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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1995
[ ] 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
$22,068,566, as of March 26, 1996, based upon a price of $1.875 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 26, 1996, was
13,193,838.
This document contains __ pages and the Exhibit Index appears at page __ hereof.
EDITEK, INC.
FORM 10-K ANNUAL REPORT
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
Table of Contents
ITEM NO.
Part I
1. Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2. Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . .
3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . .
4. Submission of Matters to a Vote of
Security Holders . . . . . . . . . . . . . . . . . . . . . .
Part II
5. Market for the Registrant's Common Equity
and Related Stockholder Matters. . . . . . . . . .
6. Selected Financial Data . . . . . . . . . . . . . . . . .
7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations. . . . . . . . . . . . . . . . . . . . . . . .
8. Financial Statements and Supplementary
Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9. Changes in and Disagreements With
Accountants on Accounting
and Financial Disclosure . . . . . . . . . . . . . . .
Part III
10. Directors and Executive Officers
of the Registrant. . . . . . . . . . . . . . . . . . . . . .
11. Executive Compensation. . . . . . . . . . . . . . . .
12. Security Ownership of Certain Beneficial
Owners and Management. . . . . . . . . . . . . .
13. Certain Relationships and Related
Transactions . . . . . . . . . . . . . . . . . . . . . . .
Part IV
14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K. . . . . . . . . . . . . .
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART I
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 two toxicology laboratories which
provide testing services for identification of substances of abuse. 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") which is now a wholly owned subsidiary. PDLA was
incorporated in Delaware in December, 1986. On December 22, 1986, it acquired
from Stauffer Chemical Company, a subsidiary of Cheesebrough-Pond's Inc., all of
the Common Stock of Psychiatric Diagnostic Laboratories of America, Inc.,
through which PDLA conducts most of its operations. On January 30, 1996, the
Company acquired the assets and certain liabilities of another laboratory,
MEDTOX Laboratories, Inc. ("MEDTOX").
The combination of laboratory services and the Company's other
products and services allows the Company 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(R) and
VERDICT(R)); (2) on-site disposable qualitative determination of alcohol
intoxication; (3) Substance Abuse and Mental Health Services Administration
(SAMHSA), formerly NIDA, certified laboratory testing (screening and
confirmation); (4) accessory items (gloves, specimen containers, permanent
recording temperature strips); and (5) consultation. Sales of these substance
abuse testing products and services accounted for approximately 73% of the
revenues of the Company for the year ended December 31, 1995.
In 1993 diAGnostix, inc. was incorporated by the Company in
Delaware as a wholly-owned subsidiary to address the broadly defined
environmental testing marketplace. On June 1, 1995 the Company, through
diAGnostix, inc., acquired Bioman Products, Inc. In addition to selling the
Company's diagnostic products for the environmental and agri/food industry,
diAGnostix, inc. is currently sourcing additional products manufactured by other
companies that could be sold through diAGnostix, inc. It is also anticipated
that the first products having civilian applications resulting from the
Company's research and product development efforts with the United States
Department of Defense will be oriented towards the environmental testing
marketplace and sold through diAGnostix, inc. Sales of the products sold through
diAGnostix, inc. accounted for approximately 14% of the Company's revenues in
the year ended December 31, 1995.
The Company also sells prepared and dehydrated culture media,
animal blood products, sera and plasma, custom antisera, and other biomedical
products and supplies, which are either produced by the Company or purchased
from other suppliers. The Company also markets contract manufacturing services
which utilize the same manufacturing equipment and processes used to manufacture
the on-site products. The Company expects sales of these products and services,
which were first introduced in 1986, to account for a smaller portion of its
future revenues due to management's decision to focus primarily on the marketing
of its laboratory services and diagnostic tests. Sales of these products and
services accounted for approximately 5% of the revenues of the Company for the
year ended December 31, 1995.
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 8% of the revenues of the
Company for the year ended December 31, 1995.
Recent Developments.
On January 30, 1996, the Company acquired the assets and
certain liabilities of MEDTOX. MEDTOX was formed in 1984 and is located in St.
Paul, Minnesota. MEDTOX was founded in 1984 by Dr. Harry G. McCoy. Dr. McCoy saw
the need for a state-of-the-art, full service, toxicology reference laboratory
that would provide timely, accurate analysis for a wide range of drugs and
toxins. From its inception, MEDTOX has fulfilled that goal by offering
broad-based toxicology services, including 24 hour emergency service at no extra
cost to the client, therapeutic drug monitoring, medico-legal investigations and
other services.
MEDTOX rapidly gained a reputation for high quality and superb
customer service in the local Minnesota medical market through the provision of
toxicology laboratory services for local hospitals, physicians and general
medical laboratories. MEDTOX then began an expanded regional program as well as
national marketing which increased revenues and expanded the customer base.
In 1987, MEDTOX purchased its largest Minneapolis competitor,
Metropolitan Medical Center ("MMC"), and gained the services of Dr. Gary
Hemphill, one of the leading scientists and laboratory directors at MEDTOX
today. Dr. Hemphill and MMC also gave MEDTOX a foothold in the emerging
employment drug screening business.
With the creation of National Institute for Drug Abuse
("NIDA") in 1988 to oversee mandated drug screening for safety sensitive
employees, MEDTOX became one of the first ten laboratories in the country on the
original list of NIDA certified laboratories. MEDTOX business then rapidly grew
in two major toxicology market segments:
1. Forensic toxicology (substance abuse testing).
2. Medical toxicology - the provision of reference toxicology testing the
areas of therapeutic drug monitoring, etc., for hospitals, physicians and
general clinical laboratories lacking the sophisticated toxicology
capabilities of MEDTOX.
For the year ended December 31, 1995 MEDTOX had net revenues
of $20,219,000 with net income of $2,879,000. See Unaudited Pro Forma
Consolidated Financial Information contained herein. 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 of
MEDTOX. Also, the Company decided to down size certain administrative positions
at both PDLA and MEDTOX in order to eliminate duplicate functions. The
consolidation plan, which was put in place prior to the closing of the
acquisition of MEDTOX, will be complete by early in the second quarter of 1996.
2. Principal Services, Products, and Markets.
General. The Company's principal sources of revenues come from
the sale of drugs of abuse laboratory testing services and products including a
variety of on-site screening products.
A. Drug Abuse Laboratory Testing Services. The primary
business focus 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 enzyme immunoassay, radio immunoassay, 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, 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. 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), 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 tests were first
introduced by the predecessor corporation of the Company in 1985. 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 VERDICT and RECON tests were both introduced in 1993.
EZ-QUANT tests, first introduced in 1994 are microtiter, ELISA-based,
quantitative assays utilized in agricultural diagnostics.
.
Clinical Diagnostics. The EZ-SCREEN tests are also 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 VERDICT cocaine test, the
VERDICT THC test, and the VERDICT opiates test. The Company has received
clearance from the FDA for its VERDICT cocaine test and VERDICT opiates test.
The VERDICT THC test is being marketed for forensic use only, pending 510(K)
premarket clearance from the FDA.
Alcohol Abuse Detection. 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 with WNCK, Inc.
Agridiagnostic Tests. 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.
Conventional Biodiagnostic Products. The Company manufactures
and/or distributes a variety of products used by researchers, clinical testing
laboratories, government agencies and private industry for veterinary and
agricultural testing purposes. These products include prepared and dehydrated
culture media, animal blood products, sera and plasma, custom antisera
(consisting of polyclonal antibodies to a variety of antigens), immunodiagnostic
kits, species identification plates and other biomedical products and supplies.
The Company produces laboratory diagnostic kits for detection of sulfa drugs and
other antibiotics in livestock, and distributes a variety of other biomedical
products and supplies produced by other manufacturers.
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 (PDLA screening and
confirmation); (4) accessory items (gloves, specimen containers, permanent
recording temperature strips); and (5) consultation.
diAGnostix, Inc. The Company currently markets its
EZ-SCREEN, EZ-QUANT, and other tests through diAGnostix, Inc. with an
internal sales and marketing department as well as through various distribution
agreements with third party distributors. The Company has current distribution
arrangements throughout Europe, Japan and other countries worldwide. Customers
for products sold through diAGnostix include livestock producers, food
processors, veterinarians, and government agencies.
Other. The Company also provides Conventional Biodiagnostic
Products. Customers for Conventional Biodiagnostic Products consist of
government agencies, testing laboratories, manufacturers of medical diagnostic
products, and researchers.
Major Customers. Sales to the United States government and its
agencies, primarily the United States Department of Agriculture ("USDA"),
amounted to approximately 4% of the Company's total revenues during 1995. The
majority of these sales are through two separate multi-year contracts with the
United States Department of Agriculture. One contract expires September 30,
1996, and the other expires September 30, 1999. Both these contracts are subject
to annual renewals by the USDA.
Sales to foreign customers, primarily distributors, amounted
to approximately 8% of the Company's total revenues during 1995. No one foreign
customer represented more than 5% of the Company's total revenues.
4. New Products.
During 1995 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 1995 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.
Clinical evaluation of the VERDICT PCP test was completed in December, 1995 and
the product was released for sale for forensic use in February, 1996. Clinical
evaluation of the VERDICT Amphetamines and VERDICT Barbiturates tests will be
conducted in early 1996 with a planned product release for sale during the
second quarter, 1996. Additional efforts in 1996 will be directed toward
development of VERDICT tests for benzodiazepines and methadone and to the design
of a test device which would permit
simultaneous testing of a sample for five different drugs of abuse following the
addition of a single sample.
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. Since September 1991 the Company has
had an ongoing contract to continue this development program. The initial phase
of the ongoing contract led to development of EZ-SCREEN tests for 6 agents,
Botulinum Toxins A and B, B. anthracis, Staphylococcal Enterotoxin B, Ricin
Toxin, Spore Simulant and Botulinum Toxin E. Currently the contract calls for
the development of RECON one-step tests for nine agents of biological origin
using reagents supplied by the U.S. Government. The contract also calls for the
supply of a limited number of each of these RECON tests to agencies within the
DOD for evaluation purposes. In December 1995 production of the last of three
trial production lots of tests for four of the agents began. Shipment of these
four tests for Ricin Toxin, Plague F1, Staphylococcal Enterotoxin B and Spore
Simulant were completed during the first quarter 1996 as was delivery of the
first lot of tests for one additional agent. Additional efforts in 1996 will be
directed toward completing development of tests for three additional agents and
toward production of trial lots of the five remaining agents. As of December
31, 1995 the total value of the contract was $1,177,000 and a total of
$941,000 had been billed under the contract to date.
EZ-SCREEN Tests for Drugs of Abuse - During 1995 the primary
EZ-SCREEN research and development effort was directed toward the development
and clinical evaluation of the EZ-SCREEN PROFILE drugs of abuse test. This
product, released for sale for forensic use in February, 1996 permits
simultaneous testing of a single urine sample for THC, cocaine, opiates,
amphetamines and PCP. During 1996, the EZ-SCREEN PROFILE product will be fully
transitioned to manufacturing, development work on EZ-SCREEN Benzodiazepines
will be completed and development of an EZ-SCREEN Methadone test will be
initiated.
EZ-QUANT Tests for Mycotoxins and Antibiotic Residues - In
1995, the Company's research and development group completed the development of
an EZ-QUANT test for determining the concentration of deoxynavalenol (DON) in
various food products. The EZ-QUANT DON test, which utilizes reagents provided
to the Company under a sole distribution agreement with Agriculture Canada, was
released for sale in September 1995. Also in 1995 work was initiated on two
additional EZ-QUANT products. The EZ-QUANT Chloramphenicol test was released in
February 1996 and the EZ-QUANT Ochratoxin test will be released in 1996.
Additional effort in 1996 will be directed towards transitioning production of
the EZ-QUANT products to manufacturing and pursuing Association of Official
Analytical Chemists (AOAC) Research Institute certification of the
EZ-QUANT Aflatoxin product.
Biosensors - In March, 1995 the Company entered into a
Research Collaboration Agreement with Battelle Memorial Institute 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. It was anticipated
that if the studies proved successful, the Company would continue working with
Battelle toward the creation of products for commercial application of the
biosensor system, initially for food safety testing purposes. At year end
studies had been completed which demonstrated detection of low levels of labeled
aflatoxin B1 conjugate with good signal to noise ratio. Studies are now underway
to determine the performance and sensitivity of the biosensor system for the
detection of aflatoxin in a corn matrix. Upon completion of these studies, data
will be analyzed and a decision made relative to potential follow-on activity.
Other Tests - The Company is assessing on a preliminary basis,
the market opportunity for and feasibility of developing other EZ-SCREEN,
EZ-QUANT and one-step tests for the detection of other mycotoxins, antibiotics,
drugs of abuse and other conditions found in humans or animals. Opportunities
for development of assays using other technologies are also assessed on an
ongoing basis.
5. Research and Development.
The markets for agridiagnostic 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 immunoassay products. During the fiscal years
ended December 31, 1995, 1994 and 1993, the Company incurred expenses of
$920,000, $729,000, and $825,000 respectively, for research and development. In
1995, $201,000, of the expenses incurred for research and development were
reimbursed by outside parties or involved charges for which outside parties had
reimbursement commitments. As of December 31, 1995, the Company employed 14
people in research and development, 6 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 holds twelve 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.
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.
8. Seasonality.
The Company believes that the laboratory testing business is
subject to seasonal fluctuations in pre-employment screening which has low
points in August 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, 1995, 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, Corning/Metpath Laboratories 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 and operating income. 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 capabilitied, 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 10 different products and the average time for clearance was 58
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.
3. United States Department of Agriculture (USDA).
The Company's animal facilities are subject to and comply with applicable
regulations of the USDA. The livestock related products of the Company may
become subject to state regulation but the Company does not anticipate any
difficulties in complying with these regulations, if enacted.
4. United States Department of Defense (DOD). With
reclassification of the Company's contract with the DOD from UNCLASSIFIED to
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.
5. 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. PDLA and MEDTOX
laboratories are registered with the DEA to conduct chemical analyses with
controlled substances. The EDITEK facility 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.
