<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
X QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended JUNE 30, 1996
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
--- THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
--------------- ----------------
Commission file number 1-13738
PSYCHEMEDICS CORPORATION
(exact name of Issuer as specified in its charter)
Delaware 58-1701987
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
1280 Massachusetts Ave., Ste. 200, Cambridge, MA 02138
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code (617-868-7455)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Exchange Act during the past 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
------ ------
Number of shares outstanding of only class of Issuer's Common Stock as of
June 30, 1996: Common Stock $.005 par value (21,526,462 shares).
Page 1
<PAGE> 2
PSYCHEMEDICS CORPORATION
INDEX
PART I FINANCIAL INFORMATION PAGE NO.
-------
Item 1 Financial Statements
Condensed Balance Sheets as of June 30, 1996 and
December 31, 1995 3
Condensed Statements of Income for the three and six
month periods ended June 30, 1996 and 1995 4-5
Condensed Statements of Cash Flows for the six month
periods ended June 30, 1996 and 1995 6
Notes to Condensed Financial Statements 7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-9
PART II OTHER INFORMATION
Item 4 Submission of Matters to a Vote of Security Holders 10
Item 6 Exhibits and Reports on Form 8-K 13
Page 2 of 14
<PAGE> 3
PSYCHEMEDICS CORPORATION
<TABLE>
CONDENSED BALANCE SHEETS
(UNAUDITED)
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
-------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,258,256 $ 193,787
Short-term investments 6,509,634 5,279,596
Receivables 2,689,664 1,722,770
Laboratory supplies 209,348 253,216
Prepaid expenses and other current assets 274,911 72,247
----------- -----------
Total current assets 10,941,813 7,521,616
----------- -----------
EQUIPMENT AND LEASEHOLD IMPROVEMENTS 4,366,149 4,106,980
Less-accumulated depreciation and amortization 2,167,908 1,864,398
----------- -----------
2,198,241 2,242,582
----------- -----------
OTHER ASSETS - NET 454,135 453,295
----------- -----------
$13,594,189 $10,217,493
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of obligations under capital leases $ 46 $ 16,459
Accounts payable 211,514 466,412
Accrued expenses 373,935 250,916
----------- -----------
Total current liabilities 585,495 733,787
----------- -----------
SHAREHOLDERS' EQUITY:
Preferred stock, $.005 par value; authorized 1,000,000
shares; none outstanding -- --
Common stock; $.005 par value; authorized 50,000,000
shares; issued 21,592,797 and 20,288,280
shares in 1996 and 1995, respectively 107,964 101,441
Paid-in capital 20,325,533 17,972,819
Accumulated deficit (7,170,740) (8,336,491)
Treasury stock, at cost; 66,335 shares in 1996
and 1995 (254,063) (254,063)
----------- -----------
Total shareholders' equity 13,008,694 9,483,706
----------- -----------
$13,594,189 $10,217,493
=========== ===========
</TABLE>
See accompanying notes to financial statements and management's discussion and
analysis of financial condition and results of operations
Page 3 of 14
<PAGE> 4
PSYCHEMEDICS CORPORATION
<TABLE>
CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
<CAPTION>
THREE MONTHS
ENDED JUNE 30,
----------------------------
1996 1995
---- ----
<S> <C> <C>
REVENUE $ 3,141,313 $ 2,747,242
DIRECT COSTS 1,222,835 1,172,357
----------- -----------
Gross profit 1,918,478 1,574,885
----------- -----------
EXPENSES:
General and administrative 559,140 453,183
Marketing and selling 525,962 399,883
Research and development 113,259 107,650
----------- -----------
1,198,361 960,716
----------- -----------
INCOME FROM OPERATIONS 720,117 614,169
OTHER INCOME (EXPENSE) - NET 84,781 84,671
----------- -----------
INCOME BEFORE PROVISION
FOR INCOME TAXES 804,898 698,840
PROVISION FOR INCOME TAXES 88,433 48,300
----------- -----------
NET INCOME $ 716,465 $ 650,540
=========== ===========
NET INCOME PER COMMON SHARE
AND COMMON EQUIVALENT SHARE $ 0.03 $ 0.03
=========== ===========
WEIGHTED AVERAGE COMMON AND
COMMON SHARE EQUIVALENTS OUTSTANDING 22,514,614 20,169,317
=========== ===========
</TABLE>
See accompanying notes to financial statements and management's discussion and
analysis of financial condition and results of operations
Page 4 of 14
<PAGE> 5
PSYCHEMEDICS CORPORATION
<TABLE>
CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
--------------------------
1996 1995
---- ----
<S> <C> <C>
REVENUE $ 5,815,977 $ 5,068,399
DIRECT COSTS 2,406,843 2,245,001
----------- -----------
Gross profit 3,409,134 2,823,398
----------- -----------
EXPENSES:
General and administrative 1,092,401 913,088
Marketing and selling 1,005,103 745,862
Research and development 203,128 211,660
----------- -----------
2,300,632 1,870,610
----------- -----------
INCOME FROM OPERATIONS 1,108,502 952,788
OTHER INCOME (EXPENSE) - NET 150,280 176,032
----------- -----------
INCOME BEFORE PROVISION
FOR INCOME TAXES 1,258,782 1,128,820
PROVISION FOR INCOME TAXES 93,033 74,800
----------- -----------
NET INCOME $ 1,165,749 $ 1,054,020
----------- -----------
NET INCOME PER COMMON SHARE
AND COMMON EQUIVALENT SHARE $ 0.05 $ 0.05
=========== ===========
WEIGHTED AVERAGE COMMON AND
COMMON SHARE EQUIVALENTS OUTSTANDING 21,964,568 20,247,488
=========== ===========
</TABLE>
See accompanying notes to financial statements and management's discussion and
analysis of financial condition and results of operations
Page 5 of 14
<PAGE> 6
PSYCHEMEDICS CORPORATION
<TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,165,749 $ 1,054,520
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 318,510 276,600
Changes in assets and liabilities:
Receivables (966,894) (193,980)
Laboratory supplies 43,868 60,608
Prepaid expenses and other current assets (202,664) (124,762)
Accounts payable (254,898) 22,720
Accrued expenses 123,019 126,930
----------- -----------
Net cash provided by operating activities 226,690 1,222,636
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments - net (1,230,036) (4,048)
Purchases of equipment and leasehold improvements (259,169) (520,339)
Increase in other assets - net (15,840) (37,778)
----------- -----------
Net cash used in investing activities (1,505,045) (562,165)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net principal payments on obligations under
capital leases (16,413) (75,119)
Net proceeds from the issuance of
common stock 2,359,237 738,127
Net cash used to repurchase common stock -- (1,198,265)
----------- -----------
Net cash (used in) provided by financing activities 2,342,824 (535,257)
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,064,469 125,214
CASH AND CASH EQUIVALENTS, beginning of period 193,787 544,776
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 1,258,256 $ 669,990
=========== ===========
SUPPLEMENTAL SCHEDULE OF NON-CASH
FINANCING ACTIVITIES:
Accrued dividend payable - 3% stock dividend $ 4,668,200 $ --
=========== ===========
</TABLE>
See accompanying notes to financial statements and management's discussion and
analysis of financial condition and results of operations
Page 6 of 14
<PAGE> 7
PSYCHEMEDICS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
June 30, 1996
1. The financial information furnished herein is unaudited; however, in the
opinion of management, it reflects all adjustments which are necessary to fairly
state the Company's financial position at June 30, 1996 and the results of its
operations and cash flows for the period ended June 30, 1996. The financial
statements have been prepared in conformity with generally accepted accounting
principles appropriate in the circumstances, and included in the financial
statements are certain amounts based on management's estimates and judgments.
The financial information herein is not necessarily representative of a full
year's operations because levels of sales, capital additions and other factors
fluctuate throughout the year. These same considerations apply to all year to
year comparisons. See the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1995 for additional information not required by this report
(Form 10-Q).
2. Net income per common and common share equivalents is based upon the weighted
average number of common shares and common share equivalents outstanding as
computed using the treasury stock method.
3. For comparative purposes certain prior year expenses have been reclassified
from selling and marketing expenses to general and administrative expenses to
conform with current year presentation.
4. On June 11, 1996, the Company declared a 3% stock dividend payable on July 3,
1996 to holders of record at the close of business on June 21, 1996. The effect
of this transaction has been reflected in all periods presented in this Form
10-Q.
