FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period to
Commission file number 1-11394
EDITEK, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-3863205
(State or other jurisdiction of (I.R.S. Employer
incorporated or organization) Identification No.)
1238 Anthony Road, Burlington, North Carolina 27215
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (910) 226-6311
- -------------------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
The number of shares of Common Stock, $.15 par value, outstanding as of November
1, 1996 was 25,513,284.
<PAGE>
EDITEK, INC.
INDEX
Page
Part I Financial Information:
Item 1:
Balance Sheets - September 30, 1996 (Unaudited)
and December 31, 1995 .......................................... 3
Statements of Operations - Nine Months Ended
September 30, 1996 and 1995 and Three Months Ended
September 30, 1996 and 1995 (Unaudited)......................... 5
Statements of Cash Flows - Nine Months
Ended September 30, 1996 and 1995 (Unaudited) .................. 6
Notes to Financial Statements .................................. 7
Item 2:
Management's Discussion and Analysis of
Financial Condition and Results of Operations ..................11
Part II Other Information .. ..............................................19
Signatures......................................................20
<PAGE>
PART I. FINANCIAL INFORMATION
<TABLE>
EDITEK, Inc.
BALANCE SHEETS
September 30 December 31
1996 1995
(Unaudited)
-----------------------------------
(in thousands)
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 325 $ 258
Accounts receivable
Trade, less allowance for
doubtful accounts ($232,000 - 1996,
$130,000 - 1995) 4,757 977
Other 150 52
Inventories:
Raw Materials 467 588
Work in process 121 169
Finished goods 655 180
-----------------------------------
1,243 937
Deposit on acquisition - 500
Prepaid expenses and other 250 368
-----------------------------------
Total current assets 6,725 3,092
Equipment and improvements
Furniture and equipment 9,632 5,857
Leasehold improvements 954 1,696
-----------------------------------
10,586 7,553
Less accumulated depreciation
and amortization (8,085) (6,824)
-----------------------------------
2,501 729
Goodwill, Net 22,166 117
-----------------------------------
$ 31,392 $ 3,938
===================================
</TABLE>
<PAGE>
<TABLE>
EDITEK, Inc.
BALANCE SHEETS
(Continued)
September 30 December 31
1996 1995
(Unaudited)
-----------------------------------
(in thousands)
<S> <C> <C>
Liabilities and stockholders' equity
Current liabilities
Line of credit $ 1,033 $ -
Accounts payable 1,803 1,184
Accrued expense 1,871 834
Accrued restructuring expenses 938 -
Deferred revenues 1 42
Current portion of notes payable 1,333 82
Note payable to director - 100
-----------------------------------
Total current liabilities 6,979 2,242
Long term debt 1,778 -
Noncurrent Restructuring Expenses 767 -
Stockholders' equity
Preferred Stock--authorized 1,000,000
shares; 53 shares issued and outstanding - -
Common Stock, $.15 par value;
authorized - 30,000,000 shares;
issued and outstanding -
25,513,284 shares in 1996 and
10,439,775 shares in 1995 3,827 1,566
Additional paid-in capital 56,356 33,973
Accumulated deficit (38,139) (33,667)
-----------------------------------
22,044 1,872
Less: Note receivable from officer - (100)
Treasury stock (176) (76)
-----------------------------------
Total stockholders' equity 21,868 1,696
$ 31,392 $ 3,938
===================================
See notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
STATEMENTS OF OPERATIONS
(Unaudited)
Nine Months Three Months
Ended Ended
September 30 September 30
1996 1995 1996 1995
----------------------------------------------------
(in thousands except for per share amounts)
<S> <C> <C> <C> <C>
Revenues
Laboratory service revenues $ 17,555 $ 3,149 $ 6,072 $ 1,086
Product sales 2,410 2,094 722 747
Royalties and fees 90 234 5 74
Interest and other income 69 186 45 5
----------------------------------------------------
20,124 5,663 6,844 1,912
Cost of services 13,122 3,062 4,707 1,004
Cost of sales 1,779 1,738 552 615
----------------------------------------------------
Gross profit 5,223 863 1,585 293
Operating expenses
Selling, general and administrative 6,337 2,963 2,505 1,024
Research and development 1,044 669 334 242
Interest and financing costs 350 21 123 1
Restructuring costs 1,966 - 1,108 -
----------------------------------------------------
9,697 3,653 4,070 1,267
----------------------------------------------------
Net loss $ (4,474) $(2,790) $ (2,485) $ (974)
=====================================================
Loss per common share $ (0.22) $ (0.28) $ (0.10) $ (0.10)
=====================================================
Weighted average number of
common shares outstanding 19,953,009 9,915,427 25,485,225 9,321,610
===============================================================
See notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
EDITEK, Inc.
STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended
September 30
1996 1995
----------------------
(in thousands)
<S> <C> <C>
Operating activities
Net loss $(4,474) $(2,790)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,703 501
Write off of goodwill and other assets 221 -
Gain on sale or retirement of equipment (16) -
Changes in operating assets & liabilities
net of effects from purchase of Medtox:
Accounts receivable (975) (355)
Inventories 57 (2)
Prepaid expenses & other 255 (462)
Accounts payable and accrued liabilities 198 (146)
Deferred revenues (96) (26)
Restructuring accruals 974 -
Leases payable - (23)
----------------------
Net cash used in operating activities (2,153) (3,303)
Investing activities
Purchases of equipment & improvements (1,065) (108)
Proceeds from sale of equipment 24 -
Cash used for BIOMAN acquisition - (37)
Cash used for MEDTOX acquisition (18,500) -
----------------------
Net cash used in investing activities (19,541) (145)
Financing activities
Payments on Debt (2,267) (945)
Proceeds from borrowings 5,033 16
Costs associated with borrowings/acquisition (824) -
Proceeds from issuance of stock for:
Employee stock purchase plan 64 21
Exercise of stock options and warrants 26 193
Private placements 600 3,715
Preferred stock 20,350 -
Costs related to stock issuances (1,221) (231)
Conversion of note payable to common stock - 61
Increase in notes payable - (71)
----------------------
Net cash provided by financing activities 21,761 2,759
----------------------
Increase (Decrease) in cash and cash equivalents $ 67 $ (689)
Cash and cash equivalents at beginning of period $ 258 $ 1,105
---------------------
Cash and cash equivalents at end of period $ 325 $ 416
=====================
</TABLE>
<PAGE>
EDITEK, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 1996
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited financial statements of EDITEK, Inc. (the "Company")
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and notes required by generally accepted accounting principles. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation of financial condition
and results of operations have been included. Operating results for the nine
month period ended September 30, 1996 are not necessarily indicative of the
results that may be attained for the entire year. For further information, refer
to the financial statements and notes thereto included in the Company's Annual
Report on Form 10-K, (as amended), for the year ended December 31, 1995.
Loss Per Share: Loss per share amounts are based on the weighted average number
of shares of common stock outstanding. Common stock equivalents have not been
included in the computation as the effect would be anti-dilutive.
NOTE B -- ACQUISITION OF MEDTOX LABORATORIES, INC. ("MEDTOX")
On January 30, 1996, the Company acquired MEDTOX, a toxicology laboratory
located in St. Paul, Minnesota. The purchase price was $24 million, which
included $19 million cash and the issuance of 2,517,306 shares of common stock.
The acquisition was accounted for under the purchase method of accounting
wherein the Company recognized approximately $22 million in goodwill. The
goodwill is being amortized over a period of 20 years. The Company financed the
acquisition by issuing $20 million of convertible preferred stock and borrowing
$4 million under two $2 million term loans. The Company also entered into a
revolving line of credit of up to $7 million for working capital purposes. The
consolidated results of operations for the nine months ended September 30, 1996
include the results of the MEDTOX operations from January 26, 1996 to September
30, 1996.
NOTE C -- ACQUISITION OF BIOMAN PRODUCTS, INC. ("BIOMAN")
On June 1, 1995, the Company acquired Bioman, an environmental diagnostics
company. The purchase price was $140,000, which included cash and the issuance
of 21,489 shares of common stock. The acquisition was accounted for under the
purchase method of accounting wherein the Company recognized $117,000 of
goodwill, which is being amortized over a period of 10 years. The consolidated
results of operations for the nine months ended September 30, 1996 include the
<PAGE>
results of the Bioman operations. In September 1996, the Company sold the former
Bioman operations to a company headed by former employees of the Company and
Bioman. As a result of the sale of the former Bioman operations, the Company has
written off $101,000 of the remaining goodwill associated with the acquisition
of Bioman.