6. Substance Abuse and Mental Health Services
Administration (SAMHSA). Both PDLA and MEDTOX laboratories are certified by
SAMHSA, PDLA since 1989 and MEDTOX 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.
7. Additional Laboratory Regulations. The PDLA and
MEDTOX laboratories and certain of the laboratory personnel are licensed or
otherwise regulated by certain federal agencies, states, and localities in which
PDLA and MEDTOX conduct business. Federal, state and local laws and regulations
require PDLA and 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.
Both laboratories receive and use 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 Liability.
Manufacturing and marketing of products by the Company entail
a risk of product liability claims. The exposure to product liability claims in
the past was mitigated to some extent by the fact that the Company's products
were principally directed toward food processors (as contrasted with human
diagnostics) and most of its Conventional Biodiagnostic Products were used as
components in research, testing or manufacturing by the purchaser and conformed
to the purchaser's specifications. However, a greater portion of the Company's
current revenues result from sales of human diagnostic tests, thereby
potentially increasing exposure to product liability claims. On August 13, 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, 1995, the Company had 106 full-time
employees compared to 100 full-time employees as of December 31, 1995. Of the
106 full-time employees, 39 were in laboratory operations and systems, 18 were
involved in research, testing, and product development activities, 20 in
production and distribution, 14 in sales and marketing, and 15 in administrative
and clerical functions. Additionally, 8 of its personnel hold Ph.D. degrees.
As of January 30, 1996, MEDTOX had 247 employees, of which 199
were involved in laboratory operations, 18 were involved in sales and marketing,
5 were involved in research and development and 25 were involved in
administrative and clerical functions. Additionally, 6 of its personnel hold
Ph.D. degrees.
The consolidation of the laboratory operations from PDLA in
New Jersey into the laboratory operations of MEDTOX will result in the
elimination of 35 positions in New Jersey and the addition of certain of the
some positions in Minnesota.
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.
14. MEDTOX Acquisition and Capital Structure
The Company has undergone a significant change as a result of
the acquisition of MEDTOX and the associated financing. The following points
represent certain potential risk factors associated with the acquisition and
financing.
1. Dependence on Sales of Equity. As of December 31, 1995, 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. From January 1, 1991 through
December 31, 1995, the Company raised approximately $12 million from equity
financing and issued 6,058,699 shares of the Company's Common Stock for an
average price of $1.98 per share, all of which were issued at a discount to the
market value of the Company's Common Stock. In order to finance the acquisition
of MEDTOX, pay applicable costs and expenses and to provide working capital, the
Company raised approximately $20 million from the sale of the Preferred Stock
and Common Stock. This amount and the amount borrowed, as described below, have
allowed the Company to consummate the MEDTOX acquisition and the Company
believes should provide enough working capital to help the Company achieve
positive cash flow. If the Company is unable to achieve a positive cash flow,
additional financing will be required. There can be no assurance that additional
financing can be obtained or if obtained, that the terms will be favorable to
the Company.
2. Debt Service; Debt Seniority; No Dividends. To finance the
acquisition of MEDTOX and to provide working capital the Company borrowed $5
million in January, 1996. The debt financing consists of two term loans totaling
$4 million and up to $7 million in the form of a revolving line of credit based
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. On January 30, 1996, the receivables and inventory amounts made
$2.9 million of the credit facility available, of which the total is still
available at March 26, 1996. There can be no assurance that the Company will
have sufficient revenues to service payments of principal and interest on this
indebtedness. Failure to service this indebtedness would have a material adverse
effect on the Company. The indebtedness of the Company will be senior to the
Series A Preferred Stock and shares of Common Stock upon liquidation of the
Company. Interest payments on the indebtedness may cause there to be
insufficient cash to pay any dividends. In addition, the loan amount and the
line of credit agreement contain covenants that restrict the Company's ability
to pay dividends even if the Company has cash available from which to pay
dividends.
3. Unexpected Effects of Merger(s). The Company completed the
acquisition of the MEDTOX assets on January 30, 1996 (the "Closing Date"). The
Company also acquired the assets and operations of Bioman Products, Inc. on June
1, 1995. In February 1994, the Company acquired Princeton Diagnostic
Laboratories of America, Inc. ("PDLA"). The Company anticipates that
certain synergism will arise between the Company and Bioman, PDLA and MEDTOX.
However, there can be no assurance that any synergism will arise from the
recent acquisitions. The efforts required to integrate the business of the
Company with other operations may have a material adverse effect on the
operations of either the Company or the acquired company(s).
4. Adverse Effect on Market Price of Sales of the Company
Stock. A substantial number of shares of capital stock of the Company have been
issued in transactions that are exempt from registration under the Securities
Act of 1933, as amended, either in private placements or pursuant to
Regulation S.
On January 30, 1996 and February 2, 1996, the Company sold 303
shares of Series A Preferred Stock utilizing the exemption afforded by
Regulation S of the Commission (the "Offshore Offering"), which shares are
convertible into a minimum of 5,459,459 shares of Common Stock and may be
convertible into more shares of Common Stock if the market price of the Common
Stock of the Company is less than $3.70 per share on the conversion dates. As of
March 26, 1996, the market price of the Common Stock was $1.875 per share at
which price the 303 shares of Series A Preferred Stock would be convertible into
10,744,681 shares of Common Stock, based on a conversion price of $1.41 per
share or a 25% discount to the market price on March 26, 1996.
Regulation S provides generally that offers or sales that
occur outside the United States and in compliance with the requirements thereof
are not subject to the registration requirements of the Act. Subject to certain
restrictions and conditions set forth therein, Regulation S is available for
offers and sales to investors that are not U.S. persons. Such offshore investors
who purchase the shares of Series A Preferred Stock in the Offshore Offering
pursuant to Regulation S are not permitted to transfer such shares or Conversion
Shares to a U.S. Person (defined generally as a resident of the U.S. or an
entity organized under the laws of the U.S.) for a period of at least 40 days
after February 2, 1996, the closing of the Offshore Offering (the "Restricted
Period"). Resales to buyers who are not U.S. persons are permitted at any time.
After the expiration of the Restricted Period, investors who
purchased shares of Series A Preferred Stock in the Offshore Offering may sell
such shares or Conversion Shares in the U.S., but only if such shares are
registered or an exemption from registration is available. Accordingly,
beginning on March 30, 1996 (the first day any investor will be able to convert
shares of Series A Preferred Stock into shares of Common Stock), to the extent
that any offshore investors have converted their shares of Series A Preferred
Stock into Common Stock, such offshore investors will also be able to sell such
Common Stock in the U.S. if the shares are registered or an exemption is
available.
The Company does not expect to file a registration statement
with respect to shares sold pursuant to Regulation S. Therefore, sales of
Conversion Shares for such offshore investors must be made in compliance with an
exemption from registration. The agreements between the Company and offshore
investors provide that the stock certificates for the
Conversion Shares will not contain restrictive securities legends. Consequently,
if the Company complies with these agreements, the Company would not be able to
prevent illegal resales of Series A Preferred Stock or Conversion Shares by
offshore investors and each offshore investor will make its own determination
whether such sales qualify for exemptions from registration. On March 27, 1996,
the Company determined it would place legends on the certificates of shares of
Common Stock to assure that all resales of securities are made in compliance
with applicable securities laws. The Company believes such legends will not
prevent legitimate trading of its stock. A number of holders of Series A
Preferred Stock have threatened litigation over the Company's decision. The
Company and its Preferred shareholders have commenced discussions through the
placement agent for the Preferred offering about ways to address the concerns
of the Company without unduely delaying stock transfers that are in compliance
with securities laws. There can be no assurance, however, that such discussions
will result in an acceptable agreement between the Company and the holders of
its Series A Preferred Stock.
In connection with the acquisition of MEDTOX, the Company
issued 2,517,306 to the former shareholders of MEDTOX and sold 103 shares of
Series A Preferred stock, all pursuant to Regulation D. The shares issued to the
former shareholders of MEDTOX and the Common Stock issuable upon the conversion
of the 103 shares of Series A Preferred Stock were included on a Registration
Statement on Form S-3 which was filed on February 9, 1996. The 103 shares of
Series A Preferred Stock would be convertible into 3,652,482 shares of Common
Stock based on a conversion price of $1.41 per share or a 25% discount to the
market price on March 26, 1996.
If substantial sales of the Company's Common Stock occur,
whether by the investors in the Offshore Offering or by U.S. investors pursuant
to the Registration Statement or otherwise, such sales could have a material
adverse effect on the market price of the Company's Common Stock.
5. Adverse Effect of Price Protection Provisions. 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 (ii) the lower of (x)
$2.775 or (y) 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. Accordingly, a minimum of 7,333,333 shares of Common Stock are
issuable upon conversion of the 407 shares of Series A Preferred Stock sold in
both the U.S. Offering and the Offshore Offering, but the actual number of
shares of Common Stock issuable upon conversion of the Series A Preferred Stock
will not be known until the time of issuance of the shares of Common Stock upon
conversion. As of March 26, 1996, the market price of the Common Stock was
$1.875 per share at which price the 407 shares of Series A Preferred Stock would
be convertible into 14,432,624 shares of Common Stock, based on a conversion
price of $1.41 per share or a 25% discount to the market price on
March 26, 1996.
The MEDTOX Asset Purchase Agreement provides that, if after
the Closing Date the market value of the Common Stock of the Company declines
below $1.986 per share during four specified periods (the "Repricing Periods")
following press releases by the Company, the Company will issue additional
shares of Common Stock ("Additional Shares") to shareholders of MEDTOX who
retain their shares of Common Stock through four specified dates (the "Repricing
Dates") to compensate the MEDTOX shareholders for decreases after the closing of
the MEDTOX acquisition in the market price of the Common Stock of the Company
below $1.986 per share. The Repricing Dates are the fifth trading day following
the date the Registrant issues press releases announcing its financial
performance for the fiscal
quarters ending on March 31, 1996, September 30, 1996 and September 30, 1997 and
the fiscal year ending on December 31, 1996 and the Repricing Periods are the
dates between the dates of the press releases and the Repricing Dates.
Accordingly, the number of Additional Shares issuable in the future in
connection with the MEDTOX acquisition 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.
The price protection provisions of the Series A Preferred
Stock and the MEDTOX shareholders could result in the Company being required
to issue more shares of Common Stock than the Company is authorized to issue.
The Company's Certificate of Incorporation currently authorizes the issuance
of 30,000,000 million shares of Common Stock, of which 13,193,838 shares are
currently issued and outstanding. If all 407 outstanding shares of the Series A
Preferred Stock were to be converted at a 25% discount from the $1.875 market
price of the Company's Common Stock on March 26, 1996, 14,471,111 shares of
Common Stock would be issuable upon conversion of the Series A Preferred Stock
and only 2,335,051 shares of Common Stock would be available for future
issuances. 1,736,133 shares of Common Stock are issuable pursuant to outstanding
stock options, stock purchase plans and warrants. The Company's Certificate of
Incorporation also authorizes the issuance of 1,000,000 shares of Preferred
Stock for which the Board of Directors has the power to designate the rights
and preferences, of which only 407 shares are issued and outstanding. The
Company intends to hold a shareholders meeting to amend the Certificate of
Incorporation of the Company to increase the number of authorized shares of
Common Stock of the Company, which additional shares would be available to
satisfy the price protection provisions of the Series A Preferred Stock and the
MEDTOX shareholders and for other corporate purposes.
The price protection provisions of the Series A Preferred
Stock are transferred upon any transfer of the Series A Preferred Stock, but
terminate upon conversion of the Series A Preferred Stock. The price protection
afforded the MEDTOX shareholders terminates upon transfer of the Common Stock
issued to MEDTOX shareholders.
Other shareholders of the Company do not have the price
protection afforded holders of Series A Preferred Stock and the MEDTOX
shareholders. Accordingly, if the market price of the Common Stock of the
Company declines, the interests in the Company's other shareholders will be
diluted by the price protection provisions afforded holders of Series A
Preferred Stock and the MEDTOX shareholders. Substantial sales of shares of
Common Stock by the MEDTOX shareholders or purchasers of Series A Preferred
Stock or other shareholders may have a material adverse effect on the market
price of the Common Stock of the Company, which would increase the number of
Additional Shares issuable to MEDTOX shareholders on the Repricing Dates and the
number of shares of Common Stock issuable upon conversion of the Series A
Preferred Stock.
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,
1995 was approximately $119,000. 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. In June 1989, the Company executed a lease agreement
with Dr. Powell for a term of one year ending May 31, 1990. The Company
subsequently acquired an option to extend the lease for an additional one-year
period after the expiration of such term on May 31, 1990. The option to extend
the lease has not been exercised and 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 Company also leases a farm in Warren County, North
Carolina from Warren Land Company ("WLC") a company in which Dr. Powell owns a
12% interest and certain members of Dr. Powell's family and their respective
families own the remainder for the purposes of maintaining animals to produce
antibodies and for research and development. The arrangement for use of this
facility is on a month-to-month basis at a cost of $2,797 per month. In the
opinion of management, comparable alternative facilities could be obtained
without disruption of its business if this facility were not available. See
"Item 13 - Certain Relationships and Related Transactions."
The Company leases administrative offices and laboratory
facilities in an approximately 22,000 square foot facility in South Plainfield,
New Jersey. The facility was built and equipped in 1985. The facility is rented
under a lease which expired in May of 1995. In February 1995 the Company
negotiated a modification to the current lease which extends the lease through
the year 2000 with one five year option to renew. The new rent payment which
commenced on May 1, 1995 is $170,345 per year which is a 32% reduction from the
annual rent of $250,908 prior to May 1, 1995. In addition, the Company received
$100,000 from the landlord to amend the lease in New Jersey. Upon the
completion of the transition of the laboratory operations from PDLA to MEDTOX,
the Company will utilize approximately 30% of the existing facility in New
Jersey for a courier system, customer service and other administrative
functions. The remaining 70% of the facility will become idle and has been
considered in the Company's restructuring charge. See Note 3 to the Notes of the
Consolidated Financial Statements contained herein.
