SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
(x ) Filed by the Registrant
( ) Filed by a Party other than the Registrant
Check the appropriate box:
( ) Preliminary Proxy Statement
( ) Confidential, for Use of the Commission Only (as permitted by
Rule 14a-b(e)(2))
(x ) Definitive Proxy Statement
( ) Definitive Additional Materials
( ) Soliciting Material Pursuant to (section mark)240.14a-11(c) or
(section mark)240.14a-12
Editek, Inc.
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement If Other Than Registrant)
PAYMENT OF FILING FEE (Check the appropriate box):
( ) $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(i)(2).
( ) $500 per each party to the controversy pursuant to Exchange Act
Rule 14a-6(i)(3).
( ) Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
2) Aggregate number of securities to which transaction applies:
3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11: *
4) Proposed maximum aggregate value of transaction:
5) Total fee paid:
(Set forth the amount on which the filing fee is calculated and state how
it was determined)
(X) Fee previously paid with preliminary materials.
( ) Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid: $
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
<PAGE>
EDITEK, INC.
1238 Anthony Road
Burlington, North Carolina 27215
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON OCTOBER 26, 1995
NOTICE IS HEREBY GIVEN that the Annual Meeting of the stockholders ("Annual
Meeting") of EDITEK, Inc., a Delaware corporation (the "Company"), will be held
at the office of the Company located at 1238 Anthony Rd., Burlington, North
Carolina on Thursday, October 26, 1995 at 1:00 p.m. for the following purposes:
1. To elect four directors to serve on the Board of Directors of the
Company (the "Board of Directors") for the ensuing year; and
2. To authorize the Board of Directors of the Company to issue the
amount of shares of the stock of the Company necessary to finance
the acquisition of MEDTOX Laboratories, Inc.
3. To consider and act upon a proposal to ratify and approve an
amendment to Article Fourth of the Company's Certificate of
Incorporation to increase its authorized Common Stock from
20,000,000 to 30,000,000 shares and increase its authorized
Preferred Stock from 600,000 to 1,000,000 shares; and
4. To consider and act upon an amendment to the Company's Equity
Compensation Plan to increase from 1,000,000 to 3,000,000 the
number of shares authorized to be issued pursuant to that Plan; and
5. To consider and act upon any other matters which may properly come
before the meeting or any adjournment thereof.
In accordance with the provisions of the Bylaws of the Company, the Board
of Directors has fixed the close of business on September 18, 1995 as the record
date for the determination of the holders of the shares of Common Stock entitled
to notice of, and to vote at, the Annual Meeting.
YOUR ATTENTION IS DIRECTED TO THE ACCOMPANYING PROXY STATEMENT.
STOCKHOLDERS ARE REQUESTED TO DATE, SIGN AND MAIL THE ENCLOSED PROXY AS
PROMPTLY AS POSSIBLE, WHETHER OR NOT THEY EXPECT TO ATTEND THE MEETING IN
PERSON.
By Order of the Board of Directors,
JAMES D. SKINNER
CHAIRMAN, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Burlington, North Carolina
September 25, 1995
<PAGE>
EDITEK, INC.
1238 Anthony Road
Burlington, North Carolina 27215
PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
October 26, 1995
PROXIES
The enclosed proxy (the "Proxy") is solicited by and on behalf of the Board
of Directors of EDITEK, Inc., a Delaware corporation (the "Company"), for use at
the Company's 1995 annual meeting of stockholders (the "Annual Meeting") and at
any and all adjournments thereof. Any stockholder has the power to revoke his or
her Proxy at any time before it is voted. A Proxy may be revoked (1) by delivery
of written notice of revocation to the Secretary of the Company at its principal
office, 1238 Anthony Road, Burlington, North Carolina 27215, (2) by the
execution of a subsequent Proxy and presentment of such subsequent Proxy at the
Annual Meeting or (3) by attendance at the Annual Meeting and voting in person.
This solicitation is being made by use of the mails and the cost thereof will be
borne by the Company. Shares represented by valid Proxies will be voted in
accordance with the instructions indicated thereon. Unless otherwise directed,
votes will be cast FOR the election of the directors named, FOR Proposal 2 to
authorize the Board of Directors of the Company to issue the amount of shares
necessary to finance the acquisition of MEDTOX Laboratories, Inc. ("MEDTOX"),
FOR Proposal 3 concerning the amendment to the Company's Certificate of
Incorporation increasing the number of authorized common shares and increasing
the number of authorized preferred shares, and FOR Proposal 4 to amend the
Company's Equity Compensation Plan to increase to 3,000,000 the number of shares
issuable under the Plan.
The costs of solicitation of proxies will be borne by the Company. In
addition to use of mails, proxies may be solicited personally, or by telephone
by one or more of the regular personnel of the Company without additional
compensation. The Company expects to pay an independent proxy solicitor
approximately $15,000 as compensation for the solicitation of proxies. In
addition, the Company may reimburse brokers and other custodians, nominees and
fiduciaries for their expenses for sending proxy material to beneficial owners,
in accordance with Securities and Exchange Commission regulations.
The Company anticipates mailing proxy materials and the annual report for
its fiscal year ended December 31, 1994 (the "Annual Report") to stockholders of
record as of September 18, 1995 (the "Stockholders") on or about September 25,
1995.
OUTSTANDING VOTING STOCK
Only holders of record of the Company's Common Stock, par value $.15 per
share (the "Common Stock"), at the close of business on September 18, 1995, are
entitled to vote on matters to be presented at the Annual Meeting. Each share of
Common Stock is entitled to one vote with respect to all such matters. The
number of shares of Common Stock outstanding and entitled to vote at the close
of business on September 18, 1995 was 10,098,055.
VOTE AND QUORUM REQUIREMENTS
The presence in person or by Proxy of Stockholders of a majority of the
outstanding shares of Common Stock is required for there to exist the quorum
needed to transact business at the Annual Meeting. If, initially, a quorum
should not be present, the Annual Meeting may be adjourned from time to time
until a quorum is obtained.
A plurality of the votes cast is required to elect the Directors. The
affirmative vote of a majority of the outstanding shares of Common Stock is
required for approval of the proposed amendment to the certificate of
incorporation of the Company. The votes of a majority of the shares present at
the meeting in person or by proxy is required for approval of the MEDTOX
financing and for approval of the amendment to the equity compensation plan.
<PAGE>
In the election of Directors, any action that other than a vote for a
nominee will have the practical effect of voting against the nominee. Abstention
from voting will have the practical effect of voting against any of the other
proposals since it is one less vote for approval. Abstentions and "broker
non-votes" (as defined below) are counted for purposes of determining whether a
quorum is present, but do not represent votes cast with respect to any proposal.
"Broker non-votes" are shares held by a broker or nominee for which an executed
proxy is received by the Company, but are not voted as to one or more proposals
because instructions have not been received from the beneficial owners or
persons entitled to vote and the broker or nominee does not have discretionary
voting power.
An independent party will receive and tabulate all proxies and ballots, and
such independent party and certain other team members of the Company will act as
voting inspectors at the Annual Meeting.
COMMON STOCK OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information available to the Company as of
September 1, 1995 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, (ii) each of the Directors and nominees for
Director of the Company, (iii) the Chief Executive Officer and all executive
officers whose compensation was $100,000 or greater during 1994, and (iv) all
executive officers, Directors and nominees for Directors of the Company as a
group:
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT OF COMMON
NAME BENEFICIALLY OWNED STOCK OUTSTANDING
<S> <C> <C>
Mr. Louis Perlman 600,000(1) 6.1%
Private Investor
Executive Officers and Directors:
James D. Skinner 370,897(2) 3.7%
Chairman, President and Chief
Executive Officer
Samuel C. Powell, Ph.D. 542,530(3) 5.5%
Director
Gene E. Lewis 46,675(4) *
Director
Robert J. Beckman 7,760(5) *
Director
Carole A. Golden, Ph.D. 75,807(6) *
Vice President-Research & Development
All directors and executive officers
as a group (6 in number) 1,143,034(7) 11.1%
</TABLE>
* Less than one percent (1%).
(1) Includes 480,000 shares owned by Mr. Perlman and his wife, Ms. Wilma Perlman
based upon representations made in a 13 D filing by Mr. & Mrs. Perlman.
(2) Includes 202,008 shares of Common Stock issuable under options granted under
the Company's stock option plans, 33,333 shares of Common Stock issuable
under Non-Qualified Stock Options, and 50,000 shares of Common Stock
issuable under Common Stock Purchase Warrants purchased in a private sale by
Mr. Skinner, all of which are or will become exercisable within the next 60
days.
(3) Includes 18,334 shares of Common Stock issuable under stock options which
are or will become exercisable within the next 60 days.
(4) Includes 29,564 shares of Common Stock issuable under options which are or
will become exercisable within the next 60 days.
(5) Includes 7,760 shares of Common Stock issuable under options which are or
will become exercisable within the next 60 days.
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<PAGE>
(6) Includes 75,807 shares of Common Stock issuable under options which are or
will become exercisable within the next 60 days.
(7) Includes 419,980 shares issuable under stock options and 60,000 shares of
Common Stock issuable under Common Stock Purchase Warrants which are or will
become exercisable within the next 60 days.
ELECTION OF DIRECTORS
The Certificate of Incorporation provides that the Board of Directors shall
consist of not less than three nor more than twelve individuals, with the exact
number to be fixed from time to time by the majority vote of the Board of
Directors. The Board of Directors has fixed the number of Directors at four
individuals.
The Board of Directors intends to present for action at the Annual Meeting
the election of Samuel C. Powell, Ph.D., James D. Skinner, Gene E. Lewis, and
Robert J. Beckman to serve for the ensuing year and until their respective
successors are duly elected and qualified. Unless otherwise instructed, the
enclosed Proxy will be voted FOR the election of the nominees listed below,
except that the persons designated as proxies reserve full discretion to cast
their votes for another person recommended by the Board of Directors in the
unanticipated event that any nominee is unable or declines to serve.
Directors will be elected by the plurality vote of the holders of Common
Stock entitled to vote at the Annual Meeting and present in person or by Proxy.
The following table sets forth the name, age and the position with the
Company of the nominees for Directors:
<TABLE>
<CAPTION>
DIRECTOR
NAME OF NOMINEE AGE SINCE POSITION WITH THE COMPANY
<S> <C> <C> <C>
James D. Skinner 50 1987 Chairman of the Board of Directors
President, Chief Executive Officer
and Director
Samuel C. Powell, Ph.D. 42 1986 Director
Gene E. Lewis 66 1990 Director
Robert J. Beckman 47 1994 Director
</TABLE>
JAMES D. SKINNER, was elected Chairman of the Board of Directors in June
1994 and has served as a Director, as well as President and Chief Executive
Officer, since July 1987. Mr. Skinner is a member of the Board of Directors and
Past Chairman of the Emerging Companies Section of the Biotechnology Industry
Organization ("BIO"). He is also a member of the Board of Directors of the North
Carolina Biotechnology Center, a charter member of the Board of Directors of the
North Carolina BioSciences Organization, Past Chairman of the North Carolina
Biotechnology Roundtable and is a member of Governor Hunt's Entrepreneurial
Development Board. Mr. Skinner also serves on the Editorial Advisory Board of
IVD Technology, a new publication of Medical Device & Diagnostic Industry. Mr.
Skinner also serves on the Graduate School Board of Advisors at North Carolina
State University. In addition, Mr. Skinner is on the Board of Directors of
Intelligent Medical Imaging, Inc., a high technology computer/software company
focusing on medical diagnostics.
SAMUEL C. POWELL, PH.D., served as Chairman of the Board of Directors from
November 1987 to June 1994 and has served as a Director of the Company since
September 1986. Since 1987, 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 Technological
Enterprises, from January 1984 until its acquisition by the Company in June
1986.
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
and other industries. From January 1985 through August 1988, Mr. Lewis served as
President and Chief Operating Officer and as 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.
ROBERT J. BECKMAN is President and Chief Executive Officer of Intergen
Company, a privately held biotechnology firm located in Purchase, NY. Mr.
Beckman has been with Intergen since 1987. Mr. Beckman also is
3
<PAGE>
on the Board of Directors and Executive Committee of BIO and is Vice 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.
OTHER EXECUTIVE OFFICERS
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.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
that the Company's directors and executive officers, and persons who own more
than ten percent (10%) of a registered class of the Company's equity securities,
file with the Commission initial reports of ownership and reports of changes in
ownership of Common Stock and other equity securities of the Company. Officers,
directors and greater than ten-percent beneficial owners are required by
Commission regulations to furnish the Company with copies of all reports they
file under Section 16(a).
To the Company's knowledge, based solely on its review of the copies of
such reports furnished to the Company and written representations that no other
reports were required, all Section 16(a) filing requirements applicable to its
officers, directors and greater than 10% beneficial owners were complied with
during the fiscal year ended December 31, 1994.
During the fiscal year ended December 31, 1994, the Board of Directors held
four meetings (including regularly scheduled, telephonic and special meetings)
and acted on five occasions by unanimous written consent. During that time, all
members of the Board attended at least Seventy-Five Percent (75%) of the
meetings held subsequent to their appointment.
The Company has a stock option committee (the "Stock Option Committee")
which, by the terms of the Company's Stock Option Plans, is to consist of not
less than two members of the Board of Directors appointed by the Board of
Directors. The Stock Option Committee is currently comprised of Samuel C.
Powell, Gene E. Lewis, and Robert J. Beckman. The Stock Option Committee
determines the terms of options granted, including, but not limited to, the
exercise price, the number of shares subject to the option and the terms and
conditions of the option. During the fiscal year ended December 31, 1994, the
Stock Option Committee met one time and all members of the committee attended at
least Seventy-Five Percent (75%) of the meetings held subsequent to their
appointment.
The Company has an Audit Committee which is currently comprised of Samuel
C. Powell, Gene E. Lewis and Robert J. Beckman. The Audit Committee's purpose is
to meet with the firm's independent public auditors to discuss relevant auditing
questions. During the fiscal year ended December 31, 1994, the Audit Committee
held one meeting.
The Company has a Compensation Committee which is currently comprised of
Samuel C. Powell, Gene E. Lewis, and Robert J. Beckman. The Compensation
Committee's purpose is to determine the compensation of the Executive Officers
of the Corporation. During the fiscal year ended December 31, 1994, the
Compensation Committee held one meeting.
The Company does not have a Nominating Committee.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE ELECTION
OF THE NOMINEES TO THE BOARD OF DIRECTORS.
4
<PAGE>
EXECUTIVE COMPENSATION
The following table and the narrative text discuss the compensation paid
during 1994 and the two prior fiscal years to the Company's President and Chief
Executive Officer and to the only other executive officer whose annual salary
and bonuses exceeded $100,000 during 1994.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
AWARDS
ANNUAL COMPENSATION RESTRICTED OPTIONS/ PAYOUTS
NAME AND OTHER ANNUAL STOCK SARS LTIP
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION (1) AWARDS (2) (#)(3) PAYOUTS(2)
<S> <C> <C> <C> <C> <C> <C> <C>
James D. Skinner, 1994 $176,714 $20,000 -- -- 68,326 --
Chairman, President and 1993 $176,153 -- -- -- 0 --
Chief Executive Officer 1992 $168,567 -- -- -- 61,152 --
Carole A. Golden, 1994 $124,034 -- -- -- 36,666 --
Vice President Research 1993 $114,046 -- -- -- 0 --
and Development 1992 $106,406 -- -- -- 30,000 --
<CAPTION>
LONG TERM COMPENSATION
PAYOUTS
NAME AND ALL OTHER
PRINCIPAL POSITION COMPENSATION
<S> <C>
James D. Skinner, $4,285(4)
Chairman, President and $3,865(4)
Chief Executive Officer $1,635(4)
Carole A. Golden, $--
Vice President Research $--
and Development $--
</TABLE>
(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) Number of shares of Common Stock issuable upon exercise of options granted
during the year. The Company did not grant any Stock Appreciation Rights
during the years covered by the table.
(4) Includes $4,285, $3,865, and $1,635 of premiums paid for by the Company for
a life insurance policy on Mr. Skinner for the benefit of his named
beneficiary in 1994, 1993, and 1992 respectively. In the event of a
termination of Mr. Skinner's employment by the Company without cause or by
reason of a "change in control" of the Company, Mr. Skinner is entitled to
receive severance pay equal to his then current annual salary. No amounts
were paid, payable or accrued during 1994 pursuant to this provision. See
"Employment Contracts".
5
<PAGE>
STOCK OPTIONS GRANTED DURING FISCAL YEAR
The following table sets forth information about the stock options granted
to the named executive officers of the Company during 1994.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZED
INDIVIDUAL GRANTS VALUE AT ASSUMED
% OF TOTAL ANNUAL RATES OF
OPTIONS STOCK PRICE
NUMBER GRANTED TO APPRECIATION FOR
OF EMPLOYEES EXERCISE OPTION TERM
OPTIONS IN FISCAL PRICE EXPIRATION 5% 10%
NAME GRANTED(1) YEAR (2) ($/SH) DATE ($) (3) ($) (3)
<S> <C> <C> <C> <C> <C> <C>
James D. Skinner 68,326 13% $ 3.19 03/09/04 $137,074 $347,372
Carole A. Golden 36,666 7% $ 3.19 03/09/04 $ 73,558 $ 86,411
</TABLE>
(1) Options were granted on March 9,1994. The options granted to Mr. Skinner and
Dr. Golden become vested and exercisable quarterly over a three year period
in twelve equal installments commencing June 9, 1994.
(2) Options to acquire an aggregate of 524,199 shares of Common Stock of the
Company were granted to all employees during 1994. Options to acquire an
additional 13,300 shares of Common Stock were granted to a non-employee
director of the Company during 1994. No stock appreciation rights were
granted to the named executive officers during 1994.
