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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A-1
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
Commission file number 1-11394
EDITEK, INC.
(Exact name of Registrant as specified in its charter)
Delaware 95-3863205
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1238 Anthony Road, Burlington, North Carolina 27215
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (910) 226-6311
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $.15 per share
(Title of Class)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]
The aggregate market value of Common Stock of the Registrant, $.15 par value
("Common Stock"), held by non-affiliates of the Registrant is approximately
$22,068,566, as of March 26, 1996, based upon a price of $1.875 which price is
equal to the closing price for the Common Stock on the American Stock Exchange.
The number of shares of Common Stock outstanding as of March 26, 1996, was
13,193,838.
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PART I
CAUTIONARY STATEMENT IDENTIFYING IMPORTANT FACTORS
THAT COULD CAUSE THE COMPANY'S ACTUAL RESULTS TO DIFFER
FROM THOSE PROJECTED IN FORWARD LOOKING STATEMENTS
In connection with the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995, readers of this document and
any document incorporated by reference herein, are advised that this document
and documents incorporated by reference into this document contain both
statements of historical facts and forward looking statements. Forward looking
statements are subject to certain risks and uncertainties, which could cause
actual results to differ materially from those indicated by the forward
looking statements. Examples of forward looking statements include, but are
not limited to (i) projections of revenues, income or loss, earning or loss
per share, capital expenditures, dividends, capital structure and other
financial items, (ii) statements of the plans and objectives of the Company
or its management or Board of Directors, including the introduction of new
products, or estimates or predictions of actions by customers, suppliers,
competitors or regulatory authorities, (iii) statements of future economic
performance, and (iv) statements of assumptions underlying other statements
and statements about the Company or its business.
This document and any documents incorporated by reference
herein also identify important factors which could cause actual results to
differ materially from those indicated by the forward looking statements.
These risks and uncertainties include price competition, the decisions of
customers, the actions of competitors, the effects of government regulation,
possible delays in the introduction of new products, customer acceptance
of products and services, the possible effects of the MEDTOX acquisition and
its related financings and other factors which are described herein and/or
in documents incorporated by reference herein.
The cautionary statements made pursuant to the Private
Litigation Securities Reform Act of 1995 above and elsewhere by the Company
should not be construed as exhaustive or as any admission regarding the
adequacy of disclosures made by the Company prior to the effective date of
such Act. Forward looking statements are beyond the ability of the Company
to control and in many cases the Company cannot predict what factors would
cause results to differ materially from those indicated by the forward
looking statements.
ITEM 1. BUSINESS.
1. General.
EDITEK, Inc., a Delaware corporation, was organized in
September, 1986 to succeed the operations of a predecessor California
corporation. EDITEK, Inc. and its subsidiaries are referred to herein as "the
Company". The Company currently operates two toxicology laboratories which
provide testing services for identification of substances of abuse. The Company
also develops, manufactures and markets on-site diagnostic and screening tests
which are used to detect substances in humans, foodstuffs, animals, feed and the
environment.
The Company entered the laboratory business on February 11,
1994 when it completed the acquisition of Princeton Diagnostic Laboratories of
America, Inc. ("PDLA") which is now a wholly owned subsidiary. PDLA was
incorporated in Delaware in December, 1986. On December 22, 1986, it acquired
from Stauffer Chemical Company, a subsidiary of Cheesebrough-Pond's Inc., all of
the Common Stock of Psychiatric Diagnostic Laboratories of America, Inc.,
through which PDLA conducts most of its operations. On January 30, 1996, the
Company acquired the assets and certain liabilities of another laboratory,
MEDTOX Laboratories, Inc. ("MEDTOX").
The combination of laboratory services and the Company's other
products and services allows the Company to offer a full line of products and
services for the substance abuse testing marketplace, including (1) on-site
tests for the detection of substance of abuse drugs (EZ-SCREEN(R) and
VERDICT(R)); (2) on-site disposable qualitative determination of alcohol
intoxication; (3) Substance Abuse and Mental Health Services Administration
(SAMHSA), formerly NIDA, certified laboratory testing (screening and
confirmation); (4) accessory items (gloves, specimen containers, permanent
recording temperature strips); and (5) consultation. Sales of these substance
abuse testing products and services accounted for approximately 73% of the
revenues of the Company for the year ended December 31, 1995.
In 1993 diAGnostix, inc. was incorporated by the Company in
Delaware as a wholly-owned subsidiary to address the broadly defined
environmental testing marketplace. On June 1, 1995 the Company, through
diAGnostix, inc., acquired Bioman Products, Inc. In addition to selling the
Company's diagnostic products for the environmental and agri/food industry,
diAGnostix, inc. is currently sourcing additional products manufactured by other
companies that could be sold through diAGnostix, inc. It is also anticipated
that the first products having civilian applications resulting from the
Company's research and product development efforts with the United States
Department of Defense will be oriented towards the environmental testing
marketplace and sold through diAGnostix, inc. Sales of the products sold through
diAGnostix, inc. accounted for approximately 14% of the Company's revenues in
the year ended December 31, 1995.
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The Company also sells prepared and dehydrated culture media,
animal blood products, sera and plasma, custom antisera, and other biomedical
products and supplies, which are either produced by the Company or purchased
from other suppliers. The Company also markets contract manufacturing services
which utilize the same manufacturing equipment and processes used to manufacture
the on-site products. The Company expects sales of these products and services,
which were first introduced in 1986, to account for a smaller portion of its
future revenues due to management's decision to focus primarily on the marketing
of its laboratory services and diagnostic tests. Sales of these products and
services accounted for approximately 5% of the revenues of the Company for the
year ended December 31, 1995.
The balance of the Company's revenues are from work performed
for the U.S. Department of Defense including product sales as well as royalties,
fees and other income. This represented approximately 8% of the revenues of the
Company for the year ended December 31, 1995.
Recent Developments.
On January 30, 1996, the Company acquired the assets and
certain liabilities of MEDTOX. MEDTOX was formed in 1984 and is located in St.
Paul, Minnesota. MEDTOX was founded in 1984 by Dr. Harry G. McCoy. Dr. McCoy saw
the need for a state-of-the-art, full service, toxicology reference laboratory
that would provide timely, accurate analysis for a wide range of drugs and
toxins. From its inception, MEDTOX has fulfilled that goal by offering
broad-based toxicology services, including 24 hour emergency service at no extra
cost to the client, therapeutic drug monitoring, medico-legal investigations and
other services.
MEDTOX rapidly gained a reputation for high quality and superb
customer service in the local Minnesota medical market through the provision of
toxicology laboratory services for local hospitals, physicians and general
medical laboratories. MEDTOX then began an expanded regional program as well as
national marketing which increased revenues and expanded the customer base.
In 1987, MEDTOX purchased its largest Minneapolis competitor,
Metropolitan Medical Center ("MMC"), and gained the services of Dr. Gary
Hemphill, one of the leading scientists and laboratory directors at MEDTOX
today. Dr. Hemphill and MMC also gave MEDTOX a foothold in the emerging
employment drug screening business.
With the creation of National Institute for Drug Abuse
("NIDA") in 1988 to oversee mandated drug screening for safety sensitive
employees, MEDTOX became one of the first ten laboratories in the country on the
original list of NIDA certified laboratories. MEDTOX business then rapidly grew
in two major toxicology market segments:
1. Forensic toxicology (substance abuse testing).
2. Medical toxicology - the provision of reference toxicology testing the
areas of therapeutic drug monitoring, etc., for hospitals, physicians and
general clinical laboratories lacking the sophisticated toxicology
capabilities of MEDTOX.
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For the year ended December 31, 1995 MEDTOX had net revenues
of $20,219,000 with net income of $2,879,000. See Unaudited Pro Forma
Consolidated Financial Information contained herein. In connection with the
acquisition of MEDTOX, the Company determined that it would be beneficial to
consolidate the laboratory operations of PDLA into the laboratory operations of
MEDTOX. Also, the Company decided to down size certain administrative positions
at both PDLA and MEDTOX in order to eliminate duplicate functions. The
consolidation plan, which was put in place prior to the closing of the
acquisition of MEDTOX, will be complete by early in the second quarter of 1996.
2. Principal Services, Products, and Markets.
General. The Company's principal sources of revenues come from
the sale of drugs of abuse laboratory testing services and products including a
variety of on-site screening products.
A. Drug Abuse Laboratory Testing Services. The primary
business focus of the Company is the provision of laboratory testing services
for the identification of drugs of abuse. These tests are conducted using
methodologies such as enzyme immunoassay, radio immunoassay, gas liquid
chromatography, high pressure liquid chromatography and gas chromatography/mass
spectrometry. The Company has pioneered security and chain of custody
procedures, including sample bar coding, to help maintain the integrity of the
specimens and the confidentiality of the test results.
The Company's customers for abused substance testing include
public and private corporations. Among this customer base are Fortune
500 companies. In addition to public and private corporations, abused substance
testing is also conducted on behalf of service firms such as financial
institutions, drug treatment counseling centers and hospitals.
B. Products. The Company's test products, which were adapted
from assay technologies previously developed in the 1970's for human medical
diagnostics, are easy to use, inexpensive, on-site tests. The tests are capable
of rapidly detecting the presence of a number of substances in human urine or
blood samples, foodstuffs, animals, feed and the environment without the
necessity of instruments or technical personnel. The Company's diagnostic tests
and the disposable devices used in connection therewith are marketed under
the names EZ-SCREEN(R), QUIK-CARD(R), VERDICT(R), RECON(R) and EZ-QUANT(R),
which are registered trademarks of the Company. A QUIK-CARD together with the
necessary reagents, comprise an EZ-SCREEN test. EZ-SCREEN tests were first
introduced by the predecessor corporation of the Company in 1985. EZ-SCREEN
and VERDICT tests are utilized in agricultural diagnostics (which includes
mycotoxin detection, drug residue surveillance, feed analysis, and
regulatory compliance) and clinical diagnostics (which includes drugs of
abuse testing). VERDICT and RECON are "self-performing", one-step tests
marketed, respectively, to the drugs of abuse and Department of Defense
testing markets. The VERDICT and RECON tests were both introduced in 1993.
EZ-QUANT tests, first introduced in 1994 are microtiter, ELISA-based,
quantitative assays utilized in agricultural diagnostics.
.
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Clinical Diagnostics. The EZ-SCREEN tests are also used in
clinical diagnostics to detect the presence of certain drugs of abuse in humans.
The Company now has received clearance from the Food and Drug Administration
("FDA") for EZ-SCREEN tests for six of the most commonly abused substances:
cannabinoids, cocaine, opiates, barbiturates, amphetamines, and PCP. The Company
markets this product line, both domestically and internationally, to law
enforcement agencies, industrial companies for pre-employment screening,
physicians' offices, hospitals, clinics and drug abuse counseling and treatment
centers.
VERDICT tests are used to detect the presence of certain drugs
of abuse in humans. The Company is now marketing the VERDICT cocaine test, the
VERDICT THC test, and the VERDICT opiates test. The Company has received
clearance from the FDA for its VERDICT cocaine test and VERDICT opiates test.
The VERDICT THC test is being marketed for forensic use only, pending 510(K)
premarket clearance from the FDA.
Alcohol Abuse Detection. The Company distributes on-site tests
for the detection of alcohol with the EZ-SCREEN Breath Alcohol Test. The test
consists of a small tube containing chemically treated crystals that change
color in the presence of alcohol. The Company purchases these products through a
distribution agreement with WNCK, Inc.
Agridiagnostic Tests. The EZ-SCREEN and EZ-QUANT tests are
used in agricultural diagnostics to detect, among other things, mycotoxins,
which are hazardous substances produced by fungal growth. Mycotoxins frequently
contaminate corn, wheat, rye, barley, peanuts, tree nuts, cottonseed, milk,
rice, and livestock feeds. The EZ-SCREEN agridiagnostic tests are marketed to
regulatory authorities and producers of foodstuffs and feeds.
Conventional Biodiagnostic Products. The Company manufactures
and/or distributes a variety of products used by researchers, clinical testing
laboratories, government agencies and private industry for veterinary and
agricultural testing purposes. These products include prepared and dehydrated
culture media, animal blood products, sera and plasma, custom antisera
(consisting of polyclonal antibodies to a variety of antigens), immunodiagnostic
kits, species identification plates and other biomedical products and supplies.
The Company produces laboratory diagnostic kits for detection of sulfa drugs and
other antibiotics in livestock, and distributes a variety of other biomedical
products and supplies produced by other manufacturers.
