000 for the year ended December 31, 1995, an increase of 35%
compared to sales of $805,000 for the prior year. The acquisition of Bioman
Products Inc. on June 1, 1995 brought $404,000 in sales revenues to the Company
for the year ended December 31, 1995. Excluding these revenues, sales of
agricultural diagnostic products were $686,000 for 1995, a decrease of 15%
compared to 1994. The Company believes this decrease is due to decreased testing
by customers of the Company.
Sales of Microbiological and associated product sales and
contract manufacturing services were $393,000 for the year ended December 31,
1995, down 10% compared to $438,000 for these products and services in 1994.
This decrease was due to a reduced marketing effort.
In 1995, the Company completed research and development on
certain tests developed for the U.S. Department of Defense. This enabled
production to begin for the first time on products specifically manufactured for
the U.S. Department of Defense. Revenues from shipment of these products were
$62,000 for the year ended December 31, 1995.
Revenues from royalties and fees during the year ended
December 31, 1995 were $300,000, compared to $200,000 for 1994. This increase
was primarily due to the royalties received from AML pursuant to the agreement
the Company has with AML. Revenues from interest and other income for the year
ended December 31, 1995 were $189,000, compared to $210,000 for the year ended
December 31, 1994.
The overall gross margin from sales for the year ended
December 31, 1995 was 6%, compared to 2% of sales for the year ended December
31, 1994. Gross margins from the sales of both manufactured and products
purchased for resale for the year ended December 31, 1995 were 18% compared to
16% of sales of these products for the year ended December 31, 1994.
An increase in the number of samples being processed at PDLA
resulted in improved gross margins for laboratory services for the year ended
December 31, 1995. For the year ended December 31, 1995, the gross margin was 9%
as compared to 2% for the year ended December 31, 1995. Since a large amount of
the costs of providing laboratory services are fixed or near fixed costs, the
margins from sales of laboratory services are volume dependent.
Selling, general and administrative expenses for the year
ended December 31, 1995 were $4,630,000, compared to $3,674,000 for the year
ended December 31, 1994. This increase of 26% was primarily a result of
increased sales and marketing expenses associated with the sale of the Substance
Abuse Testing Products and Services marketed through PDLA, the sales and
marketing costs associated with former operations of Bioman, as well as overall
increases in the general expenditures resulting from the acquisition of PDLA.
Research and development expenses incurred during the year
ended December 31, 1995 were $920,000, as compared to $729,000 for the year
ended December 31, 1994. This 26% increase was primarily due to increased
personnel costs and expenses, as well as increases in work being performed
pursuant to the DOD contract.
For the year ended December 31, 1995, the Company incurred
interest expense of $23,000, compared to interest expense of $25,000 incurred
during the year ended December 31, 1994.
The continued operating losses and negative cash flows in 1995
of the PDLA operations resulted in an evaluation at year end of the PDLA
goodwill for possible impairment. The Company determined that the operations of
PDLA did not have long-term future viability as a stand-alone laboratory
operation and would not be supported by the Company on a stand-alone basis. The
underlying factors contributing to the financial results for PDLA include
competitive pricing pressures in the marketplace and the inability of the
Company to generate sufficient PDLA business volume that would result in
positive cash flows and profitable operations as a stand-alone laboratory
operation. The Company performed an analysis of the PDLA undiscounted cash flows
and projected that PDLA would have negative cash flows for the foreseeable
future. The Company determined that the estimated shortfall of cash flows
exceeded the carrying value of the remaining PDLA goodwill, and as a result,
recorded a write-off of $3,073,000 at December 31, 1995. The noncash write-off
of goodwill will reduce the future amortization expense of the Company by
$173,000 per year.
As a result of the above, the net loss for the year ended December 31, 1995
was $7,285,000 compared to the net loss of $3,546,000 for the year ended
December 31, 1994.
Material Changes in Financial Condition
At December 31, 1996, cash and cash equivalents were $82,000 compared to
$258,000 as of December 31, 1995.
At December 31, 1996, net accounts receivable were $4,553,000.
This $3,524,000 increase compared to $1,029,000 at December 31, 1995 was
primarily due to the MEDTOX accounts receivable balance at December 31, 1996.
Inventories were $1,290,000 at December 31, 1996 compared to
$937,000 at December 31, 1995. This increase of $353,000 or 38% was primarily
due to the inventory balance of MEDTOX at December 31, 1996.
Prepaid expenses and other assets were $140,000 at December
31, 1996, as compared to $868,000 at December 31, 1995. This decrease of
$728,000 was primarily the result of the January 1996 application of the
$500,000 deposit the Company had previously made towards the purchase price for
the acquisition of MEDTOX.
As of December 31, 1996, the Company had a balance of accounts
payable of $2,387,000 compared to a balance of $1,184,000 at December 31, 1995.
The increase of $1,203,000 was net of an increase due to accounts payable of
MEDTOX and a decrease in past due expenses resulting from the Company's improved
financial condition.
Accrued expenses were $2,074,000 at December 31, 1996, as
compared to $834,000 at December 31, 1995. Of the total increase of $1,240,000,
the accrued expenses from MEDTOX were $1,155,000 at December 31, 1996.
As of December 31, 1996, the Company had accrued $1,100,000
for the payment of certain restructuring costs associated with the consolidation
of the laboratory of PDLA with the laboratory operations of MEDTOX as well as
costs associated with certain actions taken by the Company including a reduction
in work force during the year ended December 31, 1996. In addition, MEDTOX has
accrued $703,000 for the payment of a lease obligation for a facility no longer
used by MEDTOX. As a result, the Company has a total balance accrued
restructuring costs of $1,803,000 at December 31, 1996. At December 31, 1995,
the Company had no accrual for restructuring costs.
During the year ended December 31, 1996, the Company repaid
the $100,000 it had borrowed from Dr. Samuel C. Powell, a director of the
Company as well as the balance of the loan payable to the North Carolina
Biotechnology Center. At December 31, 1996, the Company had a total balance of
$4,227,000 for its loan payable to its institutional lender. At December 31,
1995, the Company had total loans payable of $182,000.
Liquidity and Capital Resources
Since its inception, the working capital requirements of the
Company have been funded by cash received from equity investments in the
Company. At December 31, 1996, the Company had cash and cash equivalents of
$82,000. To finance the acquisition of MEDTOX and provide working capital, the
Company raised $20,350,000 from the sale of 407 shares of Series A Preferred
Stock and borrowed $5,000,000. The debt financing consists of two term loans
totaling $4,000,000 and up to $7,000,000 in the form of a revolving line of
credit based primarily on the receivables of the Company (the "Loan Agreement").
The amount of credit available to the Company varies with the accounts
receivable and the inventory of the Company. The interest rates on the two term
loans of $2,000,000 each are 2.5 points above the prime rate and 2.0 points
above the prime rate. The revolving line of credit carries an interest rate
equal to 1.5 points above the prime rate. The Company believes that the
aforementioned capital will be sufficient to fund the Company's planned
operations through 1997, although there can be no assurance that the available
capital will be sufficient to fund the future operations of the Company beyond
1997.
As of December 31, 1996, the Company had not achieved a
positive cash flow from operations. Accordingly, the Company relies on available
credit arrangements, outside funding of research and development, and continued
sales of its equity securities to fund operations until a positive cash flow can
be achieved. Management believes that it has taken, and is prepared to continue
to take, the actions required to yield a positive cash flow from operations in
the future.