(3) The potential realizable value of the options reported above was calculated
by assuming Five Percent (5%) and Ten Percent (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 value 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.
STOCK OPTIONS EXERCISED DURING FISCAL YEAR
The following table sets forth information about the stock options
exercised by the named executive officers of the Company during 1994.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF NUMBER OF UNEXERCISED
SHARES UNEXERCISED IN-THE-MONEY
ACQUIRED REALIZED OPTIONS AT FY-END OPTIONS AT FY-END
NAME ON EXERCISE VALUE EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE (1)
<S> <C> <C> <C> <C>
James D. Skinner -- $ -- 215,761/53,730 $238,616/$28,689
Carole A. Golden -- $ -- 64,974/29,159 $95,144/$15,396
</TABLE>
(1) The closing price of the Common Stock of the Company at December 31, 1994
was $3.75 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
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<PAGE>
on its stock option plans to provide long-term incentives for executive
officers. The Company has three stock option plans, a 1983 Stock Option Plan for
employees which expired on June 23, 1993 an equity compensation plan which was
adopted by the shareholders of the annual meeting in 1993 to replace the 1983
Incentive Stock Option Plan 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. See "Employment
Contracts."
COMPENSATION OF DIRECTORS
In 1994 each director who is not an employee of the Company received
$10,000 as a payment for serving on the Board during the year. All directors are
also reimbursed for expenses incurred in attending Board of Directors meetings
and participating in other activities.
EMPLOYMENT CONTRACTS
James D. Skinner, Chairman of the Board of Directors, 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 Fifty Percent (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, Samuel C. Powell, and Robert J. Beckman. Mr. James D. Skinner, the
Chairman, President and Chief Executive Officer of the Company, participated in
deliberation of the Compensation Committee concerning compensation for executive
officers other than himself, but Mr. Skinner is not a member of the Compensation
Committee. (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, Gene E. Lewis, and Robert J. Beckman who are eligible to
receive stock
7
<PAGE>
options under the Company's 1991 Non-Employee Director Plan, which is a formula
plan in accordance with the requirements of Rule 16b-3 under the Securities Act
of 1934, as amended.
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.
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
IN GENERAL
The Committee has three primary goals for executive compensation at the
Company.
(Bullet) Retaining good performers,
(Bullet) Rewarding executives appropriately for performance, and
(Bullet) Aligning executives' interests with those of stockholders.
Currently, executive pay consists of two elements that are designed to meet
those objectives:
(Bullet) Base salary is paid based primarily on job responsibilities and
industry job comparison. The Committee believes that base salaries at
approximately industry averages are essential to retaining good performers.
(Bullet) Stock options, which allow executives to benefit when the market
price of the Company's stock increases. The Committee believes that the Stock
Option Plan is presently a better incentive than bonuses for aligning executives
interests with those of stockholders.
Following is additional information regarding each of the above elements.
BASE SALARY
The executive officers of the Company have all been with the Company for
over five years. Base salary increases for executive officers have been modest
and consistent with the financial condition of the Company as well as consistent
with job performance and increases in responsibility.
BONUS
In 1994, the Board of Directors awarded a one time bonus of $20,000 to the
Chief Executive Officer for his role in the Company's successful acquisition of
PDLA.
STOCK OPTIONS
In 1994 the executive officers received incentive stock options to purchase
a total of 133,324 shares. The number of options granted to the executive
officers represented Twenty-Three Percent (23%) of the total options granted in
1994.
SUMMARY
Currently, the Company's executive compensation program rewards the
following elements of performance.
(Bullet) Individual performance is rewarded through continued employment
with the Company.
(Bullet) Stock price performance is rewarded through increases in the value
of previously granted stock options.
The Committee believes that the current program has been effective in
rewarding executives appropriately for performance, retaining good performers,
and aligning executives' interests with those of stockholders. While the
Committee is pleased with the current compensation system, it reserves the right
to make changes to the program as are necessary to continue to meet its stated
goals in future years.
Benefits also are offered to officers that are not based on performance.
Such benefits provide a safety net of protection in the event of illness,
disability, death, retirement, etc. Such a safety net is provided to all full
time employees of the Company.
8
<PAGE>
CHIEF EXECUTIVE OFFICER PAY
Amounts earned during 1994 by the Chief Executive Officer, James D.
Skinner, are shown in the Summary Compensation Table. Achievements by the
Company during 1994 which were deemed material to the Chief Executive Officer's
compensation include the acquisition of PDLA in February, 1994 and the
negotiations that led to the acquisition of Bioman Products, Inc. in June, 1995
and the execution of the Agreement for the acquisition of MEDTOX in July, 1995.
For the current year the Compensation Committee used, in its deliberations on
executive compensation, these criteria and other accomplishments.
Submitted by the Compensation
Committee
of the Company's Board of Directors,
Samuel C. Powell, Ph.D.
Gene E. Lewis
Robert J. Beckman
PERFORMANCE GRAPH
The graph shown below is a line presentation comparing the Company's
cumulative five-year shareholder returns on an indexed basis with the Russell
2,000 Index and a Pharmaceutical Company Index compiled for the Company by Value
Line for the five-year period commencing on December 31, 1989 and ending on
December 31, 1994. The total return assumes that dividends were reinvested
quarterly and is based on a $100 investment on December 31, 1989.
COMPARATIVE FIVE-YEAR TOTAL RETURNS*
EDITEK INC., RUSSELL 2000, PEER GROUP
(PERFORMANCE RESULTS THROUGH 12/31/94)
The graph assumes $100 invested at the close of trading on the last trading
day preceding the first day of the fifth preceding fiscal year in EDITEK common
stock, RUSSELL 2000, and Pharmaceutical Companies Peer Group. *Cumulative total
return assumes reinvestment of dividends.
Source: Frank Russell Company
Factual material is obtained from sources believed to be reliable, but the
publisher is not responsible for any errors or omissions contained herein.
9
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
LEASE AGREEMENT WITH DR. SAMUEL C. POWELL
In July 1986, the Company executed a lease agreement with Dr. Powell
providing for a lease to the Company of approximately 16,743 square feet of
space at 1238 Anthony Road, Burlington, North Carolina. Since 1986, the Company
has expanded the space rented under the lease to approximately 33,000 square
feet. Upon the expiration of the original lease, the Company entered into a new
lease with Dr. Powell for the same space and at the same base rental rate for a
term of one year ending on May 31, 1990. Effective June 1, 1990, the Company has
been leasing the space on a month-to-month basis. The Company is currently
leasing space at a rate of approximately $9,000 per month. The Company intends
to negotiate a new lease with Dr. Powell in the near future. The Company holds
certain rights of first refusal to lease additional space in the building if it
becomes available (the building contains a total of 42,900 square feet). The
total rent paid by the Company to Dr. Powell during the fiscal year ended
December 31, 1994 was approximately $119,000.
LEASE AGREEMENT WITH WLC
The Company leases a farm in Warren County, North Carolina from WLC for the
purposes of maintaining animals to produce antibodies and for research and
development. Dr. Powell owns a Twelve Percent (12%) interest in WLC, and the
remainder of WLC is owned by certain of Dr. Powell's family members and their
respective families. The arrangement for use of the Warren County facility is on
a month-to-month basis at a rental of $2,797 per month. The Company intends to
negotiate a new lease with WLC in the near future. The total rent paid by the
Company to WLC during the fiscal year ended December 31, 1994 was approximately
$34,000.
PRODUCT SALES TO CAROLINA BIOLOGICAL SUPPLY COMPANY
During 1994, the Company sold approximately $1,000 of Conventional
Biodiagnostic Products to Carolina Biological Supply Company ("CBSC"), a company
in which Dr. Powell owns a Six Percent (6%) interest and the remainder of which
is owned by Dr. Powell's brother, step-brother and their respective families.
All sales of Conventional Biodiagnostic Products to CBSC were on an
"arms-length" basis.
LOAN TO MR. JAMES D. SKINNER
The provisions of non-qualified stock options granted to Mr. Skinner
provide that the Company will lend the funds necessary to exercise such stock
options. The loans for this purpose will not exceed a term of 36 months and will
bear interest at a rate equal to the prime lending rate of Wachovia Bank & Trust
Company, N.A. and will be secured by a pledge of the shares purchased with the
proceeds of the loan. During 1988, Mr. Skinner exercised non-qualified stock
options exercisable into 13,334 shares of Common Stock at an exercise price of
$7.50 per share. At Mr. Skinner's request, the Company loaned $100,000 to Mr.
Skinner to be used to exercise such options. The loan was secured solely by a
pledge of, and as recourse only with respect to, the shares of Common Stock
purchased with the proceeds of the loan. Effective May 3, 1990, the Company
modified the loan agreement with Mr. Skinner to defer interest payments on such
loan until the date upon which the principal comes due. During 1995 the Company
modified the loan agreement with Mr. Skinner to extend the maturity date of the
loan to September 10, 1996. The outstanding balance of such loan as of December
31, 1994, was $100,000, excluding accrued interest thereon.
EXTENSION OF WARRANT TERMS
Mr. Skinner and Mr. Heath have warrants to purchase 50,000 and 10,000
shares of Common Stock respectively at a price of $1.00 per share. The warrants
were purchased as part of a private placement of Common Stock by the Company in
1991. The warrants originally had an expiration date of June 28, 1994. The
Company has extended the expiration date to June 28, 1996.
10
<PAGE>
AUTHORIZATION TO ISSUE SHARES OF STOCK FOR THE PURPOSE OF
EXECUTING THE ACQUISITION OF MEDTOX LABORATORIES, INC.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE FOLLOWING
RESOLUTIONS:
RESOLVED, that in connection with the acquisition and related
transactions described in the Proxy Statement for this Annual Meeting of
Stockholders, the Stockholders hereby approve the issuance of:
a) up to 480 shares of Series A Convertible Preferred Stock
("Preferred Stock") for a purchase price of $50,000 per share of
Preferred Stock (the "Purchase Price"); and
b) upon conversion of each share of Preferred Stock, a number of
shares of Common Stock equal to the quotient derived by dividing (i) the
Purchase Price, by (ii) Seventy-Five Percent (75%) of the market price
of the Common Stock of the Company at the time of conversion of the
Preferred Stock, which market price may be determined by any means
deemed reasonable by the Board of Directors of the Company; and
c) warrants (and the shares of Common Stock issuable upon exercise
of such warrants) to purchase a number of shares of Common Stock of the
Company equal to the quotient derived by dividing (i) Eight Percent (8%)
of the aggregate Purchase Price of all shares of Preferred Stock issued,
by (ii) the market price of the Common Stock of the Company at the time
of issuance of the shares of the Preferred Stock, which market price may
be determined by any means deemed reasonable by the Board of Directors
of the Company, which warrants shall have an exercise price equal to the
market price of the Common Stock of the Company (determined as provided
above) on the date of issuance of the Preferred Stock, which warrants
shall be issued to the investment banking firm(s) that have assisted the
Company to sell the Preferred Stock; and
d) warrants (and the shares of Common Stock issuable upon exercise
of such warrants) to purchase a number of shares of Common Stock of the
Company equal to the product derived by multiplying (i) the aggregate
number of shares of Common Stock issued and outstanding immediately
following the Closing of the Acquisition and the shares of Common Stock
that would be issuable from the conversion of the Preferred Stock if
such conversion were to happen at that time by (ii) Two Percent (2%),
which warrants shall have an exercise price equal to the greater of (i)
$2.00 or (ii) the exercise price of any warrants sold by the investment
banking firm(s) in the placement of the debt securities, which warrants
shall be issued to the investment banking firm(s) that have assisted the
Company to sell debt securities used to finance the acquisition.
RESOLVED, that all such issuances of securities shall be upon the
terms and conditions described in the Proxy Statement for this Annual
Meeting or upon such other terms and conditions as the Board of Directors
shall determine is prudent at the time of issuance of such securities; and
further
RESOLVED, that the Board of Directors be, and it hereby is, authorized
and directed to change any of the terms, including price, set forth above
in connection with the issuance of such securities, if the Board of
Directors deems such change to be in the best interest of the Corporation
to ensure obtaining adequate proceeds to finance the acquisition and obtain
sufficient working capital.
If the shareholders fail to approve the foregoing resolutions authorizing
the issuance of stock and warrants, the Company will not be able to complete the
acquisition of MEDTOX as described in this Proxy Statement. The Company would
then exercise its right to terminate the Asset Purchase Agreement because one of
the conditions to closing (shareholder approval of the financing) has not
occurred.
On July 1, 1995, the Company executed the "Purchase Agreement" for the
purchase by the Company of substantially all of the assets, other than cash, and
the assumption of certain liabilities, of MEDTOX Laboratories, Inc. ("MEDTOX").
The Purchase Agreement provides for a purchase price of $24,000,000, of which
the Company paid a $500,000 deposit upon execution of the Purchase Agreement
with the remainder payable in full at the closing of the acquisition. The
Company intends to close the acquisition as soon as practicable following the
Annual Meeting of Stockholders of the Company.
MEDTOX, headquartered in St. Paul, Minnesota, is a privately held
laboratory broadly based in the performance of toxicology testing services
including forensic, medical, biological and pharmacological toxicology.
11
<PAGE>
MEDTOX enjoys a well deserved reputation for quality and customer service and is
often referred to in the laboratory industry as a "Laboratory's Laboratory."
MEDTOX was founded in 1984 by Dr. Harry 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, etc.
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, 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 burgeoning employment drug screening business,
forensic toxicology market.
With the creation of 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
in the areas of therapeutic drug monitoring, etc., for hospitals,
physicians and general clinical laboratories lacking the
sophisticated toxicology capabilities of MEDTOX.
Today, MEDTOX has over 220 employees with annual revenues of approximately
$20,000,000 with net income of approximately $3,000,000.
American Stock Exchange, Inc. ("AMEX") rules require stockholder approval
of transactions involving the sale or issuance by the Company of Common Stock or
securities convertible into Common Stock at a price less than the greater of
book value or market value if the number of shares sold or issued equals Twenty
Percent (20%) or more of the outstanding shares of Common Stock.
Pursuant to AMEX rules, the Company is seeking stockholder approval for the
Company to issue:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OR PER SHARE CLASS OF
WARRANTS PRICE SECURITY PURPOSE
<C> <C> <S> <C>
Preferred Stock (1)
480 $50,000.00 (3)
558,139 $3.44 Common Stock (2) (4)
320,543 $2.00 Common Stock (2) (5)
</TABLE>
1) Issuable into 9,305,932 shares of Common Stock pursuant to a formula and the
market price of the Common Stock on September 1, 1995 (See Rights of Series A
Convertible Preferred Stock)
2) Warrants to purchase Common Stock.
3) To raise the funds necessary to acquire MEDTOX
4) Compensation to Investment Banker for placement of Series A Convertible
Preferred Stock (See Compensation of Investment Bankers)
5) Compensation to Investment Banker for placement of Debt Securities (See
Compensation of Investment Bankers)
The Preferred Stock is convertible into shares of Common Stock at a rate
determined by a formula based on a discount from the market price of the
Company's Common Stock at the time of conversion. Consequently, shares of
Preferred Stock converted at different times may be convertible into different
numbers of shares of Common Stock.
12
<PAGE>
The Company expects the conversion formula of the Preferred Stock to use a
Twenty-Five Percent (25%) discount from market price at the time(s) the
Preferred Stock is converted into shares of Common Stock. The resolutions to be
submitted to the shareholders at the Annual Meeting will, however, permit the
Board of Directors to authorize a greater discount from market price if the
Board of Directors determines it is in the best interest of the Company.
The number of shares of Common Stock to be issued upon conversion of a
share of Preferred Stock will equal the number derived by dividing (i) the price
of the Preferred Stock ($50,000 per share), by (ii) Seventy-Five Percent (75%)
of the market price on the day the share of Preferred Stock is converted into
Common Stock.
The actual number of shares of Common Stock issuable upon conversion will
not be known until the actual time of issuance, but the following example
illustrates the effect of this formula. If the weighted average (taking into
account of the number of shares converted each day) market price of the Common
Stock is $3.438 (the actual market price on September 1, 1995) on all the
conversion dates, the $16,000,000 of Preferred Stock (the amount being offered,
see Proposed Offerings) would be convertible into 6,203,955 shares of Common
Stock (approximately sixty-three percent (63%) of the number of shares of Common
Stock issued and outstanding on September 1, 1995).
The Company and its investment banker believe this formula for the
conversion of the Preferred Stock is in the best interests of both the current
stockholders of the Company and the investors as it provides antidilution
protection to both groups. The Company believes that the acquisition of MEDTOX
will enhance shareholder value which should increase the market price of Common
Stock. An increased market price would mean fewer shares of Common Stock that
would be ultimately issued upon the conversion of the Preferred Stock. The
Company believes that the Twenty-Five Percent (25%) discount from the market
price of the Common Stock time of conversion is consistent with other similar
deals in the market.
PROPOSED OFFERINGS
The Company is offering to sell up to 320 shares of Series A Preferred
Stock (the "Preferred Stock"), each share of which would be convertible at the
option of the holder thereof into shares of Common Stock. The shares of
Preferred Stock are being offered at a purchase price of $50,000 per share for
an aggregate offering price of $16,000,000. The investment banking firm of
Financial West Group is conducting this offering on behalf of the Company. The
Company is seeking stockholder approval to issue up to 480 shares of Series A
Preferred Stock so that financing could be obtained to close the MEDTOX
acquisition in the event market conditions require, or make it advantageous for,
the Company to issue shares instead of Debt Securities (as defined below). The
rights and preferences of the Preferred Stock are summarized under the heading
"Rights and Preferences of Preferred Stock."
The Company is offering to sell up to $15,000,000 principal amount of
Senior Secured Notes and Subordinated Notes ("Debt Securities"). The investment
banking firm of Interstate/Johnson Lane ("IJL") is conducting this offering on
behalf of the Company. The terms of the Debt Securities are summarized under the
heading "Terms of Debt Securities."