3. Marketing and Sales.
The Company believes that the combined operations of the
laboratory operations and the on-site test kits manufactured by the Company have
created synergy in the marketing of comprehensive, on-site and laboratory
testing programs to a common customer base. The Company is in a position to
offer a full line of products and services for the substance abuse testing
marketplace, including (1) on-site tests for the detection of substance of abuse
drugs (EZ-SCREEN and VERDICT); (2) on-site qualitative and quantitative
determination of alcohol intoxication (both disposable and electronic instrument
detection devices); (3) SAMHSA certified laboratory testing (PDLA screening and
confirmation); (4) accessory items (gloves, specimen containers, permanent
recording temperature strips); and (5) consultation.
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diAGnostix, Inc. The Company currently markets its
EZ-SCREEN, EZ-QUANT, and other tests through diAGnostix, Inc. with an
internal sales and marketing department as well as through various distribution
agreements with third party distributors. The Company has current distribution
arrangements throughout Europe, Japan and other countries worldwide. Customers
for products sold through diAGnostix include livestock producers, food
processors, veterinarians, and government agencies.
Other. The Company also provides Conventional Biodiagnostic
Products. Customers for Conventional Biodiagnostic Products consist of
government agencies, testing laboratories, manufacturers of medical diagnostic
products, and researchers.
Major Customers. Sales to the United States government and its
agencies, primarily the United States Department of Agriculture ("USDA"),
amounted to approximately 4% of the Company's total revenues during 1995. The
majority of these sales are through two separate multi-year contracts with the
United States Department of Agriculture. One contract expires September 30,
1996, and the other expires September 30, 1999. Both these contracts are subject
to annual renewals by the USDA.
Sales to foreign customers, primarily distributors, amounted
to approximately 8% of the Company's total revenues during 1995. No one foreign
customer represented more than 5% of the Company's total revenues.
4. New Products.
During 1995 the primary research and development efforts of
the Company focused on the development of tests to extend the product offerings
in each of the immunoassay product lines produced by the Company. These product
lines consist of the VERDICT/RECON "self-performing" immunochromatographic
assays, the EZ-SCREEN membrane-based enzyme immunoassays, and the EZ-QUANT
microtiter immunoassays.
VERDICT Tests for Drugs of Abuse - During 1995 research and
development efforts were directed to continued support and refinement of the
currently marketed VERDICT one-step tests for the detection of cocaine, THC
(marijuana), and opiate metabolites and to the development of additional VERDICT
tests for the detection of phencyclidine (PCP), amphetamines and barbiturates.
Clinical evaluation of the VERDICT PCP test was completed in December, 1995 and
the product was released for sale for forensic use in February, 1996. Clinical
evaluation of the VERDICT Amphetamines and VERDICT Barbiturates tests will be
conducted in early 1996 with a planned product release for sale during the
second quarter, 1996. Additional efforts in 1996 will be directed toward
development of VERDICT tests for benzodiazepines and methadone and to the design
of a test device which would permit
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simultaneous testing of a sample for five different drugs of abuse following the
addition of a single sample.
RECON Tests for Agents of Biological Origin - In 1991 the
Company successfully completed a "proof of principle" study under contract with
the U.S. Department of Defense (DOD) to develop rapid, on-site tests for the
detection of certain biological materials. Since September 1991 the Company has
had an ongoing contract to continue this development program. The initial phase
of the ongoing contract led to development of EZ-SCREEN tests for 6 agents,
Botulinum Toxins A and B, B. anthracis, Staphylococcal Enterotoxin B, Ricin
Toxin, Spore Simulant and Botulinum Toxin E. Currently the contract calls for
the development of RECON one-step tests for nine agents of biological origin
using reagents supplied by the U.S. Government. The contract also calls for the
supply of a limited number of each of these RECON tests to agencies within the
DOD for evaluation purposes. In December 1995 production of the last of three
trial production lots of tests for four of the agents began. Shipment of these
four tests for Ricin Toxin, Plague F1, Staphylococcal Enterotoxin B and Spore
Simulant were completed during the first quarter 1996 as was delivery of the
first lot of tests for one additional agent. Additional efforts in 1996 will be
directed toward completing development of tests for three additional agents and
toward production of trial lots of the five remaining agents. As of December
31, 1995 the total value of the contract was $1,177,000 and a total of
$941,000 had been billed under the contract to date.
EZ-SCREEN Tests for Drugs of Abuse - During 1995 the primary
EZ-SCREEN research and development effort was directed toward the development
and clinical evaluation of the EZ-SCREEN PROFILE drugs of abuse test. This
product, released for sale for forensic use in February, 1996 permits
simultaneous testing of a single urine sample for THC, cocaine, opiates,
amphetamines and PCP. During 1996, the EZ-SCREEN PROFILE product will be fully
transitioned to manufacturing, development work on EZ-SCREEN Benzodiazepines
will be completed and development of an EZ-SCREEN Methadone test will be
initiated.
EZ-QUANT Tests for Mycotoxins and Antibiotic Residues - In
1995, the Company's research and development group completed the development of
an EZ-QUANT test for determining the concentration of deoxynavalenol (DON) in
various food products. The EZ-QUANT DON test, which utilizes reagents provided
to the Company under a sole distribution agreement with Agriculture Canada, was
released for sale in September 1995. Also in 1995 work was initiated on two
additional EZ-QUANT products. The EZ-QUANT Chloramphenicol test was released in
February 1996 and the EZ-QUANT Ochratoxin test will be released in 1996.
Additional effort in 1996 will be directed towards transitioning production of
the EZ-QUANT products to manufacturing and pursuing Association of Official
Analytical Chemists (AOAC) Research Institute certification of the
EZ-QUANT Aflatoxin product.
Biosensors - In March, 1995 the Company entered into a
Research Collaboration Agreement with Battelle Memorial Institute to explore the
commercial feasibility of utilizing the Company's immunoassay reagents with a
novel, state-of-the-art biosensor instrument developed
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by Battelle under contract with the Department of Defense. It was anticipated
that if the studies proved successful, the Company would continue working with
Battelle toward the creation of products for commercial application of the
biosensor system, initially for food safety testing purposes. At year end
studies had been completed which demonstrated detection of low levels of labeled
aflatoxin B1 conjugate with good signal to noise ratio. Studies are now underway
to determine the performance and sensitivity of the biosensor system for the
detection of aflatoxin in a corn matrix. Upon completion of these studies, data
will be analyzed and a decision made relative to potential follow-on activity.
Other Tests - The Company is assessing on a preliminary basis,
the market opportunity for and feasibility of developing other EZ-SCREEN,
EZ-QUANT and one-step tests for the detection of other mycotoxins, antibiotics,
drugs of abuse and other conditions found in humans or animals. Opportunities
for development of assays using other technologies are also assessed on an
ongoing basis.
5. Research and Development.
The markets for agridiagnostic and clinical diagnostic
products are highly competitive, and innovations and technological changes occur
frequently. For these reasons, the Company has devoted substantial funds to
research and development of its immunoassay products. During the fiscal years
ended December 31, 1995, 1994 and 1993, the Company incurred expenses of
$920,000, $729,000, and $825,000 respectively, for research and development. In
1995, $201,000, of the expenses incurred for research and development were
reimbursed by outside parties or involved charges for which outside parties had
reimbursement commitments. As of December 31, 1995, the Company employed 14
people in research and development, 6 of whom hold Ph.D.'s.
6. Raw Materials.
The raw materials required by the laboratory for urine drug
testing consist primarily of two types: specimen collection supplies and
reagents for laboratory analysis. The collection supplies include Drug Testing
Custody and Control Forms that identify the specimen and the client, as well as
document the chain-of-custody. Collection supplies also consist of specimen
bottles and shipping boxes. Reagents for drug testing are primarily immunoassay
screening products and various chemicals used for confirmation testing. The
Company believes all of these materials are available at competitive prices from
other suppliers.
The primary raw materials required for the immunoassay-based
test kits produced by the Company consist of antibodies, antigens and other
reagents, plastic injection-molded devices, glass fiber, nitrocellulose filter
materials, and packaging materials. The Company maintains an inventory of raw
materials which, to date, has been acquired primarily from third parties.
Currently, most raw materials are available from several sources. The Company
possesses the technical capability to produce its own antibodies and has
initiated production of antibodies for certain tests. However, if the Company
were to change its source of supply for
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raw materials used in a specific test, additional development, and the
accompanying costs, may be required to adapt the alternate material to the
specific diagnostic test.
7. Patents, Trademarks, Licensing and Other Proprietary Information.
The Company holds nine issued United States patents, eight of
which generally form the basis for the EZ-SCREEN and one-step technologies.
Additionally, the Company has one patent which relates to methods of utilizing
whole blood as a sample medium on its immunoassay devices. The Company also
holds various patents in several foreign countries. The Company also holds two
United States patents which it acquired in the acquisition of Granite
Technological Enterprises, Inc. in 1986.
Of the eight U.S. patents mentioned above which generally form
the basis for the EZ-SCREEN and one-step technologies, one expires in 2000, one
expires in 2004, five expire in 2007, and one expires in 2010. The patent which
relates to the methods of utilizing whole blood as a sample medium expires in
2012.
There can be no guarantee that there will not be a challenge
to the validity of the patents. In the event of such a challenge, the Company
might be required to spend significant funds to defend its patents, and there
can be no assurance that the Company would be successful in any such action.
The Company holds twelve registered trade names and/or
trademarks in reference to its products and corporate names. The trade names
and/or trademarks of the Company range in duration from 10 years to 20 years
with expiration dates ranging from 2001 to 2008. Applications have also been
made for additional trade names.
The Company believes that the basic technologies requisite to
the production of antibodies are in the public domain and are not patentable.
The Company intends to rely upon trade secret protection of certain proprietary
information, rather than patents, where it believes disclosure could cause the
Company to be vulnerable to competitors who could successfully replicate the
Company's production and manufacturing techniques and processes.
8. Seasonality.
The Company believes that the laboratory testing business is
subject to seasonal fluctuations in pre-employment screening which has low
points in August and December annually. The Company does not believe that
seasonality is a significant factor in sales of its on-site immunoassay tests.
However, the Company believes that sales of certain of its tests for the
agricultural markets such as its EZ-SCREEN:AFLATOXIN test coincide with the
harvesting of crops meant for human and animal consumption.
9. Backlog.
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At December 31, 1995, the Company did not have any significant
backlog and normally does not have any significant backlog. The Company does not
believe that recorded sales backlog is a significant factor in its business.
10. Competition.
Laboratory Services. Competition in the area of drugs of abuse
testing is intense. Competitors and potential competitors include forensic
testing units of large clinical laboratories, such as Laboratory Corporation
of America Holdings, Corning/Metpath Laboratories and SmithKline Laboratories,
Inc. and other independent laboratories, other specialized laboratories, and
in-house testing facilities maintained by hospitals.
Competitive factors include reliability and accuracy of tests,
price structure, service, transportation collection networks and the ability to
establish relationships with hospitals, physicians, and users of drug abuse
testing programs. It should be recognized, however, that many of the competitors
and potential competitors have substantially greater financial and other
resources than the Company.
The industry in which the Company competes is characterized by
service issues including turn-around time of reporting results, price, the
quality and reliability of results, and an absence of patent or other
proprietary protection. In addition, since tests performed by the Company are
not protected by patents or other proprietary rights, any of these tests could
be performed by competitors. However, there are proprietary assay protocols for
the more specialized testing that are unique to the company.
Some specific segments of the laboratory testing business are
price competitive with low margins. Other segments, which place a premium on
quality, constitute a large part of the business of MEDTOX, where, to date,
quality service has been a more important competitive factor than price. This
has allowed MEDTOX to generate positive gross margins and operating income. The
Company's ability to successfully compete in the future and maintain it margins
will be based on its ability to maintain its quality and customer service
strength while maintaining efficiencies and low cost operations. There can be no
assurance that price competitiveness will not increase in importance as a
competitive factor in the business of MEDTOX.
Immunoassay Tests. The diagnostics market has become highly
competitive with respect to the price, quality and ease of use of various tests
and is characterized by rapid technological and regulatory changes. The Company
has designed its on-site tests as inexpensive, on-site tests for use by
unskilled personnel, and has not endeavored to compete with laboratory-based
systems. Numerous large companies with greater research and development,
marketing, financial, and other capabilitied, as well as government-funded
institutions and smaller research firms, are engaged in research,
development and marketing of diagnostic assays for application in the areas
for which the Company produces its products.