NOTE D -- DEBT
On August 15, 1989 the Company entered into a long-term loan agreement with the
North Carolina Biotechnology Center ("NCBC"), a state funded, non-profit
organization whereby the Company borrowed an aggregate of $125,000 to fund the
development cost of a test for Chlamydia, a sexually transmitted disease. The
loan originally had an interest rate of seven and one half percent (7.5%) per
annum with all principal and interest due on August 15, 1994. The Company
amended the loan agreement on the due date and issued 16,100 shares of common
stock for $62,000 of the loan. The remaining principal of $63,000 and all
accrued interest was paid on September 30, 1996.
To help finance the acquisition of MEDTOX, the Company entered into revolving
and term loan facilities with Heller Financial, Inc. ("Heller"). The debt
financing is for a total of $11,000,000 and consists of two term loans totaling
$4,000,000 and up to $7,000,000 in the form of a revolving line of credit based
primarily on the receivables of the Company. The amount of credit available to
the Company varies with the accounts receivable and the inventory of the
Company. The interest rates on the two term loans of $2,000,000 are 2.5 points
above the prime rate and 2.0 points above the prime rate, respectively. The
revolving line of credit carries an interest rate equal to 1.5 points above the
prime rate.
As of September 30, 1996, the Company was not in compliance with certain
covenants in its loan agreement with Heller. As a result of the existence and
continuance of the lack of compliance, Heller has established a reserve by
reducing the availability under the revolving line of credit. The amount of the
reserve at September 30, 1996 is $1,111,000. The Company and Heller are in the
process of establishing new covenants where appropriate.
NOTE E -- RESTATEMENT OF 1995 FINANCIAL STATEMENTS
During 1995, the Company recorded a restructuring charge in the amount of
$758,000 associated with the consolidation of the laboratory operations at
Princeton Diagnostic Laboratories of America, Inc. ("PDLA") into the laboratory
operations at MEDTOX. Subsequent to the filing of the 1995 Audited Financial
Statements, it was determined that the restructuring charge should be recorded
during the first quarter of 1996, consistent with the consummation of the MEDTOX
acquisition on January 30, 1996. Accordingly, the Company has restated the 1995
Audited Financial Statements.
<PAGE>
NOTE F -- GOODWILL
It is the Company's policy to account for goodwill and all other intangible
assets at the lower of amortized cost or fair value. As such, management
continually reviews the valuation and amortization of the intangible assets. As
part of its ongoing review, management estimates the fair value of the Company's
intangible assets, taking into consideration any events or circumstances which
might have diminished the fair value. As part of an overall management review of
the Company's strategic plan, the Company is currently reviewing the current
value of the goodwill associated with the acquisition of MEDTOX to determine if
the current value is appropriate or if an impairment of the goodwill has
occurred. While the analysis is not yet complete, the Company expects that an
impairment has occurred and that the Company will make the appropriate
adjustment at the conclusion of the analysis which is expected to be completed
prior to December 31, 1996.
<PAGE>
CAUTIONARY STATEMENT IDENTIFYING IMPORTANT FACTORS
THAT COULD CAUSE THE COMPANY'S ACTUAL RESULTS TO DIFFER
FROM THOSE PROJECTED IN FORWARD LOOKING STATEMENTS
In connection with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, readers of this document and any
document incorporated by reference herein, are advised that this document and
documents incorporated by reference into this document contain both statements
of historical facts and forward looking statements. Forward looking statements
are subject to certain risks and uncertainties, which could cause actual results
to differ materially from those indicated by the forward looking statements.
Examples of forward looking statements include, but are not limited to (i)
projections of revenues, income or loss, earnings or loss per share, capital
expenditures, dividends, capital structure and other financial items, (ii)
statements of the plans and objectives of the Company or its management or Board
of Directors, including the introduction of new products, or estimates or
predictions of actions by customers, suppliers, competitors or regulatory
authorities, (iii) statements of future economic performance, and (iv)
statements of assumptions underlying other statements and statements about the
Company or its business.