Shares of Common Stock would be issuable to investment banking firms
pursuant to the exercise of certain warrants ("Investment Banker Warrants") in
connection with the contemplated offerings. See "Compensation of Investment
Bankers" for a description of the securities, fees and expenses to be paid to
investment bankers in connection with the contemplated offerings.
Both the Preferred Stock and the Debt Securities are being sold in private
placements in reliance upon exemptions from the registration requirements of the
Securities Act of 1933, as amended. Both offerings are being conducted by the
investment bankers on a best efforts basis.
In order for EDITEK to complete the acquisition of MEDTOX, the investment
bankers, acting on behalf of the Company, need raise only $23,500,000 as
$500,000 is already in an escrow account. Should this amount or any amount
between this amount and the objective of $31,000,000 be raised, the Company will
proceed with the acquisition of MEDTOX. Should the amount raised be less than
$23,500,000, the Company will negotiate with certain key MEDTOX shareholders who
have expressed an interest in receiving EDITEK stock in lieu of cash.
13
<PAGE>
Should the amount of funds raised be inadequate for the acquisition of
MEDTOX, the Company will discontinue its attempt to acquire MEDTOX. The Company
will, however, continue its mergers and acquisition strategy by pursuing the
acquisition of other synergistic toxicology laboratories where those
laboratories may be acquired for EDITEK stock or for cash to be received by the
sales of EDITEK securities where the amount to be raised is less than the amount
required for the acquisition of MEDTOX.
SUMMARIZED TERMS OF DEBT SECURITIES
<TABLE>
<S> <C>
Issue: Up to $5,000,000 Senior Secured Notes.
Up to $15,000,000 Subordinated Notes.
Principal Amount Total proceeds are not to exceed $15,000,000 in the aggregate.
Use of Proceeds: The proceeds of the Notes and Sub Debt, together with the proceeds of the Convertible
Preferred Stock, shall be used to purchase the net assets and liabilities of MEDTOX and
to provide for working capital needed in the consolidation of the operations of the two
entities.
Security: Security for the Notes will include a first priority lien on all tangible assets of the
Company.
Pricing: The Notes are being offered to investors at a spread of 300-400 basis points over the
5-year on-the-run treasury. The Sub Debt is anticipated to be offered to investors at a
spread of 500-650 basis points above the 8-year on-the-run treasury.
Repayment: The Notes will require payment of interest only for three years, with principal and
interest payments to begin in year four at a rate of Twenty-Five Percent (25%) of the
principal balance due each year.
</TABLE>
These terms represent the Company's expectation of the form of Debt
Security to be issued. The actual terms may differ depending on market
conditions.
RIGHTS OF SERIES A CONVERTIBLE PREFERRED STOCK
The principal rights of the Preferred Stock are summarized below.
CONVERSION RIGHTS. Shares of the Preferred Stock are convertible into
shares of Common Stock with the number of shares issuable to be determined by
dividing (i) the aggregate price paid for the Preferred Stock ($50,000 per
share), by (ii) Seventy-Five Percent (75%) of the market price of the Common
Stock of the Company at the time of conversion. As the market price of the
Common Stock changes from day to day, the number of shares issuable upon
conversion will vary depending upon the conversion date. Conversion rights are
protected from dilution upon occurrence of a stock dividend, stock split or
similar event.
The Preferred Stock ceases to be convertible if not converted within two
years after the date the shares of Preferred Stock are issued by the Company.
During the first one hundred twenty (120) days after issuance, there are
limitations on the amount and timing of conversion as follows: (i) no shares may
be converted during the initial fifty-nine (59) days after issuance of the
Preferred Stock; (ii) during the period beginning sixty (60) days and ending
eighty-nine (89) days after issuance of the Preferred Stock, a holder of
Preferred Stock may convert up to one-third of the shares of Preferred Stock
held by that holder; (iii) during the period beginning ninety (90) days and
ending one hundred nineteen (119) days after issuance of the Preferred Stock, a
holder of Preferred Stock may convert up to an additional one-third of the
shares of Preferred Stock held by that holder, plus any shares not converted
during the first eighty-nine (89) days that could have been converted during
that period; and (iv) commencing one hundred twenty (120) days after issuance of
the Preferred Stock, all the Preferred Stock can be converted. No holder may
convert its shares of Preferred Stock in more than eight (8) installments.
VOTING RIGHTS. Except as required by applicable law, the shares of
Preferred Stock will not have voting rights.
DIVIDEND RIGHTS. Shares of Preferred Stock will accrue an annual dividend
of Four Thousand Five Hundred ($4,500) Dollars per share. Such Preferred
Dividend shall be payable when and as declared by the Board of Directors in its
sole discretion. The Preferred Dividend is cumulative for two years after
issuance of the Preferred Stock. Dividends accruing after two years 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
shares of Preferred Stock.
14
<PAGE>
LIQUIDATION PREFERENCE. Holders of shares of the Preferred Stock will have
a preference upon the liquidation of the Company over the Common Stock. The
initial liquidation preference shall equal Fifty Thousand ($50,000) Dollars per
share of Preferred Stock and shall increase to equal the sum of the initial
liquidation preference, plus all accrued but unpaid cumulative Preferred
Dividends plus all declared but unpaid noncumulative Preferred Dividends. After
payment in full of the liquidation preference, the holders of Preferred Stock
shall not be entitled to receive any additional liquidation payments.
REGISTRATION RIGHTS. Holders of Preferred Stock will have the right,
exercisable beginning immediately after issuance of the Preferred Stock, to
require the Company to register shares of Common Stock issuable upon conversion
of the Preferred Stock.
COMPENSATION OF INVESTMENT BANKERS
INTERSTATE/JOHNSON LANE -- as compensation for arranging the placement of
debt securities (the IJL Capital Placement), IJL will receive a fee in cash (the
Success Fee) equal to Two Percent (2%) of the funds received by the Company and
raised by IJL in the IJL Capital Placement.
The Success Fee shall be paid, when and to the extent that the Company
receives the proceeds of such financing.
The Company agrees to issue to IJL, concurrently with the successful
completion of the IJL Capital Placement, provided IJL raises at least $15
million in the IJL Capital Placement, common stock purchase warrants
("Warrants") covering shares of common stock equal to two percent (2%) of the
shares issued and outstanding on a post-deal basis. All shares of common stock
issuable upon the exercise of such Warrants will be issuable out of the
authorized unissued shares of common stock of the Company. Such Warrants will
have a term of five years and may be exercised as to all or any lesser number of
shares of common stock covered thereby, commencing twelve (12) months after
issuance, provided that the Warrants may not be exercised unless at the time of
exercise the market price of a share of the common stock of the Company exceeds
Two Hundred Percent (200%) of the per share exercise price of the Warrants.
The exercise price of the Warrants shall equal the greater of (i) $2.00 or
(ii) the exercise price of any Warrants sold by IJL in the IJL Capital
Placement. The exercise price and the number of shares of common stock issuable
upon exercise of the Warrants are subject to adjustment in the event of a stock
dividend, split, consolidation or similar events.
FINANCIAL WEST GROUP ("FWG") -- As compensation for arranging the placement
of the Series A Preferred Stock, FWG will receive a fee in cash equal to Six
Percent (6%) of the principal amount of Preferred Stock sold. In addition, the
Company will issue warrants to purchase shares of its Common Stock having a term
of three (3) years and an exercise price equal to the closing price of the
Common Stock on the closing date of the placement of the shares of Series A
Preferred Stock. The number of shares issuable upon exercise of warrants will
equal the quotient derived by dividing (i) 8% of the gross proceeds from sale of
the shares of Series A Preferred Stock, by (ii) the market price of the Common
Stock of the Company on the date the Shares of Series A Preferred Stock are
issued.
USE OF PROCEEDS
The Company is in the process of offering to sell up to $31 million of debt
and equity securities, of which $23,500,000 of the proceeds would be used to
finance the MEDTOX acquisition, approximately $1,500,000 of the proceeds would
be used to pay the fees and expenses associated with the financing and the
acquisition, and approximately $6,000,000 of the proceeds would be used for
working capital purposes.
The Company believes that the primary valuation of companies like MEDTOX
when calculating a purchase price is based upon a multiple of revenues rather
than book value as evidenced by the over fifty laboratory acquisitions that have
occurred over the last four years. Much less significant than the valuation of
the revenues acquired are the assets to be purchased since the primary assets
utilized to run a laboratory are generic throughout the industry. Accordingly,
the purchase price of $24 million, which is 120% of MEDTOX revenues, is
consistent with similar transactions in the industry where acquisition prices
have ranged from 52% of revenues to as much as 200% of revenues.
15
<PAGE>
ADVANTAGES/DISADVANTAGES OF PROPOSED OFFERING AND TERMS OF SECURITIES BEING
OFFERED
By offering equity in the form of Convertible Preferred Stock, the Company
believes that this will limit the amount of common shares that will ultimately
be issued. Since the conversion formula is based upon the market price of the
Common Stock at the time of conversion and such conversion cannot happen until
after the acquisition is completed, it is anticipated that the market price of
the Common Stock will be higher after the acquisition than the market price of
the Common Stock prior to the acquisition. However, there can be no guarantee
that the market price of the Common Stock will be higher at the time of
conversion. The two year limit on conversion rights will ensure eventual
conversion which will limit the amount of dividends the Company may pay. The use
of equity to finance a part of the total funding requirements also will limit
the amount of debt financing required.
If the price of the Common Stock should fall and be lower at the time of
conversion than at the time of the sale of the Preferred Shares, the Company
will suffer more dilution of its shareholders than it would if it offered common
shares rather than convertible preferred shares. The payment of dividends to the
holders of the preferred shares would be a use of cash that could not be used
for other purposes.
The Company and its investment bankers believe that the combination of debt
and equity securities in the form of convertible preferred shares is the
structure that will allow the necessary funds to be raised, help limit the
amount of common stock that will ultimately be issued, and limit the amount of
interest that will have to be paid so that the post acquisition company can
effectively compete in the marketplace and be successful.
ADVANTAGES/DISADVANTAGES OF THE ACQUISITION OF MEDTOX
In 1994, the Company completed the acquisition of Princeton Diagnostic
Laboratories of America, Inc. ("PDLA"). This was the first step in the execution
of the strategic plan to effectively position the Company in the substance abuse
testing marketplace by combining the on-site diagnostic testing products
manufactured by the Company with a full service laboratory certified by the
Substance Abuse and Mental Health Services Administration ("SAMHSA"). This was
part of the overall strategic plan to grow the Company from both the sale of its
own internally developed products as well as through synergistic mergers and
acquisitions. The Company believes that a successful acquisition of MEDTOX will
result in the Company becoming a company with the size, structure and balance
sheet to effectively compete in its chosen markets resulting in profitability
and substantial growth which will benefit the shareholders. The successful
acquisition of MEDTOX will allow the Company to take advantage of many
opportunities that the Company believes are available to it.
The financing requirements to complete the acquisition of MEDTOX will
result in dilution to the current shareholders and the liability of debt. The
obligations of significant debt is something the Company has not had to incur
for a number of years. The requirements of the holders of the debt may limit
some of the actions the Company may otherwise take. The payment of principal and
interest will substantially increase the Company's cash flow requirements. The
Company believes, however, that the revenues historically generated by MEDTOX
will be sufficient to enable the Company to meet its debt service obligations
and that the benefits of the acquisition outweigh its disadvantages.
16
<PAGE>
MEDTOX SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following selected financial data for the two years ended December 31,
1994, are derived from the financial statements of MEDTOX. The financial data
for the six months ended June 30, 1995 and 1994 are derived from unaudited
financial statements. The unaudited financial statements include all
adjustments, consisting of normal recurring accruals, which MEDTOX considers
necessary for a fair presentation of the financial position and the results of
operations for this period. Operating results for the six months ended June 30,
1995 and 1994 are not necessarily indicative of the results that can be expected
for the entire year ended December 31, 1995. The data should be read in
conjunction with the financial statements, related notes, and other financial
information included herein.
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30 DECEMBER 31
1995 1994 1994 1993
<S> <C> <C> <C> <C>
(UNAUDITED)
Statement of Operations Data (000's)
Revenues............................................................. $10,237 $9,875 $19,688 $18,497
Cost of Sales........................................................ 4,594 3,648 8,714 10,416
Selling, general and administrative.................................. 3,825 4,530 7,594 8,796
Restructuring costs.................................................. -- -- 568 1,162
Interest expense..................................................... 92 83 218 208
Operating income (loss).............................................. $ 1,726 $1,614 $ 2,594 $(2,085)
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER
AS OF JUNE 30 31
1995 1994 1994 1993
<S> <C> <C> <C> <C>
(UNAUDITED)
Balance Sheet Data (000's)
Working Capital.......................................................... $2,156 $1,636 $2,122 $ 553
Total assets............................................................. 7,049 5,783 5,637 5,399
Long-term liabilities, less current portion.............................. 709 802 1,179 1,411
Stockholder's equity..................................................... 3,404 2,477 2,567 832
</TABLE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma consolidated balance sheet as of June 30,
1995, and the unaudited pro forma consolidated statements of operations for the
six months ended June 30, 1995 and the year ended December 31, 1994, give effect
to the acquisition of MEDTOX by EDITEK using the purchase method. The unaudited
pro forma consolidated financial information is based on the historical
financial information of EDITEK and MEDTOX as of June 30, 1995 and the pro forma
adjustments described in the notes thereto, with the exception of the $961,000
of cash on hand of MEDTOX which would be distributed to the shareholders of
MEDTOX by MEDTOX prior to the acquisition of MEDTOX by EDITEK. There are no pro
forma adjustments to other amounts reflected in the historical financial
statements of MEDTOX as management believes that the historical costs assigned
to MEDTOX assets and liabilities approximate fair value.
Information was prepared as if the acquisition was effected as of June 30,
1995 in the case of the unaudited pro forma consolidated balance sheet; as of
January 1, 1994 in the case of the June 30, 1995 and December 31, 1994 unaudited
pro forma statements of operations. The unaudited pro forma financial statements
may not be indicative of the results that actually would have occurred if the
acquisition had been in effect on the dates indicated or which may be obtained
in the future. The unaudited pro forma financial information should be read in
conjunction with the financial statements and other financial data of EDITEK and
MEDTOX.
17
<PAGE>
EDITEK AND MEDTOX
UNAUDITED CONSOLIDATED BALANCE SHEETS
JUNE 30, 1995
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL PROFORMA
EDITEK MEDTOX ADJUSTMENTS CONSOLIDATED
<S> <C> <C> <C> <C>
ASSETS:
Cash and cash equivalents..................................... $ 731 $ -- $ 6,000(a) $ 6,731
Accounts receivable, net...................................... 1,067 3,598 -- 4,665
Inventory and supplies........................................ 801 287 -- 1,088
Other current assets.......................................... 680 245 -- 925
Total current assets..................................... 3,279 4,130 6,000 13,409
Property and equipment........................................ 7,466 6,209 -- 13,675
Accumulated depreciation...................................... (6,578) (4,277 ) -- (10,855)
Property and equipment, net.............................. 888 1,932 -- 2,820
Other assets.................................................. 59 19 -- 78
Goodwill, net................................................. 3,286 7 21,957(c) 25,250
Total non-current assets................................. 3,345 26 21,957 25,328
Total assets............................................. $ 7,512 $6,088 $27,957 $ 41,557
LIABILITIES AND STOCKHOLDERS' EQUITY:
Accounts payable.............................................. $ 1,016 $ 408 $ -- $ 1,424
Accrued expenses.............................................. 376 1,216 400(b) 1,992
Current maturities of LTD..................................... -- 502 -- 502
Restructuring accrual, current portion........................ -- 804 -- 804
Other current liabilities..................................... 20 6 -- 26
Total current liabilities................................... 1,412 2,936 400 4,748
Long term debt obligations.................................... 63 709 15,000(a) 15,772
Total liabilities........................................... 1,475 3,645 15,400 20,520
Common stock.................................................. 1,488 30 (30)(e) 1,488
Preferred stock............................................... -- -- 16,000(a) 16,000
Additional paid-in capital.................................... 32,852 600 (600)(e)
(1,000) 31,852
Retained earnings (deficit)................................... (28,198) 1,813 (1,813)(e) (28,198)
6,142 2,443 12,557 21,142
Less: Treasury stock and other contra equity.................. (105) -- -- (105)
Total stockholders' equity.................................. 6,037 2,443 12,557 21,037
Total liabilities and shareholders' equity.................... $ 7,512 $6,088 $27,957 $ 41,557
</TABLE>
See notes to unaudited pro forma consolidated financial statements.