The Company also leases a 1,700 square foot warehouse facility
in Mississauga, Ontario where the Canadian sales and distribution operations
of diAGnostix, inc. are based. The space is rented under a lease which expires
in July 1998. The current lease payment is approximately $4,800 per year.
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 1997. The current
annual rent for the facility is $330,000 per year.
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.
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.
The Annual Meeting (the "1994 Annual Meeting") of the
stockholders of EDITEK was held on October 26, 1995. 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: James
D. Skinner, Samuel C. Powell, Ph.D., Gene E. Lewis and Robert J. Beckman. Also
by a vote of 6,250,643 shares in favor and 105,755 shares against, at the 1994
Annual Meeting, the stockholders of EDITEK approved the issuance of the amount
of shares of the stock of EDITEK to finance the acquisition of MEDTOX. Also, by
a vote of 6,239,995 in favor and 105,228 shares against, at the 1994 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 5,736,650
shares in favor and 569,595 shares against, at the 1994 Annual Meeting, the
stockholders of EDITEK approved the adoption of certain amendments to the Equity
Compensation Plan. During the year ended December 31, 1995, 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 19, 1996, the number of holders of record of the
Common Stock was 2,895. 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:
1996: (through March 26, 1996) High Low
First Quarter............................. 3 11/16 1 7/8
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
1994:
First Quarter........................... 5- 3/8 2- 7/16
Second Quarter....................... 3 1- 15/16
Third Quarter.......................... 3- 3/16 1- 3/4
Fourth Quarter........................ 4- 5/8 1- 1/4
On March 26, 1996, the closing price of the Common Stock as
reported by the American Stock Exchange was $1.875.
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.
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
1995 1994 1993 1992 1991
(in thousands, except per share amounts)
Net revenues $7,526 $6,593 $2,633 $2,989 $2,731
Net loss (8,043) (3,546) (3,066) (1,292) ( 847)
Net loss per share (.85) ( .49) ( .56) ( .35) ( .31)
Total assets 3,806 7,378 4,005 3,188 1,254
Long term debt -0- 63 -0- 113 154
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. On February 11, 1994 the Company
completed the acquisition of PDLA, which is now a wholly-owned subsidiary of the
Company. The results of operations for the year ended December 31, 1994 include
the results from operations of PDLA for the period February 12, 1994 through
December 31, 1994. Since inception, the Company has financed its working capital
requirements primarily from the sale of equity securities.
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. However, as in the year ended December 31, 1994, the cost of
providing laboratory services exceeded revenue realized from these services.
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 $4,206,000, compared to $3,341,000 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.
Effects of MEDTOX Acquisition
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. In addition the Company
decided to down size certain administrative positions at both PDLA and MEDTOX in
order to eliminate duplicative functions. As a result of this restructuring
plan, the Company has taken a charge of $731,000 to cover certain costs of the
restructuring. The Company had no such charge in 1994. See Note 3 of the Notes
to the Consolidated Financial Statements contained herein.
With the subsequent consolidation of the laboratory
operations, the Company has written off the remaining amount of goodwill that
was recorded from the acquisition of PDLA in 1994. This resulted in a charge of
$3,100,000 for the year ended December 31, 1995. The Company had no such charge
for the year ended December 31, 1994.
As a result of the above, the net loss for the year ended
December 31, 1995 was $8,043,000 compared to the net loss of $3,546,000 for the
year ended December 31, 1994.
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
additional strategic acquisitions and the addition of new accounts as well as
the introduction of new products.
Year Ended December 31, 1994 Compared to Year Ended December 31, 1993
Total revenues for the year ended December 31, 1994 increased
150% to $6,593,000, compared to $2,633,000 for the year ended December 31, 1993.
This increase is primarily attributable to an increase in revenues from sales of
products and services. These revenues totaled $6,183,000, an increase of 169%
compared to $2,295,000 for the prior year. The acquisition of PDLA in February
of 1994 brought total revenues of $3,775,000 to the
Company for year ended December 31, 1994 of which, $3,647,000 were laboratory
service revenues. Excluding the PDLA revenues, total revenues for 1994 were up
7% to $2,818,000 compared to $2,633,000 for 1993, and total product and service
revenues increased 11% to $2,536,000 compared to $2,295,000 for 1993.
Laboratory Service Revenues for the year ended December 31,
1994 were $3,647,000. These revenues did not exist for the Company in 1993. By
acquiring PDLA in February of 1994, the Company was able to offer laboratory
services as a complementary product to the substance abuse testing products
already marketed by the Company. As a result of the acquisition, the Company
recognized almost eleven months of revenues generated through the laboratory
services of PDLA.
Product sales include the sales generated from substance abuse
testing products. Sales from these products were $1,293,000 for the year end
December 31, 1994, an 18% increase compared to $1,093,000 for the prior year.
This increase is the result of increased sales of the on-site products,
particularly VERDICT, in 1994.
Product sales also include sales of agricultural diagnostic
products consisting of EZ-SCREEN test kits (for mycotoxin detection, drug
residue surveillance, etc.), species identification kits, other bioassay
technology products and third party products. These products are marketed
through diAGnostix, inc. Sales of these products were $805,000 for the year
ended December 31, 1994, an increase of 7% compared to sales of $751,000 during
the prior year. This increase was due to the increased purchases by the United
States Department of Agriculture ("USDA") pursuant to two contracts the Company
has with the USDA, as well as regaining the sulfa-on-site test kit business from
an international customer which did not occur during the year ended December 31,
1993.
Microbiological and associated product sales including
contract manufacturing were $438,000 for the year ended December 31, 1994
compared to $445,000 for these products in 1993. This decrease was due to a
reduced marketing effort.
Revenues from royalties and fees during the year ended
December 31, 1994 were $200,000, compared to $257,000 for 1993. These revenues
decreased 22% as a result of the termination on October 12, 1993 of the contract
the Company had with Farnam Companies, Inc.
Revenues from interest and other income for the year ended
December 31, 1994 were $210,000, compared to $81,000 for the year ended December
31, 1993. This 159% increase was due to the recovery of debts owed by a customer
of laboratory services which had previously been written off.
The gross margin from overall sales for the year ended
December 31, 1994 was 2%, compared to 12% of sales for the year ended
December 31, 1993. Excluding the effect of the PDLA acquisition for the year
ended December 31, 1994, the gross margin would have been 16%. This increase
in gross margin excluding the effect of the PDLA acquisition is overshadowed by
the impact
of the laboratory services provided through PDLA. As a large amount of the costs
of providing laboratory services are fixed or near fixed costs, the margins from
the sales of laboratory services are volume dependent. The volume of testing
performed by PDLA for the period ended December 31, 1994 was adversely affected
by the loss of contracts before the acquisition of PDLA by the Company.
Selling, general and administrative expenses for the year
ended December 31, 1994 were $3,341,000, compared to $2,152,000 for the year
ended December 31, 1993. This 55% increase was primarily a result of increased
personnel from the acquisition of PDLA, increased expenses for the sales and
marketing of the substance abuse testing products, the amortization of goodwill
arising from the acquisition of PDLA, and increases in other expenses due to the
acquisition of PDLA.
The acquisition of PDLA was accounted for under the purchase
method of accounting and the Company recorded goodwill of $3,394,000. For 1994,
the Company amortized goodwill on a straight line basis over 20 years.
Research and development expenses incurred during the year
ended December 31, 1994 were $729,000, as compared to $825,000 for the year
ended December 31, 1993. This 12% decrease was primarily due to decreased
expenses, including personnel costs associated with the movement of certain
personnel from research and development to operations, and the lack of costs and
expenses associated with the Farnam contract which was terminated on October 12,
1993. Research and development efforts are directed toward enhancements of
existing products, as well as the development of new products which in some
cases have been or are funded by outside parties.
For the year ended December 31, 1994, the Company incurred
interest expense of $25,000, compared to interest expense of $9,000 incurred
during the year ended December 31, 1993. This increase was primarily a result of
the Company borrowing funds against a line of credit.
During the year ended December 31, 1993 the Company incurred
expenses of $353,000 related to its legal disputes with DDI and
Transia-Diffchamb S.A. On August 10, 1993 the arbitrator's decision in the DDI
dispute awarded to DDI certain costs and legal fees. The actual costs and fees
were later set at $336,000, bringing the total to $689,000. The Company had no
such expenditures during the year ended December 31, 1994.
As a result of the above, the net loss for the year ended
December 31, 1994 was $3,546,000, compared to the net loss of $3,066,000 for the
year ended December 31, 1993.
Material Changes in Financial Condition
At December 31, 1995, cash and cash equivalents were $258,000
compared to $1,105,000 as of December 31, 1994. The decrease of $847,000 was a
result of several factors as discussed below.
At December 31, 1995, accounts receivable were $1,029,000.
This 22% increase compared to $843,000 at December 31, 1994 was primarily due to
$113,000 in receivable generated through seven months of sales from the
acquisition of Bioman Products. Excluding the Bioman receivables, accounts
receivables for the year ended December 31, 1995 increased 9% over the prior
year.
The allowance for doubtful accounts at December 31, 1995 was
$130,000, a decrease of 37% compared to $206,000 for the prior year end. This
decrease was the result of the write-off for PDLA customers for $70,000. Also,
in 1995, the Company had fewer customers with receivables due over 90 days, thus
the allowance was not significantly adjusted to reflect the increase in accounts
receivable.
Inventories were $937,000 at December 31, 1995 compared to
$853,000 at December 31, 1994. This increase of $84,000 or 10% was primarily due
to an increase in work in process inventory related to the VERDICT product line.
Prepaid expenses and other assets were $868,000 at December
31, 1995, as compared to $272,000 at December 31, 1994. This increase of
$596,000 was primarily due to the costs associated with the acquisition of
MEDTOX including a $500,000 deposit placed into an escrow account pending
closing of the acquisition of MEDTOX.
During the year ended December 31, 1995, the Company took a
charge of $3,100,000 to write off the goodwill associated with the acquisition
of PDLA. Accordingly, the amount of goodwill at December 31, 1995 was $117,000
as compared to $3,247,000 at December 31, 1994. The remaining goodwill relates
to the acquisition of Bioman in June 1995.
At December 31, 1994, the Company had an outstanding balance
of $850,000 on a line of credit with a bank. The Company repaid the total
outstanding balance during the year ended December 31, 1995.
Accrued expenses were $1,202,000 at December 31, 1995 as
compared to $347,000 at December 31, 1994. This increase of $855,000 was
primarily due to expenses associated with the acquisition of MEDTOX.
As described more fully in the notes to the financial
statements, the Company entered into a $125,021 loan agreement with the North
Carolina Biotechnology Center (NCBC). The loan, plus accrued interest, was due
August 14, 1994. On December 15, 1994, the Company and NCBC negotiated a loan
modification extending the due date to August 14, 1996. In addition, NCBC
exercised their right to convert 50%, or approximately $62,000, of the loan
amount into 16,100 shares of the Company's common stock. Accordingly, at
September 30, 1995, the Company had a balance of loan payable of $63,000 to
NCBC. In addition, during 1995 the Company borrowed $100,000 from Dr. Samuel C.
Powell in the form of a 90 day promissory note. Primarily as a result of these
transactions, the balance of notes payable at December 31, 1995 was $182,000 as
compared to $158,000 at December 31, 1994.
At December 31, 1995, the Company accrued $626,000 for the
payment of certain restructuring costs associated with the consolidation of the
laboratory operations of PDLA with the laboratory operations of MEDTOX. At
December 31, 1994, the Company had no accrual for restructuring costs.
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, 1995, the Company had cash and cash equivalents of
$258,000. The Company had also deposited $500,000 in an escrow account towards
the acquisition of MEDTOX. On January 30, 1996, the Company completed the
acquisition of MEDTOX. 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 1996 and beyond, although there can be no assurance that the
available capital will be sufficient to fund the future operations of the
Company.
As of December 31, 1995, 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.
During 1995, the Company sold a total of 2,140,963 shares of
common stock in 13 separate private transactions. The sale of these 2,140,963
shares generated net proceeds of $3,884,109 to the Company.
As mentioned above, the Company sold 407 shares of its Series
A Preferred Stock for $20,350,000 in 1996. Also in 1996, the Company sold
235,295 shares of its common stock to a director in a private transaction. The
sale of these 235,295 shares generated proceeds of $600,002 to the Company.
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.
Directors, executive officers, their ages, offices held and
initial effective dates thereof, are as follows:
Initial
Effective
Name Age Position Date
James D. Skinner 51 Chairman of the
Board of Directors
President, Chief
Executive Officer July 1987
Samuel C. Powell, Ph.D. 43 Director November 1987
Carole A. Golden, Ph.D. 53 Vice President
Research and
Development November 1987
Gene E. Lewis 67 Director May 1990
Peter J. Heath 37 Secretary,
Vice President
Finance, Chief
Financial Officer October 1990
Robert J. Beckman 47 Director January 1994
Michael A. Terretti 45 Vice President
Sales and Marketing October 1995
George W. Masters 55 Director January 1996
Harry G. McCoy, Pharm.D. 44 Director January 1996
Vice President
President-MEDTOX
James D. Skinner was elected President, Chief Executive
Officer and a Director of the Company effective July 19, 1987. On June 8, 1994,
Mr. Skinner was elected Chairman of the Board of the Company. Mr. Skinner is
currently serving as a member of the Board of Directors of both the
Biotechnology Industry Organization ("BIO") and the Emerging Companies Section
of BIO. In addition, he serves on the Board of Directors of the North Carolina
Biotechnology Center, and the Graduate School Board of Advisors of North
Carolina State University. Mr. Skinner is also a member of the Board of
Directors of Intelligent Medical Imaging, Inc., a computer software company
focusing on medical diagnostics, where he serves as Chairman of the
Compensation Committee. Mr. Skinner was also appointed by North Carolina
Governor, the Honorable James B. Hunt, to the position of Chairman of the
Entrepreneurial Development Board. Mr. Skinner is also a charter member of the
Board of Directors of the North Carolina Biosciences Organization. Mr. Skinner
also serves on the Editorial Advisory Board of IVD Technology, a new
publication of the Medical Device and Diagnostic Industry.
