<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, 2000
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., Suite 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
2, 2000: Common Stock $.005 par value (21,176,376 shares).
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PSYCHEMEDICS CORPORATION
<TABLE>
<CAPTION>
Part I FINANCIAL INFORMATION Page No.
--------
<S> <C>
Item 1 Financial Statements
Condensed Balance Sheets as of June 30, 2000
and December 31, 1999 3
Condensed Statements of Income for the three
month periods ended June 30, 2000 and 1999 4
Condensed Statements of Income for the six
month periods ended June 30, 2000 and 1999 5
Condensed Statements of Cash Flows for the
six month periods ended June 30, 2000 and 1999 6
Notes to Condensed Financial Statements 7-8
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-11
Item 3 Quantitative and Qualitative Disclosures about Market Risk 11
Part II OTHER INFORMATION
Item 4 Submission of Matters to a Vote of Security Holders 12
Item 6 Exhibits and Reports on Form 8-K 13
SIGNATURES 14
</TABLE>
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PSYCHEMEDICS CORPORATION
CONDENSED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
----------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,044,122 $ 899,387
Short-term investments 2,712,132 4,938,463
Accounts receivable, net 4,189,345 3,219,510
Inventories 460,656 449,103
Prepaid expenses and other current assets 629,460 557,276
Deferred tax asset 337,752 337,752
----------- -----------
Total current assets 9,373,467 10,401,491
----------- -----------
PROPERTY AND EQUIPMENT:
Equipment and leasehold improvements, at cost 9,137,373 8,572,486
Less-Accumulated depreciation and amortization (5,802,703) (5,154,037)
----------- -----------
3,334,670 3,418,449
----------- -----------
OTHER ASSETS - NET 358,488 370,965
----------- -----------
$13,066,625 $14,190,905
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 489,356 $ 512,580
Accrued expenses 1,560,036 842,790
Deferred revenue 769,833 862,088
----------- -----------
Total current liabilities 2,819,225 2,217,458
----------- -----------
DEFERRED TAX LIABILITY 167,520 167,520
SHAREHOLDERS' EQUITY:
Preferred stock, $.005 par value; 1,000,000
shares authorized; none outstanding - -
Common stock; $.005 par value; 50,000,000
shares authorized; issued 22,612,440
shares in 2000 and 1999 113,062 113,062
Paid-in capital 24,430,118 24,414,985
Accumulated deficit (7,214,560) (6,746,157)
Less - Treasury stock, at cost; 1,430,064 and 1,172,464
shares in 2000 and 1999, respectively (6,855,235) (5,580,293)
Less - Receivable from officer (393,505) (395,670)
----------- -----------
Total shareholders' equity 10,079,880 11,805,927
----------- -----------
$13,066,625 $14,190,905
=========== ===========
</TABLE>
See accompanying notes to financial statements and management's discussion and
analysis of financial condition and results of operations.
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PSYCHEMEDICS CORPORATION
CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED JUNE 30,
------------------------------
2000 1999
----------- -----------
<S> <C> <C>
REVENUE $ 5,472,701 $ 5,854,999
DIRECT COSTS 2,353,094 2,287,059
----------- -----------
Gross profit 3,119,607 3,567,940
----------- -----------
EXPENSES:
General and administrative 890,803 822,506
Marketing and selling 1,022,611 1,080,360
Research and development 111,430 129,338
----------- -----------
2,024,844 2,032,204
----------- -----------
OPERATING INCOME 1,094,763 1,535,736
OTHER INCOME 60,852 92,798
----------- -----------
NET INCOME BEFORE INCOME TAXES 1,155,615 1,628,534
PROVISION FOR INCOME TAXES 477,700 667,690
----------- -----------
NET INCOME $ 677,915 $ 960,844
=========== ===========
BASIC NET INCOME PER SHARE $ 0.03 $ 0.04
=========== ===========
DILUTED NET INCOME PER SHARE $ 0.03 $ 0.04
=========== ===========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 21,207,720 21,925,614
=========== ===========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING, ASSUMING DILUTION 21,483,974 22,155,948
=========== ===========
</TABLE>
See accompanying notes to financial statements and management's discussion and
analysis of financial condition and results of operations.