The Company believes that the acquisition of MEDTOX, the
consolidation of the laboratory operations from PDLA to MEDTOX, and other
synergies that will be realized from the acquisition of MEDTOX will enable the
Company to generate positive cash flow. The Company continues to follow a plan
which includes (i) continuing to aggressively monitor and control costs, (ii)
increasing revenue from sales of the Company's products, services, and research
and development contracts, as well as (iii) pursuing synergistic acquisitions to
increase the Company's critical mass. There can be no assurance that costs can
be controlled, revenues can be increased, financing may be obtained,
acquisitions successfully consummated, or that the Company will be profitable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Reference is made to the financial statements, financial
statement schedules and notes thereto included later in this report under Item
14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
This information will be contained in the Definitive Proxy
Statement with respect to the Annual Meeting of Stockholders
of EDITEK, Inc., to be filed with the Securities and Exchange
Commission within 120 days following the end of the fiscal
year ended December 31, 1996.
ITEM 11. EXECUTIVE COMPENSATION.
This information will be contained in the Definitive Proxy
Statement with respect to the Annual Meeting of Stockholders
of EDITEK, Inc., to be filed with the Securities and Exchange
Commission within 120 days following the end of the fiscal
year ended December 31, 1996.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
This information will be contained in the Definitive Proxy
Statement with respect to the Annual Meeting of Stockholders
of EDITEK, Inc., to be filed with the Securities and Exchange
Commission within 120 days following the end of the fiscal
year ended December 31, 1996.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
This information will be contained in the Definitive Proxy
Statement with respect to the Annual Meeting of Stockholders
of EDITEK, Inc., to be filed with the Securities and Exchange
Commission within 120 days following the end of the fiscal
year ended December 31, 1996.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, REPORTS ON FORM 8-K.
a. (i) Financial Statements Page
Report of Independent Auditors......... 33
Consolidated Balance Sheets at December
31, 1996 and 1995.................... 34
Consolidated Statements of Operations
for the years ended December 31,
1996, 1995 and 1994.................. 36
Consolidated Statements of Stockholders'
Equity for the years
ended December 31, 1996,
1995 and 1994........................ 37
Consolidated Statements of Cash
Flows for the years ended
December 31, 1996, 1995 and 1994..... 38
Notes to Consolidated Financial
Statements........................... 40
(ii) Consolidated Financial Statement Schedules
Schedule II - Valuation and
Qualifying Accounts ....................... 58
All other financial statement schedules normally required under Regulation S-X
are omitted as the required information is inapplicable.
(iii) Exhibits
3.1 Bylaws of the Registrant (incorporated by reference to
Exhibit 4.2 filed with the Registrant's Report on Form
10-Q for the quarter ended September 30, 1986).
3.2 Restated Certificate of Incorporation of the Registrant
filed with the Delaware Secretary of State on July 29,
1994 (incorporated by reference to Exhibit 3.8 filed
with the Registrant's Form 10-K for fiscal year ended
December 31, 1994).
3.3 Certificate of Amendment of Certificate of
Incorporation of the Registrant, filed with the
Delaware Secretary of State on November 27, 1995.
3.4 Amended Certificate of Designations of Preferred Stock
(Series A Convertible Preferred Stock) of the
Registrant, filed with the Delaware Secretary of State
on January 29, 1996 (incorporated by reference to
Exhibit 3.1 filed with the Registrant's report on Form
8-K dated January 30, 1996.)
10.2 Registrant's Stock Option Plan (as amended and
restated) (incorporated by reference to Exhibit 10.2
filed with the Registrant's Report on Form 10-K for the
fiscal year ended December 30, 1990).
10.3 Second Amendment dated December 31, 1986 to Exclusive
License Agreement amending and restating exclusive
license granted by the Registrant to Disease Detection
International, Inc. (incorporated by reference to
Exhibit 10.25 filed with the Registration Statement on
Form S-1 dated August 26, 1987, Commission File No.
33-15543).
10.5 Non-Qualified Stock Option Agreement between the
Registrant and James D. Skinner dated as of July 1,
1987 (incorporated by reference to Exhibit 10.26 filed
with the Registrant's Registration Statement on Form
S-1 dated August 26, 1987, Commission File No.
33-15543).
10.6 Non-Qualified Stock Option Agreement between the
Registrant and James D. Skinner (incorporated by
reference to Exhibit 10.17 filed with the Registrant's
Form 10-K for the fiscal year ended December 31, 1988).
10.7 Non-Qualified Stock Option Agreement between the
Registrant and James D. Skinner dated as of August 10,
1988 (incorporated by reference to Exhibit 10.18 filed
with the Registrant's Form 10-K for the fiscal year
ended December 31, 1987).
10.8 Lease Agreement, dated as of June 1, 1989 between
Samuel C. Powell, as lessor, and EDITEK, as lessee
relating to premises located at 1238 Anthony Road,
Burlington, North Carolina (incorporated by reference
as filed with the Registrant's report on Form 10-Q for
the quarter ended June 30, 1989).
10.12 Stock Option Agreement dated May 4, 1990 between the
Registrant and Samuel C. Powell amending and restating
the Non-Qualified Stock Option Agreement between the
Registrant and Samuel C. Powell dated as of May 23,
1988. (Incorporated by reference to Exhibit 10.34 filed
with the Registrant's Form 10-K for the fiscal year
ended December 31, 1990).
10.13 Loan Modification Agreement dated May 3, 1990 between
the Registrant and James D. Skinner regarding the
Promissory Note dated as of September 10, 1988 by James
D. Skinner to the Registrant. (Incorporated by
reference to Exhibit 10.36 filed with the Registrant's
Form 10-K for the fiscal year ended December 31, 1990).
10.14 Stock Purchase Agreements dated as of July 19, 1991
between the Registrant and Walter O. Fredericks, Peter
J. Heath, Samuel C. Powell, and James D. Skinner.
(Incorporated by reference to Exhibit (a) filed
with the Registrant's Form 10-Q for the quarter ended
June 30, 1991).
10.15 Form of Stock Purchase Agreement dated as of September
3, 1992 between the Registrant and Purchasers of
EDITEK's common stock in a private placement on
September 3, 1992. (Incorporated by reference in
Exhibit 10.46 filed with the Registrant's Form 10-K for
the fiscal year ended December 31, 1992).
10.16 Agreement and Plan of Merger between the Registrant,
PDLA Acquisition Corporation, and Princeton Diagnostic
Laboratories of America, Inc. dated October 12, 1993.
(Incorporated by reference to Exhibit (a) filed with
the Registrant's Form 10-Q for the quarter ended
September 30, 1993.)
10.17 Registrant's Amended and Restated Stock Option Plan for
non-employee directors (incorporated by reference to
Exhibit 4 filed with the Registrant's Registration
Statement on Form S-8 dated February 21, 1995,
Commission File No. 33-89646).
10.18 Registrant's Equity Compensation Plan (incorporated by
reference to Exhibit 4 filed with the Registrant's
Registration Statement on Form S-8 dated November 11,
1993, Commission File No. 33-71490).