Samuel C. Powell, Ph.D. has served as a Director of the
Company since September 1986. From January 1988 to the present, he has been
president of Powell Enterprises, Burlington, North Carolina, which engages in
the management of a variety of businesses and in commercial real estate
development. Dr. Powell served as Chairman of the Board and Chief Executive
Officer of Granite, from January 1984 until its acquisition by the Company in
June 1986. Dr. Powell served as Chairman of the Board of the Company from
November 1987 until June 1994.
Gene E. Lewis has served as a Director of the Company since
May 1990. From August 1988 to the present, Mr. Lewis has been a consultant to
the healthcare industry. From January 1985 through August 1988, Mr. Lewis served
as President and Chief Operating Officer and a member of the Board of Directors
of Baker Instruments Corporation, a wholly-owned subsidiary of Richardson-Vicks,
which later became a wholly-owned subsidiary of Procter & Gamble.
Carole A. Golden, Ph.D. was elected as Vice President-Research
and Development effective November 1987. From 1978 until she joined the Company,
Dr. Golden was Scientific Director for Microbiological Research Corporation,
Bountiful, Utah, a company engaged in the development and manufacture of
clinical diagnostic products. Dr. Golden has published numerous scientific
articles pertaining to immunodiagnostics of infectious diseases. She is a member
of various scientific societies including the New York Academy of Science and
Environmental Mutagen Society.
Peter J. Heath was appointed Vice President - Finance and
Chief Financial Officer on April 29, 1991. Mr. Heath was appointed Secretary and
Chief Accounting Officer effective October 31, 1990. Mr. Heath has held the
position of Controller of the Company since July 1986. Mr. Heath was employed as
Controller and Office Manager of Granite from January 1984 until its acquisition
by the Company in June 1986.
Michael A. Terretti was elected Vice President-Sales and
Marketing in October 1995. Mr. Terretti joined PDLA in May 1994 as Vice
President and General Manager. Prior to joining PDLA, Mr. Terretti was Vice
President of Marketing and Planning for Genetic Design, Inc. Prior to joining
Genetic Design, Mr. Terretti was Vice President of Sales and Marketing with
CompuChem Laboratories. Mr. Terretti currently serves on the Board of Directors
of the Institute for a Drug Free Workplace.
Robert J. Beckman has served as a Director of the Company
since January 1994. Mr. Beckman is President and Chief Executive Officer of
Intergen Company, a privately held biotechnology firm located in Purchase, NY.
Mr. Beckman has been at Intergen since 1987. Mr.
Beckman also is on the Board of Directors and Executive Committee of BIO and is
Chairman of the Emerging Companies Section of BIO. As a founding member of the
New York Biotechnology Association, he serves on its executive committee in
addition to serving on the Commission on Biomedical Research in New York City.
George W. Masters is Vice Chairman, President and Chief
Executive Officer of Seragen, Inc. Mr. Masters has been at Seragen since 1993.
Prior to joining Seragen, Mr. Masters was President and CEO of Verax, Inc. from
1992 to 1993. From 1991 to 1992, Mr. Masters served as President of
ImmunoSystems, Inc. Mr. Masters serves as Vice Chairman and Director for
Hemosol, Inc. where he is Chairman of the Compensation Committee. Mr. Masters
also currently serves on the Board of Directors of three other companies,
ImmuCell Corporation, Intelligent Medical Imaging, Inc., where he serves as a
member of the Compensation Committee, and CME Telemetrix, where he is a member
of the Compensation Committee. Mr. Masters also serves on various boards for
industry associations and educational institutions.
Harry G. McCoy, Pharm.D., a Vice President of the Company, is
President of MEDTOX. Dr. McCoy founded MEDTOX in 1984 and served as the Clinical
Director and Executive Vice President of MEDTOX from 1984 until its acquisition
by the Company in January 1996. Dr. McCoy also served as a Director of MEDTOX
from 1993 until its acquisition by the Company. Since 1986, Dr. McCoy has
served as a Clinical Associate Professor in the College of Pharmacy at the
University of Minnesota and since 1990 has served as a Clinical Assistant
Professor in the Department of Pathology at the University of North Dakota.
Currently, all Directors are elected annually by the
stockholders of the Company. All executive officers are elected annually by the
Board of Directors of the Company. There are no familial relationships between
any Directors and executive officers of the Company, and there are no
arrangements or understandings between any Director or nominee for Director and
any other person pursuant to which any person was or is to be selected as a
Director or nominee.
ITEM 11. EXECUTIVE COMPENSATION.
The following table and the narrative text discuss the compensation
paid during 1995 and the two prior fiscal years to the Company's President and
Chief Executive Officer and to the other executive officers whose annual salary
and bonuses exceeded $100,000 during 1995.
Summary Compensation Table
Long Term Compensation
Annual Compensation Awards Payouts
Name and Principal Other Restricted Options/ All Other
Position Annual Stock SAR's LTIP Compen-
Year Salary Bonus Compen- Awards (#) Payouts(2) sation
sation (1) (2)
James D. Skinner, 1995 $183,136 -- -- -- 25,000 -- $4,785(3)
President and 1994 $176,714 $20,000 -- -- 68,326 -- $4,285
Chief Executive 1993 $176,153 -- -- -- 0 -- $3,865
Officer
Carole A. Golden 1995 $131,940 -- -- -- 15,000 -- --
Vice President 1994 $124,034 -- -- -- 36,666 -- --
Research & Development 1993 $114,046 -- -- -- 0 -- --
Peter J. Heath 1995 $101,541 -- -- -- 17,660 -- --
Vice President of 1994 $ 91.610 -- -- -- 28,332 -- --
Finance 1993 $71,446 -- -- -- 0 -- --
and Chief Financial
Officer
Michael Terretti 1995 132,952 -- -- -- 3,910 -- --
Vice President of 1994 90,321 -- -- -- 80,000 -- --
Sales and Marketing 1993 -- -- -- -- -- -- --
(1) Other Annual Compensation for executive officers is not reported as it
is less than the required reporting threshold of the Securities and
Exchange Commission.
(2) Not applicable. No compensation of this type received.
(3) Includes $4,785 of premiums paid for by the Company for a life
insurance policy on Mr. Skinner for the benefit of his named
beneficiary. In the event of a termination of Mr. Skinner's employment
by the Company without cause or by reason of a "change in control" of
the Company, Mr. Skinner is entitled to receive severance pay equal to
his then current annual salary. No amounts were paid, payable or
accrued during 1995 pursuant to this provision. See "Employment
Contracts".
Stock Options Granted During Fiscal Year
The following table sets forth information about the stock options
granted to the named executive officers of the Company during 1995.
Option Grants In Last Fiscal Year
Potential Realized
Value at Assumed
Annual Rates of
Stock Price
Appreciation for
Individual Grants Option Term
% of Total
Options
Number Granted to
of Employees Exercise
Options in Fiscal Price Expiration 5% ($) 10% ($)
Name Granted(3) Year (1) ($/Sh) Date (2) (2)
James D.
Skinner 25,000 7% $2.94 12/13/05 46,224 117,140
Carole A.
Golden 15,000 4% $2.94 12/13/05 27,734 70,284
Peter J.
Heath 2,660 1% $3.38 10/02/05 5,654 14,329
15,000 4% $2.94 12/13/05 27,734 70,284
Michael A.
Terretti 3,910 1% $3.44 7/25/05 8,459 21,436
(1) Options to acquire an aggregate of 340,742 shares of Common Stock of
the Company were granted to all employees during 1995. No options to
acquire Common Stock were granted to non-employee directors of the
Company during 1995. No stock appreciation rights were granted to the
named executive officers during 1995.
(2) The potential realizable value of the options reported above was
calculated by assuming 5% and 10% annual rates of appreciation of the
Common Stock of the Company from the date of grant of the options until
the expiration of the options. These assumed annual rates of
appreciation were used in compliance with the rules of the Securities
and Exchange Commission and are not intended to forecast future price
appreciation of the Common Stock of the Company. The Company chose not
to report the present value of the options, which is an alternative
under Securities and Exchange Commission rules, because the Company
does not believe any formula will determine with reasonable accuracy a
present value based on unknown or volatile factors. The actual value
realized from the options could be substantially higher or lower than
the values reported above, depending upon the future appreciation or
depreciation of the Common Stock during the option period and the
timing of exercise of the options.
(3) Options were granted on July 25, 1995, October 2, 1995, and December
13, 1995. 25,000 of the options granted to Mr. Skinner, 15,000 of the
options granted to Dr. Golden, 17,660 of the options granted to Mr.
Heath, and 3,190 of the options granted to Mr. Terretti became
vested and exercisable quarterly over a three year period in twelve
equal installments commencing three months after the grant date.
Stock Options Exercised During Fiscal Year and Year-End Values of Unexercised
Options
The following table sets forth information about the stock options held
by the named executive officers of the Company at December 31, 1995. No stock
options or stock appreciation rights were exercised by the named executive
officers of the Company during 1995.
Number of Unexercised Value of Unexercised In-the-
Options at FY-End Money Options at FY-End
Name Exercisable/Unexercisable Exercisable/Unexercisable (1)
James D. Skinner 241,033/53,458 $159,431/$0
Carole A. Golden 8,861/30,272 $ 66,111/$0
Peter J. Heath 55,534/29,461 $ 14,700/$0
Michael A. Terretti 47,006/36,904 $ 0/$0
(1) The closing price of the Common Stock of the Company at December 31, 1995
was $2.88 per share.
Long-Term Incentive Plans and Pension Plans
The Company does not contribute to any Long-Term Incentive Plan or
Pension Plan for its executive officers as those terms are defined in the rules
of the Securities and Exchange Commission. The Company relies on its stock
option plans to provide long-term incentives for executive officers. The Company
has two stock option plans, an equity compensation plan which was adopted by the
shareholders of the annual meeting in 1993 to replace the 1983 Incentive Stock
Option Plan which expired on June 23, 1993 and a 1991 Non-Employee Director's
Plan for members of the Board of Directors who are not employees of the Company.
The Company has also granted options to James D. Skinner outside these plans.
Compensation of Directors
In 1995 each director who is not an employee of the Company received
$10,000 as a payment for the year 1995. All directors are also reimbursed for
expenses incurred in attending Board of Directors meetings and participating in
other activities.
Employment Contracts
James D. Skinner, the Chairman of the Board, President and Chief
Executive Officer of the Company, has an employment agreement with the Company
covering the period ending June 30, 1990, which by its terms is extended
thereafter in one-year increments unless otherwise terminated due to death,
permanent disability, change in control of the Company or for "cause". The
employment agreement, as amended on July 1, 1988, provides for an annual salary
of at least $135,000 and certain fringe benefits including a disability
insurance policy, a life insurance policy on Mr. Skinner for the benefit of his
named beneficiary in the amount of $1,000,000 and automotive expenses. During
1994, the Company paid insurance premiums aggregating $4,078 for Mr. Skinner's
disability insurance and $4,285 for Mr. Skinner's life insurance and paid Mr.
Skinner an auto allowance of $8,800, none of which are included under Annual
Compensation in the Summary Compensation Table set forth above. In the event of
a termination of Mr. Skinner's employment by the Company without cause or by
reason of a "change in control" of the Company, Mr. Skinner is entitled to
receive severance pay equal to his then current annual salary. A "change in
control" is defined as (i) the acquisition of control by any person or group of
capital stock representing 50% or more of the Company's voting stock, (ii) the
approval of the Company of a merger or consolidation in which the Company is not
the surviving entity, (iii) the agreement by the Company to sell substantially
all of its assets to a third party unless the third party is controlled by the
Company and Mr. Skinner continues as its President and Chief Executive Officer,
(iv) the approval by the Company of a plan of liquidation of the Company, or (v)
the election of directors constituting more than one-half of the Board who,
prior to their election, were not elected or nominated for election by at least
a majority of the Board of Directors.
Upon a change of control or termination of Mr. Skinner's employment for
any reason other than death or permanent disability, the non-qualified stock
options granted to Mr. Skinner pursuant to the terms of his employment agreement
will immediately vest. On September 10, 1988 Mr. Skinner borrowed funds from the
Company to exercise nonqualified stock options to purchase 13,334 shares of
Common Stock for an exercise price of $7.50 per share granted to him pursuant to
his employment arrangement. The terms of the loan are described under "Certain
Relationships and Related Transactions - Loan to James D. Skinner." Pursuant to
his employment arrangement, Mr. Skinner holds nonqualified stock options to
purchase 26,666 shares of Common Stock for an exercise price of $3.75 per share
which expire on May 4, 2000 and 33,334 shares of Common Stock for an exercise
price of $3.75 per share which expire on May 4, 2000. Mr. Skinner has the right
to require the Company to loan him the exercise price for 26,666 shares on the
same terms as the loan described above.
Compensation Committee and Decision Making
The compensation (other than stock options) of executive
officers of the Company was determined by the Compensation Committee consisting
of Gene E. Lewis, and Samuel C. Powell. Mr. James D. Skinner, the Chairman,
President and Chief Executive Officer of the Company participated in
deliberation of the Board of Directors concerning compensation for executive
officers other than himself. Messrs. Powell and Skinner have also entered into
other transactions with the Company. See "Certain Relationships and Related
Transactions."