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PSYCHEMEDICS CORPORATION
CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
------------------------------
2000 1999
----------- -----------
<S> <C> <C>
REVENUE $10,154,728 $10,535,256
DIRECT COSTS 4,503,280 4,230,158
----------- -----------
Gross profit 5,651,448 6,305,098
----------- -----------
EXPENSES:
General and administrative 1,674,563 1,582,265
Marketing and selling 2,003,377 2,071,934
Research and development 218,346 270,399
----------- -----------
3,896,286 3,924,598
----------- -----------
OPERATING INCOME 1,755,162 2,380,500
OTHER INCOME 341,197 209,453
----------- -----------
NET INCOME BEFORE INCOME TAXES 2,096,359 2,589,953
PROVISION FOR INCOME TAXES 863,700 1,061,870
----------- -----------
NET INCOME $ 1,232,659 $ 1,528,083
=========== ===========
BASIC NET INCOME PER SHARE $ 0.06 $ 0.07
=========== ===========
DILUTED NET INCOME PER SHARE $ 0.06 $ 0.07
=========== ===========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 21,280,645 21,986,321
=========== ===========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING, ASSUMING DILUTION 21,552,827 22,217,651
=========== ===========
</TABLE>
See accompanying notes to financial statements and management's discussion and
analysis of financial condition and results of operations.
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PSYCHEMEDICS CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
ENDED JUNE 30,
----------------------------
2000 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,232,659 $ 1,528,083
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 680,646 677,759
Compensation expense related to issuance of
stock options 15,133 -
Changes in assets and liabilities:
Receivables (969,835) (1,456,527)
Inventories (11,553) 39,835
Prepaid expenses and other current assets (72,184) (153,282)
Accounts payable (23,224) (158,381)
Accrued expenses 717,246 724,943
Deferred revenue (92,255) (277,167)
----------- -----------
Net cash provided by operating activities 1,476,633 925,263
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Maturities (purchases) of short-term investments - net 2,226,331 2,562,575
Purchases of property and equipment (564,887) (389,231)
Increase in other assets - net (19,503) -
----------- -----------
Net cash provided by investing activities 1,641,941 2,173,344
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from the issuance of common stock - -
Proceeds from the receivable from officer 2,165 (2,718)
Cash dividends paid (1,701,062) (1,756,546)
Acquisition of treasury stock (1,274,942) (1,140,921)
----------- -----------
Net cash used in financing activities (2,973,839) (2,900,185)
----------- -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 144,735 198,422
CASH AND CASH EQUIVALENTS, beginning of period 899,387 724,738
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 1,044,122 $ 923,160
=========== ===========
</TABLE>
See accompanying notes to financial statements and management's discussion and
analysis of financial condition and results of operations.
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PSYCHEMEDICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
June 30, 2000
1. Interim Financial Statements
The accompanying unaudited interim financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and pursuant to the rules and regulations of the Securities and
Exchange Commission for reporting on Form 10-Q. Accordingly, certain information
and footnote disclosure required for complete financial statements are not
included herein. It is recommended that these financial statements be read in
conjunction with the financial statements and related notes of Psychemedics
Corporation (the "Company") as reported in the Company's Annual Report on Form
10-K for the year ended December 31, 1999. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation of financial position, results of operations, and cash
flows at the dates and for the periods presented have been included. The balance
sheet presented as of December 31, 1999 has been derived from the financial
statements that have been audited by the Company's independent public
accountants. The results of operations for the three months and the six months
ended June 30, 2000 may not be indicative of the results that may be expected
for the year ending December 31, 2000, or any other period.
2. Basic and Diluted Net Income Per Share
In accordance with Statement of Financial Accounting Standard ("SFAS") No. 128,
EARNINGS PER SHARE, basic net income per share is computed by dividing net
income by the weighted average number of common shares outstanding during the
period. Diluted net income per share was computed by dividing net income by the
weighted average number of common and dilutive common equivalent shares
outstanding during the period. The number of dilutive common equivalent shares
outstanding during the period has been determined in accordance with the
treasury-stock method. Common equivalent shares consist of common stock issuable
upon the exercise of outstanding options.
Basic and diluted weighted average common shares outstanding are as
follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
---------------------------- --------------------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Weighted average common shares 21,207,720 21,925,614 21,280,645 21,986,321
Dilutive common stock options 276,254 230,334 272,182 231,330
----------- ---------- ---------- ----------
Weighted average common shares
outstanding, assuming dilution 21,483,974 22,155,948 21,552,827 22,217,651
</TABLE>
For the three months ended June 30, 2000 and 1999, options to purchase 834,370
and 832,406 common shares, respectively, were outstanding but not included in
the diluted
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weighted average common share calculation as the effect would have been
antidilutive. For the six months ended June 30, 2000 and 1999, options to
purchase 1,096,070 and 832,406 common shares, respectively, were outstanding but
not included in the diluted weighted average common share calculation as the
effect would have been antidilutive.
3. Revenue Recognition
Except as provided below, revenues from the Company's services are recognized
upon reporting of drug test results to the customer. Revenues related to sample
collection kits not returned for processing by customers are recognized when the
likelihood of the Company performing any service obligation is deemed remote.