10.19 Registrant's Amended and Restated Qualified Employee
Stock Purchase Plan (incorporated by reference to
Exhibit 4 filed with the Registrant's Registration
Statement on Form S-8 dated November 11, 1993,
Commission File No. 33-71596).
10.20 Non-Qualified Stock Option Agreement between the
Registrant an Mark D. Dibner dated January 14, 1993
(incorporated by reference to Exhibit 4.2 filed with
the Registrant's Registration Statement on Form S-8
dated February 21, 1995, Commission File No. 33-89646).
10.22 Asset Purchase Agreement dated as of July 1, 1995
between the Registrant and MEDTOX Laboratories, Inc.
(incorporated by reference to Exhibit 10.1 filed with
the Registrant's Report on Form 8-K dated January 30,
1996).
10.23 Amendment Agreement dated as of January 2, 1996 between
the Registrant and MEDTOX Laboratories, Inc.
(incorporated by reference to Exhibit 10.2 filed with
the Registrant's Report on Form 8-K dated January 30,
1996).
10.24 Assignment Agreement dated as of January 10, 1996
between and among the Registrant, MEDTOX
Laboratories, Inc. and Psychiatric Diagnostic
Laboratories of America, Inc.(incorporated by
reference to Exhibit 10.3 filed with the Registrant's
Report on Form 8-K dated January 30, 1996).
10.25 Amendment Agreement dated as of January 30,
1996 among the Registrant, MEDTOX Laboratories,
Inc. and Psychiatric Diagnostic Laboratories of
America, Inc.
10.26 Loan and Security Agreement (together with the Exhibits
and Schedules thereto) by and between the Registrant,
Psychiatric Diagnostic Laboratories of America, Inc.,
diAGnostix, inc. and Heller Financial, Inc. dated
January 30, 1996 (incorporated by reference to Exhibit
10.4 filed with the Registrant's Report on form 8-K
dated January 30, 1996).
10.27 Term Note A executed by the Registrant, Psychiatric
Diagnostic Laboratories of America, Inc. and
diAGnostix in favor of Heller Financial, Inc.
dated January 30, 1996 (incorporated by reference to
Exhibit 10.5 filed with the Registrant's Report on
Form 8-K dated January 30, 1996).
10.28 Term Note B executed by the Registrant, Psychiatric
Diagnostic Laboratories of America, Inc. and diAGnostix
in favor of Heller Financial, Inc., dated January 30,
1996 (incorporated by reference to Exhibit 10.6 filed
with the Registrant's Report on Form 8-K dated January
30, 1996).
10.29 Assignment for Security (Patents) executed by the
Registrant in favor of Heller Financial, Inc., dated
January 30, 1996 (incorporated by reference to Exhibit
10.7 filed with the Registrant's Report on Form 8-K
dated January 30, 1996).
10.30 Assignment for Security - EDITEK (Trademarks) executed
by the Registrant in favor of Heller Financial, Inc.,
dated January 30, 1996 (incorporated by reference to
Exhibit 10.8 filed with the Registrant's Report on Form
8-K dated January 30, 1996).
10.31 Assignment for Security - Princeton (Trademarks)
executed by Princeton Diagnostic Laboratories of
America, Inc. in favor of Heller Financial, Inc., dated
January 30, 1996 (incorporated by reference to Exhibit
10.9 filed with the Registrant's Report on Form 8-K
dated January 30, 1996).
10.32 Lease Agreement between MEDTOX Laboratories, Inc.
and Phoenix Home Life Mutual Ins. Co. dated April 1,
1992, and amendments thereto (incorporated by ref-
erence to Exhibit 10.10 filed with the Registrant's
Report on Form 8-K dated January 30, 1996).
10.33 Employment Agreement between the Registrant and Harry
G. McCoy dated January 30, 1996. (Incorporated by
reference to Exhibit 10.33 filed with the Registrant's
Report on Form 10-K for the fiscal year ended December
31, 1995.)
10.34 Registrant's Amended and Restated Equity Compensation
Plan (increasing shares to 3,000,000). (Incorporated by
reference to Exhibit 10.34 filed with the Registrant's
Report on Form 10-K for the fiscal year ended December
31, 1995.)
10.35 Asset Purchase Agreement dated as of May 31, 1995
between the Registrant, Bioman Products, Inc. and
NOVAMANN International, Inc. (Incorporated by reference
to Exhibit 10.35 filed with the Registrant's Report on
Form 10-K for the fiscal year ended December 31, 1995.)
10.36 Securities Purchase Agreement dated January 31, 1996
between the Registrant and Harry G. McCoy.
(Incorporated by reference to Exhibit 10.36 filed with
the Registrant's Report on Form 10-K for the fiscal
year ended December 31, 1995.)
10.37 Registration Rights Agreement dated February 1, 1996
between the Registrant and Harry G. McCoy.
(Incorporated by reference to Exhibit 10.37 filed with
the Registrant's Report on Form 10-K for the fiscal
year ended December 31, 1995.)
10.38 Agreement regarding rights to "MEDTOX" name dated as of
January 30, 1996 between the Registrant and Harry G.
McCoy. (Incorporated by reference to Exhibit 10.38
filed with the Registrant's Report on Form 10-K for the
fiscal year ended December 31, 1995.)
10.39 Warrant Agreement dated as of December 18, 1995 between
Samuel C. Powell and the Registrant. (Incorporated by
reference to Exhibit 10.39 filed with the Registrant's
Report on Form 10-K for the fiscal year ended December
31, 1995.)
10.40 Termination and Settlement Agreement dated as of
July 3,1996 between the Registrant and James D.Skinner.
10.41 Agreement dated as of March 17, 1997 between the
Registrant and Harry G. McCoy whereby Dr. McCoy assigns
his rights to the name "MEDTOX" to the Registrant.
24.1 Consent of Ernst & Young LLP
b. Reports on Form 8-K
There was no report on Form 8-K filed for the three months ended
December 31, 1996.
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EDITEK, INC.
Report on Form 10-K
for year ended December 31, 1996
INDEX TO EXHIBITS FILED SEPARATELY WITH FORM 10-K
EXHIBIT # DESCRIPTION OF EXHIBIT
10.25 Amendment Agreement dated as of January 30, 1996 among
the Registrant, MEDTOX Laboratories, Inc. and Psychiatric Diagnostic
Laboratories of America, Inc.
10.40 Termination and Settlement Agreement dated as of July 3,
1996 between the Registrant and James D. Skinner.
10.41 Agreement dated as of March 17, 1997 between the Registrant
and Harry G. McCoy whereby Dr. McCoy assigns his rights to the name "MEDTOX"
to the Registrant.
24.1 Consent of Ernst & Young LLP
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Act of 1934, the Registrant has duly caused this Annual Report to be
signed on its behalf by the undersigned, thereunto duly authorized on the 18th
day of March 1997.
EDITEK, Inc.
Registrant
By:/s/ Harry G. McCoy, PharmD.
Harry G. McCoy, PharmD.
President and
Chairman of the Board
Pursuant to the requirements of the Securities Act of 1934,
this Registration Statement has been signed below by the following persons on
behalf of the Registrant in the capacities and on the dates indicated.
Signature Title Date
/s/ Harry G. McCoy, Pharm.D. President, March 18, 1997
Harry G. McCoy and Chairman of the Board
/s/ Richard J. Braun Chief Executive Officer March 19, 1997
Richard J. Braun Director
/s/ Peter J. Heath Vice President of March 19, 1997
Peter J. Heath Finance and Chief
Financial Officer
/s/ Samuel C. Powell Director March 19, 1997
Samuel C. Powell, Ph.D.