Stock options are awarded under the Company's 1983 Stock Option Plan,
the Equity Compensation Plan and Non-Employee Director Plan by a stock option
committee consisting of the nonemployee members of the Board of Directors:
Samuel C. Powell, and Gene E. Lewis, who are eligible to receive stock options
under the Company's 1991 Non-Employee Director Plan. The number of shares
issuable pursuant to options granted under the Non-Employee Stock Option Plan is
determined by dividing the aggregate award of $10,000 by the exercise price of
the options, which was the fair market value of the Company's Common Stock on
the date of the award.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth information available to the Company as of March
19, 1996, regarding the beneficial ownership of the Common Stock by (i) each
person known by the Company to beneficially own more than Five Percent (5%) of
the outstanding Common Stock, and beneficial ownership of the Common Stock and
the Series A Convertible Preferred Stock, par value $1.00 per share (the "Series
A Stock"), by (i) each of the Directors of the Company, (ii) the Chief Executive
Office and all executive officers whose compensation was $100,000 or greater
during 1995 and (iii) all executive officers and Directors of the Company as a
group:
Number of Shares Percent of Common
Name Beneficially Owned Stock Outstanding
Morgan Capital, L.L.C. 1,742,222 (1) 11.66%
Harlan Kleiman 906,667 (2) 6.43%
Leitinger Corp. 924,444 (3) 6.55%
Magal Company 888,889 (4) 6.31%
Mifal Klita 960,000 (5) 6.78%
Executive Officers and Directors:
James D. Skinner, Chairman, President
and Chief Executive Officer 484,365 (6) 3.56%
Samuel C. Powell, Ph.D., Director 536,209 (7) 4.05%
Gene E. Lewis, Director 46,675 (8) *
Robert J. Beckman, Director 9,976 (9) *
Harry G. McCoy, Director
and Vice President 817,956 (10) 6.20%
George W. Masters, Director 1,109 (11) *
Peter J. Heath, Vice President Finance 160,779 (12) 1.21%
Michael A. Terretti, Vice President
Sales and Marketing 119,248 (13) *
Carole A. Golden, Ph.D., Vice President
Research and Development 83,166 (14) *
All directors and executive officers as a
group (9 in number) 2,246,483 (15) 15.72%
- ----------
* Less than one percent (1%)
(1) Includes 1,742,222 shares issuable upon conversion of shares of Series
A Stock which will become convertible within the next 60 days. The
conversion rate for the Series A Stock fluctuates based on the market
price of the Common Stock. Consequently, the number of shares of Common
Stock listed as beneficially owned by Morgan Capital, L.L.C. has been
calculated based on the closing bid price of the Common Stock for March
26, 1995.
(2) Includes 906,667 shares issuable under Common Stock Purchase Warrants,
which are or will become exercisable within the next 60 days.
(3) Includes 924,444 shares issuable upon conversion of shares of Series A
Stock which will become convertible within the next 60 days. The
conversion rate for the Series A Stock fluctuates based on the market
price of the Common Stock. Consequently, the number of shares of Common
Stock listed as beneficially owned by Leitinger Corp. has been
calculated based on the closing bid price of the Common Stock for March
26, 1995.
(4) Includes 888,889 shares issuable upon conversion of shares of Series A
Stock which will become convertible within the next 60 days. The
conversion rate for the Series A Stock fluctuates based on the market
price of the Common Stock. Consequently, the number of shares of Common
Stock listed as beneficially owned by Magal Company has been calculated
based on the closing bid price of the Common Stock for March 26, 1995.
(5) Includes 960,000 shares issuable upon conversion of shares of Series A
Stock which will become convertible within the next 60 days. The
conversion rate for the Series A Stock fluctuates based on the market
price of the Common Stock. Consequently, the number of
shares of Common Stock listed as beneficially owned by Mifal Klita has
been calculated based on the closing bid price of the Common Stock for
March 26, 1995.
(6) Includes 216,492 shares of Common Stock issuable under options granted
under the Company's stock option plans, 132,317 shares of Common Stock
issuable under Non-Qualified Stock Options, and 50,000 shares of Common
Stock issuable under Common Stock Purchase Warrants purchased in a
private sale by Mr. Skinner, all of which are or will become
exercisable within the next 60 days.
(7) Includes 13,334 shares of Common Stock issuable under stock options,
5,000 shares of Common Stock issuable under Non-Qualified Stock
Options, and 32,679 shares of Common Stock issuable under Common Stock
Purchase Warrants which are or will become exercisable within the next
60 days.
(8) Includes 29,564 shares of Common Stock issuable under options which are
or will become exercisable within the next 60 days.
(9) Includes 9,976 shares of Common Stock issuable under options which are
or which will become exercisable within the next 60 days.
(10) Includes 451,712 shares with contractually provided price protection.
See "Amendment of Incorporation to Increase Number of Authorized Shares
of Common Stock."
(11) Includes 1,109 shares of Common Stock issuable under options which are
or which will become exercisable within the next 60 days.
(12) Includes 78,156 shares of Common Stock issuable under stock options,
56,432 shares of Common Stock issuable under Non-Qualified Stock
Options, and 10,000 shares of Common Stock issuable under Common Stock
Purchase Warrants which are or will become exercisable within the next
60 days.
(13) Includes 60,992 shares of Common Stock issuable under stock options and
43,330 Common Stock issuable under Non-Qualified Stock Options, which
are or will become exercisable within the next 60 days.
(14) Includes 83,166 shares of Common Stock issuable under options which are
or will become exercisable within the next 60 days.
(15) Includes 492,789 shares issuable under stock options, 237,079 shares of
Common Stock issuable under Non-Qualified Stock Options and 92,679
shares of Common Stock issuable under Common Stock Purchase Warrants
which are or will become exercisable within the next 60 days.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Lease Agreement with Dr. Samuel C. Powell
In July 1986, the Company executed a lease agreement with Dr. Powell
providing for a lease to the Company of approximately 16,743 square feet of
space at 1238 Anthony Road, Burlington, North Carolina. Since 1986, the Company
has expanded the space rented under the lease to approximately 22,272 square
feet. Upon the expiration of the original lease, the Company entered into a new
lease with Dr. Powell for the same space and at the same base rental rate for a
term of one year ending on May 31, 1990. Effective June 1, 1990, the Company has
been leasing the space on a month-to-month basis. The Company is currently
leasing space at a rate of approximately $10,000 per month. The Company intends
to negotiate a new lease with Dr. Powell in the near future. The Company 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). The
total rent paid by the Company to Dr. Powell during the fiscal year ended
December 31, 1995 was approximately $121,000.
Lease Agreement with Warren Land Company (WLC)
The Company leases a farm in Warren County, North Carolina from WLC for
the purposes of maintaining animals to produce antibodies and for research and
development. Dr. Powell owns a 12% interest in WLC, and the remainder of WLC is
owned by certain of Dr. Powell's family members and their respective families.
The arrangement for use of the Warren County facility is on a month-to-month
basis at a rental of $2,797 per month. The Company intends to negotiate a new
lease with WLC in the near future. The total rent paid by the Company to WLC
during the fiscal year ended December 31, 1995 was approximately $34,000.
Loan to Mr. James D. Skinner
The provisions of non-qualified stock options granted to Mr. Skinner
provide that the Company will lend the funds necessary to exercise such stock
options. The loans for this purpose will not exceed a term of 36 months and will
bear interest at a rate equal to the prime lending rate of Wachovia Bank & Trust
Company, N.A. and will be secured by a pledge of the shares purchased with the
proceeds of the loan. During 1988, Mr. Skinner exercised non-qualified stock
options exercisable into 13,334 shares of Common Stock at an exercise price of
$7.50 per share. At Mr. Skinner's request, the Company loaned $100,000 to Mr.
Skinner to be used to exercise such options. The loan was secured solely by a
pledge of, and as recourse only with respect to, the shares of Common Stock
purchased with the proceeds of the loan. Effective May 3, 1990, the Company
modified the loan agreement with Mr. Skinner to defer interest payments on such
loan until the date upon which the principal comes due. In 1995, the Company
modified the loan agreement with Mr. Skinner to extend the maturity date of the
loan to September 28, 1996. The outstanding balance of such loan as of December
31, 1995, was $100,000, excluding accrued interest thereon.
Loan From Dr. Samuel C. Powell
On December 18, 1995, the Company borrowed $100,000 from Dr. Samuel C. Powell in
the form of a 90 day loan. The loan had an interest rate of 10.5%. The Company
repaid the principal and interest in February, 1996.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, REPORTS ON FORM 8-K.
a. (i) Financial Statements
Report of Independent Auditors...................
Consolidated Balance Sheets at December
31, 1995 and 1994...............................
Consolidated Statements of Operations
for the years ended December 31,
1995, 1994 and 1993.............................
Consolidated Statements of Stockholders'
Equity for the years
ended December 31, 1995,
1994 and 1993...................................
Consolidated Statements of Cash
Flows for the years ended
December 31, 1995, 1994 and 1993...........
Notes to Consolidated Financial
Statements........................................
(ii) Consolidated Financial Statement Schedules
Schedule V - Valuation and
Qualifying Accounts ...............................
(iii) MEDTOX Financial Statements
Report of Independent Auditors.......................
Consolidated Balance Sheets at December
31, 1995 and 1994...................................
Consolidated Statements of Operations
for the years ended December 31, 1995,
1994 and 1993.......................................
Consolidated Statements of Stockholders'
Equity for the years ended
December 31, 1995, 1994 and 1993....................
Consolidated Statements of Cash
Flows for the years ended
December 31, 1995, 1994, 1993.......................
Notes to Consolidated Financial
Statements........................................
(iv) Unaudited Pro Forma Consolidated Financial Information
Introduction.........................................
Unaudited Pro Forma Consolidated Balance Sheet at
December 31, 1995..................................
Unaudited Pro Forma Consolidated Statement of
Operations for the year ended December 31, 1995....
Notes to Unaudited Pro Forma Consolidated Financial
Statements.........................................
All other financial statement schedules normally required
under Regulation S-X are omitted as the required information is inapplicable.
(v) 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.)
10.1 Lease Agreement dated as of June 1, 1986
between Samuel C. Powell, as lessor, and
Environmental Diagnostics, Inc. as lessee,
relating to premises at 1238 Anthony Road,
Burlington, North Carolina (incorporated by
reference to Exhibit 1.5 filed with the
Registrant's Report on Form 8-K dated July
18, 1986).
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).
10.4 Employment Agreement between the Registrant
and James D. Skinner dated as of July 1,
1987 (incorporated by reference to Exhibit
10.15 filed with the Registrant's Form 10-K
for the fiscal year ended December 31,
1988).
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).
10.9 Promissory Note dated as of September 10,
1988 by James D. Skinner to the Registrant
(incorporated by reference to Exhibit 10.27
filed with the Registrant's Form 10-K for
the fiscal year ended December 31, 1989).
10.10 Pledge Agreement dated as of September 10,
1988 between the Registrant and James D.
Skinner (incorporated by reference to
Exhibit 10.28 filed with the Registrant's
Form 10-K for the fiscal year ended December
31, 1989).
10.11 Stock Option Agreement between the
Registrant and Gene E. Lewis dated as of May
4, 1990. (Incorporated by reference to
Exhibit 10.33 filed with the Registrant's
Form 10-K for the fiscal year ended December
31, 1990).
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).
10.21 Loan Modification Agreement dated December
15, 1994 between the Registrant and the
North Carolina Biotechnology Center.
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 reference 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.
10.34 Registrant's Amended and Restated Equity
Compensation Plan (increasing shares to
3,000,000).
10.35 Asset Purchase Agreement dated as of May 31,
1995 between the Registrant, Bioman
Products, Inc. and NOVAMANN International,
Inc.
10.36 Securities Purchase Agreement dated January
31, 1996 between the Registrant and Harry G.
McCoy.
10.37 Registration Rights Agreement dated February
1, 1996 between the Registrant and Harry G.
McCoy.
10.38 Agreement regarding rights to "MEDTOX" name
dated as of January 30, 1996 between the
Registrant and Harry G. McCoy.
10.39 Warrant Agreement dated as of December 18,
1995 between Samuel C. Powell and the
Registrant.
24.1 Consent of Ernst & Young LLP
27 Financial Data Schedule
99.0 Report of KPMG Peat Marwick LLP
b. Reports on Form 8-K
There was no report on Form 8-K filed for the three months
ended December 31, 1995.
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EDITEK, INC.
Report on Form 10-K
for year ended December 31, 1995
INDEX TO EXHIBITS FILED SEPARATELY WITH FORM 10-K
EXHIBIT # DESCRIPTION OF EXHIBIT
10.33 Employment Agreement between the
Registrant and Harry G. McCoy dated
January 30, 1996.
10.34 Registrant's Amended and Restated Equity
Compensation Plan (increasing shares to
3,000,000).
10.35 Asset Purchase Agreement dated as of
May 31, 1995 between the Registrant,
Bioman Products, Inc. and NOVAMANN
International, Inc.
10.36 Securities Purchase Agreement dated
January 31, 1996 between the Registrant
and Harry G. McCoy.
10.37 Registration Rights Agreement dated
February 1, 1996 between the Registrant
and Harry G. McCoy.
10.38 Agreement regarding rights to "MEDTOX"
name dated as of January 30, 1996 between
the Registrant and Harry G. McCoy.
10.39 Warrant Agreement dated as of December 18, 1995
between Samuel C. Powell and the Registrant.
24.1 Consent of Ernst & Young LLP
27 Financial Data Schedule
99.0 Report of KPMG Peat Marwick 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 27th
day of March 1996.
EDITEK, Inc.
Registrant
By: /s/ James D. Skinner
James D. Skinner
President,
Principal Executive Officer 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/ James D. Skinner President, March 27, 1996
James D. Skinner Principal Executive
Officer, and
Chairman of the Board
/s/ Samuel C. Powell Director March 27, 1996
Samuel C. Powell, Ph.D.
/s/ Peter J. Heath Vice President of March 27, 1996
Peter J. Heath Finance and Chief
Financial Officer
/s/ Gene E. Lewis Director March 27, 1996
Gene E. Lewis
/s/ Robert J. Beckman Director March 27, 1996
Robert J. Beckman
/s/ Harry G. McCoy, Pharm.D. Director March 27, 1996
Harry G. McCoy, Pharm.D.
/s/ George W. Masters Director March 27, 1996
George W. Masters
EDITEK, Inc.
