-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MJW6K9r3IjAk4pyi3ORQkLE5pVIJnCLzRRFuNXrLZBwTIBdH8FSk13rDTgDPMOfH B8I2nzHi+vlzYpT/zFAdPg== 0000950135-00-001621.txt : 20000327 0000950135-00-001621.hdr.sgml : 20000327 ACCESSION NUMBER: 0000950135-00-001621 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000324 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PSYCHEMEDICS CORP CENTRAL INDEX KEY: 0000806517 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MEDICAL LABORATORIES [8071] IRS NUMBER: 581701987 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-13738 FILM NUMBER: 578030 BUSINESS ADDRESS: STREET 1: 1280 MASSACHUSETTS AVENUE STREET 2: SUITE 200 CITY: CAMBRIDGE STATE: MA ZIP: 02138 BUSINESS PHONE: 6178687455 MAIL ADDRESS: STREET 1: 1280 MASSACHUSETTS AVE STREET 2: SUITE 200 CITY: CAMBRIDGE STATE: MA ZIP: 02138 10-K405 1 PSYCHEMEDICS CORPORATION 1 U. S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 COMMISSION FILE NUMBER: 1-13738 PSYCHEMEDICS CORPORATION (exact name of registrant as specified in its charter) Delaware 58-1701987 - --------------------------------- ------------------------------------ (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 1280 Massachusetts Ave., Cambridge, MA 02138 - --------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 617-868-7455 Securities registered pursuant to Section 12(b) of the Act: Common Stock, $.005 Par Value American Stock Exchange - ----------------------------- ------------------------------------------- (Title of class) (name of each exchange on which registered) 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-B 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) On March 15, 2000 the aggregate market value of the voting stock held by non-affiliates of the registrant (assuming for these purposes, but without conceding, that all executive officers, directors and 10% shareholders are "affiliates" of the Registrant) was $76,332,879 and 21,282,676 shares of Common Stock, $.005 par value, were outstanding at such date. DOCUMENTS INCORPORATED BY REFERENCE ----------------------------------- Part III - Portions of the Registrant's Proxy Statement relative to the 2000 Annual Meeting of Stockholders to be held on May 11, 2000. 2 PART I ------ The information provided by the Company in this Report may contain "forward-looking" information which involves risks and uncertainties, such as statements of the Company's plans, objectives, expectations and intentions. The cautionary statements made in this report should be read as being applicable to all forward-looking statements wherever they appear in this report. The Company's actual results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include those discussed in Item 7 below, as well as those discussed elsewhere herein. ITEM 1. BUSINESS GENERAL Psychemedics Corporation ("the Company") is a Delaware corporation organized on September 24, 1986 to provide testing services for the detection of abused substances through the analysis of hair samples. The Company's testing methods utilize a patented technology for performing immunoassays on enzymatically dissolved hair samples with confirmation testing by mass spectrometry. The Company's first application of its patented technology is a testing service that screens for the presence of certain drugs of abuse in hair. The application of radioimmunoassay procedures using hair differs from the more widely used application of radioimmunoassay procedures using urine samples. The Company's tests provide quantitative information which indicates the approximate amount of drug ingested as well as historical data which can show a pattern of individual drug use over a period of time. This information is useful to employers in both applicant and employee testing, to physicians, treatment professionals, law enforcement agencies, to the insurance industry; and to parents concerned about drug use by their children and to other individuals and entities engaged in any business where drug use is an issue. The Company provides commercial testing and confirmation by mass spectrometry using industry accepted practices for cocaine, marijuana, PCP, methamphetamine, and opiates. In addition, the Company has developed a test for methadone for use in the drug treatment industry. Testing services are currently performed at the Company's laboratory at 5832 Uplander Way, Culver City, California. The Company's services are marketed under the name RIAH (Radioimmunoassay of Hair), a registered service mark. DEVELOPMENT OF RADIOIMMUNOASSAY OF HAIR The application of special radioimmunoassay procedures to the analysis of hair was initially developed in 1978 by the founders of the Company, Annette Baumgartner and Werner A. Baumgartner, Ph.D. The Baumgartners demonstrated that when certain chemical substances enter the bloodstream, the blood carries them to the hair where they become "entrapped" in the protein matrix in amounts roughly proportional to the amount ingested. The Company's drugs of abuse testing procedure involves washing the hair sample to clean it of surface contaminants and then subjecting the cleaned hair sample to the Company's unique proprietary process which involves