/s/ Louis Perlman Director March 19, 1997
Louis Perlman
____________________ Director March __, 1997
Alex Bistricer
____________________ Director March __, 1997
David Bistricer
/s/ James W. Hansen Director March 19, 1997
James W. Hansen
/s/ Miles E. Efron Director March 20, 1997
Miles E. Efron
Report of Independent Auditors
The Board of Directors
EDITEK, Inc.
We have audited the accompanying consolidated balance sheets of EDITEK, Inc. as
of December 31, 1996 and 1995, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1996. Our audits also included the financial
statement schedule listed in the Index at Item 14(a). These consolidated
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and schedule 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of EDITEK,
Inc. at December 31, 1996 and 1995, and the result of its operations and its
cash flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule, when considered in relation to the
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
February 21, 1997
EDITEK, Inc.
Consolidated Balance Sheets
(In thousands, except for number of shares)
December 31
1996 1995
Assets
Current assets:
Cash and cash equivalents $ 82 $ 258
Accounts receivable:
Trade, less allowance for doubtful accounts
(1996--$358; 1995-- $130) 4,476 977
Other 77 52
--------------------------------
4,553 1,029
Inventories:
Raw materials 488 588
Work in process 146 169
Finished goods 656 180
---------------------------------
1,290 937
Deposit on acquisition (Note 2) - 500
Prepaid expenses and other 140 368
----------------------------------
Total current assets 6,065 3,092
Equipment and improvements:
Furniture and equipment 9,200 5,857
Leasehold improvements 929 1,696
----------------------------------
10,129 7,553
Less accumulated depreciation and amortization (7,951) (6,824)
----------------------------------
2,178 729
Goodwill, net of accumulated amortization of $1,184 in 1996 and $7 in
1995 (Notes 2 and 3) 15,836 117
----------------------------------
Total assets $ 24,079 $3,938
=================================
December 31
1996 1995
Liabilities and stockholders' equity Current liabilities:
Line of credit (Note 4) $ 1,437 $ -
Accounts payable 2,387 1,184
Accrued expenses 2,074 834
Current portion of restructuring accrual 899 -
Current portion of long-term debt (Note 4) 2,790 82
Note payable to director - 100
Other current liabilities 40 42
--------------------------------
Total current liabilities 9,627 2,242
Long-term portion of restructuring accrual 904 -
Stockholders' equity (Notes 5 and 6): Preferred Stock, $1.00 par value:
Authorized shares - 1,000,000
Issued and outstanding shares - 238 in 1996
and -0- in 1995 - -
Common Stock, $.15 par value:
Authorized shares - 60,000,000 in 1996 and
30,000,000 in 1995
Issued and outstanding shares - 25,555,796 in 1996
and 10,439,775 in 1995 3,834 1,566
Additional paid-in capital 56,366 33,973
Accumulated deficit (46,476) (33,667)
--------------------------------
13,724 1,872
Less: Note receivable from stockholder - (100)
Treasury stock (176) (76)
--------------------------------
Total stockholders' equity 13,548 1,696
--------------------------------
Total liabilities and stockholders' equity $24,079 $ 3,938
================================
See accompanying notes.
EDITEK, Inc.
Consolidated Statements of Operations
Year ended December 31
1996 1995 1994
(In thousands, except share
and per share data)
Revenues:
Laboratory service revenues $ 23,541 $ 4,312 $ 3,647
Product sales 2,957 2,725 2,536
Royalties and fees 90 300 200
Interest and other income 138 189 210
------------------------------------------------------
26,726 7,526 6,593
Costs and expenses:
Cost of services 15,344 3,925 3,569
Cost of sales 2,151 2,240 2,142
Selling, general and administrative 11,725 4,630 3,674
Research and development 1,280 920 729
Interest and financing costs 469 23 25
Restructuring costs (Note 8) 2,449 - -
Goodwill write-off (Note 3) 6,117 3,073 -
------------------------------------------------------
39,535 14,811 10,139
------------------------------------------------------
Net loss $(12,809) $ (7,285) $ (3,546)
======================================================
Loss per share of common stock $(.38) $(.77) $(.49)
======================================================
Weighted average number of shares of common stock
outstanding 33,455,867 9,445,707 7,204,244
======================================================
See accompanying notes.
EDITEK, Inc.
Consolidated Statements of Stockholders' Equity
Note
Additional Accumu- Receivable
Preferred Stock Common Stock Paid-In lated from Treasury
Shares Par Value Shares Par Value Capital Deficit Stockholder Stock Total
-------------------------------------------------------------------------------------------
(In thousands, except for number of shares)
Balances at December 31, 1993 6,069,231 $ 910 $25,262 $(22,836) $(100) $ (5) $3,231
Exercise of stock options and 23,019 4 43 - - - 47
warrants
Stock issued for PDLA acquisition 1,167,729 175 3,803 - - - 3,978
Sale of stock 15,360 2 31 - - - 33
Private placement of common stock 800,000 120 993 - - - 1,113
Net loss - - - (3,546) - - (3,546)
--------------------------------------------------------------------------------------------
Balances at December 31, 1994 8,075,339 1,211 30,132 (26,382) (100) (5) 4,856
Exercise of stock options and 156,347 23 170 - - - 193
warrants
Stock issued for Bioman acquisition 21,489 3 58 - - - 61
Sale of stock 12,037 2 25 - - - 27
Stock issued for conversion of debt 16,100 3 59 - - - 62
Purchase of treasury stock - - - - - (71) (71)
Private placement of common stock 2,158,463 324 3,529 - - - 3,853
Net loss - - - (7,285) - - (7,285)
-------------------------------------------------------------------------------------------
Balances at December 31, 1995 - $ - 10,439,775 1,566 33,973 (33,667) (100) (76) 1,696
Exercise of stock options and - - 100,422 15 31 - - - 46
warrants
Stock issued for Medtox acquisition - - 2,517,306 378 4,447 - - - 4,825
Sale of preferred stock 407 - - - 19,126 - - - 19,126
Cancellation of note receivable from
officer in exchange for common
stock - - - - - - 100 (100) -
Sale of stock - - 76,483 12 52 - - - 64
Conversion of preferred stock to
common stock (169) - 12,186,515 1,828 (1,828) - - - -
Private placement of common stock - - 235,295 35 565 - - - 600
Net loss - - - - - (12,809) - - (12,809)
-------------------------------------------------------------------------------------------
Balances at December 31, 1996 238 $ - 25,555,796 $3,834 $56,366 $(46,476) $ - $(176) $13,548
===========================================================================================
See accompanying notes.
EDITEK, Inc.