18
<PAGE>
EDITEK AND MEDTOX
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1995
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL PROFORMA
EDITEK MEDTOX ADJUSTMENTS CONSOLIDATED
<S> <C> <C> <C> <C>
Revenues........................................................ $3,751 $10,204 $ 33(g) 13,988
Cost of sales................................................... 3,181 4,594 1,331(g) 9,106
Gross margin.................................................. 570 5,610 (1,298) 4,882
Operating expenses
Research and development...................................... 427 -- -- 427
Selling, general and administrative........................... 1,865 3,803 (1,309)(g) 4,359
Amortization.................................................. 74 -- 590(d) 664
Total operating expenses...................................... 2,366 3,803 (719) 5,450
Income (loss) before interest................................... (1,796 ) 1,807 (579) (568)
Other income.................................................... -- 11 (11)(g) --
Interest expense................................................ (20 ) (92 ) (1,013)(a) (1,125)
Net income (loss)............................................. (1,816 ) 1,726 (1,603) (1,693)
Preferred Stock:
Dividend declared............................................. -- -- 720(f) 720
Net income (loss) applicable to common shareholders............. $(1,816) $1,726 $(2,323) $ (2,413)
Income (loss) per common share.................................. $(0.20 ) $58.21 $ (0.26)
Weighted average number of common shares outstanding............ 9,239,159 29,650 9,239,159
</TABLE>
YEAR ENDED DECEMBER 31, 1994
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<S> <C> <C> <C> <C>
Revenues........................................................ $6,593 $19,651 $ 37(g) $ 26,281
Cost of sales................................................... 6,044 8,714 2,635(g) 17,393
Gross margin.................................................. 549 10,937 (2,598) 8,888
Operating expenses
Research and development...................................... 729 -- -- 729
Selling, general and administrative........................... 3,194 7,576 (2,617)(g) 8,153
Amortization.................................................. 147 -- 1,180(d) 1,327
Restructuring costs........................................... -- 568 -- 568
Total operating expenses...................................... 4,070 8,144 (1,437) 10,777
Income (loss) before interest................................... (3,521 ) 2,793 (1,161) (1,889)
Other income.................................................... -- 19 (19)(g) --
Interest expense................................................ (25 ) (218 ) (2,025)(a) (2,268)
Net income (loss)............................................. (3,546 ) 2,594 (3,205) (4,157)
Preferred Stock:
Dividend declared............................................. -- -- 1,440(f) 1,440
Net income (loss) applicable to common shareholders............. $(3,546) $2,594 $(4,645) $ (5,597)
Income (loss) per common share.................................. $(0.49 ) $87.87 $ (0.78)
Weighted average number of common shares outstanding............ 7,204,244 29,520 7,204,244
</TABLE>
See notes to unaudited pro forma consolidated financial statements.
19
<PAGE>
EDITEK AND MEDTOX
NOTES TO UNAUDITED
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
a) EDITEK plans to raise up to $31 million from the issuance of $15 million
of debt securities with an interest rate of 13.5% and $16 million from the
issuance of preferred stock of which $24 million will be used to acquire MEDTOX
and $1 million will be used to pay financing costs. However, the total amount of
the funds raised, the investment terms, and the mix of equity and debt financing
will depend on market conditions at the time of the closing of such investments.
b) Adjustment to reflect Acquisition costs are expected to approximate
$400,000.
c) Goodwill representing the excess of the purchase price of $24 million
over the fair value of the identifiable net assets of MEDTOX has been reflected
and is comprised of the following:
<TABLE>
<CAPTION>
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C>
Purchase price......................................... $24,000
Costs related to acquisition........................... 400
Net assets acquired @ 6/30/95.......................... (2,433)
$21,957
</TABLE>
The allocation of the total amount of excess purchase price over the fair
value of the assets is a preliminary allocation absent an appraisal of certain
intangible assets.
d) Amortization is based on an effective date of the acquisition of MEDTOX
of January 1, 1994 amortized over a twenty year period.
e) Pro Forma adjustment to stockholder's equity accounts are summarized as
follows:
<TABLE>
<CAPTION>
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
ADDITIONAL
COMMON STOCK PREFERRED STOCK PAID IN CAPITAL RETAINED EARNINGS
Elimination of MEDTOX'S
equity accounts........... $(30) $ -- $ (600) $(1,813)
Issuance of Preferred
Stock..................... -- 16,000 (1,000) --
$(30) $16,000 $(1,600) $(1,813)
</TABLE>
f) Dividend of 9% declared for $16 million of Preferred Stock issued and
outstanding.
g) Adjustments to reclassify certain expenses of MEDTOX, including
distribution expenses to conform with the historical presentation of the
financial statements of EDITEK. These reclassifications have no impact on the
operating income of MEDTOX.
20
<PAGE>
AMENDMENT TO CERTIFICATE OF INCORPORATION TO INCREASE
NUMBER OF AUTHORIZED SHARES OF COMMON STOCK
AND PREFERRED STOCK
The Company's Certificate of Incorporation presently authorizes the
issuance of a total of 20,000,000 shares of Common Stock par value $.15 per
share, and 600,000 shares of preferred stock, par value $1.00 per share. Of such
20,000,000 presently authorized shares of Common Stock, 9,823,242 shares were
issued and outstanding as of September 1, 1995. In addition, an aggregate of
1,947,110 shares has been reserved for issuance as of September 1, 1995, as
summarized in the following table:
<TABLE>
<CAPTION>
NUMBER OF SHARES
SHARES OF COMMON STOCK RESERVED FOR RESERVED
<S> <C>
Common Stock Warrants
Series J........................................................ 60,000
Series K........................................................ 50,000
Series M........................................................ 35,000
Common Stock Options:
Incentive....................................................... 451,406
Non-Employee Director........................................... 239,540
Nonqualified.................................................... 33,333
Qualified Employee Stock Purchase Plan............................ 79,498
Equity Compensation Plan.......................................... 998,333
1,947,110
</TABLE>
In addition to the 1,947,110 shares of Common Stock reserved for future
issuance, the Company will have to issue shares of Common Stock for the
acquisition of MEDTOX. An aggregate of 8,524,499 shares could be issued as a
result of the acquisition of MEDTOX, as summarized in the following table:
<TABLE>
<CAPTION>
NUMBER OF SHARES
THAT MAY BE
SHARES OF COMMON STOCK RESERVED FOR ISSUED
<S> <C>
Conversion of 320 Shares of Series A Preferred Stock (1).......... 6,203,955
Common Stock Purchase Warrants Issued to Investment Bankers in
connection with financing....................................... 320,544(1)
Increase in number of Shares issuable under Equity Compensation
Plan............................................................ 2,000,000
8,524,499
</TABLE>
1) Based upon the calculation of the number of Common Shares that would be
issuable at the market price of the Common Stock of the Company on September
1, 1995 pursuant to the applicable formula under which the number of shares
issuable is based upon Seventy-Five Percent (75%) of the market price of the
Common Stock of the Company on the date(s) of conversion.
If the total of 10,471,609 shares were to be issued, the Company would not
have enough shares authorized for issuance. Accordingly, the Board of Directors
has approved an amendment to the Company's Certificate of Incorporation to
increase the number of authorized shares of Common Stock from 20,000,000 to
30,000,000 and the number of authorized shares of Preferred Stock from 600,000
to 1,000,000.
The additional Common Stock or Preferred Stock ("Stock"), if so authorized
could be issued at the discretion of the Board of Directors without any further
action by the stockholders except as required by applicable law or regulation,
for use in connection with acquisitions, efforts to raise additional capital for
the Company and other corporate purposes. Shares of the Stock will be issued
only upon a determination by the Board of Directors that a proposed issuance is
in the best interests of the Company.
The Company believes that other synergistic acquisitions are available to
it. The increase in authorized shares will allow the Board of Directors of the
Company to consider and, if in the best interest of the stockholders, take
advantage of any such acquisition possibilities. In addition, the flexibility
vested in the Company's Board of Directors to authorize the issuance and sale of
authorized but unissued shares of Common Stock and/or to issue Preferred Stock
in one or more series could enhance the Board of Director's bargaining
capability on
21
<PAGE>
behalf of the Company's stockholders in a takeover situation and could, under
some circumstances, be used to render more difficult or discourage a merger,
tender offer or proxy contest, the assumption of control by a holder of a large
block of the Company's securities, or the removal of incumbent management, even
if such a transaction were favored by the holders of the requisite number of the
then outstanding shares. Accordingly, stockholders of the Company might be
deprived of an opportunity to consider a takeover proposal which a third party
might consider if the Company did not have authorized but unissued shares of
Common Stock and a class of authorized but unissued Preferred Stock.
The Company is not aware of any present efforts to gain control of the
Company or to organize a proxy contest. If such a proposal were presented,
management would make a recommendation based upon the best interests of the
Company stockholders. Except as described above and except for certain
provisions of its agreements with employees and equity compensation plan which
provide for severance payments and acceleration of vesting of options and stock
upon a change of control, the Company is not aware of any anti-takeover measures
which are currently part of the Company's charter, bylaws or agreements. See
"Executive Compensation -- Employment Contracts" and "Approval for Amendment to
the EDITEK, Inc. Equity Compensation Plan."
Accordingly, the Board of Directors has proposed that Article FOURTH of the
Company's Certificate of Incorporation be amended to increase its authorized
capital stock. As so amended, this provision of the Certificate of Incorporation
would read as set forth on Appendix A hereto.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSED AMENDMENT TO THE
CERTIFICATE OF INCORPORATION. An affirmative vote by holders of a majority of
the outstanding shares of Common Stock entitled to vote at the Annual Meeting is
required to approve the Amendment.
APPROVAL FOR AMENDMENT TO THE EDITEK, INC.
EQUITY COMPENSATION PLAN
On October 26, 1993, the shareholders of the Company approved the EDITEK,
Inc. Equity Compensation Plan (the "Plan"). The Plan was adopted by the Board of
Directors, subject to shareholder approval, to give the Company the ability to
attract and retain personnel of exceptional ability; to motivate such personnel
through added incentives to make a maximum contribution to greater
profitability; to develop and maintain a highly competent management team; and
to be competitive with other companies with respect to executive compensation.
The successful acquisition of MEDTOX will add approximately 220 employees
to those eligible to receive incentive stock options under the Plan. It is the
Company's long standing practice to issue incentive stock options to all
employees. Accordingly, the Company will issue a total of approximately
1,000,000 incentive stock options to all employees of MEDTOX upon the
effectiveness of the acquisition of MEDTOX.
The Board of Directors of the Company has approved an amendment to the
Plan, to be effective as of August 1, 1995, subject to approval by the
shareholders of the Company, to increase from 1,000,000 to 3,000,000 the number
of shares of Common Stock of the Company, par value $0.15 per share (the
"Stock"), that may be issued pursuant to awards under the Plan. With the
exception of the increase in the number of shares of Stock issuable under the
Plan, the provisions of the Plan, as amended, are unchanged from the version of
the Plan approved by the shareholders of the Company on October 26, 1993.
The affirmative vote of a majority of the shares of Common Stock present,
or represented, and entitled to vote at the Annual Meeting, is required for
approval of this amendment to the Plan.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSAL TO APPROVE THE
AMENDMENT OF THE EQUITY COMPENSATION PLAN AND TO AMEND AND RESTATE THE PLAN IN
THE FORM AS AMENDED.
DESCRIPTION OF THE PLAN, AS AMENDED
All references hereinafter to the "Plan" shall be to the Plan, as amended,
unless otherwise indicated. The following description of the Plan is merely a
brief summary of some of the terms of the Plan, is not intended to be a complete
description of the Plan and is qualified in its entirety by reference to the
full text of the Plan. If any part of the summary of the Plan contained in this
document differs from the formal legal documents governing the Plan, the formal
legal Plan documents will be considered correct and controlling.
22
<PAGE>
The Plan is not generally subject to the provisions of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"). The Plan is not a
qualified plan under Section 401 of the Internal Revenue Code of 1986, as
amended (the "Code").
The Plan is administered by a committee (the "Committee") appointed by the
Board of Directors of the Company (the "Board") from among its members who are
"disinterested persons" as required under Rule 16b-3 of the Securities Exchange
Act of 1934 (the "Act") to serve at the pleasure of the Board. The Committee has
the exclusive right to interpret, construe and administer the Plan and to select
the eligible participants under the Plan.
The Plan provides for the grant to eligible participants of a number of
different types of equity-based compensation vehicles under one Plan. Employees
of the Company and other persons selected by the Committee, including directors
(other than certain "disinterested persons", as described above), are eligible
to participate in the Plan. Awards under the Plan may be made to participants in
the form of incentive stock options, nonqualified stock options, discounted
stock options, restricted stock, stock appreciation rights, phantom stock, stock
awards, performance shares, deferred stock and other forms of equity-based
compensation as may be provided and are permissible under the Plan and the law.
See "Types of Awards" below. The Committee is given broad discretion to
determine the terms and conditions (not inconsistent with the Plan) of the
awards made under the Plan.
SECURITIES TO BE OFFERED. The Company is authorized to issue 1,000,000
shares of Common Stock under the Plan as currently written. As of July 26, 1995,
grants and awards to purchase 588,886 shares had been made under the Plan,
leaving 411,114 shares available for issuance pursuant to awards under the Plan.
The current Plan includes a provision for automatic increases in the number of
shares of Stock issuable under the Plan in the event of increases in the number
of issued shares of Stock of the Company above the number outstanding as of
October 26, 1993, such that six percent of any increase will be added to the
shares otherwise available for issuance under the Plan. The application of this
provision has increased the aggregate number of shares issuable under the
current Plan as of July 26, 1995 (taking into account the awards already made
under the Plan) to 636,684. The amendment to the Plan for which approval is
sought will increase the number of authorized shares issuable under the Plan, as
amended, by 2,000,000 shares. Thus, an aggregate of 2,636,684 shares will be
available to be issued pursuant to awards granted under the Plan. The Plan will
continue to provide for incremental increases in the number of shares issuable
under the Plan in the same manner as the Plan currently provides.
The Stock subject to an award under the Plan will be made available from
the authorized and unissued shares of Stock of the Company. To the extent any
shares of Stock or performance shares awarded or subject to purchase under the
Plan are not delivered or purchased, or are reacquired by the Company, such
shares or performance shares will not be charged against the aggregate number of
shares available for awards under the Plan, and may again be awarded under the
Plan. This would occur, for example, upon a forfeiture of restricted stock or
termination, expiration, or cancellation of a stock option, stock right, or
performance share under the Plan, or any other termination of an award without
payment being made in the form of Stock.
Proportionate and equitable adjustments will be made by the Committee upon
the occurrence of certain events that result in changes in the outstanding
shares of Stock of the Company or that result in exchanges of shares of Stock
for a different number or class of Stock or other securities of the Company or
another corporation. These events include, without limitation, a reorganization
or recapitalization of the Company or reclassification of its shares, stock
split-up, stock dividend, or consolidation of shares of Stock, merger,
consolidation, or sale of assets of the Company, or any distribution to
shareholders other than a cash dividend. Under such circumstances, adjustments
may be made by the Committee in the limitation on the aggregate number of shares
of Stock that may be awarded under the Plan, the number and class of shares that
may be subject to an award, the purchase price for shares of Stock under
outstanding stock options, and the number of shares to be transferred in
settlement of outstanding stock rights, and the terms, conditions, or
restrictions of any award or award agreement, including the price payable for
the acquisition of Stock.
The closing price of the Common Stock of the Company on the American Stock
Exchange on July 26, 1995 was $3.38 per share. The prices, expiration dates and
other material conditions upon which the awards under the Plan may be exercised
vary depending on the type of award. See "Types of Awards" below.
TYPES OF AWARDS. Each award granted under the Plan is evidenced by a
written agreement setting forth the terms and conditions of the award. Each such
agreement is also subject to and incorporates the applicable terms
23
<PAGE>
and conditions of the Plan and any other terms and conditions, not inconsistent
with the Plan required by the Committee. The various forms of awards that may be
made to participants under the Plan are described below.
INCENTIVE STOCK OPTIONS. The Company is authorized to grant incentive stock
options ("ISOs") that may be entitled to favorable tax treatment under Section
422 of the Code. See "Tax Effects of Plan Participation" below. ISOs may be
granted to eligible participants under the Plan at such time or times as
determined by the Committee until October 26, 2003, subject to certain
conditions described below.
The exercise price of an ISO under the Plan may not be less than 100% of
the fair market value of the Stock at the date of grant (110% for 10% owners of
the Company). The fair market value of the Stock will be determined for purposes
of the Plan, based upon the closing price of the Stock as reported by such
source as the Committee may select for any day in question, provided at least
100 shares of Stock were sold on such date. If there was not a sale of at least
100 shares of Stock that day, then the fair market value shall be determined
based on the closing price of the Stock on the last day on which there was a
sale of at least 100 shares of Stock. The Committee is also authorized to
establish an alternate method of determining fair market value of the Stock.
An ISO and any related stock right, if any, granted under the Plan must be
exercised in whole or in part from time to time within 10 years from the date of
grant (5 years for 10% owners of the Company), or such shorter period specified
by the Committee in the corresponding award agreement. Upon a termination of
employment of the optionee with the Company, as determined by the Committee in
its discretion, the ISO and any related stock right will lapse and cease to be
exercisable upon, or within such period following, the termination of
employment, as determined by the Committee pursuant to the terms of the Plan and
as provided in the award agreement. In no event, however, can the period of time
during which an ISO or related stock right remains exercisable following a
termination of employment exceed three months, unless employment is terminated
because of death or disability of the optionee. Following death or disability,
the period of time during which an ISO or related stock right may be exercised
cannot exceed one year after the date of death or disability. In no event can
the period of time following a termination of employment during which an ISO or
related stock right may be exercised extend beyond the original exercise period
of the ISO or related stock right.
The amount of ISOs which are first exercisable by any one participant in
any year which may receive favorable tax treatment as ISOs is generally limited
to $100,000. However, if a participant's employment is terminated on account of
death, disability or retirement, to the extent that the aggregate fair market
value of the shares of Stock with respect to which ISOs are first exercisable
during the post-termination period by the participant exceeds $100,000, such
options shall be treated as non-qualified stock options. Similar treatment
applies in the event the exercise of an ISO is accelerated by reason of an
"acceleration event." See "Effects of Change in Control" below. The aggregate
fair market value of the Stock for these purposes is determined as of the date
the ISO is granted. An ISO granted under the Plan will also be subject to such
other terms and conditions which the Committee deems necessary to impose in
order to qualify the ISO under Section 422 of the Code, as well as any other
terms and conditions not inconsistent with the ISO provisions of the Plan, as
determined by the Committee.
NONQUALIFIED STOCK OPTIONS. The Company may also grant nonqualified stock
options ("NQSOs") to eligible participants to purchase shares of Stock at such
time or times as determined by the Committee. These stock options will not be
eligible for the favorable tax treatment available to ISOs under Section 422 of
the Code. The exercise price of an NQSO under the Plan is established by the
Committee in the agreement evidencing the award. Such exercise price is not
limited under the Plan and may be less than 100% of the fair market value at the
time of grant. Thus, discounted stock options providing for an exercise price of
less than the fair market value of the Stock at the date of the award may be
granted as NQSOs under the Plan.