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
---------------------
REVENUE
Revenue for the second quarter of 1996 was $3,141,313, an increase of 14% over
the $2,747,242 reported for the second quarter of 1995. Revenue for the six
month period ended June 30, 1996 was $5,815,977 an increase of 15% over the
$5,068,399 reported for the comparable period of 1995. The revenue increases
result primarily from the addition of new customers and expanding volume from
the Company's existing customer base.
Page 7 of 14
<PAGE> 8
DIRECT COSTS AND EXPENSES
<TABLE>
The following table sets forth the direct costs of revenue, general and
administrative expenses, marketing and selling expenses and research and
development expenses as a percentage of revenue.
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Direct costs 39% 43% 41% 44%
General and administrative 18% 16% 19% 18%
Marketing and selling 17% 15% 17% 15%
Research and development 4% 4% 4% 4%
</TABLE>
Direct Costs
Direct costs were $1,222,835, $1,172,357, $2,406,843 and $2,245,001 for the
three and six month periods ended June 30, 1996 and 1995, respectively. The
decrease in direct costs as a percentage of revenues for both the three and six
month periods ended June 30, 1996 versus 1995 is attributable to increased
volume during the periods coupled with efficiencies derived in both labor and
other laboratory costs associated with the increase in sales volume.
General and Administrative Expenses
General and Administrative expenses were $559,140, $453,183, $1,092,401, and
$913,088 for the three and six month periods ended June 30, 1996 and 1995,
respectively. The increase in general and administrative expenses in the 1996
periods as compared to the same periods in 1995 is primarily due to higher
expenses incurred as a result of increased personnel, legal and bad debt
expenses.
Marketing and Selling Expenses
Marketing and selling expenses were $525,962, $399,883, $1,005,103, and $745,862
for the three and six month periods ended June 30, 1996 and 1995, respectively.
Marketing and selling expenses increased in each period in 1996 as compared to
1995 due primarily to the Company's addition of marketing and sales personnel
and the increased marketing efforts for both the corporate market and in
conjunction with the Company's home testing service, PDT-90, which was
introduced in July 1995.
Other Income (Expense) - Net
Other income for the three month periods ended June 30, 1996 and 1995 was flat
due to slightly higher average cash balances in 1996 offset by lower yield on
investments. Other income for the six month periods ended June 30, 1996 as
compared to the comparable period in 1995 was lower due to both lower average
cash balances and lower yields on investments.
Page 8 of 14
<PAGE> 9
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The Company's cash and investment balances at June 30, 1996 amounted to
$7,760,890. Cash generated from operations in the first six months of 1996 was
$226,690. The Company also received $2,359,237 of net proceeds from the exercise
of warrants and stock options in 1996.
Management believes that cash generated from operations, together with proceeds
from such private placements, should be adequate to fund anticipated working
capital requirements. Depending upon the Company's results of operations, its
future capital needs and available marketing opportunities, the Company may use
various financing sources to raise additional capital.
Working capital at June 30, 1996 amounted to $10,536,318 as compared to
$6,787,829 at December 31, 1995. The increase primarily resulted from the
exercise of warrants and stock options, and cash generated from operations.
The Company's capital expenditures were $529,169 for the first six months of
1996. Capital expenditures for the remainder of 1996 are expected to be
approximately $300,000 and are expected to be funded through cash generated from
operations and from existing cash reserves.
In December 1994, the Company's Board of Directors authorized the repurchase of
up to one million shares of the Company's common stock. This program is a direct
result of the Company's solid financial condition and cash-generating
capability, and it was authorized after evaluating various alternatives to
enhance long-term shareholder value. As of June 20, 1996, the Company had
purchased 699,387 shares of common stock for $2,676,793.
On June 11, 1996, the Company declared a 3% stock dividend payable on
July 3, 1996 to holders of record at the close of business on June 21, 1996. The
shares issued in the stock dividend represented shares which the Company
acquired in the stock repurchase program. This transaction resulted in an
increase in accumulated deficit of $4,668,200 (632,976 shares distributed at a
fair market value of $7.375 per share at June 21, 1996). Treasury stock has
been reduced by $2,422,730 as a result of this distribution. This transaction
also resulted in a $2,244,786 increase to additional paid-in capital. The
effect of this transaction has been reflected in all periods presented in this
FORM 10-Q.
Page 9 of 14
<PAGE> 10
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders of Psychemedics Corporation was
held on May 7, 1996 for the purpose of electing a board of
directors, approving the appointment of auditors, and approving
amendments to the Company's 1989 Employee Stock Option Plan and the
1989 Non-Qualified Stock Option Plan. Proxies for the meeting were
solicited pursuant to Section 14(a) of the Securities Exchange Act
of 1934 and there was no solicitation in opposition to management's
solicitations.