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The Company has experienced increased competition with respect
to its immunoassay tests from systems and products developed by others, many of
whom compete solely on price. As the number of firms marketing diagnostic tests
has grown, the Company has experienced increased price competition. A further
increase in competition may have a material adverse effect on the business and
future financial prospects of the Company.
11. Government Regulations.
The products and services of the Company are subject to the
regulations of a number of governmental agencies as listed below. It is believed
that the Company is currently in compliance with all regulatory authorities. The
Company cannot predict whether future changes in governmental regulations might
significantly increase compliance costs or adversely affect the time or cost
required to develop and introduce new products. In addition, products of the
Company are or may become subject to foreign regulations.
1. United States Food and Drug Administration (FDA).
Certain tests for human diagnostic purposes must be cleared by the FDA prior
to their marketing for in vitro diagnostic use in the United States. The
FDA regulated products produced by the Company are in vitro diagnostic products
subject to FDA clearance through the 510(k) process which requires the
submission of information and data to the FDA that demonstrates that the device
to be marketed is substantially equivalent to a currently marketed device. This
data is generated by performing clinical studies comparing the results obtained
using the Company's device to those obtained using an existing test product.
Although no maximum statutory response time has been set for review of a 510(k)
submission, as a matter of policy the FDA has attempted to complete review of
510(k) submissions within 90 days. To date, the Company has received 510(k)
clearance for 10 different products and the average time for clearance was 58
days with a maximum of 141 days and a minimum of 20 days. Products subject to
510(k) regulations may not be marketed for in vitro diagnostic use until the FDA
issues a letter stating that a finding of substantial equivalence has been made.
As a registered manufacturer of FDA regulated
products, the Company is subject to a variety of FDA regulations including the
Good Manufacturing Practices (GMP) regulations which define the conditions under
which FDA regulated products are to be produced. These regulations are enforced
by FDA and failure to comply with GMP or other FDA regulations can result in the
delay of premarket product reviews, fines, civil penalties, recall, seizures,
injunctions and criminal prosecution.
2. Health Care Financing Administration (HCFA). The
Clinical Laboratory Improvement Act (CLIA) introduced in 1992 requires that all
in vitro diagnostic products be categorized as to level of complexity. A request
for CLIA categorization of any new clinical laboratory test system must be made
simultaneously with FDA 510(k) submission. The EZ-SCREEN and VERDICT drugs of
abuse tests currently marketed by EDITEK have been categorized as moderately
complex. The complexity category to which a clinical laboratory test system
is assigned may limit the number of laboratories qualified to use the test
system thus impacting product sales.
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3. United States Department of Agriculture (USDA).
The Company's animal facilities are subject to and comply with applicable
regulations of the USDA. The livestock related products of the Company may
become subject to state regulation but the Company does not anticipate any
difficulties in complying with these regulations, if enacted.
4. United States Department of Defense (DOD). With
reclassification of the Company's contract with the DOD from UNCLASSIFIED to
SECRET, it has been necessary to establish the appropriate security procedures
and facilities, including designation of a Facility Security Officer who is
responsible for overseeing the security system, including conduct of periodic
security audits by appropriate defense agencies. Additionally, the Company is
now subject to periodic audits of its accounting systems and records by the
Defense Audit Agency.
5. Drug Enforcement Administration (DEA). The primary
business of the Company involves either testing for drugs of abuse or developing
test kits for the detection of drugs/drug metabolites in urine. PDLA and MEDTOX
laboratories are registered with the DEA to conduct chemical analyses with
controlled substances. The EDITEK facility is registered by the DEA to
manufacture and distribute controlled substances and to conduct research with
controlled substances. Maintenance of these registrations requires that the
Company comply with applicable DEA regulations.
6. Substance Abuse and Mental Health Services
Administration (SAMHSA). Both PDLA and MEDTOX laboratories are certified by
SAMHSA, PDLA since 1989 and MEDTOX since 1988. SAMHSA certifies laboratories
meeting strict standards under Subpart C of Mandatory Guidelines for Federal
Workplace Drug Testing Programs. Continued certification is accomplished through
periodic inspection by SAMHSA to assure compliance with applicable regulations.
7. Additional Laboratory Regulations. The PDLA and
MEDTOX laboratories and certain of the laboratory personnel are licensed or
otherwise regulated by certain federal agencies, states, and localities in which
PDLA and MEDTOX conduct business. Federal, state and local laws and regulations
require PDLA and MEDTOX, among other things, to meet standards governing the
qualifications of laboratory owners and personnel, as well as the maintenance of
proper records, facilities, equipment, test materials, and quality control
programs. In addition, both laboratories are subject to a number of other
federal, state, and local requirements which provide for inspection of
laboratory facilities and participation in proficiency testing, as well as
govern the transportation, packaging, and labeling of specimens tested by either
laboratory. The laboratories are also subject to laws and regulations
prohibiting the unlawful rebate of fees and limiting the manner in which
business may be solicited.
Both laboratories receive and use small quantities of
hazardous chemicals and radioactive materials in their operations and are
licensed to handle and dispose of such chemicals and materials. Any business
handling or disposing of hazardous and radioactive waste is subject to potential
liabilities under certain of these laws.
<PAGE>
12. Product Liability.
Manufacturing and marketing of products by the Company entail
a risk of product liability claims. The exposure to product liability claims in
the past was mitigated to some extent by the fact that the Company's products
were principally directed toward food processors (as contrasted with human
diagnostics) and most of its Conventional Biodiagnostic Products were used as
components in research, testing or manufacturing by the purchaser and conformed
to the purchaser's specifications. However, a greater portion of the Company's
current revenues result from sales of human diagnostic tests, thereby
potentially increasing exposure to product liability claims. On August 13, 1993,
the Company procured insurance coverage against the risk of product liability
arising out of events after such date, but such insurance does not cover claims
made after that date based on events that occurred prior to that date.
Consequently, for uncovered claims, the Company could be required to pay any and
all costs associated with any product liability claims brought against it, the
cost of defense whatever the outcome of the action, and possible settlement or
damages if a court rendered a judgment in favor of any plaintiff asserting such
a claim against the Company. Damages may include punitive damages, which may
substantially exceed actual damages. The obligation to pay such damages could
have a material adverse effect on the Company and exceed its ability to pay such
damages. No product liability claims are pending.
The Company's laboratory testing services are primarily
diagnostic and expose the Company to the risk of liability claims. The Company's
laboratories have maintained continuous Professional and General Liability
insurance since 1985. To date, the Company has not had any substantial product
liability and no material professional service claims are currently pending.
13. Employees.
As of December 31, 1995, the Company had 106 full-time
employees compared to 100 full-time employees as of December 31, 1995. Of the
106 full-time employees, 39 were in laboratory operations and systems, 18 were
involved in research, testing, and product development activities, 20 in
production and distribution, 14 in sales and marketing, and 15 in administrative
and clerical functions. Additionally, 8 of its personnel hold Ph.D. degrees.
As of January 30, 1996, MEDTOX had 247 employees, of which 199
were involved in laboratory operations, 18 were involved in sales and marketing,
5 were involved in research and development and 25 were involved in
administrative and clerical functions. Additionally, 6 of its personnel hold
Ph.D. degrees.
The consolidation of the laboratory operations from PDLA in
New Jersey into the laboratory operations of MEDTOX will result in the
elimination of 35 positions in New Jersey and the addition of certain of the
some positions in Minnesota.
<PAGE>
The Company's employees are not covered by any collective
bargaining agreements, and the Company has not experienced any work stoppages
and the Company considers its relations with its employees to be good.
14. MEDTOX Acquisition and Capital Structure
The Company has undergone a significant change as a result of
the acquisition of MEDTOX and the associated financing. The following points
represent certain potential risk factors associated with the acquisition and
financing.
1. Dependence on Sales of Equity. As of December 31, 1995, the
Company had not achieved a positive cash flow from operations. Accordingly, the
Company relies on available credit arrangements, outside funding of research and
development and continued sales of its equity securities to fund operations
until a positive cash flow can be achieved. From January 1, 1991 through
December 31, 1995, the Company raised approximately $12 million from equity
financing and issued 6,058,699 shares of the Company's Common Stock for an
average price of $1.98 per share, all of which were issued at a discount to the
market value of the Company's Common Stock. In order to finance the acquisition
of MEDTOX, pay applicable costs and expenses and to provide working capital, the
Company raised approximately $20 million from the sale of the Preferred Stock
and Common Stock. This amount and the amount borrowed, as described below, have
allowed the Company to consummate the MEDTOX acquisition and the Company
believes should provide enough working capital to help the Company achieve
positive cash flow. If the Company is unable to achieve a positive cash flow,
additional financing will be required. There can be no assurance that additional
financing can be obtained or if obtained, that the terms will be favorable to
the Company.
2. Debt Service; Debt Seniority; No Dividends. To finance the
acquisition of MEDTOX and to provide working capital the Company borrowed $5
million in January, 1996. The debt financing consists of two term loans totaling
$4 million and up to $7 million in the form of a revolving line of credit based
on the receivables of the Company (the "Loan Agreement"). The amount of credit
available to the Company varies with the accounts receivable and the inventory
of the Company. On January 30, 1996, the receivables and inventory amounts made
$2.9 million of the credit facility available, of which the total is still
available at March 26, 1996. There can be no assurance that the Company will
have sufficient revenues to service payments of principal and interest on this
indebtedness. Failure to service this indebtedness would have a material adverse
effect on the Company. The indebtedness of the Company will be senior to the
Series A Preferred Stock and shares of Common Stock upon liquidation of the
Company. Interest payments on the indebtedness may cause there to be
insufficient cash to pay any dividends. In addition, the loan amount and the
line of credit agreement contain covenants that restrict the Company's ability
to pay dividends even if the Company has cash available from which to pay
dividends.
3. Unexpected Effects of Merger(s). The Company completed the
acquisition of the MEDTOX assets on January 30, 1996 (the "Closing Date"). The
Company also acquired the assets and operations of Bioman Products, Inc. on June
1, 1995. In February 1994, the Company acquired Princeton Diagnostic
Laboratories of America, Inc. ("PDLA"). The Company anticipates that
<PAGE>
certain synergism will arise between the Company and Bioman, PDLA and MEDTOX.
However, there can be no assurance that any synergism will arise from the
recent acquisitions. The efforts required to integrate the business of the
Company with other operations may have a material adverse effect on the
operations of either the Company or the acquired company(s).
4. Adverse Effect on Market Price of Sales of the Company
Stock. A substantial number of shares of capital stock of the Company have been
issued in transactions that are exempt from registration under the Securities
Act of 1933, as amended, either in private placements or pursuant to
Regulation S.
On January 30, 1996 and February 2, 1996, the Company sold 303
shares of Series A Preferred Stock utilizing the exemption afforded by
Regulation S of the Commission (the "Offshore Offering"), which shares are
convertible into a minimum of 5,459,459 shares of Common Stock and may be
convertible into more shares of Common Stock if the market price of the Common
Stock of the Company is less than $3.70 per share on the conversion dates. As of
March 26, 1996, the market price of the Common Stock was $1.875 per share at
which price the 303 shares of Series A Preferred Stock would be convertible into
10,744,681 shares of Common Stock, based on a conversion price of $1.41 per
share or a 25% discount to the market price on March 26, 1996.
Regulation S provides generally that offers or sales that
occur outside the United States and in compliance with the requirements thereof
are not subject to the registration requirements of the Act. Subject to certain
restrictions and conditions set forth therein, Regulation S is available for
offers and sales to investors that are not U.S. persons. Such offshore investors
who purchase the shares of Series A Preferred Stock in the Offshore Offering
pursuant to Regulation S are not permitted to transfer such shares or Conversion
Shares to a U.S. Person (defined generally as a resident of the U.S. or an
entity organized under the laws of the U.S.) for a period of at least 40 days
after February 2, 1996, the closing of the Offshore Offering (the "Restricted
Period"). Resales to buyers who are not U.S. persons are permitted at any time.
After the expiration of the Restricted Period, investors who
purchased shares of Series A Preferred Stock in the Offshore Offering may sell
such shares or Conversion Shares in the U.S., but only if such shares are
registered or an exemption from registration is available. Accordingly,
beginning on March 30, 1996 (the first day any investor will be able to convert
shares of Series A Preferred Stock into shares of Common Stock), to the extent
that any offshore investors have converted their shares of Series A Preferred
Stock into Common Stock, such offshore investors will also be able to sell such
Common Stock in the U.S. if the shares are registered or an exemption is
available.