An NQSO under the Plan and its related stock right, if any, will be
exercisable in full or in part from time to time as specified by the Committee
or in the corresponding award agreement. Upon termination of employment of the
optionee, the NQSO and any related stock right will lapse and cease to be
exercisable upon, or within such period following, such termination of
employment, as determined by the Committee pursuant to the terms of the Plan and
as specified in the award agreement. The period of time during which the NQSO
and any related stock right may be exercisable following termination of
employment cannot exceed three months, unless employment is terminated as a
result of retirement or disability, in which case such period cannot exceed one
year after the date of retirement or disability or within such longer period as
the Committee may specify. If the termination of employment is as a result of
death, such period may exceed one year after the date of death, as provided by
the
24
<PAGE>
Committee or in the award agreement. An NQSO may also be subject to such other
terms and conditions, not inconsistent with the Plan, as determined by the
Committee and specified in the award agreement.
STOCK APPRECIATION RIGHTS. The Committee is empowered under the Plan to
grant a stock appreciation right (an "SAR") to an eligible participant in
connection with an ISO or an NQSO. SARs may also be granted independent of any
related stock option.
An SAR is a stock right granted under the Plan that provides for an amount
payable in shares of Stock and/or cash, as determined by the Committee, equal to
the excess of the fair market value of a share of Stock on the date the stock
right is exercised over the exercise price of the SAR or the exercise price of a
related stock option to purchase a share of Stock. Thus, an SAR granted in
conjunction with a stock option will entitle the participant, within the period
specified for the exercise of the stock option, to surrender the unexercised
stock option, or a portion thereof, and receive in lieu thereof a payment in
cash or shares of Stock having an aggregate value equal to the amount by which
the fair market value of each share of Stock exceeds the exercise price per
share of Stock under the stock option, times the number of shares of Stock under
the stock option, or portion thereof, that is surrendered.
Any SAR granted under the Plan in conjunction with a stock option will be
subject to the same terms and conditions as the related stock option, including
limits on transferability, and will be exercisable only to the extent the stock
option is exercisable. If the related stock option terminates or lapses, the SAR
will also terminate or lapse. Upon exercise of an SAR, the number of shares
subject to exercise under any related stock option will be reduced automatically
by the number of shares of stock represented by the related stock option (or
portion thereof) that is surrendered. The grant of SARs related to ISOs under
the Plan must be concurrent with the grant of the related ISOs. For NQSOs, the
grant of a related SAR may either be made concurrently with the grant of the
NQSO or may be made in connection with NQSOs previously granted that are
unexercised and have not terminated or lapsed.
In addition to the foregoing restrictions, a person subject to Section
16(b) of the Act will be subject to a number of additional requirements imposed
by Rule 16b-3, promulgated by the SEC under the Act, in connection with the
exercise of an SAR.
The Committee is also empowered under the Plan, in its sole discretion, to
grant limited stock appreciation rights ("Limited SARs"), which will become
exercisable only upon a change in control and/or a potential change in control
of the Company, as defined in the Plan, subject to such terms and conditions as
the Committee, in its sole discretion, may specify. Such Limited SARs may be
settled only in cash. For further information on Limited SARs and other aspects
of the Plan, which may be triggered by virtue of a change in control and/or a
potential change in control of the Company, see "Effects of Change in Control"
below.
INCIDENTS OF STOCK OPTIONS AND STOCK RIGHTS. Each stock option (ISO or
NQSO) and stock right (SAR or Limited SAR) granted under the Plan will be
subject to such terms and conditions, not inconsistent with the Plan, as may be
determined by the Committee. Such provisions, for example, may require the
continued employment of a participant as consideration for the grant or exercise
of a stock option or stock right. A stock option or stock right under the Plan
will not be transferable by the participant other than by will or the laws of
descent and distribution and will be exercisable during the lifetime of the
participant only by the participant or his or her guardian or legal
representative.
The purchase price for shares of Stock upon exercise of a stock option
under the Plan will be payable in such amounts, at such times, and upon such
terms as will be determined by the Committee. The Committee may establish
payment terms for the exercise of stock options that permit the participant to
deliver shares of Stock with a fair market value equal to the stock option
exercise price as payment upon exercise of a stock option. No cash dividends
will be paid on shares of Stock subject to unexercised stock options under the
Plan. The Committee, however, may, in its discretion, provide for the payment of
"dividend equivalents" on shares of Stock subject to an exercisable stock option
under the Plan. The Committee may also, in its discretion, authorize payment of
"interest equivalents" on dividend equivalents under the Plan.
To the extent a participant may be required to pay the Company amounts with
respect to income and employment tax withholding in connection with the exercise
of an NQSO and/or with respect to certain dispositions of Stock acquired upon
exercise of an ISO, the Committee, in its sole discretion, may permit the
participant to satisfy the obligation, in whole or in part, by making an
irrevocable election that a portion of the total fair
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market value of the applicable shares of Stock be paid in cash in lieu of the
issuance of Stock and that such cash payment be applied to the satisfaction of
the withholding obligations. Certain restrictions, however, will be applicable
with respect to this feature of the Plan for participants subject to Section
16(b) of the Act and Rule 16b-3 thereunder.
RESTRICTED STOCK. Restricted stock awards may be made to participants under
the Plan as an incentive for the performance of future services that will
contribute materially to the successful operation of the Company. The Company
may award restricted stock either alone, in addition to, or in tandem with other
awards granted under the Plan and/or cash payments made outside of the Plan. A
restricted stock award under the Plan will be an award of Stock issued with the
restriction that the holder may not sell, transfer, pledge, or assign such stock
and with such other restrictions as the Committee, in its sole discretion, may
impose. These other restrictions may include without limitation, a restriction
on the right to vote such shares to the extent, if any, such shares possess
voting rights and the right to receive cash dividends. The restrictions may
lapse separately or in combination and at such time or times as the Committee
may determine appropriate. The Committee may also in its discretion determine
the purchase price, if any, to be paid for such restricted stock, the length of
the time during which the restrictions will apply, and whether dividends and
other distributions on the restricted stock will be paid currently to the
participant or paid to the Company for the account of the participant.
A participant receiving an award of restricted stock under the Plan must
accept the award within 60 days, or such shorter period as the Committee may
specify, after the date of the award, by executing an award agreement and paying
the purchase price, if any, for the restricted stock. Upon termination of
employment of a participant with the Company prior to the lapse of restrictions,
all shares of restricted stock then held by the participant will be forfeited,
unless otherwise provided in the award agreement or determined by the Committee.
Except as otherwise provided in the Plan, no shares of restricted stock received
by a participant may be sold, exchanged, transferred, pledged, or otherwise
disposed of during the restriction period. The Committee in its discretion may
waive applicable restrictions upon the death, disability, or retirement of a
participant or in cases of special circumstances. In its discretion, the
Committee may also waive any remaining restrictions on restricted stock upon
hardship or other special circumstances of a participant whose employment with
the Company is involuntarily terminated.
Unless otherwise provided, a participant receiving an award of restricted
stock will have all the rights of a holder of the Stock with respect to such
restricted stock, including the right to vote the shares to the extent, if any,
such shares possess voting rights and the right to receive any dividends
thereon. The Committee may require, however, that any dividends be deferred
automatically and reinvested in additional restricted stock or may require that
dividends and other distributions on restricted stock be paid to the Company for
the account of the participant. If all of the restrictions applicable to
restricted stock expire without a forfeiture of the restricted stock,
unrestricted certificates for such shares will be delivered to the participant.
To ensure that award payments actually reflect performance of the Company
and the service of the participant, the Committee, in its discretion, may
provide for a tandem performance-based or other award designed to guarantee a
minimum value, payable in cash or Stock, to the recipient of a restricted stock
award, subject to such performance, future service, deferral and other terms and
conditions as may be specified by the Committee.
DEFERRED STOCK. The Plan also empowers the Company to issue shares of
deferred stock to participants under the Plan. Deferred stock awards may be
issued either alone or in addition to other awards granted under the Plan, as
determined by the Committee in its sole discretion. The Committee is empowered
to determine the individuals to whom, and the time or times at which, awards of
deferred stock may be made, the number of shares to be awarded, the price, if
any, to be paid for the deferred stock, the time or times within which such
awards may be subject to forfeiture, whether shares of deferred stock will
accrue cash dividend equivalents, and all other conditions of the deferred stock
awards. The Committee may also condition awards of deferred stock upon the
attainment of specified performance goals or such other factors or criteria as
the Committee may determine.
Subject to the provisions of the Plan and the applicable award agreement,
deferred stock awards may not be sold, transferred, pledged, assigned, or
otherwise encumbered during the deferral period, as specified by the Committee.
Upon the expiration of the deferral period, certificates for shares of Stock
will be delivered to the participant representing the number of shares of Stock
covered by the deferred stock award. The Committee, in its discretion, however,
at or after grant, may accelerate the vesting of all or any part of any deferred
stock award and/or may waive the deferral limitations for all or any part of
such award.
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Upon termination of employment of a recipient of a deferred stock award
with the Company, the deferred stock covered by an award will be forfeited by
the participant, unless otherwise provided in the Plan or the applicable award
agreement. The Committee in its discretion, however, at or after grant, may
provide for accelerated vesting upon the termination of employment due to death,
disability, or retirement, or upon hardship or other special circumstances as
determined by the Committee. The Committee may also require that a certain
percentage of the fair market value of deferred stock shares be paid in the form
of cash in lieu of shares of Stock and that such cash payment be applied to the
satisfaction of all applicable federal and state income and employment tax
withholding obligations that arise at the time the deferred stock becomes free
of all restrictions.
A participant receiving a deferred stock award may elect to further defer
receipt of deferred stock for a specified period or until a specified event,
subject in each case to the Committee's approval and to such terms as are
determined by the Committee. Unless otherwise determined by the Committee, such
election must be made at least 12 months prior to completion of the deferral
period for the deferred stock award in question, or for the applicable
installment of such an award.
To ensure that the award actually reflects the performance of the Company
and the service of the participant, the Committee, in its discretion, may
provide for a tandem performance-based or other award designed to guarantee a
minimum value, payable in cash or Stock, to the recipient of a restricted stock
award, subject to such performance, future service, deferral and other terms and
conditions as may be specified by the Committee.
STOCK AWARDS. The Company may grant an award of Stock under the Plan in
payment of compensation that has been earned or as compensation to be earned,
including without limitation, compensation awarded concurrently with or prior to
the grant of the stock award. In determining the value of the stock award, the
shares of Stock subject to such award will be valued at not less than 100% of
the fair market value of such shares of Stock on the award date, regardless of
whether such shares of Stock are then issued or transferred to the participant
and whether or not such shares of Stock are subject to restrictions that affect
their value.
Shares of Stock subject to a stock award may be issued to the participant
at the time the award is granted, or at any time subsequent thereto, or in
installments from time to time, as determined by the Committee. To the extent
the shares of Stock subject to a stock award are not issued to the participant
at the time the award is granted, dividend equivalents may be issued to the
participant as determined by the Committee. In the Committee's discretion, any
issuance payable in shares of Stock under a stock award may be paid in cash on
the date delivery of shares would otherwise have been made.
A stock award will be subject to such terms and conditions, including
without limitation, restrictions on the sale or other disposition of the stock
award or the shares of Stock issued pursuant thereto, as determined by the
Committee. Upon issuance of shares to a participant pursuant to a stock award,
the participant will become a holder of the Stock fully entitled to receive
dividends, to vote to the extent, if any, such shares possess voting rights and
to exercise all of the rights of a shareholder, except to the extent otherwise
provided in the stock award.
PERFORMANCE SHARES. Awards of performance shares may be made to
participants under the Plan as an incentive for the performance of future
services that will contribute materially to the successful operation of the
Company. Awards of performance shares may be made either alone, in addition to,
or in tandem with other awards granted under the Plan and/or cash payments made
outside of the Plan.
A performance share under the Plan will be an award of a unit valued by
reference to a designated number of shares of Stock, which value may be paid to
the participant by the delivery of such cash or Stock, or any combination
thereof as determined by the Committee, upon achievement of such performance
objectives during the applicable performance period as the Committee may
establish at the time of the award grant or thereafter. The Committee in its
sole discretion may determine the participants to whom awards of performance
shares will be made, the performance period, and/or the performance objectives
applicable to such awards, the form of settlement of a performance share, and
any other terms and conditions of such awards. Performance periods may overlap,
and participants may participate simultaneously with respect to performance
shares for which different performance periods are prescribed.
The Committee in its sole discretion will determine the performance
objectives relating to awards of performance shares. These objectives may vary
from participant to participant and between awards and will be based upon such
performance criteria or combination of factors as the Committee may deem
appropriate. For example,
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such performance criteria may include minimum earnings per share or return on
equity. The Committee is empowered to revise such performance objectives during
the applicable performance period if significant events occur that the Committee
expects to have a substantial effect on the applicable performance objectives
during such period. The Committee may also provide for the proration of
performance shares if a participant terminates service with the Company during a
performance period because of death, disability, retirement or under other
circumstances in which the Committee, in its discretion, finds that a waiver is
appropriate. If a participant terminates service with the Company during a
performance period for any other reason, then such participant will not be
entitled to any payment with respect to that performance period, unless
otherwise determined by the Committee.
The Committee is also authorized to approve requests by participants to
defer payment of performance shares on terms and conditions approved by the
Committee and set forth in an award agreement entered into in advance of the
time of receipt or constructive receipt of payment by the participant.
OTHER STOCK-BASED AWARDS. The Plan also authorizes the grant of other
awards that are valued in whole or in part by reference to, or otherwise based
on, Stock. These other stock-based awards will include without limitation
convertible preferred stock, convertible debentures, exchangeable securities,
phantom stock, and stock awards or options valued by reference to book value or
performance. Other stock-based awards may be granted either alone or in addition
to or in tandem with other awards granted under the Plan and/or cash awards made
outside of the Plan.
The Committee in its sole discretion is empowered to determine the
participants eligible to receive other stock-based awards, the time or times at
which such awards may be made, the number of shares of Stock subject to such
awards, and all other terms and conditions of such awards. The provisions of
other stock-based awards need not be the same with respect to each recipient.
Shares of Stock subject to other stock-based awards may not be sold, assigned,
transferred, pledged, or otherwise encumbered prior to the date on which the
shares are issued or, if later, the date on which any applicable restriction,
performance, or deferral period lapses. Interest or dividend equivalents may be
payable with respect to other stock-based awards in the discretion of the
Committee. The Committee may also determine whether any other stock-based awards
will be subject to vesting or forfeiture provisions and the effects of
termination of employment upon such awards.
EFFECTS OF CHANGE IN CONTROL. The Committee is granted broad discretion
under the Plan to deal with awards under the Plan upon an acceleration event,
which will be deemed to occur in the event of a change in control or a potential
change in control of the Company, as defined in the Plan. For these purposes, a
"change in control" will be deemed to have occurred if (a) any person (including
a group, but not the Company and any subsidiary and any employee benefit plan
thereof) makes a tender or exchange offer for shares of the Stock pursuant to
which any shares of the Stock are purchased, or such person (together with its
affiliates and associates) becomes the beneficial owner of at least 20% of the
Stock, or (b) the stockholders of the Company approve a definitive agreement or
plan to merge the Company with or into another corporation, to sell or otherwise
dispose of all or substantially all of its assets or to liquidate the Company,
or (c) during any period of 24 consecutive months, the incumbent directors at
the beginning of such period cease for any reason other than death to constitute
at least a majority of the Board (provided that a director will be deemed to be
an incumbent director if such director, although not a director at the beginning
of such 24-month period, was elected by, or on the recommendation of or with the
approval of, at least two-thirds of the directors then qualified as incumbent
directors). A "potential change in control" is defined in the Plan to mean (y)
the approval by stockholders of the Company of an agreement by the Company, the
consummation of which would result in a change in control of the Company, as
described above, or (z) the acquisition of direct or indirect beneficial
ownership by any person (as described above) of securities of the Company
representing 5% or more of the combined voting power of the Company's
outstanding securities and the adoption by the Board of a resolution to the
effect that a potential change in control of the Company has occurred for the
purposes of the Plan. A "Board-approved change in control" will be deemed to
have occurred if the offer, acquisition, or transaction in question is approved
by a majority of the directors serving as members of the Board at the time of
the potential change in control or change in control.
Upon the occurrence of an acceleration event, the Committee will be
authorized to take such action as it determines to be necessary or advisable,
and fair and equitable to participants, with respect to awards under the Plan.
The Committee's action may include without limitation, establishing, amending,
or waiving the forms, terms, conditions, and duration of an award and the award
agreement, so as to provide for earlier, later, extended,
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or additional times for exercise or payments, differing methods for calculating
payments, alternate forms and amounts of payment, and accelerated release of
restrictions, or other modifications.
Upon the occurrence of an acceleration event, subject to the approval of
the Committee if the acceleration event results from a Board-approved change in
control, then all outstanding performance shares under the Plan with respect to
which the applicable performance period has not been completed will be paid as
soon as practicable based upon the percentage of the period completed. All
performance objectives applicable to the award of performance shares will be
deemed to have been satisfied to the extent necessary to result in payment of
100% of the performance shares covered by the award. In addition, the applicable
performance periods will be deemed to have ended on the date of the acceleration
event. Under such circumstances, the payment to the participant will be the
amount determined either by the Committee, in its discretion, or in the manner
stated in the award agreement. This amount will then be multiplied by a
fraction, the numerator of which is the number of full calendar months of the
applicable performance period that have elapsed prior to the date of the
acceleration event and the denominator of which is the total number of months in
the original performance period. Upon the making of any such payment, the
related award agreement will be deemed canceled.