the direct analysis of liquefied hair samples by radioimmunoassay procedures utilizing special reagents and antibodies. The antibodies detect the presence of a specific drug or metabolite in the liquefied hair sample by reacting with the drug present in the sample solution and an added radioactive analog of the drug. The resulting antibody-drug complex is precipitated and analyzed. The amount of drug present in the sample is inversely proportional to the amount of radioactive analog in the precipitate. Depending upon both the length of hair and the hair growth rate (hair grows approximately 1.3 centimeters per month), the Company is able to provide historical information on drug use by the person from whom the sample was obtained. Another testing option involves 2 3 sectional analysis of the hair sample. In this procedure, the hair is sectioned lengthwise to approximately correspond to certain time periods. The sections are then labeled by time period, which allows the Company to provide trend information on drug use. VALIDATION OF THE COMPANY'S PROPRIETARY TESTING METHOD The process of analyzing human hair for the presence of drugs using the Company's patented method has been the subject of over sixty-five scientific field studies. Results from the studies that have been published or accepted for publication in scientific journals are generally favorable to the Company's technology. These studies were performed with the following organizations: Citizens for a Better Community Court, Columbia University, Koba Associates-DC Initiative, Harvard Cocaine Recovery Project, Hutzel Hospital, ISA Associates (Interscience America)-NIDA Workplace Study, University of California-Sleep State Organization, Maternal/Child Substance Abuse Project, Matrix Center, National Public Services Research Institute, Narcotic and Drug Research Institute, San Diego State University-Chemical Dependency Center, Spectrum Inc., Stapleford Centre (London), Task Force on Violent Crime (Cleveland, Ohio); University of Miami-Department of Psychiatry, University of Miami-Division of Neonatology, University of South Florida-Operation Par Inc., University of Washington, VA Medical Center-Georgia, U.S. Probation Parole-Santa Ana. The above studies include research in the following areas: prenatal, treatment evaluation, workplace drug use, the criminal justice system and epidemiology. Many of the studies have been funded by the National Institute of Justice or the National Institute on Drug Abuse ("NIDA"). Over 400 research articles written by independent researchers have been published supporting the general validity and usefulness of hair analysis. An additional independent evaluation of the technology, favorable to the Company's services, has been performed by submission of blind samples by Dr. Robert DuPont, President of the Institute of Behavior and Health, Inc., the first Director of the National Institute on Drug Abuse and presently Chairman of the Company's Scientific Advisory Board. Some of the Company's customers have also completed their own testing to validate the Company's proprietary hair testing method as a prelude to utilizing the Company's services. These studies have consistently confirmed the Company's superior detection rate. When the results from utilizing the Company's patented hair testing method were compared to urine results in side-by-side evaluations, 3 to 10 times as many drug abusers were accurately identified with the Company's proprietary method. In addition to these studies, the Company has over 1,700 clients for whom it performs testing. In 1998, the National Institute of Justice, utilizing Psychemedics hair testing, completed a Pennsylvania Prison study where hair analysis revealed an average prison use level in 1996 of approximately 7.9%. Comparatively, urinalysis revealed virtually no positives. After measures to curtail drug use were instituted, drug sniffing dogs, searches and scanners, the use level fell to approximately 2% according to the results of hair analysis in 1998. Again, the urine tests had virtually no positives. The study illustrated the usefulness of hair analysis to monitor populations and the weakness of urinalysis. In July of 1999, the scientific validity of the Company's hair analysis for workplace testing was reported in an article published in the Journal of Occupational and Environmental Medicine by Benjamin Hoffman, M.D. The study reported hair analysis and urinalysis results on a group of 1,852 candidates for employment at a large metropolitan police department and presented the largest analysis of pre-employment hair analysis to be published in the peer-reviewed literature. The results demonstrated the superior capability of hair analysis over urinalysis in detecting drug users by a three to one ratio and also showed no evidence of a bias of hair analysis based on hair color or race. 3 4 ADVANTAGES OF USING THE COMPANY'S PATENTED METHOD The Company asserts that hair testing using its patented method confers substantive advantages relative to existing means of drug detection through urinalysis. Although urinalysis testing can provide accurate drug use information, the scope of the information is short-term