Sales of Conversion Shares for such offshore investors must be
made in compliance with an exemption from registration. The agreements
between the Company and offshore investors provide that the stock certificates
for the
<PAGE>
Conversion Shares will not contain restrictive securities legends. Consequently,
if the Company complies with these agreements, the Company would not be able to
prevent illegal resales of Series A Preferred Stock or Conversion Shares by
offshore investors and each offshore investor will make its own determination
whether such sales qualify for exemptions from registration. On March 27, 1996,
the Company determined it would place legends on the certificates of shares of
Common Stock to assure that all resales of securities are made in compliance
with applicable securities laws. On March 27, 1996, the Company determined it
would place legends on Common Stock Certificates to assure that all resales of
securities are made in compliance with applicable securities laws. Since that
date, the Company has been in discussions with Preferred shareholders about
whether the Common Stock should be legended. In part to avoid protracted
litigation from Preferred shareholders and in part in reliance on the
cooperation of Preferred shareholders who have reaffirmed their intention to
comply with securities laws on all resales, the Company has begun to issue
Common Stock certificates without legends. The Company will seek to work
with its Preferred shareholders to assure compliance with securities laws on
resales. The Company intends to monitor trading in its stock closely,
but notwithstanding that the Preferred shareholders sell only pursuant to an
available exemption, there can be no assurance that the trading activities of
their transferees will not result in decreases in the market price of the
Company's Common Stock. The Company is continuing to discuss issues related
to conversion with its Preferred shareholders and may offer registration
rights and/or other rights to Preferred shareholders as an inducement to
delay conversion. There can be no assurance the issues related to resale of
the Common Stock of the Company issued pursuant to Regulation S will not have
a material adverse effect on the Company, including the ability of the
Company to raise additional capital in the future.
In connection with the acquisition of MEDTOX, the Company
issued 2,517,306 to the former shareholders of MEDTOX and sold 104 shares of
Series A Preferred stock, all pursuant to Regulation D. The shares issued to the
former shareholders of MEDTOX and the Common Stock issuable upon the conversion
of the 104 shares of Series A Preferred Stock were included on a Registration
Statement on Form S-3 which was filed on February 9, 1996. The 104 shares of
Series A Preferred Stock would be convertible into 3,652,482 shares of Common
Stock based on a conversion price of $1.41 per share or a 25% discount to the
market price on March 26, 1996.
If substantial sales of the Company's Common Stock occur,
whether by the investors in the Offshore Offering or by U.S. investors pursuant
to the Registration Statement or otherwise, such sales could have a material
adverse effect on the market price of the Company's Common Stock.
5. Adverse Effect of Price Protection Provisions. The number
of shares of Common Stock issuable upon conversion of a share of Series A
Preferred Stock will equal the number derived by dividing (i) the purchase price
of the Series A Preferred Stock ($50,000 per share) by (ii) the lower of (x)
$2.775 or (y) 75% of the Market Price of the Common Stock on the day the shares
of Series A Preferred Stock are converted into Common Stock. "Market Price" is
defined for this purpose as the daily average of the closing bid prices quoted
on the American Stock Exchange or other exchange on which the Common Stock is
traded for the five trading days immediately preceding the date the shares are
converted. Accordingly, a minimum of 7,333,333 shares of Common Stock are
issuable upon conversion of the 407 shares of Series A Preferred Stock sold in
both the U.S. Offering and the Offshore Offering, but the actual number of
shares of Common Stock issuable upon conversion of the Series A Preferred Stock
will not be known until the time of issuance of the shares of Common Stock upon
conversion. As of March 26, 1996, the market price of the Common Stock was
$1.875 per share at which price the 407 shares of Series A Preferred Stock would
be convertible into 14,432,624 shares of Common Stock, based on a conversion
price of $1.41 per share or a 25% discount to the market price on
March 26, 1996.
The MEDTOX Asset Purchase Agreement provides that, if after
the Closing Date the market value of the Common Stock of the Company declines
below $1.986 per share during four specified periods (the "Repricing Periods")
following press releases by the Company, the Company will issue additional
shares of Common Stock ("Additional Shares") to shareholders of MEDTOX who
retain their shares of Common Stock through four specified dates (the "Repricing
Dates") to compensate the MEDTOX shareholders for decreases after the closing of
the MEDTOX acquisition in the market price of the Common Stock of the Company
below $1.986 per share. The Repricing Dates are the fifth trading day following
the date the Registrant issues press releases announcing its financial
performance for the fiscal
<PAGE>
quarters ending on March 31, 1996, September 30, 1996 and September 30, 1997 and
the fiscal year ending on December 31, 1996 and the Repricing Periods are the
dates between the dates of the press releases and the Repricing Dates.
Accordingly, the number of Additional Shares issuable in the future in
connection with the MEDTOX acquisition cannot be determined at this time and
will depend upon changes in the market price of the Common Stock, as well as the
extent to which MEDTOX shareholders retain the MEDTOX shares on each of the
Repricing Dates.
The price protection provisions of the Series A Preferred
Stock and the MEDTOX shareholders could result in the Company being required
to issue more shares of Common Stock than the Company is authorized to issue.
The Company's Certificate of Incorporation currently authorizes the issuance
of 30,000,000 million shares of Common Stock, of which 13,193,838 shares are
currently issued and outstanding. If all 407 outstanding shares of the Series A
Preferred Stock were to be converted at a 25% discount from the $1.875 market
price of the Company's Common Stock on March 26, 1996, 14,471,111 shares of
Common Stock would be issuable upon conversion of the Series A Preferred Stock
and only 2,335,051 shares of Common Stock would be available for future
issuances. 1,736,133 shares of Common Stock are issuable pursuant to outstanding
stock options, stock purchase plans and warrants. The Company's Certificate of
Incorporation also authorizes the issuance of 1,000,000 shares of Preferred
Stock for which the Board of Directors has the power to designate the rights
and preferences, of which only 407 shares are issued and outstanding. The
Company intends to hold a shareholders meeting to amend the Certificate of
Incorporation of the Company to increase the number of authorized shares of
Common Stock of the Company, which additional shares would be available to
satisfy the price protection provisions of the Series A Preferred Stock and the
MEDTOX shareholders and for other corporate purposes.
The price protection provisions of the Series A Preferred
Stock are transferred upon any transfer of the Series A Preferred Stock, but
terminate upon conversion of the Series A Preferred Stock. The price protection
afforded the MEDTOX shareholders terminates upon transfer of the Common Stock
issued to MEDTOX shareholders.
Other shareholders of the Company do not have the price
protection afforded holders of Series A Preferred Stock and the MEDTOX
shareholders. Accordingly, if the market price of the Common Stock of the
Company declines, the interests in the Company's other shareholders will be
diluted by the price protection provisions afforded holders of Series A
Preferred Stock and the MEDTOX shareholders. Substantial sales of shares of
Common Stock by the MEDTOX shareholders or purchasers of Series A Preferred
Stock or other shareholders may have a material adverse effect on the market
price of the Common Stock of the Company, which would increase the number of
Additional Shares issuable to MEDTOX shareholders on the Repricing Dates and the
number of shares of Common Stock issuable upon conversion of the Series A
Preferred Stock.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data are derived from
financial statements of the Company and should be read in conjunction with the
financial statements, related notes, and other financial information included
herein.
<PAGE>
Years Ended December 31
1995 1994 1993 1992 1991
(in thousands, except per share amounts)
Net revenues $7,526 $6,593 $2,633 $2,989 $2,731
Net loss (7,285) (3,546) (3,066) (1,292) ( 847)
Net loss per share (.77) ( .49) ( .56) ( .35) ( .31)
Total assets 3,806 7,378 4,005 3,188 1,254
Long term debt -0- 63 -0- 113 154
Cash dividends -0- -0- -0- -0- -0-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
General
The Company commenced operations in June 1983 and until 1986
was a development stage company. The Company became engaged in the manufacture
and sale of culture media, animal blood products, customer antisera, and other
Conventional Biodiagnostic Products as a result of its acquisition of Granite
Technological Enterprises, Inc. in June 1986. The Company began the manufacture
and sale of its EZ-SCREEN diagnostic tests in 1985 and introduced its patented
one-step assay, VERDICT and RECON, in 1993. On February 11, 1994 the Company
completed the acquisition of PDLA, which is now a wholly-owned subsidiary of the
Company. The results of operations for the year ended December 31, 1994 include
the results from operations of PDLA for the period February 12, 1994 through
December 31, 1994. Since inception, the Company has financed its working capital
requirements primarily from the sale of equity securities.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Total revenues for year ended December 31, 1995 increased 14%
to $7,526,000, compared to $6,593,000 for the prior year. This increase is
primarily fully attributable to the increase in revenues from sales of products
and services for 1995. These revenues totaled $7,037,000, an increase of 14%
compared to $6,183,000 for the prior year.
Laboratory Service Revenues for the year ended December 31,
1995 were $4,312,000, an 18% increase compared to $3,647,000 for the prior year.
This increase was due primarily to the efforts of a full sales and marketing
force for the laboratory services of PDLA. During the year ended December 31,
1994, the company realized sales of $566,000 from laboratory services that were
transferred to American Medical Laboratories, Inc. ("AML") in January 1995 and,
as such, are not included in the sales for the year ended December 31, 1995.
Accordingly, the increase in Laboratory Service revenue excluding those sales
transferred to AML was actually $1,231,000.
Product sales include the sales generated from substance abuse
testing products, which incorporates the EZ-SCREEN and VERDICT on site tests and
other ancillary products for
<PAGE>
the detection of abused substances. Sales from these products were $1,180,000,
down 9% compared to $1,293,000 for the prior year. The Company believes this
decrease was primarily due to increased competition. This competition was caused
by the introduction of several products by competitors which compete with the
products of the Company. The decrease was also affected by the lack of a
complete product line of the VERDICT products.
Product sales also include sales of agricultural diagnostic
products which are marketed through diAGnostix, inc. Sales of these products
were $1,090,000 for the year ended December 31, 1995, an increase of 35%
compared to sales of $805,000 for the prior year. The acquisition of Bioman
Products Inc. on June 1, 1995 brought $404,000 in sales revenues to the Company
for the year ended December 31, 1995. Excluding these revenues, sales of
agricultural diagnostic products were $686,000 for 1995, a decrease of 15%
compared to 1994. The Company believes this decrease is due to decreased testing
by customers of the Company.
Sales of Microbiological and associated product sales and
contract manufacturing services were $393,000 for the year ended December 31,
1995, down 10% compared to $438,000 for these products and services in 1994.
This decrease was due to a reduced marketing effort.
In 1995, the Company completed research and development on
certain tests developed for the U.S. Department of Defense. This enabled
production to begin for the first time on products specifically manufactured
for the U.S. Department of Defense. Revenues from shipment of these products
were $62,000 for the year ended December 31, 1995.
Revenues from royalties and fees during the year ended
December 31, 1995 were $300,000, compared to $200,000 for 1994. This increase
was primarily due to the royalties received from AML pursuant to the agreement
the Company has with AML. Revenues from interest and other income for the year
ended December 31, 1995 were $189,000, compared to $210,000 for the year ended
December 31, 1994.
The overall gross margin from sales for the year ended
December 31, 1995 was 6%, compared to 2% of sales for the year ended December
31, 1994. Gross margins from the sales of both manufactured and products
purchased for resale for the year ended December 31, 1995 were 18% compared to
16% of sales of these products for the year ended December 31, 1994.
An increase in the number of samples being processed at PDLA
resulted in improved gross margins for laboratory services for the year ended
December 31, 1995. However, as in the year ended December 31, 1994, the cost of
providing laboratory services exceeded revenue realized from these services.
Since a large amount of the costs of providing laboratory services are fixed or
near fixed costs, the margins from sales of laboratory services are volume
dependent.
Selling, general and administrative expenses for the year
ended December 31, 1995 were $4,206,000, compared to $3,341,000 for the year
ended December 31, 1994. This increase of 26% was primarily a result of
increased sales and marketing expenses associated with
<PAGE>
the sale of the Substance Abuse Testing Products and Services marketed through
PDLA, the sales and marketing costs associated with former operations of Bioman,
as well as overall increases in the general expenditures resulting from the
acquisition of PDLA.
Research and development expenses incurred during the year
ended December 31, 1995 were $920,000, as compared to $729,000 for the year
ended December 31, 1994. This 26% increase was primarily due to increased
personnel costs and expenses, as well as increases in work being performed
pursuant to the DOD contract.
For the year ended December 31, 1995, the Company incurred
interest expense of $23,000, compared to interest expense of $25,000 incurred
during the year ended December 31, 1994.