This document and any documents incorporated by reference herein also
identify important factors which could cause actual results to differ materially
from those indicated by the forward looking statements. These risks and
uncertainties include price competition, the decisions of customers, the actions
of competitors, the effects of government regulation, possible delays in the
introduction of new products, customer acceptance of products and services, the
possible effects of the MEDTOX acquisition and its related financings and other
factors which are described herein and/or in documents incorporated by reference
herein.
The cautionary statements made pursuant to the Private Litigation
Securities Reform Act of 1995 above and elsewhere by the Company should not be
construed as exhaustive or as any admission regarding the adequacy of
disclosures made by the Company prior to the effective date of such Act. Forward
looking statements are beyond the ability of the Company to control and in many
cases the Company cannot predict what factors would cause results to differ
materially from those indicated by the forward looking statements.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Introduction
The Company commenced operations in June 1983 and until 1986 was a
development stage company. The Company became engaged in the manufacture and
sale of Conventional Biodiagnostic Products as a result of its acquisition of
Granite Technological Enterprises, Inc. in 1986. The Company began the
manufacture and sale of its EZ-SCREEN(R) diagnostic tests in 1985 and introduced
its patented one-step assays, VERDICT(R) and RECON(R), in 1993. Also in 1993,
the Company formed DIAGNOSTIX, Inc. to market its agricultural diagnostic
products. In addition, DIAGNOSTIX now markets the Company's on-site substance
abuse products to certain segments of the substance abuse marketplace. The
Company entered the laboratory testing market when it completed the acquisition
of PDLA in 1994. In 1995, the Company acquired the former operations of Bioman
through its DIAGNOSTIX, Inc. subsidiary. On January 30, 1996 the Company
completed the acquisition of MEDTOX. The results of operations for the nine
months ended September 30, 1996 include the operations of MEDTOX from January
26, 1996 through the end of the period. Since inception, the Company has
financed its working capital requirements primarily from the sale of equity
securities.
Nine Months Ended September 30, 1996 Compared to Nine Months Ended September
30, 1995
Total revenues for the nine months ended September 30, 1996 were
$20,124,000 as compared to $5,663,000 for the nine months ended September 30,
1995. The increase was attributable to the increase in revenues from products
and services. These revenues totaled $19,965,000 for the nine months ended
September 30, 1996, as compared to $5,243,000 for the nine months ended
September 30, 1995.
Laboratory service revenues were $17,555,000 for the nine months ended
September 30, 1996, compared to $3,149,000 for the nine months ended September
30, 1995. This increase was primarily the result of the revenues contributed by
the MEDTOX customer base. The MEDTOX revenues for the period February 1 through
September 30, 1995 were $13,831,000, providing for proforma laboratory service
revenues for the nine months ended September 30, 1995 of $16,980,000.
Product sales include the sales generated from substance abuse testing
products, which incorporates the EZ-SCREEN and VERDICT on-site test kits and
other ancillary products for the detection of abused substances. Sales from
these products were $1,134,000 for the nine months ended September 30, 1996
compared to sales of $914,000 recorded for the same period in 1995. This
increase of 24% was primarily the result of sales of the EZ-SCREEN PROFILE(TM)
test kits which were introduced in May of this year.
<PAGE>
Product sales also include sales of agricultural diagnostic products.
Sales of these products were $970,000 for the nine months ended September 30,
1996, an increase of 17% compared to sales of $830,000 for the nine months ended
September 30, 1995. The Company had sales of $367,000 which were generated
through the former operations of Bioman, which was acquired by the Company on
June 1, 1995. Excluding these revenues, sales of agricultural diagnostic
products were $603,000 for the nine months ended September 30, 1996 as compared
to $577,000 for the same period in 1995. In September 1996, the Company sold the
former Bioman operations to a company headed by former employees of the Company
and Bioman.