Consolidated Statements of Cash Flows
Year ended December 31
1996 1995 1994
-----------------------------------------
(In thousands)
Operating activities
Net loss $(12,809) $(7,285) $(3,546)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 2,265 644 633
Goodwill write-off 6,117 3,073 -
PDLA write-off 284 - -
Provision for losses on accounts receivable 128 (54) 58
Provision for obsolete inventory 97 (13) 5
Gain on sale or retirement of equipment (42) - -
Changes in operating assets and liabilities, net of acquisition:
Accounts receivable (749) (22) 31
Inventories (87) (58) (306)
Prepaid expenses and other 365 (589) (19)
Accounts payable, accrued expenses and other 1,025 453 116
Deferred revenues (97) 3 (17)
Restructuring accruals 1,072 - -
Leases payable - (23) (37)
-----------------------------------------
Net cash used in operating activities (2,431) (3,871) (3,082)
Investing activities
Purchase of equipment and improvements (1,118) (177) (505)
Proceeds from sale of equipment 45 - -
Acquisitions, net of cash acquired (19,630) (37) 89
-----------------------------------------
Net cash used in investing activities (20,703) (214) (416)
Financing activities
Net proceeds from sale of preferred stock 19,126 - -
Net proceeds from sale of common stock 710 4,073 1,193
Purchase of treasury stock - (71) -
Net proceeds from line of credit, term loans and notes payable 5,437 119 850
Principal payments on line of credit, term loans and notes payable (2,315) (883) -
-----------------------------------------
Net cash provided by financing activities 22,958 3,238 2,043
-----------------------------------------
Decrease in cash and cash equivalents (176) (847) (1,455)
Cash and cash equivalents at beginning of year 258 1,105 2,560
-----------------------------------------
Cash and cash equivalents at end of year $ 82 $ 258 $ 1,105
=========================================
EDITEK, Inc.
Consolidated Statements of Cash Flows (continued)
Supplemental Noncash Activities
During 1996, the Company canceled the note receivable from an officer of
$100,000 in exchange for 13,334 shares of common stock.
In January 1996, the Company acquired Medtox Laboratories, Inc. The purchase
price was $24 million, which included $19 million cash and the issuance of
$5,000,000 in common stock (2,517,306 shares).
During 1995, the Company issued $62,000 of common stock related to the
conversion of debt and issued $61,000 of common stock in connection with the
acquisition of Bioman.
See accompanying notes.
EDITEK, Inc.
Notes to Consolidated Financial Statements
December 31, 1996
1. Summary of Significant Accounting Policies
The Company
The consolidated financial statements include the accounts of EDITEK, Inc.
("EDITEK") and its wholly-owned subsidiaries, Medtox Laboratories, Inc.
("Medtox") and diAGnostix, Inc. (collectively referred to as "the Company").
EDITEK is engaged in the research, development and sale of products based upon
enzyme immunoassay technology for the detection of antibiotic residues,
mycotoxins, drugs of abuse and other hazardous substances. Medtox provides
clinical testing services for the detection of substances of abuse and
diAGnostix, Inc. distributes agridiagnostic and food safety testing products.
All significant intercompany transactions and balances have been eliminated.
Trade Accounts Receivable
Sales are made to local, national and international customers including
corporations, clinical laboratories, government agencies, medical professionals,
law enforcement agencies and healthcare facilities. Concentration of credit risk
is limited due to the large number of customers to which the Company sells its
products and services. The Company extends credit based on an evaluation of the
customer's financial condition and receivables are generally unsecured. The
Company provides an allowance for doubtful accounts equal to the estimated
losses expected to be incurred in the collection of accounts receivable.
Inventories
Inventories are valued at the lower of cost (first-in, first-out method) or
market. At December 31, 1996 and 1995, the inventory included reserves of
$109,000 and $12,000, respectively, for lower of cost or market and for
obsolescence.
Equipment and Improvements
Equipment and improvements are stated at cost. Provisions for depreciation have
been computed using the straight-line method to amortize the cost of depreciable
assets over their estimated useful lives. Leasehold improvements are amortized
over the lesser of the lease term or the economic useful lives of the
improvements.
EDITEK, Inc.
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Revenue Recognition
Sales are recognized in the statement of operations when products are shipped or
services are rendered.
Research and Development
Research and development expenditures are charged to expense as incurred.
Income Taxes
The Company uses the liability method of accounting for income taxes. Under this
method, deferred tax assets and liabilities are determined based on differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
Cash and Cash Equivalents
Cash and cash equivalents include cash and highly liquid investments maturing
within three months when purchased.
Loss Per Share of Common Stock
Loss per share of common stock amounts are based on the weighted average number
of shares of common stock outstanding, as well as shares of common stock that
would have been issued and outstanding in certain transactions had the Company
had the necessary number of authorized shares of common stock. All other common
stock equivalents, including convertible debt disclosed in Note 4, were
anti-dilutive and therefore were not included in the computation of loss per
share, for all periods presented.
1. Summary of Significant Accounting Policies (continued)
Goodwill
Goodwill is amortized on a straight-line basis over 20 years. The carrying value
of goodwill is reviewed if the facts and circumstances suggest that it may be
impaired. If this review indicates that goodwill will not be recoverable, as
determined based on the undiscounted cash flows of the entity acquired over the
remaining amortization period, the Company's carrying value of the goodwill is
reduced by the estimated shortfall of cash flows (see Note 3).
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Impairment of Long-Lived Assets
In March 1995, the Financial Accounting Standards Board issued Statement No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of," which requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amount. Statement 121 also addresses the
accounting for long-lived assets that are expected to be disposed of. The
Company adopted Statement 121 in 1996, with no impact on the consolidated
financial statements.
1. Summary of Significant Accounting Policies (continued)
Reclassifications
Certain reclassifications have been made to the 1995 and 1994 financial
statements to conform with the 1996 presentation.
2. Acquisitions
In January 1996, the Company acquired Medtox, a toxicology laboratory located in
St. Paul, Minnesota. The purchase price was $24 million, which included $19
million cash and the issuance of 2,517,306 shares of common stock. The
acquisition was accounted for under the purchase method of accounting under
which the Company recorded approximately $22 million of goodwill. The goodwill
is being amortized over a period of 20 years (see Note 3).
The Company financed the acquisition by issuing $19 million of convertible
preferred stock and borrowing $4 million under two $2 million term loans. In
connection with the acquisition, the Company entered into a revolving line of
credit of up to $7 million for working capital purposes.
The following unaudited pro forma information presents the combined results of
operations of the Company and Medtox for the years ended December 31, 1996 and
1995, as if the acquisition had been consummated as of January 1, 1995.
1996 1995
----------------
Revenues $ 27,926 $27,745
=================
Net loss $(12,953) $(4,459)
=================
Net loss per share $(.39) $(.37)
=================
2. Acquisitions (continued)
On June 1, 1995, the Company acquired Bioman Products, Inc. ("Bioman"), an
environmental diagnostics company. The purchase price was $140,000, which
included cash and the issuance of 21,489 shares of common stock. The acquisition
was accounted for under the purchase method of accounting under which the
Company recorded $117,000 of goodwill, which is being amortized over a period of
20 years. The consolidated results of operations for the year ended December 31,
1995 included the results of the Bioman operations from June 1, 1995 to December
31, 1995. In September 1996, the Company sold the Bioman operations to a company
headed by former employees of the Company and Bioman.
The Company acquired Princeton Diagnostics Laboratories of America, Inc. (PDLA)
on February 11, 1994 by issuing 826,790 shares of its common stock in exchange
for all of the outstanding shares of PDLA's stock. The total value of the
exchange was $3,876,000. The acquisition was accounted for under the purchase
method of accounting and the Company recorded goodwill of $3,394,000. Additional
shares of common stock were subsequently issued to former major shareholders of
PDLA through price protection agreements. The consolidated results of operations
for the year ended December 31, 1994 include the results of the PDLA operations
from February 12, 1994 to December 31, 1994 (see Note 3).
