<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, 1997
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
August 8, 1997: Common Stock $.005 par value (21,912,050 shares).
<PAGE> 2
PSYCHEMEDICS CORPORATION
Part l FINANCIAL INFORMATION Page No.
--------
Item 1 Financial Statements
Condensed Balance Sheets as of June 30, 1997
and December 31, 1996 3
Condensed Statements of Income for the three
and six month periods ended June 30, 1997
and 1996 4-5
Condensed Statements of Cash Flows for the
six months ended June 30, 1997 6
Notes to Condensed Financial Statements 7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-11
Part II OTHER INFORMATION
Item 4 Submission of Matters to a Vote of Security Holders 12
Item 6 Exhibits and Reports on Form 8K 13
Page 2 of 14
<PAGE> 3
PSYCHEMEDICS CORPORATION
CONDENSED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 745,050 $ 1,462,678
Short-term investments 8,621,623 8,370,727
Receivables 4,131,095 2,657,416
Inventory 429,372 230,777
Prepaid expenses and other current assets 559,510 129,828
------------ ------------
Total current assets 14,486,650 12,851,426
------------ ------------
EQUIPMENT AND LEASEHOLD IMPROVEMENTS 5,730,948 4,843,412
Less-accumulated depreciation and amortization 2,686,895 2,399,919
------------ ------------
3,044,053 2,443,493
------------ ------------
OTHER ASSETS - NET 437,009 449,601
------------ ------------
$ 17,967,712 $ 15,744,520
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 669,391 $ 395,434
Accrued dividend payable -- 437,217
Accrued expenses 233,551 283,719
Accrued income taxes 429,789 283,808
Deferred revenue 921,690 48,525
------------ ------------
Total current liabilities 2,254,421 1,448,703
------------ ------------
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 21,981,400 and 21,758,087
shares in 1997 and 1996, respectively 109,907 108,790
Paid-in capital 21,631,317 20,722,137
Accumulated deficit (5,773,870) (6,281,047)
Treasury stock, at cost; 66,381 shares in 1997
and 1996 (254,063) (254,063)
------------ ------------
Total shareholders' equity 15,713,291 14,295,817
------------ ------------
$ 17,967,712 $ 15,744,520
============ ============
</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
CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED JUNE 30,
-------------------------
1997 1996
----------- -----------
<S> <C> <C>
REVENUE $ 4,402,203 $ 3,141,313
DIRECT COSTS 1,606,615 1,222,835
----------- -----------
Gross profit 2,795,588 1,918,478
----------- -----------
EXPENSES:
General and administrative 563,049 559,140
Marketing and selling 1,124,003 525,962
Research and development 110,174 113,259
----------- -----------
1,797,226 1,198,361
----------- -----------
INCOME FROM OPERATIONS 998,362 720,117
OTHER INCOME (EXPENSE) - NET 131,214 84,781
----------- -----------
INCOME BEFORE PROVISION
FOR INCOME TAXES 1,129,576 804,898
PROVISION FOR INCOME TAXES 384,056 88,433
----------- -----------
NET INCOME $ 745,520 $ 716,465
=========== ===========
NET INCOME PER COMMON SHARE
AND COMMON EQUIVALENT SHARE $ 0.03 $ 0.03
=========== ===========
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING 22,797,637 22,514,614
=========== ===========
</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
CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
-------------------------
1997 1996
----------- -----------
<S> <C> <C>
REVENUE 7,655,947 $ 5,815,977
DIRECT COSTS 2,928,487 2,406,843
----------- -----------
Gross profit 4,727,460 3,409,134
----------- -----------
EXPENSES:
General and administrative 1,095,703 1,092,401
Marketing and selling 1,781,446 1,005,103
Research and development 219,082 203,128
----------- -----------
3,096,231 2,300,632
----------- -----------
INCOME FROM OPERATIONS 1,631,229 1,108,502
OTHER INCOME (EXPENSE) - NET 256,806 150,280
----------- -----------
INCOME BEFORE PROVISION
FOR INCOME TAXES 1,888,035 1,258,782
PROVISION FOR INCOME TAXES 505,408 93,033
----------- -----------
NET INCOME $ 1,382,627 $ 1,165,749
=========== ===========
NET INCOME PER COMMON SHARE
AND COMMON EQUIVALENT SHARE $ 0.06 $ 0.05
=========== ===========
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING 22,8O7,787 21,964,568
=========== ===========
</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
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,382,627 $ 1,165,749
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 286,976 318,510
Changes in assets and liabilities:
Receivables (1,473,679) (966,894)
Inventory (198,595) 43,858
Prepaid expenses and other current assets (429,682) (202,664)
Accrued income taxes payable 145,981 --
Accounts payable 273,957 (254,898)
Accrued expenses (50,168) 74,494
Deferred revenue 873,165 48,525
----------- -----------