Sales of microbiological and associated product sales combined with
contract manufacturing services were $231,000 for the nine months ended
September 30, 1996 compared to $313,000 for the same period in 1995. This
decrease of 26% was primarily the result of the Company's decision not to market
these products. Accordingly, the Company has closed down the operations of its
farm facility. While this closure will decrease the amount of revenues generated
from these sales, the elimination of the costs of the farm facility are expected
to improve the overall gross margin from the sale of the Company's products.
Revenues generated from the shipment of products to the U.S. Department
of Defense were $75,000 for the nine months ended September 30, 1996 compared to
$37,000 for the same period in 1995. This increase was the result of modest
sales of finished products following the completion of research and development
on certain tests in late 1995 and early 1996.
Revenues from royalties and fees during the nine months ended September
30, 1996 were $90,000, compared to $234,000 for the nine months ended September
30, 1995. This decrease was primarily due to lower royalties from American
Medical Laboratories, Inc.
("AML"), as AML lost accounts that required payment of royalties to the Company.
Revenues from interest and other income for the nine months ended
September 30, 1996 were $69,000 compared to $186,000 for the nine months ended
September 30, 1995. The $186,000 in 1995 included the recovery of debts owed by
a customer of laboratory services which had been written off, as well as a
payment made to the Company by the landlord of the facility in New Jersey for
renewing the lease for that facility. For the same period in 1996, there was no
such payment or recovery of such debts.
The gross margin from the revenues generated from the laboratory
services was 25% for the nine months ended September 30, 1996 an increase
compared to the same period in 1995, when the cost of providing laboratory
services was approximately the same as the revenue realized from these services.
<PAGE>
The improvement in the gross margin was primarily due to the operations of
MEDTOX and the consolidation of the laboratory operations of PDLA into the
laboratory operations of MEDTOX.
Gross margins from the sales of both manufactured products and products
purchased for resale for the nine months ended September 30, 1996 were 26%
compared to 17% of sales of these products during the nine months ended
September 30, 1995. This increase in gross margin from product sales is
primarily the result of the increased sales of contract manufacturing services,
sales of the EZ-SCREEN PROFILE test kits, as well as sales of the agricultural
products sold through DIAGNOSTIX.
Selling, general and administration expenses for the nine months ended
September 30, 1996 were $6,337,000, compared to $2,963,000 for the nine months
ended September 30, 1995. Of the $3,374,000 increase, MEDTOX related expenses
totaled $2,411,000. Net of MEDTOX, there was an increase of $963,000 compared to
the same period in 1995. This increase is primarily due to $848,000 of
amortization expense related to goodwill resulting from the MEDTOX acquisition.
In addition, the Company has expensed in excess of $500,000 for legal fees.
These legal fees are primarily for expenses relating to the Company's inability
to issue shares to certain of the Series A Preferred Shareholders.
Research and development expenses incurred during the nine months ended
September 30, 1996 were $1,044,000 as compared to $669,000 for the same period
in 1995. This increase of $375,000 was primarily the result of $310,000 of
research and development expenses from MEDTOX as well as increases in personnel
costs.
For the nine months ended September 30, 1996, EDITEK incurred interest
expense of $350,000, compared to interest expense of $21,000 incurred during the
nine months ended September 30, 1995. This increase was the result of the funds
borrowed by the Company to complete the financing for the acquisition of MEDTOX.
In connection with the acquisition of MEDTOX, the Company determined
that it would be beneficial to consolidate the laboratory operations of PDLA
into the laboratory operations at MEDTOX as well as to down size certain
administrative positions at both PDLA and MEDTOX in order to eliminate
duplicative functions. The Company also determined that to improve the operating
results of the Company, it would be necessary to sell the former operations of
Bioman, close its farm facility and reduce its work force at its Burlington,
North Carolina location. As a result of these restructuring steps, the Company
has taken charges of $1,966,000 during the nine months ended September 30, 1996
to cover certain costs of the restructurings, including $702,000 related to
certain severance payments (see Note E of the Financial Statements). The Company
had no such charge during the nine months ended September 30, 1995.
As a result of the above, the net loss for the nine months ended September
30, 1996 was $4,474,000, compared to the net loss of $2,790,000 for the nine
months ended September 30, 1995.