The continued operating losses and negative cash flows
in 1995 of the PDLA operations resulted in an evaluation at year end of
the PDLA goodwill for possible impairment. The Company determined that the
operations of PDLA did not have long-term future viability as a stand-alone
laboratory operation and would not be supported by the Company on a
stand-alone basis. The underlying factors contributing to the financial
results for PDLA include competitive pricing pressures in the marketplace
and the inability of the Company to generate sufficient PDLA business volume
that would result in positive cash flows and profitable operations as a
stand-alone laboratory operation. The Company performed an analysis of the
PDLA undiscounted cash flows and projected that PDLA would have negative
cash flows for the foreseeable future. The Company determined that the
estimated shortfall of cash flows exceeded the carrying value of the
remaining PDLA goodwill, and as a result, recorded a write-off of $3,073,000
at December 31, 1995. The noncash write-off of goodwill will reduce the
future amortization expense of the Company by $173,000 per year.
As a result of the above, the net loss for the year ended
December 31, 1995 was $7,285,000 compared to the net loss of $3,546,000 for the
year ended December 31, 1994.
At December 31, 1995 and in connection with the acquisition
of MEDTOX, the Company determined that it would consolidate the laboratory
operations of PDLA into the laboratory operations at MEDTOX. In addition, the
Company decided to down size certain administrative positions at both PDLA
and MEDTOX in order to eliminate duplicative functions. As a result of this
restructuring plan, the Company will record a charge of $858,000 in the first
quarter of 1996 to cover certain costs of the restructuring.
Management believes the acquisition of MEDTOX and the
restructuring of the laboratory operations will significantly improve the
operating results of the Company although there can be no assurance of the
success of the consolidation of the laboratory operations in reducing costs and
improving efficiencies. Management expects net sales to grow through both
additional strategic acquisitions and the addition of new accounts as well as
the introduction of new products.
Year Ended December 31, 1994 Compared to Year Ended December 31, 1993
Total revenues for the year ended December 31, 1994 increased
150% to $6,593,000, compared to $2,633,000 for the year ended December 31, 1993.
This increase is primarily attributable to an increase in revenues from sales of
products and services. These revenues totaled $6,183,000, an increase of 169%
compared to $2,295,000 for the prior year. The acquisition of PDLA in February
of 1994 brought total revenues of $3,775,000 to the
<PAGE>
Company for year ended December 31, 1994 of which, $3,647,000 were laboratory
service revenues. Excluding the PDLA revenues, total revenues for 1994 were up
7% to $2,818,000 compared to $2,633,000 for 1993, and total product and service
revenues increased 11% to $2,536,000 compared to $2,295,000 for 1993.
Laboratory Service Revenues for the year ended December 31,
1994 were $3,647,000. These revenues did not exist for the Company in 1993. By
acquiring PDLA in February of 1994, the Company was able to offer laboratory
services as a complementary product to the substance abuse testing products
already marketed by the Company. As a result of the acquisition, the Company
recognized almost eleven months of revenues generated through the laboratory
services of PDLA.
Product sales include the sales generated from substance abuse
testing products. Sales from these products were $1,293,000 for the year end
December 31, 1994, an 18% increase compared to $1,093,000 for the prior year.
This increase is the result of increased sales of the on-site products,
particularly VERDICT, in 1994.
Product sales also include sales of agricultural diagnostic
products consisting of EZ-SCREEN test kits (for mycotoxin detection, drug
residue surveillance, etc.), species identification kits, other bioassay
technology products and third party products. These products are marketed
through diAGnostix, inc. Sales of these products were $805,000 for the year
ended December 31, 1994, an increase of 7% compared to sales of $751,000 during
the prior year. This increase was due to the increased purchases by the United
States Department of Agriculture ("USDA") pursuant to two contracts the Company
has with the USDA, as well as regaining the sulfa-on-site test kit business from
an international customer which did not occur during the year ended December 31,
1993.
Microbiological and associated product sales including
contract manufacturing were $438,000 for the year ended December 31, 1994
compared to $445,000 for these products in 1993. This decrease was due to a
reduced marketing effort.
Revenues from royalties and fees during the year ended
December 31, 1994 were $200,000, compared to $257,000 for 1993. These revenues
decreased 22% as a result of the termination on October 12, 1993 of the contract
the Company had with Farnam Companies, Inc.
Revenues from interest and other income for the year ended
December 31, 1994 were $210,000, compared to $81,000 for the year ended December
31, 1993. This 159% increase was due to the recovery of debts owed by a customer
of laboratory services which had previously been written off.
The gross margin from overall sales for the year ended
December 31, 1994 was 2%, compared to 12% of sales for the year ended
December 31, 1993. Excluding the effect of the PDLA acquisition for the year
ended December 31, 1994, the gross margin would have been 16%. This increase
in gross margin excluding the effect of the PDLA acquisition is overshadowed by
the impact
<PAGE>
of the laboratory services provided through PDLA. As a large amount of the costs
of providing laboratory services are fixed or near fixed costs, the margins from
the sales of laboratory services are volume dependent. The volume of testing
performed by PDLA for the period ended December 31, 1994 was adversely affected
by the loss of contracts before the acquisition of PDLA by the Company.
Selling, general and administrative expenses for the year
ended December 31, 1994 were $3,341,000, compared to $2,152,000 for the year
ended December 31, 1993. This 55% increase was primarily a result of increased
personnel from the acquisition of PDLA, increased expenses for the sales and
marketing of the substance abuse testing products, the amortization of goodwill
arising from the acquisition of PDLA, and increases in other expenses due to the
acquisition of PDLA.
The acquisition of PDLA was accounted for under the purchase
method of accounting and the Company recorded goodwill of $3,394,000. For 1994,
the Company amortized goodwill on a straight line basis over 20 years.
Research and development expenses incurred during the year
ended December 31, 1994 were $729,000, as compared to $825,000 for the year
ended December 31, 1993. This 12% decrease was primarily due to decreased
expenses, including personnel costs associated with the movement of certain
personnel from research and development to operations, and the lack of costs and
expenses associated with the Farnam contract which was terminated on October 12,
1993. Research and development efforts are directed toward enhancements of
existing products, as well as the development of new products which in some
cases have been or are funded by outside parties.
For the year ended December 31, 1994, the Company incurred
interest expense of $25,000, compared to interest expense of $9,000 incurred
during the year ended December 31, 1993. This increase was primarily a result of
the Company borrowing funds against a line of credit.
During the year ended December 31, 1993 the Company incurred
expenses of $353,000 related to its legal disputes with DDI and
Transia-Diffchamb S.A. On August 10, 1993 the arbitrator's decision in the DDI
dispute awarded to DDI certain costs and legal fees. The actual costs and fees
were later set at $336,000, bringing the total to $689,000. The Company had no
such expenditures during the year ended December 31, 1994.
As a result of the above, the net loss for the year ended
December 31, 1994 was $3,546,000, compared to the net loss of $3,066,000 for the
year ended December 31, 1993.
Material Changes in Financial Condition
At December 31, 1995, cash and cash equivalents were $258,000
compared to $1,105,000 as of December 31, 1994. The decrease of $847,000 was a
result of several factors as discussed below.
<PAGE>
At December 31, 1995, accounts receivable were $1,029,000.
This 22% increase compared to $843,000 at December 31, 1994 was primarily due to
$113,000 in receivable generated through seven months of sales from the
acquisition of Bioman Products. Excluding the Bioman receivables, accounts
receivables for the year ended December 31, 1995 increased 9% over the prior
year.
The allowance for doubtful accounts at December 31, 1995 was
$130,000, a decrease of 37% compared to $206,000 for the prior year end. This
decrease was the result of the write-off for PDLA customers for $70,000. Also,
in 1995, the Company had fewer customers with receivables due over 90 days, thus
the allowance was not significantly adjusted to reflect the increase in accounts
receivable.
Inventories were $937,000 at December 31, 1995 compared to
$853,000 at December 31, 1994. This increase of $84,000 or 10% was primarily due
to an increase in work in process inventory related to the VERDICT product line.
Prepaid expenses and other assets were $868,000 at December
31, 1995, as compared to $272,000 at December 31, 1994. This increase of
$596,000 was primarily due to the costs associated with the acquisition of
MEDTOX including a $500,000 deposit placed into an escrow account pending
closing of the acquisition of MEDTOX.
During the year ended December 31, 1995, the Company took a
charge of $3,100,000 to write off the goodwill associated with the acquisition
of PDLA. Accordingly, the amount of goodwill at December 31, 1995 was $117,000
as compared to $3,247,000 at December 31, 1994. The remaining goodwill relates
to the acquisition of Bioman in June 1995.
At December 31, 1994, the Company had an outstanding balance
of $850,000 on a line of credit with a bank. The Company repaid the total
outstanding balance during the year ended December 31, 1995.
Accrued expenses were $834,000 at December 31, 1995 as
compared to $347,000 at December 31, 1994. This increase of $487,000 was
primarily due to expenses associated with the acquisition of MEDTOX.
As described more fully in the notes to the financial
statements, the Company entered into a $125,021 loan agreement with the North
Carolina Biotechnology Center (NCBC). The loan, plus accrued interest, was due
August 14, 1994. On December 15, 1994, the Company and NCBC negotiated a loan
modification extending the due date to August 14, 1996. In addition, NCBC
exercised their right to convert 50%, or approximately $62,000, of the loan
amount into 16,100 shares of the Company's common stock. Accordingly, at
September 30, 1995, the Company had a balance of loan payable of $63,000 to
NCBC. In addition, during 1995 the Company borrowed $100,000 from Dr. Samuel C.
Powell in the form of a 90 day promissory note. Primarily as a result of these
transactions, the balance of notes payable at December 31, 1995 was $182,000 as
compared to $158,000 at December 31, 1994.
<PAGE>
Liquidity and Capital Resources
Since its inception, the working capital requirements of the
Company have been funded by cash received from equity investments in the
Company. At December 31, 1995, the Company had cash and cash equivalents of
$258,000. The Company had also deposited $500,000 in an escrow account towards
the acquisition of MEDTOX. On January 30, 1996, the Company completed the
acquisition of MEDTOX. To finance the acquisition of MEDTOX and provide working
capital, the Company raised $20,350,000 from the sale of 407 shares of Series A
Preferred Stock and borrowed $5,000,000. The debt financing consists of two term
loans totaling $4,000,000 and up to $7,000,000 in the form of a revolving line
of credit based primarily on the receivables of the Company (the "Loan
Agreement"). The amount of credit available to the Company varies with the
accounts receivable and the inventory of the Company. The interest rates on the
two term loans of $2,000,000 each are 2.5 points above the prime rate and 2.0
points above the prime rate. The revolving line of credit carries an interest
rate equal to 1.5 points above the prime rate. The Company believes that the
aforementioned capital will be sufficient to fund the Company's planned
operations through 1996 and beyond, although there can be no assurance that the
available capital will be sufficient to fund the future operations of the
Company.
As of December 31, 1995, the Company had not achieved a
positive cash flow from operations. Accordingly, the Company relies on available
credit arrangements, outside funding of research and development, and continued
sales of its equity securities to fund operations until a positive cash flow can
be achieved. Management believes that it has taken, and is prepared to continue
to take, the actions required to yield a positive cash flow from operations in
the future.
The Company believes that the acquisition of MEDTOX, the
consolidation of the laboratory operations from PDLA to MEDTOX, and other
synergies that will be realized from the acquisition of MEDTOX will enable the
Company to generate positive cash flow. The Company continues to follow a plan
which includes (i) continuing to aggressively monitor and control costs, (ii)
increasing revenue from sales of the Company's products, services, and research
and development contracts, as well as (iii) pursuing synergistic acquisitions to
increase the Company's critical mass. There can be no assurance that costs can
be controlled, revenues can be increased, financing may be obtained,
acquisitions successfully consummated, or that the Company will be profitable.
During 1995, the Company sold a total of 2,140,963 shares of
common stock in 13 separate private transactions. The sale of these 2,140,963
shares generated net proceeds of $3,884,109 to the Company.
<PAGE>
As mentioned above, the Company sold 407 shares of its Series
A Preferred Stock for $20,350,000 in 1996. Also in 1996, the Company sold
235,295 shares of its common stock to a director in a private transaction. The
sale of these 235,295 shares generated proceeds of $600,002 to the Company.
<PAGE>
Report of Independent Auditors
The Board of Directors
EDITEK, Inc.