Upon the occurrence of an acceleration event, and the approval of the
Committee if the acceleration event results from a Board-approved change in
control, the Committee in its discretion may also declare any and all then
outstanding stock options, and any and all related stock rights outstanding for
at least six months not previously exercisable and vested to be immediately
exercisable and fully vested, in whole or in part. In addition, under such
circumstances the Committee may also in its discretion declare the restrictions
applicable to awards of restricted stock, deferred stock, or other stock-based
awards to have lapsed. The value of all outstanding stock options, stock rights,
restricted stock, deferred stock, performances shares, stock awards, and other
stock-based awards, in each case to the extent vested, will, unless otherwise
determined by the Committee in its sole discretion at or after grant but prior
to any change in control, be cashed out on the basis of the change in control
price as of the date such change in control or such potential change in control
is determined to have occurred or such other date as the Committee may determine
prior to the change in control. For these purposes, "change in control price"
means the highest price per share of Stock paid in any transaction reported on
the exchange on which the stock is traded, or paid or offered in any bona fide
transaction related to a potential or actual change in control of the Company at
any time during the 60-day period immediately preceding the occurrence of the
change in control, or, where applicable, the occurrence of the potential change
in control event), in each case as determined by the Committee. For ISOs and
SARs, or Limited SARs, related to such ISOs, such change in control price will
be based only on transactions reported for the date on which the optionee
exercises such SARs, or Limited SARs.
In addition to the effects of an acceleration event upon an award under the
Plan, the Plan also allows the Committee in its sole discretion to grant Limited
SARs, which become exercisable only in the event of a change in control and/or a
potential change in control, subject to such terms and conditions as the
Committee, in its sole discretion, may specify. Limited SARs will be settled
solely in cash. A Limited SAR will entitle the holder of the related stock
option to surrender such stock option, or any portion thereof, to the extent
unexercised, and to receive a cash payment equal to the difference between the
SAR fair market value, at the date of surrender, of a share of Stock for which
the surrendered stock option or portion thereof is then exercisable, and the
price at which a participant could exercise a related stock option to purchase
the share of Stock. For these purposes, the "SAR fair market value" means a
value established by the Committee for the exercise of an SAR or Limited SAR.
The foregoing provisions regarding changes of control might be used by the
Company as an antitakeover device to deter potential suitors from acquiring the
Company at prices that may be advantageous to current shareholders.
AMENDMENT AND TERMINATION. The Plan will continue in effect until
terminated by the Company as provided in the Plan. Notwithstanding the perpetual
nature of the Plan, ISOs may only be granted under the Plan until September 15,
2003.
Upon the recommendation of the Committee, or otherwise, the Board may amend
the Plan. To the extent required by Rule 16b-3 under the Act, no amendment to
the Plan may be made without approval by the Company's shareholders that would
make certain changes, including altering the group of persons eligible to
participate in the Plan, increasing the maximum number of shares of Stock
available for awards under the Plan (except as otherwise provided in the Plan),
extending the period during which ISOs may be granted under the Plan,
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limiting or restricting the powers of the Committee in administering the Plan,
changing the definition of participants eligible for ISOs or increasing the
limit or value of shares of Stock for which eligible participants may be granted
ISOs under the Plan, materially increasing the benefits accruing to participants
under the Plan, materially modifying the requirements of eligibility for
participation in the Plan or changing the amendment provisions of the Plan.
Notwithstanding the foregoing, no amendment to or discontinuation of the
Plan or any provision thereof may adversely affect any award previously granted
to a participant under the Plan without the written consent of such participant.
The Committee is empowered to determine whether an amendment or discontinuation
adversely affects any existing award. Notwithstanding the foregoing, the
Committee retains the power to: (a) annul any award if the participant is
terminated for cause as determined by the Committee, (b) provide for the
forfeiture of shares of Stock or other gain under an award as determined by the
Committee for competing against the Company, and (c) convert any outstanding ISO
to an NQSO. If an acceleration event (change in control or potential change in
control) has occurred, no amendment or termination will impair the rights of any
person with respect to an outstanding award as discussed under "Effects of
Change in Control" above.
TAX EFFECTS OF PLAN PARTICIPATION
The following discussion of the federal income tax consequences of the Plan
is intended only as a summary of the federal income tax treatment of stock
options (ISOs and NQSOs), stock rights (SARs and Limited SARS), and other stock
awards under the Plan as of the date of this Proxy Statement. The federal income
tax laws pertaining to the Plan are highly technical, and such laws are subject
to change at any time. Some variations on the federal income tax effects of Plan
participation described below may occur with respect to participation by persons
subject to Section 16(b) of the Act.
QUALIFIED OPTIONS. Although the Company has obtained neither a letter
ruling from the Internal Revenue Service nor an opinion of counsel stating that
the ISO provisions of the Plan constitute an incentive stock option plan under
the Code, it is expected that the options granted under the ISO provisions of
the Plan will qualify as ISOs for federal income tax purposes. It is also
expected that options granted under the ISO provisions of the Plan in tandem
with stock rights will likewise qualify as ISOs for federal income tax purposes
as long as the stock right expires with the underlying option and the right may
be exercised only when the market price of the stock subject to the option
exceeds the exercise price of the option.
In general, no taxable income will be realized by an optionee, and no
federal income tax deduction will be allowed to the Company, upon the grant or
exercise of an ISO. The federal income tax consequences of a disposition of
Stock received pursuant to the exercise of an ISO will depend upon whether the
optionee has held the shares for the requisite holding period. If the optionee
disposes of such shares after the later to occur of (1) two years from the date
of the grant of the ISO or (2) one year after the date of the transfer of the
shares to him (the "Holding Period"), then the optionee will be taxed according
to the rules of sales and exchanges generally. The amount subject to tax will be
the difference between the amount realized and the optionee's cost basis in the
shares of Stock, which difference will be capital gain if the shares are held as
a capital asset. In such event, the Company will not be entitled to a tax
deduction by reason of the disposition. For purposes of this discussion,
"disposition" means a lifetime transfer of legal title, such as by sale,
exchange, or gift, but does not include a transfer that is triggered by death,
such as one by bequest or inheritance or one made by a decedent to his estate.
The Holding Period will not apply to an ISO that is exercised after the
optionee's death by his estate or by a person who acquired the right to exercise
it by bequest or inheritance, or otherwise by reason of the optionee's death.
The Holding Period will apply if the optionee dies after he exercises his ISO.
In that case, his estate, or any other person holding the shares acquired
pursuant to the ISO, must either hold the shares for the applicable Holding
Period or suffer the tax consequences discussed below for a "disqualifying
disposition."
A "disqualifying disposition" takes place if the optionee makes a
disposition of the shares of Stock acquired through the exercise of an ISO
before satisfying the Holding Period. If a "disqualifying disposition" occurs,
the optionee must include as ordinary income the gain realized on that
disposition to the extent of the lesser of (1) the fair market value of the
Stock on the date of exercise of the ISO minus the option price or (2) the
amount realized on the disposition minus the option price. Upon the occurrence
of a "disqualifying disposition," the Company will be entitled to deduct, as
compensation paid, the amount so included as ordinary income by the optionee.
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Under the Plan, an optionee who exercises an option may be allowed to pay
for his shares with cash or with shares of Stock of the Company, including
shares acquired in a prior ISO exercise. Generally, such payment would not give
rise to recognition by the optionee of a gain or loss. If, however, an optionee
exercises an option and pays for the shares upon exercise with shares that the
optionee acquired in a prior ISO exercise but has not held for the requisite
Holding Period, the optionee will be taxed on the disposition of the shares
acquired in the prior ISO exercise as if a "disqualifying disposition" of those
shares had occurred.
In order for an ISO granted under the Plan to be governed by the general
rules pertaining to ISOs, the optionee must be an employee of the Company for
the entire time from the date the ISO is granted until three months before its
exercise. An optionee who is disabled has twelve months rather than three months
after leaving employment to exercise his ISOs. These employment requirements do
not apply if the optionee dies before exercising an ISO, but in such
circumstances the employment requirement must have been met by the employee at
his death.
The federal alternative minimum tax consequences of the exercise of an ISO
under the Plan may differ from the federal income tax consequences of such
exercise. The alternative minimum tax consequences of the disposition of shares
acquired upon the exercise of an ISO may also differ from the regular income tax
consequences of such disposition. The difference between the option price and
the fair market value of the shares upon exercise will be a preference item
subject to the federal alternative minimum tax. For purposes of the individual
alternative minimum tax, the income tax rules governing the transfer of property
in connection with the performance of services apply, not the regular income tax
rules applicable only to ISOS. For example, if an optionee acquires shares
pursuant to the exercise of an ISO under the Plan and disposes of the shares in
the same taxable year, tax treatment under the regular income tax and the
alternative minimum tax will be the same. If, however, the shares are disposed
of in a disqualifying disposition in a later taxable year, the difference
between the option price and the fair market value of the shares will be
included in alternative minimum taxable income in the year of exercise and in
regular taxable income, but not in alternative taxable income, in the year of
the disposition. Similarly, if an optionee acquires shares pursuant to the
exercise of an ISO under the Plan and disposes of the shares after the Holding
Period is satisfied, the difference between the option price and the fair market
value of the stock at the time of exercise will be included in alternative
minimum taxable income, but not in regular taxable income, in the year of
exercise, and for alternative minimum tax purposes the cost basis of the shares
will be the sum of the option price and the amount of income included in
alternative minimum taxable income in the year of exercise.
NONQUALIFIED OPTIONS. Holders of NQSOs will not be entitled to the special
tax treatment afforded by Sections 421 and 422 of the Code in connection with
ISOs. Under the Code, an optionee granted an NQSO will realize no taxable income
upon receipt of the NQSO, but will be deemed to have realized ordinary taxable
income equal to the excess of the fair market value of the stock acquired at the
time of the exercise of the NQSO over the option price paid, unless at the time
of exercise the stock remains subject to a "substantial risk of forfeiture" as
defined in Section 83 of the Code. Whether an optionee who exercises an NQSO
under the Plan will acquire the stock subject to such risk will depend upon the
terms of the NQSO award as determined by the Committee. For a complete
discussion of the income tax treatment when a participant acquires the Company's
Stock subject to a "substantial risk of forfeiture," see "Restricted Stock"
below. The Company is required for federal income tax purposes to withhold tax
on the amount of income realized by the optionee in the transaction. The Company
will be entitled to a deduction for federal income tax purposes in the year the
optionee must report the income in an amount equal to the ordinary income
realized by the optionee as a result of exercise of his NQSO.
An optionee's tax basis in shares acquired upon the exercise of an NQSO
will be the fair market value of such shares used to determine the amount of
ordinary taxable income reported by the optionee with respect to the exercise of
the NQSO. Upon any sale of such shares of Stock, the optionee's gain or loss
will therefore equal the difference between the sale price and such tax basis.
Any such gain or loss will be short-term or long-term capital gain or loss,
depending on whether the shares have been held for more than the long-term
capital gain holding period. In general, when an NQSO is exercised by the
exchange of previously acquired stock, the optionee receives a tax-free exchange
and basis carryover for old shares for an equivalent number of new shares. The
basis for any additional shares will equal the sum of the amount included in
gross income by reason of the exercise of the NQSO, plus any amount of cash paid
by the optionee upon the exercise of the NQSO.
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STOCK RIGHTS. The grant of a stock right to a participant under the Plan
will not require recognition of taxable income. Upon the exercise of a stock
right, however, payments received by the participant will be included in that
participant's income as compensation in that year. If payment is made in cash,
that amount of cash must be recognized as income. If the stock right is paid in
the Company's Stock, income will be recognized in the amount of the Stock's fair
market value. The Company will be entitled to a deduction for compensation in an
equal amount, to be recognized in its taxable year in which the participant's
taxable year of income inclusion ends. Upon the sale of any Stock acquired by
the exercise of stock rights, the participant will realize gain or loss equal to
the difference between the amount realized on the sale and the participant's
basis in such stock.
RESTRICTED STOCK. A recipient of restricted stock, or any other stock award
under the Plan that is subject to a "substantial risk of forfeiture," generally
will be subject to federal income tax at ordinary income rates on the excess of
the fair market value of the restricted stock or other stock award, at such time
that the stock is no longer subject to forfeiture and restrictions on transfer
for purposes of Section 83 of the Code ("restrictions"), over the purchase
price, if any, of such restricted stock or other stock award. However, a
recipient who so elects under Section 83(b) within 30 days of the date of
transfer of the shares will have ordinary taxable income on the date of transfer
of the shares equal to the excess of the fair market value of such shares on the
transfer date, determined without regard to the restrictions, over the purchase
price, if any, of such restricted stock or other stock award. No additional
ordinary taxable income will then be recognized when the restrictions expire,
although any gain on the disposition of the stock will be subject to tax as
discussed below. If the shares subject to such election are forfeited, the
recipient will only be entitled to a deduction, refund, or loss for tax purposes
equal to the purchase price, if any, of the forfeited shares, regardless of
whether the recipient made an election under Section 83(b) of the Code.
Upon the sale of any Stock following the expiration of the forfeiture
period for restricted stock or other stock award or upon the sale of Stock for
which a timely election under Section 83(b) was made, the participant will
realize capital gain or loss equal to the difference between the amount realized
on the sale and the participant's basis in such stock. The holding period to
determine whether the participant has long-term or short-term capital gain will
generally begin when the restrictions expire, and the tax basis for such shares
will generally be based on the fair market value of such shares on such date.
However, if the participant timely elects to be taxed as of the date of transfer
of the shares, the holding period will commence on such date, and the tax basis
will be equal to the fair market value of the shares on such date, determined
without regard to the restrictions.
The Company will be entitled to a deduction for federal income tax purposes
in the year the participant is taxable in an amount equal to the ordinary income
realized by the participant as a result of the restricted stock or other stock
award. The Plan requires any participant exercising an award to give the
Committee prompt written notice of any election made by the participant under
Section 83(b) of the Code.
DEFERRED STOCK. The recipient of a deferred stock award under the Plan will
generally be subject to federal income tax at ordinary income rates on the fair
market value of the deferred unrestricted stock on the date that such stock is
transferred to the participant under the award, and the holding period for
purposes of determining capital gain or capital loss on any subsequent sale of
such stock will also commence on such date. Upon the sale of any Stock acquired
pursuant to a deferred stock award, the participant will realize gain or loss
equal to the difference between the amount realized on the sale and the
participant's basis in such stock. The tax basis for such shares will generally
be based on the fair market value of such shares on the date the deferred
unrestricted stock is transferred to the participant. The Company will be
entitled to a deduction for federal income tax purposes in the year the
participant is taxable in an amount equal to the ordinary income realized by the
participant as a result of the deferred stock award.
STOCK AWARDS. Unrestricted awards of Stock will be taxable to the
participant and deductible by the Company at the time of the award in an amount
equal to the fair market value of the shares at that time. If the shares are
subject to forfeitability and nontransferability restrictions, the participant
may either elect immediate taxation in an amount equal to the fair market value
of the shares at the time of the award, less any payment therefor, or delay the
recognition of taxable income in an amount equal to the fair market value of the
shares, less the purchase price, if any, when the restrictions lapse. See
"Restricted Stock" above. Upon a sale of shares received as a stock award, the
participant will realize capital gain or loss in an amount equal to the
difference between the amount realized and the participant's tax basis, which is
generally the amount of ordinary income previously recognized plus any cash
payment. The Company will be entitled to a deduction for federal income tax
purposes
32
<PAGE>
in the year the participant is taxable in an amount equal to the ordinary income
realized by the participant as a result of the stock award.
PERFORMANCE SHARES. A participant granted an award of performance shares
will not recognize income at the time of grant but generally will recognize
ordinary income when the award is settled, either at the conclusion of the
performance period or at the end of the deferral period elected by a
participant. The amount of ordinary income recognized will be equal to the sum
of the cash received, if any, plus the then fair market value of the shares of
stock of the Company received. The Company will be entitled to a deduction for
federal income tax purposes in the year the participant is taxable in an amount
equal to the ordinary income realized by the participant as a result of the
performance share award.
PHANTOM STOCK. A participant granted an award of phantom stock under the
Plan will not recognize income at the time of grant but will generally recognize
ordinary income when the phantom stock award is settled. The amount of ordinary
income recognized will be equal to the sum of the cash received, if any, plus
the then fair market value of shares of stock received. The Company will be
entitled to a deduction for federal income tax purposes in the year the
participant is taxable in an amount equal to the ordinary income realized by the
participant as a result of the phantom stock award.
DIVIDENDS AND DIVIDEND EQUIVALENTS. Dividends paid on restricted stock or
other stock awards transferred to a participant under the Plan will generally be
treated as compensation that is taxable as ordinary income to the participant
and deductible by the Company, subject to applicable withholding requirements,
unless the participant makes a timely election under Section 83(b) of the Code,
in which case the dividends will be treated as dividends that are taxable as
ordinary income to the participant but not deductible by the Company. If
dividend equivalents are credited with respect to an award under the Plan, such
equivalents will be taxed at ordinary income rates when paid to the participant
and will generally be deductible by the Company at that time, subject to
applicable withholding requirements.
PAYMENTS UPON CHANGE IN CONTROL. The Plan authorizes the acceleration of
payment of awards and related shares of Stock in the event of a change in
control or potential change in control of the Company, as defined in the Plan.
Such acceleration of payment may cause part or all of the consideration involved
to be treated as a "parachute payment" under the Code, which may subject the
recipient thereof to a 20% excise tax and which may not be deductible by the
Company.