<PAGE>
Three Months Ended September 30, 1996 Compared to Three Months Ended September
30, 1995
Total revenues for the three months ended September 30, 1996 were
$6,844,000 as compared to $1,912,000 for the three months ended September 30,
1995. The increase was attributable to the increase in revenues from products
and services. These revenues totaled $6,794,000 for the three months ended
September 30, 1996, as compared to $1,833,000 for the three months ended
September 30, 1995.
Laboratory service revenues were $6,072,000 for the three months ended
September 30, 1996, compared to $1,086,000 for the three months ended September
30, 1995. This increase was primarily the result of the revenues contributed by
the MEDTOX customer base. The MEDTOX revenues for the same period in 1995 were
$5,092,000, providing for proforma laboratory service revenues of $6,178,000 for
the three months ended September 30, 1995.
Product sales include the sales generated from substance abuse testing
products, which incorporates the EZ-SCREEN and VERDICT on-site test kits and
other ancillary products for the detection of abused substances. Sales from
these products were $369,000 for the three months ended September 30, 1996
compared to sales of $298,000 recorded for the same period in 1995. This
increase of 24% was primarily due to sales of the EZ-SCREEN PROFILE test kits.
Product sales also include sales of agricultural diagnostic products.
Sales of these products were $283,000 for the three months ended September 30
1996, a decrease of 19% compared to sales of $349,000 for the three months ended
September 30, 1995. This decrease was due to the absence of revenues for the
month of September, 1996 generated through the former operations of Bioman which
the Company sold effective September 3, 1996.
Sales of microbiological and associated product sales combined with
contract manufacturing services were $70,000 for the three months ended
September 30, 1996 compared to $100,000 for the same period in 1995. This
decrease of 30% was primarily the result of the Company's decision to close down
the operations of the farm facility in early September 1996. While this closure
will decrease the amount of revenues generated from these sales, the elimination
of the costs of the farm facility are expected to improve the overall gross
margin from the sale of the Company's products.
There were no revenues generated from the shipment of products to the
U.S. Department of Defense for the three months ended September 30, 1996 or
September 30, 1995.
Revenues from royalties and fees during the three months ended
September 30, 1996 were $5,000, compared to $74,000 for the three months ended
<PAGE>
September 30, 1995. This decrease was primarily due to lower royalties from AML,
as AML lost accounts that require payment of royalties to the Company.
Revenues from interest and other income for the three months ended
September 30, 1996 were $45,000 compared to $5,000 for the three months ended
September 30, 1995. The increase of $40,000 was primarily due to gains on the
sale of certain assets.
The gross margin from the revenues generated from the laboratory
services was 22% for the three months ended September 30, 1996 an increase
compared to the same period in 1995, when the gross margin was 8%. The
improvement in the gross margin was primarily due to the operations of MEDTOX
and the consolidation of the laboratory operations of PDLA into the laboratory
operations of MEDTOX.
Gross margins from the sales of both manufactured products and products
purchased for resale for the three months ended September 30, 1996 were 24%
compared to 18% of sales of these products during the three months ended
September 30, 1995. This increase in gross margin from product sales is
primarily the result of increased sales of contract manufacturing services,
sales of the EZ-SCREEN PROFILE test kits and reduced costs as a result of the
closure of the farm facility.
Selling, general and administration expenses for the three months ended
September 30, 1996 were $2,505,000, compared to $1,024,000 for the three months
ended September 30, 1995. The increase of $1,481,000 was primarily the result of
increased costs associated with the MEDTOX operation as well as amortization
expense related to goodwill resulting from the MEDTOX acquisition and
approximately $500,000 in legal fees relating to the Company's inability to
issue shares to certain of the Series A Preferred Shareholders.
Research and development expenses incurred during the three months
ended September 30, 1996 were $334,000 as compared to $242,000 for the same
period in 1995. This increase of $92,000 was primarily the result of $117,000 of
research and development expenses from MEDTOX.
For the three months ended September 30, 1996, EDITEK incurred interest
expense of $123,000, compared to interest expense of $1,000 incurred during the
three months ended September 30, 1995. This increase was the result of the funds
borrowed by the Company to complete the financing for the acquisition of MEDTOX.
During the three months ended September 30, 1996, the Company took
certain actions in order to improve the operating results of the Company
including reducing the work force at its Burlington, North Carolina location.