Net cash provided by operating activities 810,582 226,680
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Purchases) sales of short-term investments - net (250,896) (1,230,036)
(Purchases) of equipment and leasehold improvements (887,536) (259,169)
(Increase) decrease in other assets - net 12,592 (15,840)
----------- -----------
Net cash provided by (used in) investing activities (1,125,840) (1,505,045)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net principal payments on obligations under
capital leases -- (16,413)
Net proceeds from the issuance of
common stock including related tax benefits 910,297 2,359,237
Cash dividends paid (1,312,667) --
----------- -----------
Net cash provided by (used in) financing activities (402,370) 2,342,824
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (717,628) 1,064,459
CASH AND CASH EQUIVALENTS, beginning of period 1,462,678 193,787
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 745,050 $ 1,258,246
=========== ===========
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, 1997
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, 1997 and the results of its
operations and cash flows for the periods ended June 30, 1997 and 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-K for the year
ended December 31, 1996 for additional information not required by this report
(Form 10-Q).
2. Net income per common and common equivalent share is based upon the weighted
average number of common and common equivalent shares outstanding as computed
using the treasury stock method.
3. On July 3, 1996, the Company distributed a 3% stock dividend to shareholders
of record on June 21, 1996. Average shares outstanding and all per share amounts
included in the accompanying financial statements and Notes are based on the
increased number of shares giving retroactive effect to the stock dividend.
4. On March 4, 1997, the Company declared a $0.02 per share cash dividend which
was paid on April 9, 1997, to shareholders of record on March 20, 1997. In
addition, on June 2, 1997, the Company declared a $0.02 per share cash dividend
which was paid on June 27, 1997 to shareholders of record on June 16, 1997.
5. During the second quarter of 1997, the Company launched a personal drug
testing service, "PDT-90" to retail drug stores. Revenues for this product are
being recognized on an "as tested" basis rather than on the basis of delivery to
retailers. At June 30, 1997, the Company had $922,000 of deferred revenue
related to this retail product. In addition, at June 30, 1997, the Company had
receivables of $491,000, product inventory of $173,000, and prepaid expenses of
$256,000 all related to the retail business.
6. New Accounting Standard
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128
Earnings Per Share. SFAS No. 128 establishes standards for computing and
presenting
Page 7 of 14
<PAGE> 8
earnings per share and applies to all publicly held companies. This statement is
effective for fiscal years ending after December 15, 1997 and early adoption is
not permitted. When adopted, the statement will require restatement of prior
years' earnings per share. The Company will adopt this statement for its fiscal
year ended December 31, 1997.
Pro forma calculations of basis and diluted earnings per share as required by
SFAS No. 128 are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
6-30-97 6-30-96 6-30-97 6-30-96
----------------------------- -----------------------------
<S> <C> <C> <C> <C>
BASIC EPS
Net income available
to common shareholders $ 745,520 $ 716,465 $ 1,375,367 $ 1,165,749
Weighted average common
shares outstanding net
of treasury shares 21,832,664 21,370,391 21,866,699 20,905,941
------------ ------------ ------------ ------------
Basic EPS $ 0.03 $ 0.03 $ 0.06 $ 0.06
============ ============ ============ ============
DILUTED EPS
Net income available to
common shareholders $ 745,520 $ 716,465 $ 1,375,367 $ 1,165,749
Weighted average common
and common equivalent
shares outstanding 22,797,637 22,514,614 22,807,787 21,964,568
------------ ------------ ------------ ------------
Diluted EPS $ 0.03 $ 0.03 $ 0.06 $ 0.05
============ ============ ============ ============
</TABLE>
Page 8 of 14
<PAGE> 9
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Revenue was $4.4 million in the second quarter of 1997 as compared to $3.1
million in the second quarter of 1996 representing an increase of 40%. Revenue
for the six month period ended June 30, 1997 was $7.7 million, an increase of
32% over the $5.8 million reported for the comparable period of 1996. The
revenue increases were due primarily to increases in volume from both new and
existing clients offset by average price decreases of 3% primarily as a result
of volume discounts granted to large customers.