3. Goodwill Write-Off
The Company has reviewed the value of the goodwill associated with the
acquisition of Medtox in 1996. The purpose of the review was to determine if the
value of the goodwill, generated as a result of the price paid by the Company
for Medtox, was in fact supported by the projected future benefit to the Company
as measured by generated cash flows.
3. Goodwill Write-Off (continued)
Given the highly-competitive nature of the testing marketplace, the industry is
undergoing and Medtox has begun to experience, a declining average selling
price. The Company expects this trend to continue. In addition the Company
believes that alternative testing methods, including on-site testing, are
available or may become available in future years that may make the current
forms of laboratory testing less competitive. While the Company expects to
continue to develop and or evaluate new testing technologies, the current form
of laboratory testing at Medtox cannot support the carrying value of the
goodwill generated from the sale of that laboratory to the Company.
Utilizing an undiscounted cash flow analysis, the Company concluded that the
carrying value of the remaining goodwill associated with the Medtox acquisition
exceeded the estimated future cash flows. Accordingly, the Company recorded a
write-off of $6,016,000 at December 31, 1996.
In September 1996, the Company recorded a write-off of the goodwill associated
with the acquisition of Bioman of $101,000 as a result of the sale of
Bioman in September 1996.
The continued operating losses and negative cash flows of the PDLA operations
resulted in an evaluation during the fourth quarter of 1995 of the PDLA goodwill
for possible impairment. The Company determined that the operations of PDLA did
not have long-term future viability as a stand-alone laboratory operation and
would not be supported by the Company on a stand-alone basis. The underlying
factors contributing to the financial results for PDLA include competitive
pricing pressures in the market place, the loss of preacquisition customers and
the inability of the Company to generate sufficient PDLA business volume that
would result in positive cash flows and profitable operations. The Company
performed an analysis of the PDLA undiscounted cash flows over the remaining
amortization period and determined that the estimated shortfall of cash flows
exceeded the carrying value of the remaining PDLA goodwill. As a result, the
Company recorded a write-off of goodwill of $3,073,000 at December 31, 1995.
4. Debt
On January 30, 1996, the Company entered into a loan agreement with a financial
institution to help finance the acquisition of Medtox. The debt financing
consists of two eighteen-month term loans of $2,000,000 each and a revolving
line of credit. The two term loans and the revolving line of credit are secured
by a lien on all equipment, inventory and receivables and, depending on the
amount of such inventory, or receivables, up to $7,000,000 may be available for
borrowing under the revolving line of credit. The two term loans bear interest
at 2.5% and 2.0%, respectively, above the bank prime rate. The revolving line of
credit bears interest at 1.5% above the prime rate. The interest rates in effect
as of December 31, 1996 for the two term loans and the revolving line of credit
were 10.75%, 10.25% and 9.75%, respectively. At December 31, 1996 $1,437,000 had
been borrowed against the revolving line of credit. At December 31, 1996 the
balance remaining on the term loans was $2,790,000. The carrying value of the
term loans and revolving line of credit approximate fair value.
As of December 31, 1996, the Company was not in compliance with certain
financial covenants in its loan agreement including, but not limited to,
tangible net worth, fixed charge coverage and interest coverage. Accordingly,
the entire amount outstanding under the term loans has been classified as a
current liability. The Company is currently negotiating with its financial
institution to revise its covenants so that the Company is in compliance.
On August 15, 1989, the Company entered into a long-term loan agreement with a
state funded, non-profit organization whereby the Company borrowed an aggregate
of $125,000 to fund the development cost of a test for Chlamydia, a sexually
transmitted disease. The loan originally had an interest rate of seven and one
half percent (7.5%) per annum with all principal and interest due on August 15,
1994. The Company amended the loan agreement on the due date and issued 16,100
shares of common stock during 1995 as repayment for $62,000 of the loan. The
remaining principal, $63,000, carries an interest rate of nine percent (9%) per
annum. This principal and interest was repaid in 1996.
On December 18, 1995, the Company borrowed $100,000 from a Director at an
interest rate of 10.5%. The Company repaid the principal and interest in
February, 1996.
Interest paid for all outstanding debt was $424,000, $19,000 and $9,000 for the
years ended December 31, 1996, 1995 and 1994, respectively.
5. Stockholders' Equity
The Company has sold its common stock in various private transactions as
follows:
Number Of Price Net
Shares Per Share Proceeds
-----------------------------------------------------------
1996 235,295 $2.55 $ 600,000
1995 2,158,463 $1.63 to $2.25 $3,853,000
1994 800,000 $1.01 to $2.03 $1,113,000
In January 1996 the Company sold 407 shares of Series A Preferred Stock at a
price of $50,000 per share. Pursuant to the Conversion Right of each share of
Series A Preferred Stock, each share may be converted to shares of common stock.
The amount of common shares to be issued upon the exercise of the Conversion
Right is derived by dividing (i) the purchase price of one share of Series A
Preferred Stock, $50,000 by (ii) the lower of (x) $2.775 or (y) 75% of the
Market Price of the Common Stock on the date the Conversion Right is exercised.
The "Market Price" is defined as the daily average of the closing bid prices
quoted on the American Stock Exchange for the five trading days immediately
preceding the date the Conversion Right is exercised. At December 31, 1996 169
shares of Series A Preferred Stock had been converted into 12,186,515 shares of
common stock.
At December 31, 1996 an additional 210 shares of Series A Preferred Stock had
been presented for conversion pursuant to the Conversion Right. However no
common shares had been issued due to unresolved issues between the Company and
the Preferred Stockholders. Subsequent to year-end, certain issues were resolved
resulting in the issuance of 17,658,387 shares of Common Stock.
As part of the purchase price paid by the Company for the acquisition of Medtox
the Company issued 2,517,306 shares of Common Stock.
5. Stockholders' Equity (continued)
In connection with the issuance of the common shares the Company agreed that if
after the Closing Date the market value of the Common Stock of the Company
declines below approximately $1.98 per share, the Company will issue additional
shares of Common Stock ("Additional Shares") to shareholders of Medtox who
retain their shares of Common Stock through specified dates (the "Repricing
Dates") to compensate the Medtox shareholders for decreases after the closing of
the Medtox transaction in the market price of the Common Stock of the Company
below approximately $1.98 per share. The first of four (4) Repricing Dates was
May 23, 1996. On May 23, 1996, the market price was $1.56 per share.
Accordingly, 1,119,057 shares of Common Stock were issuable to the Medtox
shareholders. The second Repricing Date was November 22, 1996 on which date the
market price was $.95 per share. Accordingly an additional 1,293,458 shares of
Common Stock were issuable to the Medtox shareholders. Subsequent to year-end,
these 2,412,515 shares were issued. Because the number of Additional Shares that
may become issuable is tied to decreases in the market price of the Common
Stock, the number of Additional Shares issuable after December 31, 1996 to the
Medtox shareholders cannot be determined at this time and will depend upon
changes in the Market Price of the Common Stock, as well as the extent to which
Medtox shareholders retain the Medtox shares on each of the Repricing Dates.