ALLOCATION OF PLAN BENEFITS
The amendment to the Plan proposed for approval by the shareholders at the
Annual Meeting of Shareholders to be held on October 26, 1995 affects only the
number of shares of Stock issuable under the Plan and makes no other
modifications to the current Plan. Consequently, the benefits or amounts that
were received by or allocated to any executive officers or any group of
employees or other persons under the current Plan during the fiscal year ended
December 31, 1994 are the same as would have been received by or allocated to
any such person or group if the Plan, as amended, had been in effect.
33
<PAGE>
The following table indicates the options that were made under the current
Plan since inception of the Plan to (a) the Company's chief executive officer,
(b) the one other executive officer whose compensation during fiscal year 1994
equaled or exceeded $100,000, (c) all current executive officers as a group, (d)
all current directors (excluding executive officers) as a group, and (e) all
employees, including all current officers who are not executive officers, as a
group. Neither any nominee for election as a director nor any associate of any
of the directors, executive officers or nominees for election as director has
received options under the Plan, and no person (other than as disclosed below)
has received options equal to five percent (5%) of the options granted under the
Plan.
<TABLE>
<CAPTION>
NAME AND POSITION DOLLAR VALUE (1) NUMBER OF OPTIONS
<S> <C> <C>
James D. Skinner $ 17,081 68,326
Chairman, President and
Chief Executive Officer
Carole A. Golden $ 9,166 36,666
Vice President, Research
and Development
All Directors (excluding n/a n/a
Executive Officers) as a Group
All Executive Officers $ 33,329 133,324
as a Group
All Employees as a Group $ 47,083 568,886
</TABLE>
(1) Dollar value is calculated by subtracting the exercise price of each
outstanding option from $3.44, the market value of the Common Stock of the
Company on September 1, 1995, and multiplying the result by the number of
shares of Common Stock subject to the option or award. Options are included
whether or not the options are currently vested or exercisable.
RELATIONSHIPS WITH AUDITORS
The Board of Directors has appointed the firm of Ernst & Young, LLP
independent accountants, as auditors of the Company for the year ending December
31, 1995. Ernst & Young has audited the Company since 1984. It is expected that
representatives of Ernst & Young will be present at the Annual Meeting. Such
representatives will have any opportunity to make a statement at the meeting if
they desire and are expected to be available to respond to appropriate
questions.
OTHER BUSINESS OF THE MEETING
Management is not aware of any matters to come before the Annual Meeting
other than those stated in the Proxy Statement. However, inasmuch as matters of
which management is not now aware may come before the meeting or any adjournment
thereof, the Proxies confer discretionary authority with respect to acting
thereon, and the persons named in such properly executed Proxies intend to vote,
act and consent in accordance with their best judgment with respect thereto.
Upon receipt of such Proxies (in the form enclosed) in time for voting, the
shares represented thereby will be voted as indicated thereon and in the Proxy
Statement.
34
<PAGE>
DATE FOR SUBMISSION OF STOCKHOLDER PROPOSALS
Any proposal, relating to a proper subject, which a Stockholder may intend
to present for action at the 1996 Annual Meeting of Stockholders, and which such
Stockholder may wish to have included in the company's proxy materials for such
meeting, in accordance with the provisions of Rule 14a-8 promulgated under the
Exchange Act, must be received in proper form by the Company addressed to Mr.
James D. Skinner, President and Chief Executive Officer, and sent by registered
mail, return receipt requested, and received at the Company's principal
executive office at 1238 Anthony Road, Burlington, North Carolina 27215, not
later than January 8, 1996.
By order of the Board of Directors,
JAMES D. SKINNER
CHAIRMAN OF THE BOARD
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
Burlington, North Carolina
September 25, 1995
COPIES OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED
DECEMBER 31, 1994 MAY BE OBTAINED WITHOUT CHARGE BY ANY STOCKHOLDER TO WHOM THE
PROXY STATEMENT IS SENT, UPON WRITTEN REQUEST TO THE SECRETARY, EDITEK, INC.,
1238 ANTHONY ROAD, BURLINGTON, NORTH CAROLINA 27215.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 (the "Exchange Act") and in accordance therewith files
reports, proxy statements and other information with the Securities and Exchange
Commission (the "Commission"). Reports, proxy statements and other information
filed by the Company can be inspected and copied at the public reference
facilities maintained by the Commission at Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549 and at its Regional Offices located at 75 Park
Place, New York, New York 10007, and the John C. Kluczynski Federal Building,
230 South Dearborn Street, Chicago, Illinois 60604. Copies of such material can
be obtained from the Public Reference Section of the Commission at Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 upon request and payment
of the prescribed fees.
The Company's Common Stock is listed on the American Stock Exchange (the
"AMEX"), and reports, proxy statements and other information filed by the
Company can be inspected at such exchange.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents, each of which was previously filed by the Company
with the Commission pursuant to Section 13 of the Exchange Act, are incorporated
herein by reference:
a) The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994.
b) The Company's Report on Form 10-Q for the quarter ended March 31, 1995.
c) The Company Report on Form 10-Q for the quarter ended June 30, 1995.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14
and 15(d) of the Exchange Act subsequent to the date of this Proxy Statement and
prior to the Annual Meeting of Shareholders to which this Proxy Statement
relates shall be deemed to be incorporated by reference herein and to be a part
hereof from the date of the filing of such reports and documents. Any statement
contained in a document incorporated or deemed to be incorporated by reference
herein shall be deemed to be modified or superseded for purposes of this Proxy
Statement to the extent that a statement contained herein or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein or in any accompanying Proxy Statement Supplement modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Proxy Statement.
The Company will provide without charge to each person to whom a Proxy
Statement is delivered upon written or oral request of each person, a copy of
any documents incorporated herein by reference (other than exhibits to such
documents unless such exhibits are specifically incorporated by reference into
the documents that this Proxy Statement) incorporates. Requests for such copies
should be directed to EDITEK, Inc., Attention: Secretary, 1238 Anthony Road,
Burlington, North Carolina 27215, (910) 226-6311.
35
<PAGE>
APPENDIX A
EDITEK, INC.
AMENDED AND RESTATED
SECTION OF CERTIFICATE OF INCORPORATION
FOURTH: The total number of shares of stock which the Corporation shall
have authority to issue is THIRTY-ONE MILLION (31,000,000) shares, THIRTY
MILLION of which shall be of a class designated as Common Stock with a par value
of FIFTEEN CENTS ($0.15) per share and ONE MILLION of which shall be of a class
designated as Preferred Stock with a par value of ONE DOLLAR ($1.00) per share.
All or any part of the authorized capital stock of the Corporation may be issued
and sold, from time to time by the corporation, without further action by
stockholders, for such consideration (but not less than the par value thereof)
and to such persons and on such terms and conditions as may, from time to time,
be fixed or determined by the Board of Directors. The voting powers,
designations, preferences and relative, participating, optional or other special
rights and the qualifications, limitations or restrictions thereof, of the
classes of stock of the corporation which are fixed by this Certificate of
Incorporation, and the authority vested in the Board of Directors to fix by
resolution or resolution providing for the issue of Preferred Stock the voting
powers, designations, preferences and relative, participating, optional or other
special rights, and the qualifications, limitations or restrictions thereof, of
the shares of Preferred Stock which are not fixed by the Certificate of
Incorporation, are as follows:
1. The Preferred Stock may be issued from time to time in one or more
series, each such series to have such distinctive designation or title as
may be fixed by the Board of Directors prior to the issuance of any shares
thereof. Each such series may differ from every other series already
outstanding as may be determined from time to time by the Board of
Directors prior to the issuance of any shares thereof, in any or all of the
following, but in other, respects:
(a) The rate of dividend which the Preferred Stock of any such
series shall be entitled to receive, whether the dividends of such
series shall be cumulative or non-cumulative and, if such dividends
shall be cumulative, the date from which they shall be cumulative.
(b) The right or obligation, if any, of the corporation to redeem
shares of Preferred Stock of any series and the amount per share which
the Preferred Stock of any such series shall be entitled to receive in
case of the redemption thereof, and the right of the corporation, if
any, to reissue any such shares after the same shall have been redeemed.
(c) The amount per share which the Preferred Stock of any such
series shall be entitled to receive in case of the voluntary
liquidation, distribution or sale of assets, dissolution or winding up
of the corporation, or in case of the involuntary liquidation,
distribution or sale of assets, dissolution or winding up of the
corporation.
(d) The right, if any, of the holders of Preferred Stock of any
such series to convert the same into other classes of stock, and the
terms and conditions of such conversion.
(e) The voting power, if any, of the holders of Preferred Stock of
any series, and the terms and conditions under which they may exercise
such voting power.
(f) The terms of the sinking fund or fund of similar nature, if
any, to be provided for the Preferred Stock of any such series.
The description of terms of the Preferred Stock of each series in respect
of the foregoing particulars shall be fixed and determined by the Board of
Directors by appropriate resolution at or prior to the time of the authorization
of the issue of the original shares of each such series.
2. In case the stated dividends and the amounts payable on
liquidation, distribution or sale of assets, dissolution or winding up of
the corporation are not paid in full, the stockholders of all series of the
Preferred Stock shall share ratably in the payment of dividends, including
accumulations, if any, in accordance with the same which would be payable
on such shares if all dividends were declared and paid in full and in any
distribution of assets other than by way of dividends, in accordance with
the sums which would be payable on such distribution if all sums payable
were discharged and paid in full.
A-1
<PAGE>
3. The holders of the Preferred Stock shall be entitled to receive,
when and as declared by the Board of Directors, out of funds legally
available therefor, preferential dividends in cash at, but not exceeding
the annual rate fixed for each particular series. The holders of the
Preferred Stock shall not be entitled to receive any dividends thereon
other than dividends referred to in this Subdivision 3.
4. So long as any of the Preferred Stock remains outstanding, in no
event shall any dividend whatever, whether in cash or other property (other
than shares of Common Stock), be paid or declared or any distribution be
made on the Common Stock, nor shall any shares of the Common Stock be
purchased, retired or otherwise acquired for a consideration by the
corporation unless (a) the full dividends of the Preferred Stock for all
past dividend periods from the respective date or then current
quarter-yearly dividend period shall have been paid or declared and a sum
set apart sufficient for the payment thereof, and (b) if at any time the
corporation is obligated to retire shares of any series of the Preferred
Stock pursuant to a sinking fund or a fund of a similar nature, all
arrears, if any, in respect of the retirement of the Preferred Stock of all
such series shall have been made good. Subject to the foregoing provisions
and not otherwise, such dividends (payable in cash, stock or otherwise) as
may be determined by the Board of Directors may be declared and paid on the
Common Stock from time to time out of the remaining funds of the
corporation legally available therefor, and the Preferred Stock shall not
be entitled to participate in any such dividend, whether payable in cash,
stock or otherwise.
5. In the event of any liquidation, distribution or sale of assets,
dissolution or winding up of the corporation, whether voluntary or
involuntary, before any distribution or payment shall be made to the
holders of Common Stock, the holders of the Preferred Stock of each series
shall be entitled to be paid in cash the applicable liquidation price per
share fixed at the time of the original authorization of issuance of shares
of such respective series, together with a sum, in the case of each share
of the Preferred Stock, computed at the annual dividend on such share
became cumulative to the date fixed for such distribution or payment date
paid thereon. If such payment shall have been made in full to the holders
of the Preferred Stock, the remaining assets and funds of the corporation
shall be distributed among the holders of the Common Stock according to
their respective shares.
6. Subject to the powers, preferences and rights and the
qualifications, limitations and restrictions thereof, with respect to each
class of capital stock of the corporation having any preference or priority
over the Common Stock, the holders of the Common Stock shall have and
possess all rights appertaining to capital stock of the corporation.
Holders of Common Stock may not act by written consent without a meeting.
A-2
<PAGE>
APPENDIX B
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND STOCKHOLDERS
MEDTOX LABORATORIES, INC.:
We have audited the accompanying consolidated balance sheets of Medtox
Laboratories, Inc. and subsidiary as of December 31, 1994 and 1993, and the
related statements of operations, stockholders' equity and cash flows for each
of the years in the three-year period ended December 31, 1994. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Medtox
Laboratories, Inc. and subsidiary as of December 31, 1994 and 1993 and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1994 in conformity with generally accepted
accounting principles.
KPMG, PEAT MARWICK LLP
Minneapolis, Minnesota
January 31, 1995
B-1
<PAGE>
MEDTOX LABORATORIES, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 AND 1993
<TABLE>
<CAPTION>
1994 1993
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................................... $ 526,512 27,977
Accounts receivable, less allowance for doubtful accounts (1994, $110,500; 1993,
$120,000)...................................................................... 2,966,466 3,030,137
Note receivable................................................................... 0 150,000
Laboratory supplies............................................................... 413,301 407,741
Prepaid expenses and other current assets......................................... 107,622 93,330
Total current assets........................................................... 4,013,901 3,709,185
Property and equipment:
Laboratory equipment.............................................................. 4,108,629 3,763,151
Office furniture and fixtures..................................................... 370,685 360,630
Leasehold improvements............................................................ 426,017 311,168
Transportation equipment.......................................................... 304,891 275,190
Total property and equipment................................................... 5,210,222 4,710,139
Less acccumulated depreciation.................................................... (3,700,312) (3,188,242)
Net property and equipment..................................................... 1,509,910 1,521,897
Other assets, net of related amortization:
Software.......................................................................... 84,242 104,070
Goodwill.......................................................................... 9,022 13,942
Covenant not to compete........................................................... 0 12,500
Deposits and other................................................................ 19,596 37,113
Total other assets............................................................. 112,860 167,625
Total assets................................................................... $ 5,636,671 5,398,707
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving line of credit.......................................................... $ 0 500,000
Current portion of long-term debt................................................. 437,755 602,395
Accounts payable.................................................................. 98,218 1,110,371
Restructuring accrual............................................................. 917,865 529,000
Accrued salary and wages.......................................................... 335,120 96,360
Accrued expenses.................................................................. 761,700 667,821
Total current liabilities...................................................... 2,550,658 3,505,947
Long-term debt (net of current portion)............................................. 518,563 1,060,791
Minority interest in subsidiary..................................................... 210 0
Total liabilities.............................................................. 3,069,431 4,566,738
Stockholders' equity:
Common stock, $1 par value per share, 50,000 shares authorized; 29,658 and 28,458
shares issued and outstanding, respectively.................................... 29,658 28,458
Additional paid-in capital........................................................ 600,032 570,032
Retained earnings................................................................. 1,937,550 233,479
Total stockholders' equity..................................................... 2,567,240 831,969
Commitments (note 5)
Total liabilities and stockholders' equity..................................... $ 5,636,671 5,398,707
</TABLE>
B-2
<PAGE>
MEDTOX LABORATORIES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
1994 1993 1992
<S> <C> <C> <C>
Revenues............................................................ $21,605,484 20,256,142 18,481,961
Pass through costs.................................................. 1,954,654 1,761,746 1,019,257
Net revenues................................................. 19,650,830 18,494,396 17,462,704
Cost of revenues:
Supplies.......................................................... 4,295,598 5,433,256 4,867,805
Direct labor...................................................... 2,990,431 3,287,293 3,063,299
Laboratory overhead............................................... 1,427,660 1,695,287 1,474,281
Gross profit................................................. 10,937,141 8,078,560 8,057,319
Operating expenses:
Distribution expenses............................................. 2,443,476 2,757,966 2,451,668
Sales and marketing expenses...................................... 1,043,759 1,494,759 1,529,445
Client support expenses........................................... 1,684,774 2,002,802 1,916,269
MIS expenses...................................................... 191,300 132,942 97,411
General and administrative........................................ 2,212,850 2,387,802 2,169,600
Restructuring costs (note 10)..................................... 567,700 1,162,033 0
Total operating expenses..................................... 8,143,859 9,938,304 8,164,393
Operating income (loss)...................................... 2,793,282 (1,859,744) (107,074)
Other income (expense):
Interest income................................................... 36,881 3,101 5,720
Interest expense.................................................. (218,059) (207,769) (194,099)
Loss on sale of assets............................................ (11,269) (18,210) (1,545)
Miscellaneous income (expense).................................... (7,025) (2,452) (10,141)
Total other expense.......................................... (199,472) (225,330) (200,065)
Net income (loss)............................................ $ 2,593,810 (2,085,074) (307,139)
Pro forma income data (unaudited) (note 2):
Net income (loss) as reported................................ 2,593,810 (2,085,074) (307,139)
Pro forma adjustment to record provision for income taxes.... 1,040,000 (758,000) (148,000)
Pro forma net income (loss).................................... $ 1,553,810 (1,327,074) (159,139)
Pro forma net income per share................................. $ 52.64 (47.46) (5.77)
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
B-3
<PAGE>
MEDTOX LABORATORIES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
SHARES PAID-IN RETAINED
ISSUED AMOUNT CAPITAL EARNINGS TOTAL
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1991............................ 26,858 $26,858 518,032 2,625,692 3,170,582
Exercise of stock option............................ 1,100 1,100 27,500 0 28,600
Net loss............................................ 0 0 0 (307,139) (307,139)
Balance, December 31, 1992............................ 27,958 27,958 545,532 2,318,553 2,892,043
Stock issuance...................................... 500 500 24,500 0 25,000
Net loss............................................ 0 0 0 (2,085,074) (2,085,074)
Balance, December 31, 1993............................ 28,458 28,458 570,032 233,479 831,969
Exercise of stock options........................... 1,200 1,200 30,000 0 31,200
Distribution to stockholders........................ 0 0 0 (889,739) (889,739)
Net income.......................................... 0 0 0 2,593,810 2,593,810
Balance, December 31, 1994............................ 29,658 $29,658 600,032 1,937,550 2,567,240
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
B-4
<PAGE>
MEDTOX LABORATORIES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECMEBER 31, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
1994 1993 1992
<S> <C> <C> <C>
Reconciliation of net income (loss) to net cash provided by operating
activities:
Net income (loss)..................................................... $ 2,593,810 (2,085,074) (307,139)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization...................................... 601,760 893,651 911,673
Loss on sale of assets............................................. 11,269 18,210 1,545
Restructuring reserves:
Reserves established............................................. 567,700 1,162,033 0
Reserves utilized................................................ (178,835) 0 0
Minority interest in subsidiary.................................... 210 0 0
Changes in operating assets and liabilities net of assets sold and
liabilities assumed by buyer in sale of California Division:
Decrease (increase) in accounts receivable......................... 63,671 (725,433) 147,903
Decrease (increase) in laboratory supplies......................... (5,560) 515,630 (386,380)
Decrease (increase) in other current assets........................ (14,292) (1,183) 58,055
Increase (decrease) in accounts payable............................ (1,012,153) 525,615 354,579
Increase (decrease) in accrued expenses............................ 332,639 294,435 140,782
Net cash provided by operating activities..................... 2,960,219 597,884 921,018
Cash flows from investing activities:
Decrease in note receivable........................................... 150,000 150,000 0
Purchases of property and equipment................................... (480,754) (398,914) (1,028,348)
Purchases of intangible assets and software........................... (33,335) 0 (147,460)
Proceeds from sale of equipment....................................... 20,563 0 6,386
Decrease (increase) in deposits and other assets...................... 17,517 3,355 (20,465)
Net cash used in investing activities......................... (326,009) (245,559) (1,189,887)
Cash flows from financing activities:
Proceeds from long-term debt.......................................... 0 2,068,439 313,667
Net increase (decrease) in line of credit............................. (500,000) 103 499,897
Payments on long-term debt............................................ (777,136) (2,507,670) (489,592)
Proceeds from the issuance of common stock............................ 31,200 25,000 28,600
Distributions to stockholders......................................... (889,739) 0 0
Net cash used in financing activities......................... (2,135,675) (414,128) 352,572
Net increase (decrease) in cash and cash equivalents.......... 498,535 (61,803) 83,703
Cash and cash equivalents, beginning of year............................ 27,977 89,780 6,077
Cash and cash equivalents, end of year.................................. $ 526,512 27,977 89,780
</TABLE>
The accompanying notes are an integral part of the financial statements.