Gross margin was 64% of sales in the second quarter of 1997 compared to 61% in
the year earlier period. Gross margin was 62% for the six months ended June 30,
1997 compared to 59% in the year earlier period. The increases in 1997 were
primarily the result of increased efficiencies resulting from increased volume,
which more than offset the impact of volume discounts.
General and administrative (G&A) expenses remained virtually unchanged at
$563,000 and $1,096,000 in the three and six month periods ended June 30, 1997
from the year earlier amount. As a percentage of revenue, G&A expenses declined
to 13% from 18% in the second quarter of 1996 because of the higher revenues in
1997. Similarly, G&A expenses as a percentage of revenues declined to 14% from
19% for the six month period ended June 30, 1997 because of higher revenues in
1997.
Marketing and selling expenses for the three month period ended June 30, 1997
increased $598,000, to $1,124,000, an increase of 114%. As a percentage of
revenues, marketing and selling expenses increased from 17% in the 1996 period
to 26% in the second quarter of 1997. Marketing and selling expenses for the six
month period ended June 30, 1997 increased $776,000, to $1,781,446, an increase
of 77%. As a percentage of revenues, marketing and selling expenses increased
from 17% in the 1996 period to 23% in 1997. These increases were primarily due
to additions of the Company's sales staff and expanded marketing activities
related to both the corporate market and significant additional expenditures
made to penetrate the retail home testing market. The Company expects to
continue to aggressively promote its drug testing services during the remainder
of 1997 and in future years in order to expand its client base.
Other income for the three and six month periods ended June 30, 1997 represented
primarily interest earned on cash equivalents and short-term investments. The
increase in 1997 was primarily due to higher investment balances coupled with
increased yields on these investments.
Page 9 of 14
<PAGE> 10
Net income increased to $745,520 in the first quarter of 1997, an increase of
$29,000 or 4% from the year earlier amount. The increase in 1997 was primarily
due to increased revenues, and related efficiencies in direct costs derived from
increased sales volume offset by increased marketing efforts and an increased
effective tax rate. The effective tax rate for the second quarter of 1997
increased significantly over the 1996 rate, reflecting the reduction in net
operating loss carryforwards available to offset the provision for income taxes
for financial reporting purposes. The Company had total net operating loss
carryforwards at December 31, 1996 of approximately $3.6 million available to
offset the 1997 and future years' cash payments for income taxes. However,
approximately $2.6 million of these loss carryforwards were comprised of
deductions from the exercise of certain options and warrants which will increase
paid-in capital when tax benefits related to these options and warrants are
recognized.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1997, the Company had $9.4 million of cash, cash equivalents and
short-term investments. The Company's operating activities generated net cash of
$811,000 in the six months ended June 30, 1997. Investing activities used $1.1
million in the six month period while financing activities used a net amount of
$402,000 during the period.
The Company's source of funds in the first six months of 1997 was derived
entirely from net cash generated from operations. Operating cash flows increased
$810,582 in the first half of 1997, compared to the year earlier period. Net
income was higher by $217,000, accounts payable increased in the 1997 period
whereas they decreased in the year earlier period, and increases in accrued
expenses were higher in 1997 than in 1996, but this was offset by higher
increases in accounts receivable in 1997 from the year earlier period and an
increase in inventory in 1997. The increase in deferred revenue relates to
shipments of retail product made to retail outlets which will be recognized as
revenue after the samples have been submitted for testing. The non-cash effect
of depreciation and amortization in the 1997 and 1996 periods was $287,000 and
$319,000, respectively.
Capital expenditures in the first six months of 1997 were $888,000. The
expenditures primarily consisted of new equipment, including laboratory and
computer equipment. The Company currently plans to make additional capital
expenditures of approximately $200,000 in 1997, primarily in connection with the
purchase of additional laboratory and computer equipment. The Company believes
that within the next two years it may be required to expand its existing
laboratory or develop a second laboratory, the cost of which is currently
believed to range from $2 million to $4 million.
On July 3, 1996, the Company distributed a 3% stock dividend to shareholders of
record on June 21, 1996. The shares issued in the stock dividend represented
shares which the Company acquired in a stock repurchase program authorized in
1994. This transaction resulted in an increase of $4.67 million in the
accumulated deficit (633,000 shares distributed at a fair market value of $7.37
per share). Treasury stock was reduced by $2.42 million as a result of this
distribution. Average shares outstanding and all per share amounts included in
the accompanying financial statements and Notes are based on the increased
number of shares giving retroactive effect to the stock dividend.