Consolidated Financial Statements
Years ended December 31, 1995 and 1994
CONTENTS
Report of Independent Auditors............................1
Consolidated Financial Statements
Consolidated Balance Sheets...............................2
Consolidated Statements of Operations.....................4
Consolidated Statements of Stockholders' Equity...........5
Consolidated Statements of Cash Flows.....................6
Notes to Consolidated Financial Statements................7
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, 1995 and 1994, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1995. 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, 1995 and 1994, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1995 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.
Ernst & Young LLP
February 23, 1996
1
EDITEK, Inc.
Consolidated Balance Sheets
DECEMBER 31
1995 1994
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents $ 258 $ 1,105
Accounts receivable:
Trade, less allowance for doubtful accounts (1995--
$130,000; 1994--$206,000) 977 737
Other 52 106
1,029 843
Inventories:
Raw materials 588 532
Work in process 169 64
Finished goods 180 257
937 853
Deposit on acquisition (NOTE 2) 500 --
Prepaid expenses and other 368 272
Total current assets 3,092 3,073
Equipment and improvements:
Furniture and equipment 2,945 5,689
Leasehold improvements 282 1,692
3,227 7,381
Less accumulated depreciation and amortization (2,630) (6,326)
597 1,055
Goodwill, net of amortization of $7,000 in 1995 and $147,000
in 1994 (NOTES 2 AND 3) 117 3,247
Other assets -- 3
Total assets
$ 3,806 $ 7,378
2
DECEMBER 31
1995 1994
(IN THOUSANDS)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit (NOTE 4) $ -- $ 850
Accounts payable 1,184 1,105
Accrued expenses 834 347
Accrued restructuring expenses (NOTE 3) 368 --
Deferred revenues 42 39
Current portion of long-term debt (NOTE 4) 82 95
Note payable to director 100 --
Current portion of capital lease -- 23
Total current liabilities 2,610 2,459
Long-term debt (NOTE 4) -- 63
Other liabilities (NOTE 3) 258 --
Stockholders' equity (NOTES 5 AND 6):
Preferred Stock--authorized 1,000,000 shares; no shares
issued or outstanding -- --
Common Stock, $.15 par value; authorized--30,000,000
shares; issued and outstanding--10,439,775 shares in
1995 and 8,075,339 shares in 1994
1,566 1,211
Additional paid-in capital 33,973 30,132
Accumulated deficit (34,425) (26,382)
1,114 4,961
Less: Note receivable from officer (100) (100)
Treasury stock (76) (5)
938 4,856
Total liabilities and stockholders' equity
$ 3,806 $ 7,378
SEE ACCOMPANYING NOTES.
3
EDITEK, Inc.
Consolidated Statements of Operations
YEAR ENDED DECEMBER 31
1995 1994 1993
(IN THOUSANDS)
Revenues:
Laboratory service revenues $ 4,312 $ 3,647 $ --
Product sales 2,725 2,536 2,295
Royalties and fees 300 200 257
Interest and other income 189 210 81
7,526 6,593 2,633
Costs and expenses:
Cost of services 4,349 3,902 --
Cost of sales 2,240 2,142 2,024
Selling, general and administrative 4,206 3,341 2,152
Research and development 920 729 825
Interest and financing costs 23 25 9
Arbitration costs (NOTE 9) -- -- 689
Restructuring costs (NOTE 3) 3,831 -- --
15,569 10,139 5,699
Net loss $ (8,043) $ (3,546) $ (3,066)
Loss per share of common stock $ (.85) $ (.49) $ (.56)
Weighted average number of shares of common stock
outstanding 9,445,707 7,204,244 5,429,128
SEE ACCOMPANYING NOTES.
4
EDITEK, Inc.
Consolidated Statements of Stockholders' Equity
NOTE
ADDITIONAL RECEIVABLE
PAID-IN ACCUMULATED FROM TREASURY
SHARES AMOUNT CAPITAL DEFICIT STOCKHOLDER STOCK TOTAL
Balances at December 31, 1992 4,885,629 $ 733 $21,467 $ (19,770) $ (100) $ (5) $ 2,325
Exercise of stock options and warrants 217,194 32 268 -- -- -- 300
Sale of stock 10,754 2 38 -- -- -- 40
Private placement of common stock 955,654 143 3,489 -- -- -- 3,632
Net loss -- -- -- (3,066) -- -- (3,066)
Balances at December 31, 1993 6,069,231 910 25,262 (22,836) (100) (5) 3,231
Exercise of stock options and warrants 23,019 4 43 -- -- -- 47
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 warrants 156,347 23 170 -- -- -- 193
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 -- -- -- (8,043) -- -- (8,043)
Balances at December 31, 1995 10,439,775 $1,566 $33,973 $ (34,425) $ (100) $ (76) $ 938
SEE ACCOMPANYING NOTES.
5
EDITEK, Inc.
Consolidated Statements of Cash Flows
YEAR ENDED DECEMBER 31
1995 1994 1993
(IN THOUSANDS)
OPERATING ACTIVITIES
Net loss $(8,043) $(3,546) $(3,066)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 644 633 318
Restructuring charge 3,831 -- --
Provision for losses on accounts receivable (54) 58 (6)
Provision for obsolete inventory (13) 5 5
Gain on sale or retirement of equipment -- -- (16)
Changes in operating assets and liabilities, net of
acquisition:
Accounts receivable (22) 31 34
Inventories (58) (306) (84)
Prepaid expenses and other (589) (19) (26)
Accounts payable and accrued expenses 453 116 (121)
Deferred revenues 3 (17) 19
Leases payable (23) (37) --
Net cash used in operating activities (3,871) (3,082) (2,943)
INVESTING ACTIVITIES
Purchase of equipment and improvements (177) (505) (339)
Proceeds from sale of equipment -- -- 41
Purchase of PDLA, net of cash acquired -- 89 --
Cash used for Bioman acquisition (37) -- --
Net cash used in investing activities (214) (416) (298)
FINANCING ACTIVITIES
Proceeds from issuance of stock for:
Private placement 4,115 1,159 3,656
Costs related to private placement (262) (46) (24)
Sale of stock 27 33 40
Exercise of stock warrants and options 193 47 300
Purchase of treasury stock (71) -- --
Proceeds from line of credit, loan payable and note
payable 119 850 13
Principal payments on line-of-credit and loan payable (883) -- --
Net cash provided by financing activities 3,238 2,043 3,985
(Decrease) increase in cash and cash equivalents (847) (1,455) 744
Cash and cash equivalents at beginning of year 1,105 2,560 1,816
Cash and cash equivalents at end of year $ 258 $ 1,105 $ 2,560
SUPPLEMENTAL NONCASH ACTIVITIES
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.
6
EDITEK, Inc.
Notes to Consolidated Financial Statements
December 31, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
The consolidated financial statements include the accounts of EDITEK, Inc.
("EDITEK") and its wholly-owned subsidiaries, Princeton Diagnostic Laboratories
of America, Inc. ("PDLA") 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. PDLA
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
livestock producers, food processors, veterinarians, government agencies,
medical professionals, corporations, 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, 1995 and 1994, the inventory included a reserve of
$12,000 and $25,000, 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.
7
EDITEK, Inc.
Notes to Consolidated Financial Statements
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.
ROYALTIES AND FEES
The Company receives reimbursement for certain research and development costs.
The reimbursement is recorded as royalties and fees.
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 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. 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.
RELATED PARTY TRANSACTIONS
The Company has transactions with related parties. The specific transactions are
disclosed in the applicable notes to the financial statements.
8
EDITEK, Inc.
Notes to Consolidated Financial Statements (continued)
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.
RECENTLY ISSUED ACCOUNTING STANDARD
In March 1995, the Financial Accounting Standards Board ("FASB") 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 will adopt Statement 121 in the first quarter of 1996 and, based on
current circumstances, does not believe the effect of adoption will be material.
RECLASSIFICATIONS
Certain reclassifications have been made to the years 1994 and 1993 to conform
with the 1995 presentation. Such reclassifications had no effect on previously
reported net loss or accumulated deficit.
9
EDITEK, Inc.
Notes to Consolidated Financial Statements (continued)
2. ACQUISITIONS
In January, 1996, the Company acquired MEDTOX Laboratories, Inc., ("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 wherein the Company recognized approximately $22 million of goodwill.
The goodwill is being amortized over a period of 20 years.
The Company financed the acquisition by issuing $19 million of convertible
preferred stock and borrowing $4 million under two $2 million term loans. The
Company also entered into a revolving line of credit of up to $7 million for
working capital purposes.
At December 31, 1995, the Company had $500,000 in an escrow account as a
required deposit toward the MEDTOX acquisition.
The following unaudited proforma information presents the results of operations
of the Company and MEDTOX for the year ended December 31, 1995, as if the
acquisition had been consummated as of January 1, 1995.
Revenues $27,745
Net loss $ 4,459
Net loss per share $ (.37)
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 wherein the Company
recognized $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.
The Company acquired 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
10
EDITEK, Inc.
Notes to Consolidated Financial Statements (continued)
2. ACQUISITIONS (CONTINUED)
operations from February 12, 1994 to December 31, 1994. As further discussed in
Note 3, the Company plans to consolidate the PDLA operations into a newly
acquired Company. The remaining PDLA goodwill of $3.1 million was written-off
during the fourth quarter.
3. RESTRUCTURING CHARGES
During the fourth quarter of 1995, the Company recorded a restructuring charge
of $3,831,000, primarily relating to the consolidation of all laboratory testing
services into the recently acquired MEDTOX laboratory. The laboratory services
performed at PDLA will be discontinued and sample testing will be transitioned
to MEDTOX. The Company will maintain client services, the courier network and
certain sales/administrative functions in the reduced PDLA facility.
The restructuring charge includes a $3,100,000 cost of the write-off of the
goodwill associated with the PDLA acquisition. An additional $731,000 of the
charge is for the write-off of net assets and future minimum lease obligations
at PDLA. A liability of $258,000 related to future minimum lease payments for
the period 1997 through 2000 has been classified as noncurrent.
4. DEBT
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 as repayment for $62,000 of the loan. The remaining
principal, $63,000, now bears interest at the rate of nine percent (9%) per
annum; this principal and interest, which are due on August 15, 1996, are
convertible into shares of common stock.
On March 1, 1994, the Company entered into a line of credit arrangement for up
to $1,000,000 at an interest rate of 5.82%. The line-of-credit was repaid and
terminated in 1995.
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.
11
EDITEK, Inc.
Notes to Consolidated Financial Statements (continued)
4. DEBT (CONTINUED)
Interest paid for all outstanding debt was $19,000, $19,000 and $9,000 for the
years ended December 31, 1995, 1994 and 1993, respectively.
5. STOCKHOLDERS' EQUITY
The Company has sold its common stock in various private transactions as
follows:
NUMBER OF SHARES PRICE NET
PER SHARE PROCEEDS
1995 2,158,463 $1.63 to $2.25 $3,853,000
1994 800,000 $1.01 to $2.03 $1,113,000
1993 955,654 $3.01 to $5.20 $3,632,000
At December 31, 1995, shares of common stock reserved for future issuance are as
follows:
Common stock warrants:
Series J 60,000
Series K 50,000
Series L 320,000
Series M 10,550
Series N 32,679
Common stock options:
Incentive 449,406
Non-Employee Director 239,540
Nonqualified 41,093
Qualified Employee Stock Purchase Plan 76,241
Equity Compensation Plan 2,998,333
Convertible Debt 21,856
4,299,698
6. STOCK OPTION AND PURCHASE PLANS
INCENTIVE STOCK OPTION PLAN
The Company has an Incentive Stock Option Plan (the "Plan") under which options
to purchase shares of common stock may be granted to officers, directors and
employees at a price which is not less than fair market value at the date of
grant. Options generally become exercisable in installments over a period of one
to five years. Under the incentive plan, no additional options may be granted
subsequent to June 23, 1993.
12
EDITEK, Inc.
Notes to Consolidated Financial Statements (continued)
6. STOCK OPTION AND PURCHASE PLANS (CONTINUED)
Following is a summary of transactions:
SHARES UNDER OPTION
1995 1994 1993
Outstanding, beginning of year 461,657 483,262 500,860
Granted during the year -- -- 13,414
Canceled during the year (12,251) (17,105) (5,965)
Exercised during the year (1994--$1.41 per share;
1993--$.55 to $6.25 per share) -- (4,500) (25,047)
Outstanding, end of year (1995--$.45 to $10.38 per
share; 1994--$.45 to $10.38 per share; 1993--$.45 to
$10.38 per share) 449,406 461,657 483,262
Exercisable, end of year (1995--$.45 to $10.38 per
share; 1994--$.45 to $10.38 per share; 1993--$.45 to
$10.38 per share) 448,536 442,182 374,867
EQUITY COMPENSATION PLAN
Effective October 26, 1993 the Company adopted an equity compensation plan that
includes incentive stock options, non-qualified stock options, stock
appreciation rights, restricted and unrestricted stock awards, performance
shares, and other stock-based awards. A total of 3,000,000 shares have been
authorized for the plan. As of December 31, 1995, 721,039 options are
outstanding and 298,436 have vested.
NON-EMPLOYEE DIRECTOR PLAN
The Company maintains a stock option plan for non-employee directors under which
options to purchase shares of common stock may be granted to directors of the
Company who are not employees of the Company. At December 31, 1995, 47,864
options that have been granted are outstanding.
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 funds necessary to exercise
the options. The stock acquired is held by the Company as collateral for the
loan and the officer is to pay interest on the borrowed funds
13
EDITEK, Inc.
Notes to Consolidated Financial Statements (continued)
6. STOCK OPTION AND PURCHASE PLANS (CONTINUED)
at a rate equal to the prime rate in effect from time to time with adjustments
in the interest accrual rate to occur on the same date that the prime rate
changes. In May 1990 the remaining 26,666 options were canceled and reissued at
$3.75 per share.