5. Stockholders' Equity (continued)
At December 31, 1996, shares of common stock reserved for future issuance are as
follows:
Common stock warrants:
Series K 50,000
Series L 320,000
Series M 10,550
Series N 32,679
Series O 586,667
Common stock options:
Incentive 206,228
Non-Employee Director 228,310
Nonqualified 41,093
Qualified Employee Stock Purchase Plan 349,758
Equity Compensation Plan 2,998,333
Preferred stock convertible (estimated) 22,083,039
Price resets for Medtox transaction (estimated) 4,588,568
The conversion prices for the warrants range from $2.77 to $4.44, and the
warrants expire in 1998 and 1999.
6. Stock Option and Purchase Plans
The Company has stock option plans to provide incentives to eligible employees,
officers, and directors in the form of incentive stock options, non-qualified
stock options, stock appreciation rights, restricted and unrestricted stock
awards, performance shares, and other stock-based awards. The Compensation
Committee of the Board of Directors determines the exercise price (not to be
less than the fair market value of the underlying stock) at the date of grant.
Options generally become exercisable in installments over a period of one to
five years and expire ten years from the date of grant.
6. Stock Option and Purchase Plans (continued)
The following table summarizes information about stock options outstanding at
December 31, 1996:
Plan Options Outstanding
Weighted
Non Average
Shares Employee Exercise
Available 1983 ISO 1993 Director Price
for Grant Plan Plan Plan Share
--------------- ---------------------------------------------------------
Balance at December 31, 1993 3,702,146 483,240 23,000 70,094 $4.53
Granted (604,499) - 591,199 13,300 3.52
Canceled 180,492 (17,083) (167,192) (13,300) 4.75
Exercised - (4,500) - - 1.41
--------------- -------------------------------------------
Balance at December 31, 1994 3,278,139 461,657 447,007 70,094 3.35
Granted (300,742) - 300,742 - 3.19
Canceled 25,043 (12,251) (25,043) - 2.74
Exercised - - (1,667) (22,230) 0.60
--------------- -------------------------------------------
Balance at December 31, 1995 3,002,440 449,406 721,039 47,864 3.34
Additional shares reserved
for issuance 350,000 - - - -
Granted (238,300) - 225,000 13,300 2.83
Canceled 484,614 (153,986) (439,680) (44,934) 3.24
Exercised - (89,192) - (11,230) 0.46
--------------- -------------------------------------------
Balance at December 31, 1996 3,598,754 206,228 506,359 5,000 $3.47
=============== ===========================================
6. Stock Option and Purchase Plans (continued)
Options Outstanding Options Exercisable
------------------------------------------------ ---------------------------------
Weighted
Weighted Average Weighted
Average Remaining Average
Range of Number Exercise Contractual Number Exercise
Exercise Prices Outstanding Price Life Exercisable Price
- - -------------------------- ------------------------------------------------ ---------------------------------
$1.41 - $2.50 38,416 $1.94 5 36,749 $1.92
$2.51 - $3.00 282,154 $2.85 9 252,706 $2.84
$3.01 - $3.44 181,912 $3.25 7 153,002 $3.23
$3.75 64,037 $3.75 7 55,707 $3.75
$3.94 - $7.69 151,068 $5.21 5 151,068 $5.21
----------------- -----------------
717,587 $3.47 7 649,232 $3.51
Options Outstanding Options Exercisable
---------------------------------------------------------
Weighted Weighted
Range of Average Average
Exercise Number Exercise Number Exercise
Option Plan Price Outstanding Price Exercisable Price
- - ----------------------------------- ---------------- ---------------------------------------------------------
1983 Incentive Stock Option Plan $1.41 - $7.19 206,228 $4.31 206,228 $4.31
1993 Equity Compensation Plan $2.25 - $7.69 506,359 $3.12 438,004 $3.12
Non Employee Director Plan $4.63 5,000 $4.63 5,000 $4,63
---------------
---------------
717,587 $3.47 649,232 $3.51
Nonqualified Stock Options
On July 1, 1987, the Company granted nonqualified options to purchase 66,667
shares of common stock to an officer at $14.70 per share. Subsequently, 26,667
of the options were canceled and reissued under the Incentive Stock Option Plan
and the remaining 40,000 options were canceled and reissued at $7.50 per share.
In September 1988 the officer exercised options to purchase 13,334 shares of
common stock. Pursuant to the terms of the option agreement, the Company
provided a loan to the officer for the amount of the
6. Stock Option and Purchase Plans (continued)
funds necessary to exercise the options. In May 1990, the remaining 26,666
options were canceled and reissued at $3.75 per share. In July 1996, the officer
resigned from the Company. As part of the resignation agreement, the Company
forgave the outstanding loan in return for 13,334 shares of common stock.
On August 10, 1988, the Company granted nonqualified options to purchase 6,667
shares of common stock to an officer at $3.75 per share. At December 31, 1996,
6,667 options are exercisable.
On January 14, 1993, the Company granted nonqualified options to purchase 7,760
shares of common stock to a director at $8.19 per share. At December 31, 1996,
the 7,760 options are exercisable.
The shares of common stock covered by these nonqualified options are restricted
as to transfer under applicable securities laws.
Qualified Employee Stock Purchase Plan
The Company has a Qualified Employee Stock Purchase Plan (the "Purchase Plan")
under which all employees meeting certain criteria may subscribe to and purchase
shares of common stock. The number of shares of common stock authorized to be
issued under the Purchase Plan is 500,000. The subscription price of the shares
is 85% of the fair market value of the common stock on the day the executed
subscription form is received by the Company. The purchase price for the shares
is the lesser of the subscription price or 85% of the fair market value of the
shares on the day the right to purchase is exercised. Payment for common stock
is made through a payroll deduction plan.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees", and related interpretations, in accounting for its
stock-based compensation plans. Accordingly, no compensation expense has been
recognized for its stock option awards, because the exercise price of all
options equals the market price of the stock on the grant date. Had compensation
expense for the Company's stock option awards been determined based upon
6. Stock Option and Purchase Plans (continued)
their grant date fair value consistent with the methodology prescribed under
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation", the Company's net loss and loss per share would have been
increased by $435,000 or $.01 per share and $162,000, or $.02 per share for 1996
and 1995, respectively. These amounts are not necessarily indicative of the
amounts that will be reported in the future. The fair value of the options at
the grant date was estimated using the Black-Scholes model with the following
weighted average assumptions:
1996 1995
------------------------------------
Expected life (years) 5 5
Interest rate 6.0% 6.0%
Volatility 119.5% 119.5%
Dividend yield 0% 0%
7. Leases
The Company leases office and research facilities from a director under a
month-to-month operating lease. Rental payments to the director were
approximately $122,000, $121,000 and $119,000 for the years ended December 31,
1996, 1995 and 1994, respectively.
The Company leases other offices and facilities and office equipment under
certain operating leases which expire on various dates through April 2000. Under
the terms of the facility leases, a pro rata share of operating expenses and
real estate taxes are charged as additional rent. See also Note 8 regarding
restructuring costs relative to certain facility leases. The Company subleases
one of its facilities to another party whereby that party makes payments
directly to the lessor.