Page 10 of 14
<PAGE> 11
During the quarter ended June 30, 1997, the Company distributed $874,000 in cash
dividends to its shareholders. The Company does not have a definitive plan to
pay cash dividends, but reviews the matter on a quarterly basis depending on the
results of operations and cash needs on both a short-term and long-term basis.
At June 30, 1997, the Company's principal sources of liquidity included $9.4
million of cash, cash equivalents and short-term investments. Management
currently believes that such funds, together with cash generated from
operations, should be adequate to fund anticipated working capital requirements
and capital expenditures in the near term. 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 funds. Such
sources could include joint ventures, issuances of common stock or debt
financing. At June 30, 1997, the Company had no long-term debt.
FACTORS THAT MAY AFFECT FUTURE RESULTS
From time to time, information provided by the Company or statements made by its
employees may contain "forward-looking" information which involves risks and
uncertainties. In particular, statements contained in this report which are not
historical facts (including but not limited to the Company's expectations
regarding principal customers, business strategy, anticipated operating results
and anticipated cash requirements) may be "forward looking" statements. The
Company's actual results may differ from those stated in any "forward looking"
statements. Factors that may cause such differences include, but are not limited
to, risks associated with the continued expansion of the Company's sales and
marketing network, development of markets for new products and services offered
by the Company, the economic health of principal customers of the Company,
financial and operational risks associated with possible expansion of testing
facilities used by the Company, government regulation, competition and general
economic conditions.
Page 11 of 14
<PAGE> 12
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 8, 1997 for the purpose of electing a board of directors,
approving the appointment of auditors, and approving an amendment to
the Company's 1989 Employee 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.
All of management's nominees for directors, as listed in the proxy
statement, were elected with the following vote:
<TABLE>
<CAPTION>
Number of Shares
----------------
Election of Directors.
For Withheld Authority
--- ------------------
<S> <C> <C>
Werner A. Baumgartner, Ph.D. 17,406,890 321,702
Raymond C. Kubacki, Jr. 17,406,890 321,702
A. Clinton Allen 17,406,890 321,602
Donald F. Flynn 17,406,746 321,846
John J. Melk 17,406,746 321,846
Fred J. Weinert 17,406,746 321,846
</TABLE>
Amendment of the Company's 1989 Employee Stock Option Plan.
<TABLE>
<CAPTION>
Number of Shares
----------------
<S> <C>
For 16,241,952
Against 1,438,137
Abstain 48,503
Delivered - not voted 309
</TABLE>
Selection of Arthur Andersen LLP as auditors of the Company.
<TABLE>
<CAPTION>
Number of Shares
----------------
<S> <C>
For 17,395,065
Against 316,961
Abstain 16,566
Delivered - not voted 309
</TABLE>
Page 12 of 14
<PAGE> 13
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
27. Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter for which
this report is filed.
Page 13 of 14
<PAGE> 14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Psychemedics Corporation
Date: August 13, 1997 By:/s/ Raymond C. Kubacki, Jr.
-----------------------------------
Raymond C. Kubacki, Jr.
President and Chief Executive Officer
Date: August 13, 1997 By:/s/ Bruce M. Stillwell
-----------------------------------
Bruce M. Stillwell
Vice President, Treasurer & Controller
Page 14 of 14
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<CASH> 745,050
<SECURITIES> 8,621,623
<RECEIVABLES> 4,131,095
<ALLOWANCES> 0
<INVENTORY> 429,372
<CURRENT-ASSETS> 14,486,650
<PP&E> 5,730,948
<DEPRECIATION> 2,686,895
<TOTAL-ASSETS> 17,967,712
<CURRENT-LIABILITIES> 2,254,421
<BONDS> 0
0
0
<COMMON> 109,907
<OTHER-SE> 15,603,384
<TOTAL-LIABILITY-AND-EQUITY> 17,967,712
<SALES> 0
<TOTAL-REVENUES> 4,402,203
<CGS> 0
<TOTAL-COSTS> 1,606,615
<OTHER-EXPENSES> 1,797,226
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,129,576
<INCOME-TAX> 384,056
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 745,520
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0.03
</TABLE>