During the second quarter of 2000 the Company did not record any revenue related
to sample collection kits that were sold for which the Company's obligation to
provide service was deemed remote. During the second quarter of 1999 and for the
six months ended June 30, 2000 and 1999, the Company recorded $100,000, $109,000
and $330,000, respectively, of revenue related to sample collection kits that
were sold for which the Company's obligation to provide service was deemed
remote. At June 30, 2000 and December 31, 1999, the Company had deferred revenue
balances of approximately $770,000 and $862,000, respectively, reflecting
payments for its personal drug testing service received prior to the performance
of the related test.
4. Comprehensive Income
The Company's comprehensive income for the three month periods and the six month
periods ended June 30, 2000 and 1999 was the same as reported net income.
5. Computer Software Costs
As of June 30, 2000 and December 31, 1999, $1,205,540 of software development
costs have been capitalized. For both of the three month periods ended June 30,
2000 and 1999, $60,294 of related amortization was charged to operations. During
the six month periods ended June 30, 2000 and 1999, $120,588 and $120,260,
respectively, of related amortization was charged to operations.
6. New Accounting Pronouncements
In June 1999, the Financial Accounting Standards Board ("FASB") issued SFAS No.
137, ACCOUNTING FOR DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES -
DEFERRAL OF THE EFFECTIVE DATE OF FASB STATEMENT NO. 133, which defers the
effective date of SFAS No. 133 to all fiscal quarters of all fiscal years
beginning after June 15, 2000. SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES, establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. It requires entities to
recognize all derivatives as either assets or liabilities in the statement of
financial position and to measure those instruments at fair value. The Company
does not anticipate the adoption of these statements to have a material impact
on its financial position or results of operations. As of June 30, 2000, the
Company did not have any derivatives or other financial instruments as defined
by SFAS No. 119, DISCLOSURES ABOUT DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR
VALUE OF FINANCIAL INSTRUMENTS.
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Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 revenues, business strategy, anticipated operating results, cash
dividends 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
(including, but not limited to, Food and Drug Administration regulations),
competition and general economic conditions.
OVERVIEW
--------
Psychemedics Corporation was incorporated in 1986. The Company utilizes a
patented hair analysis method involving radioimmunoassay technology to analyze
human hair to detect abused substances. The founder of the Company has granted
to the Company an exclusive license to all his rights in this hair analysis
technology, including his rights to the drug extraction method.
RESULTS OF OPERATIONS
---------------------
Revenue was $5,472,701 in the second quarter of 2000 as compared to $5,854,999
in the second quarter of 1999, representing a decrease of 7%. Revenue for the
six month period ended June 30, 2000 was $10,154,728, a decrease of 4% from the
$10,535,256 of revenue reported for the comparable period of 1999. The revenue
decrease was due primarily to decreases in volume from both new and existing
clients.
Gross margin was 57% of sales in the second quarter of 2000, as compared to 61%
in the second quarter of 1999. Gross margin for the six months ended June 30,
2000 was 56% of sales, as compared to 60% for the six months ended June 30,
1999. The decrease in gross margin was due to higher direct costs in the first
and second quarter of 2000 in anticipation of higher volume.
General and administrative ("G&A") expenses were $890,803 for the three months
ended June 30, 2000 as compared to $822,506 for the three months ended June 30,
1999, representing an increase of 8%. G&A expenses were $1,674,563 for the six
months ended June 30, 2000 as compared to $1,582,265 for the year earlier
period, representing an increase of 6%. As a percentage of revenue, G&A expenses
increased to 16% in the second quarter of 2000 from 14% in the second quarter of
1999 and
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increased to 16% for the six months ended June 30, 2000 from 15% for the
comparable year earlier period. Professional fees related to legal services and
investor relations accounted for most of the increase, while all other G&A
expenses remained relatively constant.
Marketing and selling expenses for the three month period ended June 30, 2000
decreased $57,749 from the comparable period of the prior year to $1,022,611, a
decrease of 5%. Marketing and selling expenses were $2,003,377 for the six
months ended June 30, 2000 as compared to $2,071,934 for the year earlier
period, representing a decrease of 3%. Expenses pertaining to additions to the
sales force and expanded marketing activities related to the corporate market
were offset by decreased customer service costs in the first and second quarter
of 2000, as compared to the first and second quarter of 1999. Customer service
costs during the first and second quarter of 1999 were elevated due to the
Company's assistance in the testing of all employees at one of the Company's
larger customers. Total marketing and selling expenses were 19% of revenue in
both the second quarter of 2000 and the second quarter of 1999, and 20% of
revenue for the six months ended June 30, 2000 and June 30, 1999. The Company
expects to continue to aggressively promote its drug testing services during the
remainder of 2000 and in future years in order to expand its client base.