Primarily as a result of this action the Company has taken a charge of
$1,108,000 during the three months ended September 30, 1996, including $602,000
related to severance payments. The Company had no such charge during the three
months ended September 30, 1995.
<PAGE>
As a result of the above, the net loss for the three months ended September
30, 1996 was $2,485,000, compared to the net loss of $974,000 for the three
months ended September 30, 1995.
Management believes the acquisition of MEDTOX, the restructuring of the
laboratory operations, the closing of the farm facility, the sale of the former
Bioman operations and the reduction in the work force in the North Carolina
office will improve the operating results of the Company, although there can be
no assurance of the success of these actions in reducing costs and improving
efficiencies. Management expects net sales to grow through both additional
strategic acquisitions and the addition of new accounts, as well as the
introduction of new products, including the recently launched EZ-SCREEN PROFILE
test kit.
Material Changes in Financial Condition
As of September 30, 1996, accounts receivable were $4,907,000 compared
to $1,029,000 at December 31, 1995. This $3,878,000 increase is primarily
attributable to the MEDTOX accounts receivable balance at September 30, 1996.
Inventories were $1,243,000 at September 30, 1996 as compared to
$937,000 at December 31, 1995. The increase of $306,000 was due to the inventory
balance of MEDTOX at September 30, 1996.
Prepaid expenses and other assets were $250,000 at September 30, 1996
as compared to $868,000 at December 31, 1995. This decrease of $618,000, or 71%,
was primarily the result of the January application of the $500,000 deposit the
Company had previously made towards the purchase price for the acquisition of
MEDTOX.
As of September 30, 1996, the Company had a balance of accounts payable
of $1,803,000 compared to a balance of $1,184,000 at December 31, 1995. The
increase of $619,000 was net of an increase due to accounts payable of MEDTOX
and a decrease in past due expenses resulting from the Company's improved
financial condition.
Accrued expenses were $1,871,000 at September 30, 1996, as compared to
$834,000 at December 31, 1995. Of the total increase of $1,037,000, the accrued
expenses from MEDTOX were $1,035,000 at September 30, 1996. Net of the MEDTOX
balance, the pro forma increase of $2,000 was the net result of payment of
certain expenses associated with the acquisition of MEDTOX, and increased
accrued legal fees relating to the Company's inability to issue Common Shares to
certain of the Series A Preferred Shareholders..
At September 30, 1996, the Company had accrued $996,000 for the payment
of certain restructuring costs associated with the consolidation of the
laboratory operations of PDLA with the laboratory operations of MEDTOX as well
as costs associated with certain actions taken by the Company including a
<PAGE>
reduction in work force during the nine months ended September 30, 1996. In
addition, MEDTOX has accrued $709,000 for the payment of a lease obligation for
a facility no longer used by MEDTOX. As a result, the Company has a total
balance of accrued restructuring costs of $1,705,000 at September 30, 1996. At
December 31, 1995 the Company had no accrual for restructuring costs (see Note E
of the Financial Statements).
During the nine months ended September 30, 1996, the Company repaid the
$100,000 it had borrowed from Dr. Samuel C. Powell, a director of the Company as
well as the balance of the loan payable to the North Carolina Biotechnology
Center. At September 30, 1996, the Company had a total balance of $4,144,000 for
its loans payable to Heller Financial, Inc. as compared to total loans of
$182,000 at December 31, 1995.
Liquidity and Capital Resources
Since its inception, the working capital requirements of the Company
have been funded primarily by cash received from equity investments in the
Company. At September 30, 1996, the Company had cash and cash equivalents of
$325,000 and borrowing capability of approximately $2,300,000 from its revolving
line of credit. The Company believes that the balance of cash and cash
equivalents at September 30, 1996 together with the revolving line of credit
should be sufficient to fund the planned operations through 1996 and 1997.
As of September 30, 1996, the Company had not achieved a positive cash
flow from operations. Accordingly, the Company relies on available credit
arrangements to fund operations until a positive cash flow can be achieved.
Management believes that it has taken, and is prepared to continue to take, the
actions required to yield a positive cash flow from operations in the future.