<TABLE>
All of management's nominees for directors, as listed in the proxy
statement, were elected with the following vote:
<CAPTION>
Number of Shares
----------------
For Withheld Authority
--- ------------------
<S> <C> <C>
Werner A. Baumgartner, Ph.D. 147,626,467 284,020
Raymond C. Kubacki, Jr. 147,626,467 284,020
A. Clinton Allen 147,626,467 284,020
Donald F. Flynn 147,626,467 284,020
John J. Melk 147,626,467 284,020
Fred J. Weinert 147,625,867 284,020
</TABLE>
<TABLE>
Amendment of the Company's 1989 Employee Stock Option Plan.
<CAPTION>
Number of Shares
----------------
<S> <C>
For 10,849,174
Against 2,826,502
Abstain 64,433
Delivered - not voted 4,170,378
</TABLE>
<TABLE>
Amendment of the Company's 1989 Non-Qualified Stock Option Plan.
<CAPTION>
Number of Shares
----------------
<S> <C>
For 11,233,404
Against 2,436,357
Abstain 70,348
Delivered - not voted 4,170,378
</TABLE>
Page 10 of 14
<PAGE> 11
<TABLE>
Selection of Arthur Andersen LLP as auditors of the Company.
<CAPTION>
Number of Shares
----------------
<S> <C>
For 17,841,357
Against 41,870
Abstain 27,350
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
The Exhibits filed as part of this Form 10-Q are listed on the
Exhibits Index immediately preceding such Exhibits, which Exhibit
Index is incorporated herein by reference.
(b) Reports on Form 8-K - None.
Page 11 of 14
<PAGE> 12
Pursuant to the requirements of the Securities Exchange Act of 1934 the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Psychemedics Corporation
Date: August 13, 1996 By: /s/ Raymond C. Kubacki, Jr.
------- --------------------------------
Raymond C. Kubacki, Jr.
President and Chief Executive Officer
Date: August 13, 1996 By: /s/ Bruce M. Stillwell
----------------------------------------
Bruce M. Stillwell
Vice President, Treasurer and Controller
Page 12 of 14
<PAGE> 13
PSYCHEMEDICS CORPORATION
10-Q
EXHIBIT INDEX
-------------
Exhibit
Number Description
- ------ -----------
11 Calculation of shares use in determining
net income per share
27 Financial Data Schedule
Page 13 of 14
<PAGE> 1
EXHIBIT 11
<TABLE>
CALCULATION OF SHARES USED IN DETERMINING INCOME PER SHARE
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
1996 1995 1996 1995
------------------------ ------------------------
<S> <C> <C> <C> <C>
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING DURING PERIOD 21,370,391 19,382,055 20,905,941 19,449,448
EFFECT OF COMMON STOCK EQUIVALENTS
COMPUTED IN ACCORDANCE WITH THE
TREASURY STOCK METHOD 1,144,223 787,262 1,058,627 798,040
---------- ---------- ---------- ----------
22,514,614 20,169,317 21,964,568 20,247,488
========== ========== ========== ==========
</TABLE>
Page 14 of 14
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS APPEARING ON THE FORM 10Q TO WHICH
THIS SCHEDULE IS AN EXHIBIT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH (B) FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> QUARTER
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 1,258,256
<SECURITIES> 6,509,634
<RECEIVABLES> 2,689,664
<ALLOWANCES> 0
<INVENTORY> 209,348
<CURRENT-ASSETS> 10,941,813
<PP&E> 4,366,149
<DEPRECIATION> 2,167,908
<TOTAL-ASSETS> 13,594,189
<CURRENT-LIABILITIES> 585,495
<BONDS> 0
<COMMON> 107,964
0
0
<OTHER-SE> 13,486,225
<TOTAL-LIABILITY-AND-EQUITY> 13,594,189
<SALES> 3,141,313
<TOTAL-REVENUES> 3,141,313
<CGS> 1,222,835
<TOTAL-COSTS> 1,222,835
<OTHER-EXPENSES> 1,198,361
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 804,898
<INCOME-TAX> 88,433
<INCOME-CONTINUING> 720,117
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 716,465
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0.03
</TABLE>