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, 1995,
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, 1995,
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 regular 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 150,000, subject to adjustment for any
future stock splits or dividends. 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. Following is a summary of transactions:
SHARES SUBSCRIBED
1995 1994 1993
Outstanding, beginning of year 13,725 7,943 18,829
Subscribed during the year 4,942 23,005 6,386
Canceled during the year (3,128) (1,863) (6,518)
Purchased during the year (1995--$1.70 to $2.55 per
share; 1994--$1.60 to $3.63 per share; 1993--$2.19 to
$6.96 per share) (12,037) (15,360) (10,754)
Outstanding, end of year (1995--$1.70 to $3.09 per
share; 1994--$1.70 to $3.94 per share;1993--$2.17 to
$6.96 per share) 3,502 13,725 7,943
14
EDITEK, Inc.
Notes to Consolidated Financial Statements (continued)
6. STOCK OPTION AND PURCHASE PLANS (CONTINUED)
The Company accounts for its stock compensation arrangements under the
provisions of APB 25, "Accounting for Stock issued to Employees," and intends to
continue to do so.
7. LEASES
The Company leases office and research facilities from a director under an
operating lease. The lease is currently a month to month lease. Rental payments
to this director were approximately $121,000, $119,000, and $109,000 for the
years ended December 31, 1995, 1994 and 1993, respectively.
The Company leases farm facilities for production of certain of its products
from a company of which a director owns a 12% interest. The lease is currently a
month to month lease. Rental payments to this company were approximately $34,000
for the years ended December 31, 1995, 1994 and 1993.
The Company leases certain office equipment and facilities under operating
leases. As of December 31, 1995, the Company is obligated for minimum lease
payments under noncancellable leases as follows:
1996 $178,000
1997 174,000
1998 171,000
1999 170,000
2000 and thereafter 57,000
$750,000
Rent expense (including amounts to the director for the leased facilities)
amounted to $435,000, $410,000 and $151,000 for the years ended December 31,
1995, 1994 and 1993, respectively.
8. INCOME TAXES
Deferred income taxes reflect the net 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.
15
EDITEK, Inc.
Notes to Consolidated Financial Statements (continued)
8. INCOME TAXES (CONTINUED)
Significant components of the Company's deferred tax liabilities and assets at
December 31 are as follows:
1995 1994
Deferred tax liabilities:
Capital leased assets $ (6,000) $ (7,000)
Total deferred tax liabilities (6,000) (7,000)
Deferred tax assets:
Excess fixed asset basis 153,000 34,000
Allowance for bad debts 49,000 78,000
Accrued vacation pay 48,000 43,000
Net acquisition costs 241,000 241,000
Net operating loss carryforwards 11,271,000 9,805,000
Research and experimental credit carryforwards 456,000 426,000
Uniform capitalization reserve 22,000 --
Restructuring costs 157,000 --
Other 63,000 26,000
Total deferred tax assets 12,460,000 10,653,000
Valuation allowance for deferred assets (12,454,000) (10,646,000)
Total deferred tax assets 6,000 7,000
Net deferred tax assets(liabilities) $ -- $ --
During 1995 and 1994, the valuation allowance increased by $1,808,000 and
$2,644,000, respectively.
At December 31, 1995, the Company has available to offset future taxable income
for financial reporting and federal tax purposes, operating loss carryforwards
of approximately $29,488,000 expiring in 1998 through 2009. Research and
experimental credits of approximately $456,000, expiring in 1998 through 2009,
are also available to offset future income tax liabilities.
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
16
EDITEK, Inc.
Notes to Consolidated Financial Statements (continued)
8. INCOME TAXES (CONTINUED)
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. Such a change in ownership
occurred at the time of the Company's 1987 public stock offering.
The amount of pre-change in ownership net operating loss carryforwards of
$8,500,000 which can be utilized to offset future federal taxable income will be
approximately $2,300,000 per year. TRA does not limit annual usage of
post-change in ownership net operating loss carryforwards.
9. ARBITRATION COSTS
During the latter part of 1993 and through 1994, the Company was involved in
arbitration matters with Transia-Diffchamb and Disease Detection International
("DDI"). In the Transia-Diffchamb arbitration case, the arbitrator ruled on July
30, 1994 in favor of the Company; however, the Company was not able to recover
any legal fees. In the DDI arbitration case, the arbitrator ruled against the
Company. The arbitrator also ruled that DDI was entitled to recover costs and
related legal fees. The Company has recognized an expense of $689,000 for these
costs and fees.
10. MAJOR CUSTOMERS
Sales to major customers and foreign sales amounted to the following percentages
of total revenue:
YEAR ENDED DECEMBER 31
1995 1994 1993
United States Government and agencies 4% 5% 11%
Foreign sales 8% 7% 15%
17
EDITEK, Inc.
Notes to Consolidated Financial Statements (continued)
11. SUBSEQUENT EVENTS
On January 30, 1996, the Company completed the acquisition of MEDTOX and has
approximately $6 million available on its revolving line of credit (see Note 2).
On January 31, 1996, the Company sold 235,295 shares of common stock to a
Director of the Company. Proceeds from the sale were $600,000.
18
SCHEDULE V - VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged Charged Balance at
Beginning to Costs and to Other the End
of Period Expenses Accounts Deductions of Period
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
Year Ended December 31, 1993:
Deducted from Asset Accounts
Allowance for Doubtful Accounts $ 25,000 $ - $ - $ 6,000 $ 19,000
Allowance for Excess and
Obsolete Inventory $ 15,000 $ 5,000 $ - $ - $ 20,000
(1) $286,000 charged to Other Expenses represents
the amount acquired thru the PDLA aquisition
(2) Includes $36,000 of Accounts Receivable determined
to be uncollectible which were written off
Financial Statements
Medtox Laboratories, Inc.
Years ended December 31, 1995, 1994 and 1993
Medtox Laboratories, Inc.
Financial Statements
Years ended December 31, 1995, 1994 and 1993
Contents
Report of Independent Auditors.......................................1
Financial Statements
Balance Sheets.......................................................2
Statements of Operations.............................................4
Statement of Stockholders' Equity....................................5
Statements of Cash Flows.............................................6
Notes to Financial Statements........................................7
ERNST & YOUNG LLP [ ] 1400 Phillsbury Center [ ] Phone: 612 343 1000
Minneapolis, Minnesota 55402
Report of Independent Auditors
Board of Directors and Stockholders
Medtox Laboratories, Inc.
We have audited the accompanying balance sheet of Medtox Laboratories, Inc. as
of December 31, 1995, and the related statements of operations, stockholders'
equity and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit. The financial
statements of Medtox Laboratories, Inc. for each of the two years in the period
ended December 31, 1994 were audited by other auditors whose reported dated
January 31, 1995, expressed an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1995 financial statements referred to above present fairly,
in all material respects, the financial position of Medtox Laboratories, Inc. as
of December 31, 1995, and the results of its operations and its cash flows for
the year then ended, in conformity with generally accepted accounting
principles.
Ernst & Young LLP
March 6, 1996
1
Medtox Laboratories, Inc.
Balance Sheets
December 31
1995 1994
------------------------------------
Assets
Current assets:
Cash and cash equivalents $1,272,928 $ 526,512
Accounts receivable, less allowance for doubtful accounts of
$100,000 in 1995 and $110,500 in 1994 3,053,698 2,966,466
Inventories 395,672 413,301
Prepaid expenses and other assets 71,816 107,622
------------------------------------
Total current assets 4,794,114 4,013,901
Property and equipment:
Laboratory equipment 5,137,105 4,435,080
Office furniture and fixtures 372,764 370,685
Leasehold improvements 543,270 426,017
Transportation equipment 320,434 304,891
------------------------------------
6,373,573 5,536,673
Less accumulated depreciation 4,617,568 3,942,521
------------------------------------
1,756,005 1,594,152
Other 22,729 28,618
====================================
Total assets $6,572,848 $5,636,671
====================================
See accompanying notes.
2
December 31
1995 1994
------------------------------------
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 407,715 $ 98,428
Accrued payroll 139,161 335,120
Accrued expenses 464,108 568,130
Accrued collection site expenses 200,000 193,570
Current portion of restructuring accrual 258,070 258,070
Current portion of long-term debt 498,690 437,755
------------------------------------
Total current liabilities 1,967,744 1,891,073
Restructuring accrual 472,837 659,795
Long-term debt 465,452 518,563
Commitments
Stockholders' equity:
Common stock, $1.00 par value:
Authorized shares - 50,000
Issued and outstanding shares - 29,658 29,658 29,658
Additional paid-in capital 600,032 600,032
Retained earnings 3,037,125 1,937,550
------------------------------------
Total stockholders' equity 3,666,815 2,567,240
------------------------------------
Total liabilities and stockholders' equity $6,572,848 $5,636,671
====================================
See accompanying notes.
3
Medtox Laboratories, Inc.
Statements of Operations
Year ended December 31
1995 1994 1993
------------------------------------------------------
Net revenues $20,219,030 $19,650,830 $18,494,396
Cost of revenues 9,499,755 8,713,689 10,415,836
------------------------------------------------------
Gross profit 10,719,275 10,937,141 8,078,560
Operating expenses:
Sales, marketing and distribution 3,480,919 3,487,235 4,252,725
General and administrative 4,240,062 4,088,924 4,523,546
Restructuring costs - 567,700 1,162,033
------------------------------------------------------
7,720,981 8,143,859 9,938,304
------------------------------------------------------
Operating income (loss) 2,998,294 2,793,282 (1,859,744)
Other expenses:
Interest 91,186 181,178 204,668
Other 28,053 18,294 20,662
------------------------------------------------------
119,239 199,472 225,330
======================================================
Net income (loss) $ 2,879,055 $ 2,593,810 $ (2,085,074)
======================================================
See accompanying notes.
4
Medtox Laboratories, Inc.
Statement of Stockholders' Equity
Additional
Common Stock Paid-in Retained
---------------------------
Shares Amount Capital Earnings Total
-------------------------------------------------------------------
Balance at December 31, 1992 27,958 $27,958 $545,532 $2,318,553 $2,892,043
Issuance of Common Stock at
$50 per share 500 500 24,500 - 25,000
Net loss - - - (2,085,074) (2,085,074)
-------------------------------------------------------------------
Balance at December 31, 1993 28,458 28,458 570,032 233,479 831,969
Exercise of stock options 1,200 1,200 30,000 - 31,200
Net income - - - 2,593,810 2,593,810
Distributions to stockholders - - - (889,739) (889,739)
-------------------------------------------------------------------
Balance at December 31, 1994 29,658 29,658 600,032 1,937,550 2,567,240
Net income - - - 2,879,055 2,879,055
Distributions to stockholders - - - (1,779,480) (1,779,480)
===================================================================
Balance at December 31, 1995 29,658 $29,658 $600,032 $3,037,125 $3,666,815
===================================================================
See accompanying notes.
5
Medtox Laboratories, Inc.
Statements of Cash Flows
Year ended December 31
1995 1994 1993
-----------------------------------------------
Operating activities
Net income (loss) $2,879,055 $2,593,810 $(2,085,074)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 720,622 601,760 893,651
(Gain) loss on sale of assets (1,112) 11,269 18,210
Changes in operating assets and liabilities
net of assets sold and liabilities assumed
by buyer in sale of California Division:
Accounts receivable (87,232) 63,671 (725,433)
Inventories 17,629 (5,560) 515,630
Prepaid expenses and other assets 35,806 (14,292) (1,183)
Accounts payable 309,287 (1,011,943) 525,615
Accrued payroll and accrued expenses (299,981) 139,069 294,435
Accrued collection site expenses 6,430 193,570 -
Restructuring accrual (186,958) 388,865 1,162,033
-----------------------------------------------
Net cash provided by operating activities 3,393,546 2,960,219 597,884
Investing activities
Decrease in note receivable - 150,000 150,000
Purchases of property and equipment (433,463) (514,089) (398,914)
Proceeds from sale of property and equipment 30,100 20,563 -
Decrease in other assets 5,889 17,517 3,355
-----------------------------------------------
Net cash used in investing activities (397,474) (326,009) (245,559)
Financing activities
Proceeds from long-term debt - - 2,068,439
Payments on long-term debt (470,176) (777,136) (2,507,670)
Net increase (decrease) in line of credit - (500,000) 103
Proceeds from the issuance of Common Stock - 31,200 25,000
Distributions to stockholders (1,779,480) (889,739) -
-----------------------------------------------
Net cash used in financing activities (2,249,656) (2,135,675) (414,128)
-----------------------------------------------
Net increase (decrease) in cash and cash equivalents 746,416 498,535 (61,803)
Cash and cash equivalents at beginning of year 526,512 27,977 89,780
===============================================
Cash and cash equivalents at end of year $1,272,928 $ 526,512 $ 27,977
===============================================
Supplemental schedule of non-cash investing and
financing activities
Equipment acquired through notes payable $ 478,000 $ 70,268 $ 64,421
Note receivable from sale of California division - - 300,000
Note payable assumed by buyer in sale of California
division - - 10,520
See accompanying notes.
6
Medtox Laboratories, Inc.
Notes to Financial Statements
December 31, 1995
1. Business Activity
Medtox Laboratories, Inc. (the Company) is a toxicology reference laboratory
offering therapeutic drug monitoring, drugs of abuse screening, clinical
analyses, research analyses and emergency toxicology. The Company is certified
by the Substance Abuse and Mental Health Services Administration (SAMHSA) and
the College of American Pathologists (CAP). The Company operates a medical
laboratory in St. Paul, Minnesota with customers throughout the United States.
2. Summary of Significant Accounting Policies
Cash Equivalents
The Company considers all highly liquid investments with maturities of three
months or less at the time of purchase to be cash equivalents.
Inventories
Inventories are stated at the lower of cost, which approximates the first-in,
first-out basis, or market.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided using
accelerated and straight-line methods based on estimated useful lives of five to
seven years. Leasehold improvements are amortized over the related lease term or
estimated useful life, whichever is shorter.
Net Revenues
Net revenues consist of gross billings less collection site and medical review
officer costs and send-outs, all of which are billed back to the customer.
Income Taxes
The Company elected to be taxed as an S corporation for income tax purposes
whereby all items of tax consequences are passed through to the stockholders.