The Company believes that the acquisition of MEDTOX, the subsequent
consolidation of the laboratory operations from PDLA into MEDTOX, the other
actions previously discussed and other synergy that will be realized from the
acquisition of MEDTOX will enable the Company to generate positive cash flow.
The Company continues to follow a plan which includes (i) continuing to
aggressively monitor and control costs, (ii) increasing revenue from sales of
the Company's products, services, and research and development contracts, as
well as (iii) continuing to selectively pursue synergistic acquisitions to
increase the Company's critical mass. There can be no assurance that costs can
be controlled, revenues can be increased, financing may be obtained,
acquisitions successfully consummated, or that the Company will be profitable.
The Company lacks sufficient shares of Common Stock to satisfy the
conversion rights of the outstanding Preferred Stock of the Company, including
conversion notices received by the Company. Consequently, the Company would lack
shares of Common Stock to sell in a future financing should it need to raise
capital or for future acquisitions, until and unless the Company's shareholders
approve an amendment to its Certificate of Incorporation increasing the number
of shares of authorized Common Stock. The Board of Directors of the Company
<PAGE>
canceled a special meeting of shareholders scheduled for June 25,1996 at which
an amendment to the Company's Certificate of Incorporation to increase the
number of shares of authorized common stock was to have been voted upon. After
proxy solicitation for the special meeting had begun, the American Stock
Exchange stated that the vote to amend the charter required brokers and nominees
holding shares of common stock to obtain written instructions from beneficial
owners regarding the voting of their shares. The Company had received numerous
proxies from brokers and nominees which did not indicate how many of the votes
were cast based on the beneficial owners' instructions. The meeting was canceled
because it was not possible to determine which votes could be counted.
As of October 30, 1996, five separate lawsuits have been commenced
against the Company by certain holders of the Series A Preferred. All five
lawsuits are currently pending in the United States District court for the
Southern District of New York. Plaintiffs in each of the lawsuits allege breach
of contract with respect to conversion of the Preferred Stock and certain
plaintiffs have also alleged misrepresentations and securities violations in
connection with the Company's sale of the Series A Preferred. The Company may be
subject to additional litigation from holders of Series A Preferred who do not
receive shares of Common Stock issuable to them under the Company's charter or
contractual obligations. The Company intends vigorously to contest each of the
five pending lawsuits as well as any additional litigations that may be filed
hereafter. However, the Company cannot predict the outcome of the lawsuits, and
decisions in favor of plaintiffs in any or all of the lawsuits could have a
material adverse effect on the Company and its business. The Company also cannot
predict the total amount of legal expenses that may be incurred in the event of
prolonged inability to issue shares to the Series A Preferred Shareholders.
The Company is currently investigating possible claims against
purchasers of Series A Preferred who may have breached the Series A Preferred
subscription agreements or otherwise engaged in improprieties in connection with
the conversion or sale of Company stock. The Company reserves the right to take
action against any such person or persons, which action may include but not be
limited to assertion of claims and the withholding of common shares otherwise
issuable upon the conversion of Series A Preferred shares.
The Company intends to seek shareholder approval to increase the
authorized Common Stock at its Annual Meeting of Stockholders to be held on
December 19, 1996. There can be no assurance the shareholders will approve such
amendment. If the Company lacks shares of Common Stock for future financings or
acquisitions, the Company will have to rely on debt financings or sales of its
Preferred Stock. There can be no assurance that the Company will be able to
obtain adequate capital or implement acquisitions through debt or Preferred
Stock financings.
<PAGE>
ITEM 2 CHANGES IN SECURITIES. Inapplicable
ITEM 3 DEFAULTS ON SENIOR SECURITIES. Inapplicable
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS. None
ITEM 5 OTHER INFORMATION. Inapplicable
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
There were no reports filed on Form 8-K during the three
months ended September 30, 1996.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 14, 1996
EDITEK, INC.
By: /s/ Harry G. McCoy
Harry G. McCoy, Chairman and President
By: /s/ Richard J. Braun
Richard J. Braun, Chief Executive Officer
By: /s/ Peter J. Heath
Peter J. Heath, Vice President of Finance
and Chief Financial Officer
<PAGE>
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