7. Leases (continued)
As of December 31, 1996, the Company is obligated for future minimum lease
payments without regard for sublease payments under noncancelable leases as
follows (in thousands):
1997 $1,246
1998 674
1999 372
2000 77
---------
$2,369
==========
Rent expense (including amounts for the facilities leased from the director)
amounted to $638,000, $435,000 and $410,000 for the years ended December 31,
1996, 1995 and 1994, respectively.
8. Restructuring Costs
During 1996 the Company recorded restructuring costs of $2,449,000 as a result
of the consolidation of the laboratory operations of PDLA into the laboratory
operations at Medtox, the sale of the former operations of Bioman, and the
reduction of its work force at certain of its facilities. The following
information presents the restructuring costs recorded in 1996.
Severance costs $ 907,000
Lease obligations 967,000
Write off of assets 284,000
Other miscellaneous costs 291,000
------------
$2,449,000
============
At December 31, 1996 the Company has accrued $1,466,000 for the continued rental
obligations and associated costs for the former PDLA laboratory facility in New
Jersey and a former Medtox laboratory facility in Illinois. These facilities are
currently idle. The Company has calculated the net present value of the
remaining payments and charges utilizing a discount rate of 9%. In addition, the
Company has accrued $337,000 at December 31, 1996 for severance costs.
9. Income Taxes
Deferred income taxes reflect the tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes.
Significant components of the Company's deferred tax liabilities and assets are
as follows:
December 31
1996 1995
-------------------------------
(In thousands)
Deferred tax liabilities:
Capital leased assets $ - $ 6
----------------------------------
Total deferred tax liabilities - 6
Deferred tax assets:
Excess fixed asset basis 315 153
Excess goodwill basis 2,154 -
Net acquisition costs 241 241
Net operating loss carryforwards 11,254 11,271
Research and experimental credit carryforwards - 456
Uniform capitalization reserve - 22
Restructuring costs 672 157
Legal reserve 198 -
Other 418 160
------------------------------------
Total deferred tax assets 15,252 12,460
Valuation allowance for deferred assets (15,252) 12,454
------------------------------------
Total deferred tax assets - 6
------------------------------------
Net deferred tax assets (liabilities) $ - $ -
====================================
9. Income Taxes (continued)
At December 31, 1996, the Company has operating loss carryforwards available to
offset future taxable income for federal tax purposes of approximately
$33,100,000 expiring in 1998 through 2011.
The Company acquired approximately $2,473,000 in net operating loss
carryforwards when it purchased PDLA. This amount is included in total net
operating loss carryforwards described in the preceding paragraph. Future use of
this carryforward will be limited based on the Separate Return Limitation Year
("SRLY") Rules found in Proposed Treasury Regulation 1.1502-21(c). These rules
limit the use of a net operating loss carryforward into consolidated return
years. The limitation, computed annually, limits the use of the SRLY net
operating loss carryforward to the cumulative annual taxable income generated by
the purchased company since its admittance into the consolidated group.
The annual usage of the Company's net operating loss carryforwards has been
limited by provisions of the Tax Reform Act of 1986 ("TRA"). Under TRA, if a
company experiences a change in ownership of more than 50% (by value) of its
outstanding stock over a three year period, the use of its pre-change in
ownership net operating loss carryforwards will be limited each year until the
loss is exhausted or the carryover period expires. Changes in ownership occurred
at the time of the Company's 1987 public stock offering and in 1996 at the time
the Company sold Series A preferred stock and acquired Medtox.
The amount of pre-change in ownership net operating loss carryforwards of
approximately $30,000,000 which can be utilized to offset future federal taxable
income will be approximately $2,000,000 per year. TRA does not limit annual
usage of post-change in ownership net operating loss carryforwards.
10. Benefit Plans
The Company has defined contribution benefit plans that cover substantially all
employees who meet certain age and length of service requirements. Contributions
to the plans are at the discretion of the Board of Directors. The 401(k) expense
for the years ended December 31, 1996, 1995 and 1994 was $80,000, $-0-, and
$-0-, respectively.
11. Contingencies
The Company was sued in Federal District Court for the Southern District of New
York in five separate lawsuits commenced by holders of Editek Series A
Convertible Preferred Stock. The lawsuits allege breach of contract with respect
to conversion of the Preferred Stock in regards to the Company's inability to
issue common stock upon the conversion of shares of preferred stock, and certain
plaintiffs have also alleged misrepresentation and securities laws violations in
connection with the sale of the Preferred Stock. In December 1996, the Company's
shareholders approved an increase in the authorized common stock of the Company.
Subsequently, four of the five lawsuits have been settled. The remaining lawsuit
alleges breach of contract and fraud in connection with the Company's inability
to convert preferred stock into common stock due to the previous unavailability
of sufficient common shares. The common stock has subsequently been delivered,
but plaintiffs continue to assert claims of money damages resulting from alleged
delays in effecting the conversions. The Company intends to vigorously contest
the matter.
The Company is a defendant to claims of patent infringement asserted on August
20, 1996. It is alleged the Company infringes two patents allegedly owned by the
plaintiff relating to forensically acceptable determinations of gestational
fetal exposure to drugs and other chemical agents. The Company has answered the
compliant denying any infringement and has counterclaimed for a declatory
judgment that the patents are invalid, unenforceable, and not infringed. It also
has counterclaimed for unfair competition under federal and state law,
requesting money damages as well as injunctive relief. The Company intends to
vigorously pursue its defense of the claims and to vigorously prosecute its
counterclaims.
The Company believes that the probable resolution of the above contingencies
will not materially affect the financial position or results of operations of
the Company.
On January 31, 1997, the Company filed suit in Federal District Court in
Minnesota against a majority shareholder and two outside directors of the
Company alleging violation of Section 16b of the Securities Exchange Act of 1934
and seeking recovery of more than $500,000 in short-swing profits. No answer to
the Company's complaint has yet been received from the defendants.
SCHEDULE II - VALUATION & QUALIFYING ACCOUNTS
CHARGED
BALANCE AT TO COSTS CHARGED BALANCE AT
BEGINNING AND TO OTHER THE END OF
OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
------------ ------------ ---------------- ---------------- ------------
Year Ended December 31, 1996:
Deducted from Asset Accounts:
Allowance for Doubtful Accounts ... $ 130,000 $ 241,000 $100,000(4) $ 113,000(5) $358,000
Allowance for Excess and Obsolete
Inventory ......................... 12,000 97,000 - - 109,000
Restructuring Accrual - 2,449,000 - 646,000(3) 1,803,000
Year Ended December 31, 1995:
Deducted from Asset Accounts:
Allowance for Doubtful Accounts .. 206,000 89,000 - 165,000(2) 130,000
Allowance for Excess and Obsolete
Inventory ........................ 25,000 2,000 - 15,000 12,000
Year Ended December 31, 1994:
Deducted from Asset Accounts:
Allowance for Doubtful Accounts .. 19,000 58,000 286,000(1) 157,000 206,000
Allowance for Excess and Obsolete
Inventory ........................ 20,000 5,000 - - 25,000
(1) $286,000 charged to Other Accounts represents the amount acquired through
the PDLA acquisition.
(2) Includes $36,000 of Accounts Receivable determined to be uncollectible which
were written off.
(3) Represents severance payments and payments on lease obligations.
(4) $100,000 charged to Other Acounts represents the amount acquired through the
MEDTOX acquisition.
(5) Uncollectible accounts written off, net of recoveries.