We have audited the accompanying consolidated balance sheets of EDITEK, Inc. as
of December 31, 1995 and 1994, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1995. Our audits also included the financial
statement schedule listed in the Index at Item 14(a). These consolidated
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of EDITEK,
Inc. at December 31, 1995 and 1994, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1995 in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule, when considered in relation to the
consolidated financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
Ernst & Young LLP
Raleigh, North Carolina
February 23, 1996,
except for Note 12, as to which
the date is May 9, 1996
1
<PAGE>
EDITEK, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1995 1994
(IN THOUSANDS)
(Restated)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 258 $ 1,105
Accounts receivable:
Trade, less allowance for doubtful accounts (1995--
$130,000; 1994--$206,000) 977 737
Other 52 106
1,029 843
Inventories:
Raw materials 588 532
Work in process 169 64
Finished goods 180 257
937 853
Deposit on acquisition (NOTE 2) 500 --
Prepaid expenses and other 368 272
Total current assets 3,092 3,073
Equipment and improvements:
Furniture and equipment 5,857 5,689
Leasehold improvements 1,696 1,692
7,553 7,381
Less accumulated depreciation and amortization (6,824) (6,326)
729 1,055
Goodwill, net of amortization of $7,000 in 1995 and $147,000
in 1994 (NOTES 2 AND 3) 117 3,247
Other assets -- 3
Total assets
$ 3,938 $ 7,378
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31
1995 1994
(IN THOUSANDS)
(Restated)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit (NOTE 4) $ -- $ 850
Accounts payable 1,184 1,105
Accrued expenses 834 347
Deferred revenues 42 39
Current portion of long-term debt (NOTE 4) 82 95
Note payable to director 100 --
Current portion of capital lease -- 23
Total current liabilities 2,242 2,459
Long-term debt (NOTE 4) -- 63
Stockholders' equity (NOTES 5 AND 6):
Preferred Stock--authorized 1,000,000 shares; no shares
issued or outstanding -- --
Common Stock, $.15 par value; authorized--30,000,000
shares; issued and outstanding--10,439,775 shares in
1995 and 8,075,339 shares in 1994
1,566 1,211
Additional paid-in capital 33,973 30,132
Accumulated deficit (33,667) (26,382)
1,872 4,961
Less: Note receivable from officer (100) (100)
Treasury stock (76) (5)
1,696 4,856
Total liabilities and stockholders' equity
$ 3,938 $ 7,378
</TABLE>
SEE ACCOMPANYING NOTES.
3
<PAGE>
EDITEK, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1995 1994 1993
(IN THOUSANDS)
(Restated)
<S> <C> <C> <C>
Revenues:
Laboratory service revenues $ 4,312 $ 3,647 $ --
Product sales 2,725 2,536 2,295
Royalties and fees 300 200 257
Interest and other income 189 210 81
7,526 6,593 2,633
Costs and expenses:
Cost of services 4,349 3,902 --
Cost of sales 2,240 2,142 2,024
Selling, general and administrative 4,206 3,341 2,152
Research and development 920 729 825
Interest and financing costs 23 25 9
Arbitration costs (NOTE 9) -- -- 689
Goodwill write-off (NOTE 3) 3,073 -- --
14,811 10,139 5,699
Net loss $ (7,285) $ (3,546) $ (3,066)
Loss per share of common stock $ (.77) $ (.49) $ (.56)
Weighted average number of shares of common stock
outstanding 9,445,707 7,204,244 5,429,128
</TABLE>
SEE ACCOMPANYING NOTES.
4
<PAGE>
EDITEK, Inc.
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
NOTE
ADDITIONAL RECEIVABLE
PAID-IN ACCUMULATED FROM TREASURY
SHARES AMOUNT CAPITAL DEFICIT STOCKHOLDER STOCK TOTAL
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1992 4,885,629 $ 733 $21,467 $ (19,770) $ (100) $ (5) $ 2,325
Exercise of stock options and warrants 217,194 32 268 -- -- -- 300
Sale of stock 10,754 2 38 -- -- -- 40
Private placement of common stock 955,654 143 3,489 -- -- -- 3,632
Net loss -- -- -- (3,066) -- -- (3,066)
Balances at December 31, 1993 6,069,231 910 25,262 (22,836) (100) (5) 3,231
Exercise of stock options and warrants 23,019 4 43 -- -- -- 47
Stock issued for PDLA acquisition 1,167,729 175 3,803 -- -- -- 3,978
Sale of stock 15,360 2 31 -- -- -- 33
Private placement of common stock 800,000 120 993 -- -- -- 1,113
Net loss -- -- -- (3,546) -- -- (3,546)
Balances at December 31, 1994 8,075,339 1,211 30,132 (26,382) (100) (5) 4,856
Exercise of stock options and warrants 156,347 23 170 -- -- -- 193
Stock issued for Bioman acquisition 21,489 3 58 -- -- -- 61
Sale of stock 12,037 2 25 -- -- -- 27
Stock issued for conversion of debt 16,100 3 59 -- -- -- 62
Purchase of treasury stock -- -- -- -- -- (71) (71)
Private placement of common stock 2,158,463 324 3,529 -- -- -- 3,853
Net loss -- -- -- (7,285) -- -- (7,285)
Balances at December 31, 1995 (Restated) 10,439,775 $1,566 $33,973 $ (33,667) $ (100) $ (76) $ 1,696
</TABLE>
SEE ACCOMPANYING NOTES.
5
<PAGE>
EDITEK, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1995 1994 1993
(IN THOUSANDS)
(Restated)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(7,285) $(3,546) $(3,066)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 644 633 318
Goodwill write-off 3,073 -- --
Provision for losses on accounts receivable (54) 58 (6)
Provision for obsolete inventory (13) 5 5
Gain on sale or retirement of equipment -- -- (16)
Changes in operating assets and liabilities, net of
acquisition:
Accounts receivable (22) 31 34
Inventories (58) (306) (84)
Prepaid expenses and other (589) (19) (26)
Accounts payable and accrued expenses 453 116 (121)
Deferred revenues 3 (17) 19
Leases payable (23) (37) --
Net cash used in operating activities (3,871) (3,082) (2,943)
INVESTING ACTIVITIES
Purchase of equipment and improvements (177) (505) (339)
Proceeds from sale of equipment -- -- 41
Purchase of PDLA, net of cash acquired -- 89 --
Cash used for Bioman acquisition (37) -- --
Net cash used in investing activities (214) (416) (298)
FINANCING ACTIVITIES
Proceeds from issuance of stock for:
Private placement 4,115 1,159 3,656
Costs related to private placement (262) (46) (24)
Sale of stock 27 33 40
Exercise of stock warrants and options 193 47 300
Purchase of treasury stock (71) -- --
Proceeds from line of credit, loan payable and note
payable 119 850 13
Principal payments on line-of-credit and loan payable (883) -- --
Net cash provided by financing activities 3,238 2,043 3,985
(Decrease) increase in cash and cash equivalents (847) (1,455) 744
Cash and cash equivalents at beginning of year 1,105 2,560 1,816
Cash and cash equivalents at end of year $ 258 $ 1,105 $ 2,560
</TABLE>
SUPPLEMENTAL NONCASH ACTIVITIES
During 1995, the Company issued $62,000 of common stock related to the
conversion of debt and issued $61,000 of common stock in connection with the
acquisition of Bioman.
6
<PAGE>
EDITEK, Inc.
Notes to Consolidated Financial Statements
December 31, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
The consolidated financial statements include the accounts of EDITEK, Inc.
("EDITEK") and its wholly-owned subsidiaries, Princeton Diagnostic Laboratories
of America, Inc. ("PDLA") and diAGnostix, Inc. (collectively referred to as "the
Company"). EDITEK is engaged in the research, development and sale of products
based upon enzyme immunoassay technology for the detection of antibiotic
residues, mycotoxins, drugs of abuse and other hazardous substances. PDLA
provides clinical testing services for the detection of substances of abuse and
diAGnostix, Inc. distributes agridiagnostic and food safety testing products.
All significant intercompany transactions and balances have been eliminated.
TRADE ACCOUNTS RECEIVABLE
Sales are made to local, national and international customers including
livestock producers, food processors, veterinarians, government agencies,
medical professionals, corporations, law enforcement agencies and healthcare
facilities. Concentration of credit risk is limited due to the large number of
customers to which the Company sells its products and services. The Company
extends credit based on an evaluation of the customer's financial condition and
receivables are generally unsecured. The Company provides an allowance for
doubtful accounts equal to the estimated losses expected to be incurred in the
collection of accounts receivable.
INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out method) or
market. At December 31, 1995 and 1994, the inventory included a reserve of
$12,000 and $25,000, respectively, for lower of cost or market and for
obsolescence.
EQUIPMENT AND IMPROVEMENTS
Equipment and improvements are stated at cost. Provisions for depreciation have
been computed using the straight-line method to amortize the cost of depreciable
assets over their estimated useful lives. Leasehold improvements are amortized
over the lesser of the lease term or the economic useful lives of the
improvements.
7
<PAGE>
EDITEK, Inc.
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
Sales are recognized in the statement of operations when products are shipped or
services are rendered.
ROYALTIES AND FEES
The Company receives reimbursement for certain research and development costs.
The reimbursement is recorded as royalties and fees.
RESEARCH AND DEVELOPMENT
Research and development expenditures are charged to expense as incurred.
INCOME TAXES
The Company uses the liability method of accounting for income taxes. Under this
method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and highly liquid investments maturing
within three months when purchased.
LOSS PER SHARE OF COMMON STOCK
Loss per share of common stock amounts are based on the weighted average number
of shares of common stock outstanding. All other common stock equivalents,
including convertible debt disclosed in Note 4, were anti-dilutive and therefore
were not included in the computation of loss per share, for all periods
presented.
RELATED PARTY TRANSACTIONS
The Company has transactions with related parties. The specific transactions are
disclosed in the applicable notes to the financial statements.
8
<PAGE>
EDITEK, Inc.
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GOODWILL
Goodwill is amortized on a straight-line basis over 20 years. The carrying value
of goodwill is reviewed if the facts and circumstances suggest that it may be
impaired. If this review indicates that goodwill will not be recoverable, as
determined based on the undiscounted cash flows of the entity acquired over the
remaining amortization period, the Company's carrying value of the goodwill is
reduced by the estimated shortfall of cash flows (see Note 3).
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
RECENTLY ISSUED ACCOUNTING STANDARD
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of," which requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. Statement 121 also addresses
the accounting for long-lived assets that are expected to be disposed of. The
Company will adopt Statement 121 in the first quarter of 1996 and, based on
current circumstances, does not believe the effect of adoption will be material.
RECLASSIFICATIONS
Certain reclassifications have been made to the years 1994 and 1993 to conform
with the 1995 presentation. Such reclassifications had no effect on previously
reported net loss or accumulated deficit.
9
<PAGE>
EDITEK, Inc.
Notes to Consolidated Financial Statements (continued)
2. ACQUISITIONS
In January, 1996, the Company acquired MEDTOX Laboratories, Inc., ("MEDTOX") a
toxicology laboratory located in St. Paul, Minnesota. The purchase price was $24
million, which included $19 million cash and the issuance of 2,517,306 shares of
common stock. The acquisition was accounted for under the purchase method of
accounting wherein the Company recognized approximately $22 million of goodwill.
The goodwill is being amortized over a period of 20 years.
The Company financed the acquisition by issuing $19 million of convertible
preferred stock and borrowing $4 million under two $2 million term loans. The
Company also entered into a revolving line of credit of up to $7 million for
working capital purposes.
At December 31, 1995, the Company had $500,000 in an escrow account as a
required deposit toward the MEDTOX acquisition.
The following unaudited proforma information presents the results of operations
of the Company and MEDTOX for the year ended December 31, 1995, as if the
acquisition had been consummated as of January 1, 1995.
Revenues $27,745
Net loss $ 4,459
Net loss per share $ (.37)
On June 1, 1995, the Company acquired Bioman Products, Inc., ("Bioman") an
environmental diagnostics company. The purchase price was $140,000, which
included cash and the issuance of 21,489 shares of common stock. The acquisition
was accounted for under the purchase method of accounting wherein the Company
recognized $117,000 of goodwill, which is being amortized over a period of 20
years. The consolidated results of operations for the year ended December 31,
1995 included the results of the Bioman operations from June 1, 1995 to December
31, 1995.