7
Medtox Laboratories, Inc.
Notes to Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
The Company reports its income or loss on the cash basis for tax purposes. If
the Company terminated its S corporation status and changed to a C corporation,
the Company will be required to use the accrual basis for tax purposes resulting
in the recognition of approximately $2,600,000 of taxable income that was
previously deferred.
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.
Reclassifications
Certain prior year amounts have been reclassified to conform to the 1995
presentation.
3. Long-Term Debt
Long-term debt consists of the following:
December 31
1995 1994
----------------------------
Note payable to bank, interest rate at prime (8.5% at December
31, 1995), monthly payments excluding interest of $29,045,
due March 1997 $435,459 $784,152
Notes payable to bank, interest rates ranging from
7.75% to 10%, monthly payments including interest of $3,424 to
$10,200, due at various dates through June 2000
528,683 172,166
----------------------------
964,142 956,318
Less current portion 498,690 437,755
============================
$465,452 $518,563
============================
The above notes are secured by substantially all of the Company's assets. The
carrying amounts reported in the balance sheets for the Company's long-term debt
approximate their fair values.
8
Medtox Laboratories, Inc.
Notes to Financial Statements (continued)
3. Long-Term Debt (continued)
Maturities of long-term debt as of December 31, 1995 are as follows:
1996 $498,690
1997 196,732
1998 100,092
1999 110,573
2000 58,055
==========
$964,142
==========
In 1995, the Company entered into a $500,000 revolving line of credit with a
bank which accrues interest at the prime rate (8.5% at December 31, 1995) and is
secured by a portion of the Company's assets. The Company must repay all amounts
owed under the line of credit by June 30, 1996. Interest on the line of credit
is payable monthly. The Company had no borrowings against this facility at
December 31, 1995. Certain financing agreements contain various restrictions and
provisions including maintaining certain financial ratios.
Cash paid for interest was $177,391, $178,829 and $213,972 for the years ended
December 31, 1995, 1994 and 1993, respectively.
4. Commitments
The Company leases office and other facilities under certain operating leases
which expire on various dates through April 2000. Under the terms of the leases,
a pro rata share of operating expenses and real estate taxes are charged as
additional rent. The Company subleases one of its facilities to another party
(see Note 8). The amount of sublease payments to be received is $131,217 and
$124,608 for the years ended December 31, 1996 and 1997, respectively.
Future minimum lease commitments under all operating leases without
regard to sublease payments as of December 31, 1995 are as follows:
1996 $ 507,248
1997 266,591
1998 186,372
1999 186,372
2000 62,124
=============
$ 1,208,707
=============
9
Medtox Laboratories, Inc.
Notes to Financial Statements (continued)
4. Commitments (continued)
Rent expense charged to operations was $464,696, $463,299 and $771,796
for the years ended December 31, 1995, 1994 and 1993, respectively.
5. Stock Options
The Company issued stock options to certain key employees which allow for the
purchase of an aggregate of 1,200 shares of Common Stock. These options were
exercised at $26 per share during 1994. There were no options outstanding at
December 31, 1995 or 1994.
6. Benefit Plan
The Company has a defined contribution profit sharing Plan, with a 401(k)
provision, that covers substantially all employees who meet certain age and
length of service requirements. Contributions to the plan are at the discretion
of the Board of Directors. The 401(k) expense for the years ended December 31,
1995, 1994 and 1993 was $78,038 $68,857 and $70,700, respectively.
7. Related Party Transactions
The Company provided laboratory services to an entity owned by certain
stockholders and employees of the Company through December 31, 1994. These
laboratory services were bundled with other services which the Company did not
offer, and sold as a package to certain clients. Total sales to the entity for
1994 and 1993 were $372,741 and $431,955, respectively.
The Company also purchased services, including collection site and medical
review officer services, and customized specimen collection supplies from that
same entity through December 31, 1994. Purchases for 1994 and 1993 were $231,604
and $1,169,731, respectively.
10
Medtox Laboratories, Inc.
Notes to Financial Statements (continued)
8. Restructuring Accrual
Effective October 31, 1993, the Company sold substantially all of its California
operations to a third party for $300,000. In addition, the buyer assumed certain
liabilities of the operation and entered into an assignment of the related
lease. The sale of the assets resulted in a loss of approximately $457,000 which
was reflected in restructuring costs for the year ended December 31, 1993.
The Company closed its Illinois division on December 31, 1993. In connection
with this closing, the Company recorded restructuring expenses as of December
31, 1993 of approximately $705,000. The expenses included lease obligations,
severance and vacation costs and other miscellaneous expenses directly related
to the closing of the facility. During 1994, the Company was not successful in
subleasing the Illinois facility as a laboratory. Accordingly, the Company
revised the estimate of sublease payments based on reconfiguring the space for
general office use at a lower lease rate and expensed an additional $567,700 for
the year ended December 31, 1994. At December 31, 1995 and 1994, the
restructuring accrual of $730,907 and $917,865, respectively, represents the
present value of future lease obligations through the lease term of April 2000.
9. Subsequent Event
On January 30, 1996, the Company sold substantially all of its assets and
liabilities other than cash and cash equivalents to a publicly-held company (the
Purchaser) for $24 million, consisting of $19 million in cash and $5 million in
the form of 2,517,306 shares of common stock of the Purchaser.
11
The following unaudited pro forma consolidated balance sheet
as of December 31, 1995, and the unaudited pro forma consolidated statements of
operations for the year ended December 31, 1995 gives effect to the acquisition
of MEDTOX by EDITEK using the purchase method. The unaudited pro forma
consolidated financial information is based on the historical financial
information of EDITEK and MEDTOX as of December 31, 1995 and the pro forma
adjustments described in the notes thereto. There are no pro forma adjustments
to other amounts reflected in the historical financial statements of MEDTOX as
management believes that the historical costs assigned to MEDTOX assets and
liabilities approximate fair value.
Information was prepared as if the acquisition was effected as
of December 31, 1995 in the case of the unaudited pro forma consolidated balance
sheet and as of January 1, 1995 in the case of the unaudited pro forma
statements of operations. The unaudited pro forma financial statements may not
be indicative of the results that actually would have occurred if the
acquisition had been in effect on the dates indicated or which may be obtained
in the future. The unaudited pro forma financial information should be read in
conjunction with the financial statements and other financial data of EDITEK and
MEDTOX included herein.
EDITEK AND MEDTOX
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
December 31, 1995
(In Thousands except per share amounts)
Historical Proforma
------------------------------ ---------------------------------------
EDITEK MEDTOX Adjustments Consolidated
------------- -------------- ---------------- ----------------
ASSETS:
Cash and Cash Equivalents $ 258 $ 1,273 $ 3,095(a) $ 4,626
Accounts Receivable, net 1,029 3,054 - 4,083
Inventory and Supplies 937 395 - 1,332
Other Current Assets 868 72 (500)(a) 440
------------------------------ ---------------- ----------------
Total Current Assets 3,092 4,794 2,595 10,481
Property and Equipment 3,227 6,374 - 9,601
Accumulated Depreciation (2,630) (4,618) - (7,248)
------------------------------ ---------------- ----------------
Property & Equipment, net 597 1,756 - 2,353
Other Assets
- - - -
Goodwill, net 117 23 22,237 (c) 22,377
------------------------------ ---------------- ----------------
Total Non-Current Assets 714 1,779 22,237 24,730
------------------------------ ---------------- ----------------
Total Assets $ 3,806 $ 6,573 $ 24,832 $ 35,211
============= ============== ================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Revolving line of credit $ - $ - $ 990 (a),(b) $ 990
Accounts Payable 1,184 408 - 1,592
Accrued Expenses 834 803 631 (h) 2,268
Current Maturities of Long Term Debt 182 499 834 (b) 1,515
Restructuring Accrual, Current Portion 368 258 - 626
Other Current Liabilities 42 - - 42
------------- -------------- ---------------- ----------------
Total Current Liabilities 2,610 1,968 2,455 7,033
Long Term Debt Obligations - 465 2,202 (b) 2,667
Restructuring Accrual, Long Term Portion 258 473 - 731
Other Long Term Liabilities - - - -
------------- -------------- ---------------- ----------------
Total Liabilities 2,868 2,906 4,657 10,431
Common Stock 1,566 30 348 (e) 1,944
Addt. Paid-in Capital 33,973 600 2,514 (e) 37,087
Preferred Stock - - 20,350 (e) 20,350
Retained Earnings (Deficit) (34,425) 3,037 (3,037)(e) (34,425)
------------- -------------- ---------------- ----------------
1,114 3,667 20,175 24,956
Less: Treasury Stock and Other Contra Equity
(176) - - (176)
------------- -------------- ---------------- ----------------
Total Stockholders' Equity 938 3,667 20,175 24,780
------------- -------------- ---------------- ----------------
Total Liabilities and Shareholders' Equity $ 3,806 $ 6,573 $ 24,832 $ 35,211
============= ============== ================ ================
See notes to unaudited pro forma consolidated financial statements
EDITEK AND MEDTOX
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended December 31, 1995
(In Thousands except per share amounts)
Historical Proforma
--------------------------------- ----------------------------------------
EDITEK MEDTOX Adjustments Consolidated
--------------------------------- ----------------- ------------------
Revenues $ 7,526 $ 20,219 $ - 27,745
Cost of sales
6,589 9,500 - 16,089
--------------------------------- ----------------- ------------------
Gross margin 937 10,719 - 11,656
Operating expenses
Research and development 920 - - 920
Selling, general and administrative 4,030 7,721 - 11,751
Amortization 176 - 936 (d) 1,112
Restructuring costs 3,831 - (3,831) (i) -
--------------------------------- ----------------- ------------------
Total operating expenses 8,957 7,721 (2,895) 13,783
Income (loss) before interest
and other income (8,020) 2,998 2,895 (2,127)
Other income - - - -
Interest and other expense (23) (119) (358) (b) (500)
--------------------------------- ----------------- ------------------
Net income (loss) (8,043) 2,879 2,537 (2,627)
Preferred stock dividend - - 1,832 (f) 1,832
--------------------------------- ----------------- ------------------
Net income (loss) applicable to common
shareholders $ (8,043) $ 2,879 $ 705 $ (4,459)
================================= ================= ==================
Income (Loss) per common share $ (0.85) $ 97.10 $ (0.37)
================================= ==================
Weighted average number of common
shares outstanding 9,445,707 29,650 11,963,013
================================= ==================
See notes to unaudited pro forma consolidated financial statements
EDITEK AND MEDTOX
NOTES TO UNAUDITED
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
a) EDITEK closed the $24 million acquisition of MEDTOX and raised additional
working capital by raising approximately $20 million from the issuance of
407 shares of Preferred Stock, borrowing approximately $5 million in the
form of two term loans and a revolving line of credit and issuing $5
million of Common Stock of the Company to the shareholders of MEDTOX in the
form of 2,517,306 shares of Common Stock. The Company did not acquire the
cash on hand of MEDTOX at December 31, 1995 and was required to pay off the
existing loans of MEDTOX and approximately $1.3 million in financing costs.
Cash and Cash Equivalents
(dollar amounts in thousands)
Proceeds from issuance of
Series A Preferred Stock $20,350
Proceeds from debt:
Term Loans 4,000
Credit Facility 990
Compensation to Investment
Bankers ( 1,343)
Compensation for Placement
of Debt ( 165)
Payment of MEDTOX Notes:
Current Portion ( 499)
Long Term Portion ( 465)
Payment to MEDTOX
Shareholders (18,500)
MEDTOX distribution of cash
on hand at MEDTOX ( 1,273)
---------
$ 3,095
The reduction of $500 in Other Current Assets represents the deposit
previously paid to MEDTOX which was held in escrow.
b) Pro Forma adjustment to long term debt accounts are summarized as follows:
Current Long Term
Portion Portion
Elimination of MEDTOX's
long term debt $ (499) $ (465)
Issuance of term loans 1,333 2,667
-----------------
$ 834 $ 2,202
The interest rates on the loans are as follows:
Term Loan A 2.0% above Prime Rate
Term Loan B 2.5% above Prime Rate
Credit Facility 1.5% above Prime Rate
c) Goodwill representing the excess of the purchase price of $24 million over
the fair value of the identifiable net assets of MEDTOX has been reflected
and is comprised of the following:
(dollar amounts in thousands)
Purchase price $24,000
Costs related to acquisition 770
Net assets acquired @ 12/31/95 (2,533)
$22,237
The allocation of the total amount of excess purchase price over the fair
value of the assets is a preliminary allocation absent an appraisal of
certain intangible assets.
d) Amortization is based on an effective date of the acquisition of MEDTOX of
January 1, 1995 amortized over a twenty year period.
e) Pro Forma adjustment to stockholder's equity accounts are summarized as
follows:
(dollar amounts in thousands)
Additional
Common Preferred Paid In Retained
Stock Stock Capital Earnings
Elimination of MEDTOX's equity accounts $ (30) $ - $ (600) $ (3,037)
Issuance of Preferred Stock - 20,350 (1,508) -
Issuance of Common Stock 378 - 4,622 -
------------ ----------- ------------- -----------
$ 348 $ 20,350 $ 2,514 $ ( 3,037)
f) Dividend of 9% declared for $20,350,000 of Preferred Stock issued and
outstanding.
g) Adjustments to reclassify certain expenses of MEDTOX, including
distribution expenses to conform with the historical presentation of the
financial statements of EDITEK. These reclassifications have no impact on
the operating income of MEDTOX.
h) Adjustment to reflect acquisition costs which are expected to approximate
$400,000, certain severance payments of $370,000, less the accrued payroll
of MEDTOX of $139,000, which was not purchased by the Company.
i) Adjustment to reflect the restructuring charge of $3,800,000 which consists
of the write-off of the remaining goodwill of $3,100,000 and $700,000 of
certain other restructuring costs. (The Company believes that the
restructuring charge should be reflected in the pro forma statement of
operations as the restructuring was a direct result of the MEDTOX
acquisition.)