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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%
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* 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