The Company acquired PDLA on February 11, 1994 by issuing 826,790 shares of its
common stock in exchange for all of the outstanding shares of PDLA's stock. The
total value of the exchange was $3,876,000. The acquisition was accounted for
under the purchase method of accounting and the Company recorded goodwill of
$3,394,000. Additional shares of common stock were subsequently issued to former
major shareholders of PDLA through price protection agreements. The consolidated
results of operations for the year ended December 31, 1994 include the results
of the PDLA
10
<PAGE>
EDITEK, Inc.
Notes to Consolidated Financial Statements (continued)
2. ACQUISITIONS (CONTINUED)
operations from February 12, 1994 to December 31, 1994 (see Note 3).
3. GOODWILL WRITE-OFF
The continued operating losses and negative cash flows of the PDLA operations
resulted in an evaluation during the fourth quarter of 1995, of the PDLA
goodwill for possible impairment. The Company determined that the operations
of PDLA did not have long-term future viability as a stand-alone laboratory
operation and would not be supported by the Company on a stand-alone basis.
The underlying factors contributing to the financial results for PDLA include
competitive pricing pressures in the market place, the loss of preacquisition
customers and the inability of the Company to generate sufficient PDLA
business volume that would result in positive cash flows and profitable
operations. The Company performed an analysis of the PDLA undiscounted cash
flows over the remaining amortization period and determined that the estimated
shortfall of cash flows exceeded the carrying value of the remaining PDLA
goodwill. As a result the Company recorded a write-off of goodwill of
$3,073,000 at December 31, 1995.
4. DEBT
On August 15, 1989, the Company entered into a long-term loan agreement with a
state funded, non-profit organization whereby the Company borrowed an aggregate
of $125,000 to fund the development cost of a test for Chlamydia, a sexually
transmitted disease. The loan originally had an interest rate of seven and one
half percent (7.5%) per annum with all principal and interest due on August 15,
1994. The Company amended the loan agreement on the due date and issued 16,100
shares of common stock as repayment for $62,000 of the loan. The remaining
principal, $63,000, now bears interest at the rate of nine percent (9%) per
annum; this principal and interest, which are due on August 15, 1996, are
convertible into shares of common stock.
On March 1, 1994, the Company entered into a line of credit arrangement for up
to $1,000,000 at an interest rate of 5.82%. The line-of-credit was repaid and
terminated in 1995.
On December 18, 1995, the Company borrowed $100,000 from a Director at an
interest rate of 10.5%. The Company repaid the principal and interest in
February, 1996.
11
<PAGE>
EDITEK, Inc.
Notes to Consolidated Financial Statements (continued)
4. DEBT (CONTINUED)
Interest paid for all outstanding debt was $19,000, $19,000 and $9,000 for the
years ended December 31, 1995, 1994 and 1993, respectively.
5. STOCKHOLDERS' EQUITY
The Company has sold its common stock in various private transactions as
follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES PRICE NET
PER SHARE PROCEEDS
<S> <C> <C> <C>
1995 2,158,463 $1.63 to $2.25 $3,853,000
1994 800,000 $1.01 to $2.03 $1,113,000
1993 955,654 $3.01 to $5.20 $3,632,000
</TABLE>
At December 31, 1995, shares of common stock reserved for future issuance are as
follows:
Common stock warrants:
Series J 60,000
Series K 50,000
Series L 320,000
Series M 10,550
Series N 32,679
Common stock options:
Incentive 449,406
Non-Employee Director 239,540
Nonqualified 41,093
Qualified Employee Stock Purchase Plan 76,241
Equity Compensation Plan 2,998,333
Convertible Debt 21,856
4,299,698
6. STOCK OPTION AND PURCHASE PLANS
INCENTIVE STOCK OPTION PLAN
The Company has an Incentive Stock Option Plan (the "Plan") under which options
to purchase shares of common stock may be granted to officers, directors and
employees at a price which is not less than fair market value at the date of
grant. Options generally become exercisable in installments over a period of one
to five years. Under the incentive plan, no additional options may be granted
subsequent to June 23, 1993.
12
<PAGE>
EDITEK, Inc.
Notes to Consolidated Financial Statements (continued)
6. STOCK OPTION AND PURCHASE PLANS (CONTINUED)
Following is a summary of transactions:
<TABLE>
<CAPTION>
SHARES UNDER OPTION
1995 1994 1993
<S> <C> <C> <C>
Outstanding, beginning of year 461,657 483,262 500,860
Granted during the year -- -- 13,414
Canceled during the year (12,251) (17,105) (5,965)
Exercised during the year (1994--$1.41 per share;
1993--$.55 to $6.25 per share) -- (4,500) (25,047)
Outstanding, end of year (1995--$.45 to $10.38 per
share; 1994--$.45 to $10.38 per share; 1993--$.45 to
$10.38 per share) 449,406 461,657 483,262
Exercisable, end of year (1995--$.45 to $10.38 per
share; 1994--$.45 to $10.38 per share; 1993--$.45 to
$10.38 per share) 448,536 442,182 374,867
</TABLE>
EQUITY COMPENSATION PLAN
Effective October 26, 1993 the Company adopted an equity compensation plan that
includes incentive stock options, non-qualified stock options, stock
appreciation rights, restricted and unrestricted stock awards, performance
shares, and other stock-based awards. A total of 3,000,000 shares have been
authorized for the plan. As of December 31, 1995, 721,039 options are
outstanding and 298,436 have vested.
NON-EMPLOYEE DIRECTOR PLAN
The Company maintains a stock option plan for non-employee directors under which
options to purchase shares of common stock may be granted to directors of the
Company who are not employees of the Company. At December 31, 1995, 47,864
options that have been granted are outstanding.
NONQUALIFIED STOCK OPTIONS
On July 1, 1987, the Company granted nonqualified options to purchase 66,667
shares of common stock to an officer at $14.70 per share. Subsequently, 26,667
of the options were canceled and reissued under the Incentive Stock Option Plan
and the remaining 40,000 options were canceled and reissued at $7.50 per share.
In September 1988 the officer exercised options to purchase 13,334 shares of
common stock. Pursuant to the terms of the option agreement, the Company
provided a loan to the officer for the amount of the funds necessary to exercise
the options. The stock acquired is held by the Company as collateral for the
loan and the officer is to pay interest on the borrowed funds
13
<PAGE>
EDITEK, Inc.
Notes to Consolidated Financial Statements (continued)
6. STOCK OPTION AND PURCHASE PLANS (CONTINUED)
at a rate equal to the prime rate in effect from time to time with adjustments
in the interest accrual rate to occur on the same date that the prime rate
changes. In May 1990 the remaining 26,666 options were canceled and reissued at
$3.75 per share.
On August 10, 1988, the Company granted nonqualified options to purchase 6,667
shares of common stock to an officer at $3.75 per share. At December 31, 1995,
6,667 options are exercisable.
On January 14, 1993, the Company granted nonqualified options to purchase 7,760
shares of common stock to a director at $8.19 per share. At December 31, 1995,
the 7,760 options are exercisable.
The shares of common stock covered by these nonqualified options are restricted
as to transfer under applicable securities laws.
QUALIFIED EMPLOYEE STOCK PURCHASE PLAN
The Company has a Qualified Employee Stock Purchase Plan (the "Purchase Plan")
under which all regular employees meeting certain criteria may subscribe to and
purchase shares of common stock. The number of shares of common stock authorized
to be issued under the Purchase Plan is 150,000, subject to adjustment for any
future stock splits or dividends. The subscription price of the shares is 85% of
the fair market value of the common stock on the day the executed subscription
form is received by the Company. The purchase price for the shares is the lesser
of the subscription price or 85% of the fair market value of the shares on the
day the right to purchase is exercised. Payment for common stock is made through
a payroll deduction plan. Following is a summary of transactions:
<TABLE>
<CAPTION>
SHARES SUBSCRIBED
1995 1994 1993
<S> <C> <C> <C>
Outstanding, beginning of year 13,725 7,943 18,829
Subscribed during the year 4,942 23,005 6,386
Canceled during the year (3,128) (1,863) (6,518)
Purchased during the year (1995--$1.70 to $2.55 per
share; 1994--$1.60 to $3.63 per share; 1993--$2.19 to
$6.96 per share) (12,037) (15,360) (10,754)
Outstanding, end of year (1995--$1.70 to $3.09 per
share; 1994--$1.70 to $3.94 per share;1993--$2.17 to
$6.96 per share) 3,502 13,725 7,943
</TABLE>
14
<PAGE>
EDITEK, Inc.
Notes to Consolidated Financial Statements (continued)
6. STOCK OPTION AND PURCHASE PLANS (CONTINUED)
The Company accounts for its stock compensation arrangements under the
provisions of APB 25, "Accounting for Stock issued to Employees," and intends to
continue to do so.
7. LEASES
The Company leases office and research facilities from a director under an
operating lease. The lease is currently a month to month lease. Rental payments
to this director were approximately $121,000, $119,000, and $109,000 for the
years ended December 31, 1995, 1994 and 1993, respectively.
The Company leases farm facilities for production of certain of its products
from a company of which a director owns a 12% interest. The lease is currently a
month to month lease. Rental payments to this company were approximately $34,000
for the years ended December 31, 1995, 1994 and 1993.
The Company leases certain office equipment and facilities under operating
leases. As of December 31, 1995, the Company is obligated for minimum lease
payments under noncancellable leases as follows:
1996 $178,000
1997 174,000
1998 171,000
1999 170,000
2000 and thereafter 57,000
$750,000
Rent expense (including amounts to the director for the leased facilities)
amounted to $435,000, $410,000 and $151,000 for the years ended December 31,
1995, 1994 and 1993, respectively.
8. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
15
<PAGE>
EDITEK, Inc.
Notes to Consolidated Financial Statements (continued)
8. INCOME TAXES (CONTINUED)
Significant components of the Company's deferred tax liabilities and assets at
December 31 are as follows:
1995 1994
Deferred tax liabilities:
Capital leased assets $ (6,000) $ (7,000)
Total deferred tax liabilities (6,000) (7,000)
Deferred tax assets:
Excess fixed asset basis 153,000 34,000
Allowance for bad debts 49,000 78,000
Accrued vacation pay 48,000 43,000
Net acquisition costs 241,000 241,000
Net operating loss carryforwards 11,271,000 9,805,000
Research and experimental credit carryforwards 456,000 426,000
Uniform capitalization reserve 22,000 --
Restructuring costs 157,000 --
Other 63,000 26,000
Total deferred tax assets 12,460,000 10,653,000
Valuation allowance for deferred assets (12,454,000) (10,646,000)
Total deferred tax assets 6,000 7,000
Net deferred tax assets(liabilities) $ -- $ --
During 1995 and 1994, the valuation allowance increased by $1,808,000 and
$2,644,000, respectively.
At December 31, 1995, the Company has available to offset future taxable income
for financial reporting and federal tax purposes, operating loss carryforwards
of approximately $29,488,000 expiring in 1998 through 2009. Research and
experimental credits of approximately $456,000, expiring in 1998 through 2009,
are also available to offset future income tax liabilities.
The Company acquired approximately $2,473,000 in net operating loss
carryforwards when it purchased PDLA. This amount is included in total net
operating loss carryforwards described in the preceding paragraph. Future use of
this carryforward will be limited based on the Separate Return Limitation Year
("SRLY") Rules found in Proposed Treasury Regulation 1.1502-21(c). These rules
limit the use of a net operating
16
<PAGE>
EDITEK, Inc.
Notes to Consolidated Financial Statements (continued)
8. INCOME TAXES (CONTINUED)
loss carryforward into consolidated return years. The limitation, computed
annually, limits the use of the SRLY net operating loss carryforward to the
cumulative annual taxable income generated by the purchased company since its
admittance into the consolidated group.
The annual usage of the Company's net operating loss carryforwards has been
limited by provisions of the Tax Reform Act of 1986 ("TRA"). Under TRA, if a
company experiences a change in ownership of more than 50% (by value) of its
outstanding stock over a three year period, the use of its pre-change in
ownership net operating loss carryforwards will be limited each year until the
loss is exhausted or the carryover period expires. Such a change in ownership
occurred at the time of the Company's 1987 public stock offering.
The amount of pre-change in ownership net operating loss carryforwards of
$8,500,000 which can be utilized to offset future federal taxable income will be
approximately $2,300,000 per year. TRA does not limit annual usage of
post-change in ownership net operating loss carryforwards.