B-5
<PAGE>
MEDTOX LABORATORIES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1993
(1) NATURE OF BUSINESS
Medtox Laboratories, Inc. (the Company) is a toxicology reference
laboratory offering therapeutic drug monitoring, drugs of abuse screening,
clinical analyses, research analyses and emergency toxicology. Medtox is
certified by the Substance Abuse and Mental Health Services Administration
(SAMHSA) and the College of American Pathologists (CAP). The Company,
incorporated in the State of Minnesota on May 15, 1984, operates a medical
laboratory in St. Paul, Minnesota with customers throughout the United States.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Medtox Laboratories, Inc. and its majority owned subsidiary, The Forensic
Resource Group, Inc. All material intercompany accounts and transactions have
been eliminated in consolidation.
LABORATORY SUPPLIES
Laboratory supplies are valued at the lower of cost, which approximates the
first in, first out (FIFO) method, or market.
PROPERTY AND EQUIPMENT
Property and equipment, including equipment under capital leases, is
reported at cost less accumulated depreciation and amortization. Maintenance and
repairs are charged to expense as incurred. The Company computes depreciation
and amortization using accelerated and straight-line methods based on estimated
useful lives of five to seven years for equipment and furniture. Leasehold
improvements are amortized over the remaining term of the lease or life of the
improvement, whichever is shorter.
INTANGIBLE AND OTHER ASSETS
Intangible and other assets include software, goodwill, and a covenant not
to compete agreement. Software is amortized over five years. Goodwill, which
represents the cost in excess of the fair value of net assets acquired, is
amortized using the straight-line method over a five-year life. The noncompete
agreement was amortized using the straight-line method over the three-year term
of the agreement.
At December 31, 1994 and 1993 accumulated amortization of intangible assets
was as follows:
<TABLE>
<CAPTION>
1994 1993
<S> <C> <C>
Software.......................................................... $242,209 220,230
Goodwill.......................................................... 15,582 20,661
Covenant not to compete........................................... 0 32,500
$257,791 273,391
</TABLE>
NET REVENUES
Net revenues consist of gross billings less collection site and medical
review officer costs and send-outs, all of which are billed back to the
customer.
INCOME TAXES
The stockholders have elected to have the Company report as an S
corporation and therefore not be taxed as a separate entity; rather, taxable
income or loss flows pro rata to stockholders and is reported on their
individual returns.
B-6
<PAGE>
MEDTOX LABORATORIES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Effective the date of incorporation, May 15, 1984, Medtox Laboratories,
Inc. elected to be taxed under Subchapter S of the Internal Revenue Code. The
proforma income tax adjustments included in the statements of operations
represent Federal and the additional state income tax expense that would have
been required had the Company not made the S Corporation election.
The Company reports its taxable income or loss on the cash basis versus the
accrual basis. If the Company becomes a regular C corporation, it would be
required to use the accrual basis, resulting in the recognition of approximately
$2,400,000 of taxable income that was previously deferred.
The Company would have to pay the tax on the deferred taxable income over
four years.
CASH FLOWS
Supplemental schedule of noncash investing activities:
<TABLE>
<CAPTION>
1994 1993 1992
<S> <C> <C> <C>
Equipment acquired through capital leases and or installment notes................ $70,268 64,421 14,942
Note receivable from sale of California division.................................. $ 0 300,000 0
Note payable assumed by buyer in sale of California division...................... $ 0 10,520 0
</TABLE>
Cash paid for interest was $178,829, $213,972 and $194,208 for the years
ended December 31, 1994, 1993 and 1992, respectively.
CASH EQUIVALENTS
For the purposes of the statement of cash flows, the Company considers all
highly liquid investments purchased with an original maturity of three months or
less to be cash equivalents.
INVESTMENT IN SUBSIDIARY
In November 1994, the Company purchased a 79% equity interest, representing
79% voting control, in a newly formed company, The Forensic Resource Group,
Inc., for $790 in cash. The Company's 79% controlling interest requires that The
Forensic Resource Group's operations since its acquisition be included in the
consolidated financial statements. The 21% equity interest not acquired by the
Company is shown as "minority interest" in the 1994 consolidated balance sheet.
The minority interest in the subsidiary is owned by shareholders and officers of
the Company.
RECLASSIFICATION
Certain 1993 and 1992 amounts have been reclassified to conform to the 1994
presentation.
(3) NOTE PAYABLE -- BANK
The Company has a line of credit agreement with Norwest Bank Minnesota,
N.A., totaling $500,000 with interest at prime (8.5% at December 31, 1994).
Advances are secured by accounts receivable, supplies, equipment and intangible
assets. Advances at December 31, 1994 were $0. The line of credit agreement
contains
B-7
<PAGE>
MEDTOX LABORATORIES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
covenants which, among other things, require the Company to maintain certain
minimum financial ratios. The line of credit agreement expires June 30, 1995.
(4) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DESCRIPTION 1994 1993
<S> <C> <C>
Note payable to bank, monthly payment of $29,045, plus interest at prime through March
1997.................................................................................. $ 784,152 1,187,471
Notes payable to bank, monthly payments of $3,424 to $4,883, including interest at rates
ranging from 7.75% to 8.0%, through April 1997........................................ 172,166 331,287
Various notes payable, monthly payments of $145 to $14,500, including interest at rates
ranging from 5.9% to 13.6%............................................................ 0 144,428
956,318 1,663,186
Less current portion.................................................................... (437,755) (602,395)
Long-term portion....................................................................... $ 518,563 1,060,791
</TABLE>
The above notes are secured by substantially all corporate assets.
Notes payable to the bank contain certain covenants discussed in note 3.
Aggregate annual maturities of long-term debt at December 31, 1994 are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31
<S> <C>
1995................................................. $ 437,755
1996................................................. 421,822
1997................................................. 96,741
$ 956,318
</TABLE>
(5) COMMITMENTS
The Company leases office space in Minnesota under an operating lease which
expires March 31, 1997. Under the terms of the lease, a pro rata share of the
building operating expenses and real estate taxes are charged as additional
rent. Minimum future rental payments under all operating leases without regard
to sublease payments are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
<S> <C>
1995........................................................................ $ 500,408
1996........................................................................ 507,260
1997........................................................................ 266,594
1998........................................................................ 186,372
1999 and beyond............................................................. 248,496
$1,709,130
</TABLE>
Rent expense charged to operations was $463,299, $771,796 and $422,056 for
the years ended December 31, 1994, 1993 and 1992, respectively. The Company has
office space in Chicago and California which is subleased to other parties. The
amount of sublease payments to be received is $126,256, $131,217 and 124,608 for
the years ended December 31, 1995, 1996 and 1997, respectively.
B-8
<PAGE>
MEDTOX LABORATORIES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(6) ACCRUED EXPENSES
Accrued expenses are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1994 1993
<S> <C> <C>
Insurance reserves (a)........................................................ $107,773 48,505
Payroll and other taxes....................................................... 61,359 22,921
Collection site/MRO fees...................................................... 250,000 203,500
Deferred rent................................................................. 80,228 90,360
Interest...................................................................... 10,842 7,247
Vacation...................................................................... 220,921 282,530
Other......................................................................... 30,577 12,758
$761,700 667,821
</TABLE>
(a) The health insurance accrual represents an estimate by the Company of
covered services received by employees prior to year end which were not
reported and/or paid by the Company until the following plan year.
(7) PROFIT SHARING PLAN
The Company has a defined contribution profit sharing plan, with a 401(k)
provision, that covers substantially all employees that meet certain age and
length of service requirements. Contributions to the plan are at the discretion
of the board of directors. During 1994, 1993 and 1992 matching contributions to
the 401(k) plan were $68,857, $70,700 and $43,221 respectively. No discretionary
contribution was made.
(8) RELATED PARTY TRANSACTIONS
The Company provided laboratory services to an entity owned by certain
stockholders and employees of the Company. These laboratory services were
bundled with other services which the Company did not offer, and sold as a
package to certain clients. Total sales to the entity for 1994, 1993 and 1992
were $372,741, $431,955 and $146,385, respectively.
The Company also purchased services, including collection site and medical
review officer services, and customized specimen collection supplies from that
same entity. Purchases for 1994, 1993 and 1992 were $231,604, $1,169,731 and
$1,463,347, respectively.
During 1993, the Company reviewed the services provided by and purchased
from the entity and terminated all purchases of supplies. In December 1993, the
Company began purchasing the collection supplies from alternative sources at
reduced prices. Management has determined all sales and purchases subsequent to
December 1993 from this entity are at arms length. As of December 31, 1994, the
entity is no longer a related party.
(9) STOCK OPTIONS
The Company had issued stock options to certain key employees which allow
for the purchase of an aggregate of 1,200 additional shares. These options to
purchase 1,200 of the outstanding shares were exercised during 1994. There were
no options outstanding at December 31, 1994.
(10) RESTRUCTURING COSTS
During fiscal 1993, the Company decided to restructure its operations and
consolidate its facilities to the Minnesota location.
B-9
<PAGE>
MEDTOX LABORATORIES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Effective October 31, 1993, the Company sold substantially all of its
California operations to a third party for $300,000 which was collected in 1993
and 1994. In addition, the buyer assumed certain liabilities of the operation
and entered into an assignment of the related lease. The sale of the assets
resulted in a loss of approximately $457,000 which is reflected in restructuring
costs in 1993.
The Company closed its Illinois division on December 31, 1993. In
connection with this closing, the Company recorded restructuring expenses as of
December 31, 1993 of approximately $705,000. The expenses included lease
obligations, severance and vacation costs and other miscellaneous expenses
directly related to the closing of the facility. The $529,000 of restructuring
accrual on the December 31, 1993 balance sheet related to lease obligations. The
accrual was based upon gross lease payments less estimated sublease payments
assuming the Company would be able to lease the facility as a laboratory at a
reduced lease rate. The accrual was discounted using a rate of 9.5%.
During 1994, the Company was not successful in subleasing the Illinois
facility as a laboratory as had been planned. Accordingly, management revised
the estimate of sublease income based on reconfiguring the space for general
office use at a lower lease rate and expensed an additional $567,700 during
1994. The lease on the Illinois facility expires on May 17, 2000.
B-10
<PAGE>
APPENDIX C
MEDTOX LABORATORIES, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
6/30/95 12/31/94
<S> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents......................................................... $ 960,983 $ 526,512
Accounts receivable, less allowance for doubtful accounts......................... 3,598,339 2,966,466
Laboratory supplies............................................................... 287,380 413,301
Prepaid expenses and other current assets......................................... 244,943 107,622
Total current assets.............................................................. 5,091,645 4,013,901
Property and equipment:
Laboratory equipment.............................................................. 4,707,260 4,108,629
Office furniture and fixtures..................................................... 372,764 370,685
Leasehold improvements 455,444 426,017
Transportation equipment.......................................................... 333,147 304,891
Total property and equipment...................................................... 5,868,615 5,210,222
Less accumulated depreciation..................................................... (4,015,120) (3,700,312)
Net property and equipment........................................................ 1,853,495 1,509,910
Other assets, net of related amortization:
Software.......................................................................... 78,954 84,242
Goodwill.......................................................................... 6,561 9,022
Deposits and other................................................................ 18,629 19,596
Total other assets................................................................ 104,144 112,860
Total assets...................................................................... $ 7,049,284 $ 5,636,671
LIABILITIES AND SHAREHOLDERS EQUITY
Current Liabilities
Current portion of long-term debt................................................. $ 501,710 $ 437,755
Accounts payable.................................................................. 407,810 98,218
Restructuring accrual, current portion............................................ 258,070 258,070
Accrued salary and wages.......................................................... 137,563 335,120
Accrued expenses.................................................................. 1,084,930 761,700
Total current liabilities......................................................... 2,390,083 1,890,863
Restructuring accrual, long-term portion............................................ 545,617 659,795
Long-term debt (net of current portion)............................................. 709,189 518,563
Minority interest in subsidiary..................................................... 210 210
Total liabilities................................................................. 3,645,099 3,069,431
Stockholder's equity:
Common stock, $1 par value per share, 50,000 shares authorized; 29,658 issued and
outstanding.................................................................... 29,658 29,658
Additional paid-in capital........................................................ 600,033 600,032
Retained earnings................................................................. 2,774,494 1,937,550
Total stockholders' equity........................................................ 3,404,185 2,567,240
Total liabilities and stockholders' equity.......................................... $ 7,049,284 $ 5,636,671
</TABLE>
C-1
<PAGE>
MEDTOX LABORATORIES, INC.
AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
6/30/95 6/30/94
<S> <C> <C>
Revenues........................................................................... $11,380,518 $10,963,684
Pass through costs................................................................. (1,176,505) (1,089,598)
Net revenues....................................................................... 10,204,013 9,874,086
Cost of revenues:
Supplies......................................................................... 2,045,461 2,209,357
Direct labor..................................................................... 1,747,695 1,439,094
Laboratory overhead.............................................................. 800,828 --
Total cost of sales................................................................ 4,593,984 3,648,451
Gross profit....................................................................... 5,610,029 6,225,635
Operating expenses:
Distribution expenses............................................................ 1,221,811 --
Sales and marketing expenses..................................................... 472,561 421,459
Client support expenses.......................................................... 939,832 1,668,590
MIS expenses..................................................................... 89,141 67,727
General and administrative expenses.............................................. 1,079,568 2,396,648
Total operating costs............................................................ 3,802,913 4,554,424
Other income (expense)
Other income..................................................................... 11,495 --
Interest expense................................................................. (91,926) (57,525)
Total other income (expense)..................................................... (80,431) (57,525)
Net income......................................................................... $ 1,726,685 $ 1,613,686
Pro forma income data:
Net income as reported........................................................... $ 1,726,685 $ 1,613,686
Pro forma adjustment to record provision for income taxes........................ 655,000 505,000
Pro forma net income............................................................. $ 1,071,685 $ 1,108,686
Pro forma net income per share..................................................... $ 36.14 $ 37.56
</TABLE>
C-2
<PAGE>
MEDTOX LABORATORIES, INC.
AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
6/30/95 6/30/94
<S> <C> <C>
Reconciliation of net income (loss) to net cash provided by operating activities:
Net income (loss)................................................................ $ 1,726,686 $ 1,613,686
Adjustment to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization................................................. 338,317 312,000
(Gain) loss on sale of assets................................................. (800) --
Decrease (increase) in accounts receivable.................................... (631,873) (380,737)
Decrease (increase) in laboratory supplies.................................... 125,921 72,921
Decrease (increase) in other current assets................................... (137,321) 169,965
Decrease (decrease) in accounts payable....................................... 286,066 (685,371)
Decrease (decrease) in accrued expenses....................................... 35,020 183,446
Net cash provided by operating activities.......................................... $ 1,742,016 $ 1,285,910
Cash flows from investing activities:
Purchases of property and equipment.............................................. $ (628,967) $ (264,416)
Purchases of intangible assets and software...................................... (44,219) (13,335)
Proceeds from sale of equipment.................................................. 800 --
Decrease (increase) in deposits and other assets................................. -- 12,385
Net cash used in investing activities.............................................. $ (672,386) $ (265,366)
Cash flows from financing activities:
Proceeds from long-term debt..................................................... $ 478,000 $ 124,619
Net increase (decrease) in line of credit........................................ -- (500,000)
Payments on long-term debt....................................................... (223,419) (383,218)
Proceeds from the issuance of common stock....................................... -- 31,200
Distributions to stockholders.................................................... (889,740) --
Net cash used in financing activities.............................................. $ (635,159) $ (727,399)
Net increase (decrease) in cash and cash equivalents............................... $ 434,471 $ 293,145
Cash and cash equivalents, beginning of year....................................... $ 526,512 $ 27,977
Cash and cash equivalents, end of year............................................. $ 960,983 $ 321,122
</TABLE>
C-3