Other income for the three month and the six month periods ended June 30, 2000
represented primarily interest earned on cash equivalents and short-term
investments. Other income for the six month period ended June 30, 2000 included
a $200,000 legal settlement from a breach of contract dispute with a third party
administrator. The remainder of other income represented interest earned on cash
equivalents and short-term investments. Although the yields on investment
balances increased in the first and second quarter of 2000 as compared to the
first and second quarter of 1999, interest income decreased due to lower average
investment balances.
During the three months ended June 30, 2000 and June 30, 1999, the Company
recorded tax provisions of $477,700 and $667,690, respectively. During the six
months ended June 30, 2000 and June 30, 1999, the Company recorded tax
provisions of $863,700 and $1,061,870, respectively. These tax provisions
reflect an effective tax rate of 41%.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
At June 30, 2000, the Company had $3.8 million of cash, cash equivalents and
short-term investments. The Company's operating activities generated net cash of
$1,476,633 in the six months ended June 30, 2000. Investing activities generated
$1,641,941 in the six month period while financing activities used a net amount
of $2,973,839 during the period.
Operating cash flows increased $551,370 in the first six months of 2000,
compared to the year earlier period. A lesser increase in accounts receivable
and a lesser decrease in accounts payable and deferred revenue during the first
six months of 2000 as compared to the first six months of 1999 were the main
reason for this increase. This was partially offset by the reduction in net
income for the first two quarters of 2000 as
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compared to the year earlier period. The non-cash effect of depreciation and
amortization in the 2000 and 1999 periods was $680,645 and $677,759,
respectively.
Capital expenditures in the first two quarters of 2000 were $564,887. The
expenditures primarily consisted of new equipment, including 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.
During the six month period ended June 30, 2000, the Company distributed
$1,701,062 in cash dividends to its shareholders and repurchased a total of
257,600 shares for treasury at an aggregate cost of $1,274,942.
At June 30, 2000, the Company's principal sources of liquidity included an
aggregate of $3.8 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 potentially include joint ventures, issuance of common stock or
debt financing. At June 30, 2000, the Company had no long-term debt.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The following discussion about the Company's market risk disclosures involves
forward-looking statements. Actual results could differ materially from those
projected in the forward-looking statements. The Company is exposed to market
risk related to changes in interest rates. The Company does not use derivative
financial instruments for speculative or trading purposes.
Interest Rate Sensitivity. The Company maintains a short-term investment
portfolio consisting principally of securities issued by the U.S. Government
with an average maturity of less than six months. These held-to-maturity
securities are subject to interest rate risk and will fall in value if market
rates increase. If market interest rates were to increase immediately and
uniformly by 10 percent from levels at June 30, 2000, the fair value of the
portfolio would decline by an immaterial amount. The Company has the ability to
hold its fixed income investments until maturity, and therefore the Company
would not expect its operating results or cash flows to be affected to any
significant degree by the effect of a sudden change in market interest rates on
its securities portfolio.
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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
11, 2000 for the purpose of electing a board of directors, ratification of the
Company's 2000 Stock Option Plan and approving the appointment of the Company's
auditors. 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.
Description and tabulation by the Company's transfer agent of each matter voted
upon at the Annual Meeting of Shareholders of Psychemedics Corporation held on
May 11, 2000.
All of management's nominees for directors, as listed in the proxy statement,
were elected with the following vote:
Election of Directors.
<TABLE>
<CAPTION>
Number of Shares
--------------------------------
For Abstain
--- -------
<S> <C> <C>
Werner A Baumgartner, Ph.D. 12,310,939 3,292,006
Donald F. Flynn 12,202,621 3,400,324
Raymond C. Kubacki, Jr. 12,232,801 3,370,144
Walter S. Tomenson, Jr. 12,329,298 3,273,647
A. Clinton Allen 12,209,536 3,393,409
Fred J. Weinert 12,229,502 3,373,443
</TABLE>
Ratification of the Company's 2000 Stock Option Plan.
<TABLE>
<CAPTION>
Number of Shares
----------------
<S> <C>
For 9,305,394
Against 3,607,294
Abstain 42,506
Delivered - not voted 2,917,751
</TABLE>
Selection of Arthur Andersen LLP as auditors of the Company.
<TABLE>
<CAPTION>
Number of Shares
----------------
<S> <C>
For 15,114,805
Against 38,215
Abstain 449,925
</TABLE>
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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.
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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 4, 2000 By: /s/ Raymond C. Kubacki, Jr.
-------------------------------------
Raymond C. Kubacki, Jr.
President and Chief Executive Officer
Date: August 4, 2000 By: /s/ Peter C. Monson
-------------------------------------
Peter C. Monson
Vice President, Treasurer &
Chief Financial Officer
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