9. ARBITRATION COSTS
During the latter part of 1992 and through 1993, the Company was involved in
arbitration matters with Transia-Diffchamb and Disease Detection International
("DDI"). In the Transia-Diffchamb arbitration case, the arbitrator ruled on July
30, 1993 in favor of the Company; however, the Company was not able to recover
any legal fees. In the DDI arbitration case, the arbitrator ruled against the
Company. The arbitrator also ruled that DDI was entitled to recover costs and
related legal fees. The Company has recognized an expense of $689,000 for these
costs and fees.
10. MAJOR CUSTOMERS
Sales to major customers and foreign sales amounted to the following percentages
of total revenue:
YEAR ENDED DECEMBER 31
1995 1994 1993
United States Government and agencies 4% 5% 11%
Foreign sales 8% 7% 15%
17
<PAGE>
EDITEK, Inc.
Notes to Consolidated Financial Statements (continued)
11. SUBSEQUENT EVENTS
On January 30, 1996, the Company completed the acquisition of MEDTOX and has
approximately $6 million available on its revolving line of credit (see Note 2).
On January 31, 1996, the Company sold 235,295 shares of common stock to a
Director of the Company. Proceeds from the sale were $600,000.
12. RESTATEMENT
The Company has restated its 1995 financial statements to eliminate $758,000 of
restructuring costs associated with the acquisition of MEDTOX. The restatement
resulted in reductions of the previously reported net loss, certain accrued
liabilities and accumulated deficit by $758,000. Additionally, the 1995 net loss
per share has been reduced from $.85 per share to $.77 per share. The Company
will record the restructuring costs in the first quarter of 1996, to comply
with EITF 95-14 as the consummation date of the acquisition of MEDTOX was
determined to be January 30, 1996.
18
<PAGE>
SCHEDULE V - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at Charged Charged Balance at
Beginning to Costs and to Other the End
of Period Expenses Accounts Deductions of Period
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1995:
Deducted from Asset Accounts
Allowance for Doubtful Accounts $ 206,000 $ 89,000 $ - $ 165,000 (2) $ 130,000
Allowance for Excess and
Obsolete Inventory $ 25,000 $ 2,000 $ - $ 15,000 $ 12,000
Year Ended December 31, 1994:
Deducted from Asset Accounts
Allowance for Doubtful Accounts $ 19,000 $ 58,000 $ 286,000 (1) $ 157,000 $ 206,000
Allowance for Excess and
Obsolete Inventory $ 20,000 $ 5,000 $ - $ - $ 25,000
Year Ended December 31, 1993:
Deducted from Asset Accounts
Allowance for Doubtful Accounts $ 25,000 $ - $ - $ 6,000 $ 19,000
Allowance for Excess and
Obsolete Inventory $ 15,000 $ 5,000 $ - $ - $ 20,000
</TABLE>
(1) $286,000 charged to Other Expenses represents
the amount acquired thru the PDLA aquisition
(2) Includes $36,000 of Accounts Receivable determined
to be uncollectible which were written off
<PAGE>
The following unaudited pro forma consolidated balance sheet
as of December 31, 1995, and the unaudited pro forma consolidated statements of
operations for the year ended December 31, 1995 gives effect to the acquisition
of MEDTOX by EDITEK using the purchase method. The unaudited pro forma
consolidated financial information is based on the historical financial
information of EDITEK and MEDTOX as of December 31, 1995 and the pro forma
adjustments described in the notes thereto. There are no pro forma adjustments
to other amounts reflected in the historical financial statements of MEDTOX as
management believes that the historical costs assigned to MEDTOX assets and
liabilities approximate fair value.
Information was prepared as if the acquisition was effected as
of December 31, 1995 in the case of the unaudited pro forma consolidated balance
sheet and as of January 1, 1995 in the case of the unaudited pro forma
statements of operations. The unaudited pro forma financial statements may not
be indicative of the results that actually would have occurred if the
acquisition had been in effect on the dates indicated or which may be obtained
in the future. The unaudited pro forma financial information should be read in
conjunction with the financial statements and other financial data of EDITEK and
MEDTOX included herein.
EDITEK AND MEDTOX
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
December 31, 1995
(In Thousands except per share amounts)
<TABLE>
<CAPTION>
Historical Proforma
------------------------------ ---------------------------------------
EDITEK MEDTOX Adjustments Consolidated
------------- -------------- ---------------- ----------------
<S> <C> <C> <C> <C>
ASSETS:
Cash and Cash Equivalents $ 258 $ 1,273 $ 3,095(a) $ 4,626
Accounts Receivable, net 1,029 3,054 - 4,083
Inventory and Supplies 937 395 - 1,332
Other Current Assets 868 72 (500)(a) 440
------------------------------ ---------------- ----------------
Total Current Assets 3,092 4,794 2,595 10,481
Property and Equipment 7,553 6,374 - 13,927
Accumulated Depreciation (6,824) (4,618) - (11,442)
------------------------------ ---------------- ----------------
Property & Equipment, net 729 1,756 - 2,485
Other Assets
- - - -
Goodwill, net 117 23 22,237 (c) 22,377
------------------------------ ---------------- ----------------
Total Non-Current Assets 846 1,779 22,237 24,862
------------------------------ ---------------- ----------------
Total Assets $ 3,938 $ 6,573 $ 24,832 $ 35,343
============= ============== ================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Revolving line of credit $ - $ - $ 990 (a),(b) $ 990
Accounts Payable 1,184 408 - 1,592
Accrued Expenses 834 803 631 (g) 2,268
Current Maturities of Long Term Debt 182 499 834 (b) 1,515
Restructuring Accrual, Current Portion - 258 - 258
Other Current Liabilities 42 - - 42
------------- -------------- ---------------- ----------------
Total Current Liabilities 2,242 1,968 2,455 6,665
Long Term Debt Obligations - 465 2,202 (b) 2,667
Restructuring Accrual, Long Term Portion - 473 - 473
Other Long Term Liabilities - - - -
------------- -------------- ---------------- ----------------
Total Liabilities 2,242 2,906 4,657 9,805
Common Stock 1,566 30 348 (e) 1,944
Addt. Paid-in Capital 33,973 600 2,514 (e) 37,087
Preferred Stock - - 20,350 (e) 20,350
Retained Earnings (Deficit) (33,667) 3,037 (3,037)(e) (33,667)
------------- -------------- ---------------- ----------------
1,872 3,667 20,175 25,714
Less: Treasury Stock and Other Contra Equity
(176) - - (176)
------------- -------------- ---------------- ----------------
Total Stockholders' Equity 1,696 3,667 20,175 25,538
------------- -------------- ---------------- ----------------
Total Liabilities and Shareholders' Equity $ 3,938 $ 6,573 $ 24,832 $ 35,343
============= ============== ================ ================
</TABLE>
See notes to unaudited pro forma consolidated financial statements
<PAGE>
EDITEK AND MEDTOX
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended December 31, 1995
(In Thousands except per share amounts)
<TABLE>
<CAPTION>
Historical Proforma
--------------------------------- ----------------------------------------
EDITEK MEDTOX Adjustments Consolidated
--------------------------------- ----------------- ------------------
<S> <C> <C> <C> <C>
Revenues $ 7,526 $ 20,219 $ - 27,745
Cost of sales
6,589 9,500 - 16,089
--------------------------------- ----------------- ------------------
Gross margin 937 10,719 - 11,656
Operating expenses
Research and development 920 - - 920
Selling, general and administrative 4,030 7,721 - 11,751
Amortization 176 - 936 (d) 1,112
Goodwill write-off 3,073 - - 3,073
--------------------------------- ----------------- ------------------
Total operating expenses 8,199 7,721 936 16,856
Income (loss) before interest
and other income (7,262) 2,998 (936) (5,200)
Other income - - - -
Interest and other expense (23) (119) (358) (b) (500)
--------------------------------- ----------------- ------------------
Net income (loss) (7,285) 2,879 (1,294) (5,700)
Preferred stock dividend - - 1,832 (f) 1,832
--------------------------------- ----------------- ------------------
Net income (loss) applicable to common
shareholders $ (7,285) $ 2,879 $ (3,126) $ (7,532)
================================= ================= ==================
Income (Loss) per common share $ (0.77) $ 97.10 $ (0.63)
================================= ==================
Weighted average number of common
shares outstanding 9,445,707 29,650 11,963,013
================================= ==================
</TABLE>
See notes to unaudited pro forma consolidated financial statements
<PAGE>
EDITEK AND MEDTOX
NOTES TO UNAUDITED
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
a) EDITEK closed the $24 million acquisition of MEDTOX and raised additional
working capital by raising approximately $20 million from the issuance of
407 shares of Preferred Stock, borrowing approximately $5 million in the
form of two term loans and a revolving line of credit and issuing $5
million of Common Stock of the Company to the shareholders of MEDTOX in the
form of 2,517,306 shares of Common Stock. The Company did not acquire the
cash on hand of MEDTOX at December 31, 1995 and was required to pay off the
existing loans of MEDTOX and approximately $1.3 million in financing costs.
Cash and Cash Equivalents
(dollar amounts in thousands)
Proceeds from issuance of
Series A Preferred Stock $20,350
Proceeds from debt:
Term Loans 4,000
Credit Facility 990
Compensation to Investment
Bankers ( 1,343)
Compensation for Placement
of Debt ( 165)
Payment of MEDTOX Notes:
Current Portion ( 499)
Long Term Portion ( 465)
Payment to MEDTOX
Shareholders (18,500)
MEDTOX distribution of cash
on hand at MEDTOX ( 1,273)
---------
$ 3,095
The reduction of $500 in Other Current Assets represents the deposit
previously paid to MEDTOX which was held in escrow.
<PAGE>
b) Pro Forma adjustment to long term debt accounts are summarized as follows:
Current Long Term
Portion Portion
Elimination of MEDTOX's
long term debt $ (499) $ (465)
Issuance of term loans 1,333 2,667
-----------------
$ 834 $ 2,202
The interest rates on the loans are as follows:
Term Loan A 2.0% above Prime Rate
Term Loan B 2.5% above Prime Rate
Credit Facility 1.5% above Prime Rate
c) Goodwill representing the excess of the purchase price of $24 million over
the fair value of the identifiable net assets of MEDTOX has been reflected
and is comprised of the following:
(dollar amounts in thousands)
Purchase price $24,000
Costs related to acquisition 770
Net assets acquired @ 12/31/95 (2,533)
$22,237
The allocation of the total amount of excess purchase price over the fair
value of the assets is a preliminary allocation absent an appraisal of
certain intangible assets.
d) Amortization is based on an effective date of the acquisition of MEDTOX of
January 1, 1995 amortized over a twenty year period.
e) Pro Forma adjustment to stockholder's equity accounts are summarized as
follows:
<TABLE>
<CAPTION>
(dollar amounts in thousands)
Additional
Common Preferred Paid In Retained
Stock Stock Capital Earnings
<S> <C> <C> <C> <C>
Elimination of MEDTOX's equity accounts $ (30) $ - $ (600) $ (3,037)
Issuance of Preferred Stock - 20,350 (1,508) -
Issuance of Common Stock 378 - 4,622 -
------------ ----------- ------------- -----------
$ 348 $ 20,350 $ 2,514 $ ( 3,037)
</TABLE>
<PAGE>
f) Dividend of 9% declared for $20,350,000 of Preferred Stock issued and
outstanding.
g) Adjustment to reflect acquisition costs which are expected to approximate
$400,000, certain severance payments of $370,000, less the accrued payroll
of MEDTOX of $139,000, which was not purchased by the Company.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Act of 1934, the Registrant has duly caused this Annual Report to be
signed on its behalf by the undersigned, thereunto duly authorized on the 6th
day of May 1996.
EDITEK, Inc.
Registrant
By: /s/ James D. Skinner
James D. Skinner
President,
Principal Executive Officer and
Chairman of the Board
Pursuant to the requirements of the Securities Act of 1934, this
Registration Statement has been signed below by the following persons on behalf
of the Registrant in the capacities and on the dates indicated.
Signature Title Date
/s/ James D. Skinner President, May 6, 1996
James D. Skinner Principal Executive
Officer, and
Chairman of the Board
/s/ Samuel C. Powell Director May 6, 1996
Samuel C. Powell, Ph.D.
/s/ Peter J. Heath Vice President of May 6, 1996
Peter J. Heath Finance and Chief
Financial Officer
/s/ Gene E. Lewis Director May 6, 1996
Gene E. Lewis
/s/ Robert J. Beckman Director May 6, 1996
Robert J. Beckman
/s/ Harry G. McCoy, Pharm.D. Director May 6, 1996
Harry G. McCoy, Pharm.D.
/s/ George W. Masters Director May 6, 1996
George W. Masters
<PAGE>