and is generally limited to the type of drug ingested within a few days of the test. Studies published in many scientific publications have indicated that most drugs disappear from urine within a few days. In contrast to urinalysis testing, hair testing using the Company's patented method provides long-term historical drug use information resulting in a significantly wider "window of detection." This "window" may be three months or longer depending on the length of the hair sample. The Company's standard test offering, however, uses a 3.9 centimeter length cut close to the scalp; therefore, it measures use for approximately the previous 90 days. This wider window of detection enhances the detection efficiency of hair analysis making it particularly useful in pre-employment testing. Hair testing not only identifies more drug users, but can also uncover patterns and severity of drug use, information most helpful in determining the scope of an individual's involvement with drugs and serves as a deterrent against the use of drugs. Hair testing using the Company's patented method greatly reduces the incidence of "false negatives" associated with evasive measures typically encountered with urinalysis testing. Urinalysis test results are impacted adversely by excessive fluid intake prior to testing as well as adulteration of the sample. Moreover, a drug user who abstains from use for a few days prior to urinalysis testing can usually escape detection. Hair testing is effectively free of these problems, as it cannot be thwarted by evasive measures typically encountered with urinalysis testing. It is also attractive to customers since sample collection is typically performed under close supervision yet is less intrusive and less embarrassing for test subjects. Hair testing using the Company's patented method (with mass spectrometry confirmation) further reduces the prospects of error in conducting drug detection tests. Urinalysis testing is more susceptible to problems such as "evidentiary false positives" resulting from passive drug exposure (e.g. poppy seeds). To combat this problem, in federally mandated testing the opiate cutoff levels for urine testing were raised 667% on December 1, 1998 and testing for the presence of a heroin metabolite, 6-AM, was required. These new results, however, effectively reduced the detection time frame for confirmed heroin in urine down to several hours post-use. In contrast, the metabolite 6-AM is stable in hair and can be detected for months. In the event a positive urinalysis test result is challenged, the only remedy is a newly collected sample. Depending on the drug usage of the forewarned individual prior to the date of the newly collected sample, a re-test may yield a negative result when using urinalysis testing because of temporary abstention. In contrast, when the Company's hair testing method is offered on a repeat hair sample the individual suspected of drug use cannot as easily affect the results because historical drug use data remain locked in the hair fiber. DISADVANTAGES OF HAIR TESTING There are some disadvantages of hair testing as compared to drug detection through urinalysis. Because hair starts growing below the skin surface, drug ingestion evidence does not appear in hair above the scalp until five to seven days after use. Thus, hair testing is not suitable for determining impairment in "for cause" testing such as is done in connection with an accident investigation. It does, however, provide a drug history which can complement urinalysis information in "for cause" testing. Currently, radioimmunoassay testing using hair samples under the Company's patented method is only practiced by Psychemedics Corporation. The absence of widespread familiarity and use of hair testing may adversely impact the Company's revenue growth. 4 5 The Company's prices for its tests are generally somewhat higher than prices for tests using urinalysis, but the Company believes that its superior detection rates provide more value to the customer. This pricing policy could, however, adversely impact the growth of the Company's sales volume. PATENTS In December 1987, Dr. Werner A. Baumgartner, the Company's founder and Director of Research and Development, with the assistance of the Company's patent counsel, filed the first in a series of patent applications in the U.S. Patent and Trademark Office on his inventions relating to radioimmunoassay using hair. In 1994, U.S. Patent No. 5,324,642 (the "642 Patent") was issued to the Company. This patent pertains to the universal drug extraction procedure and immunoassay technology for the detection of drugs in hair specimens. In 1995, the Company was granted an additional patent covering Dr. Baumgartner's inventions pertaining to the immuno chemical screening assay for marijuana, which is the most difficult drug to detect. In August 1999, the Canadian Patent Office issued the Company a patent containing broad claims to the Company's proprietary basic hair analysis method. In December 1999, the Company was issued European patents related to the analysis of marijuana analyte in hair. As a result of the issuance of this patent, national patents are in effect in Germany, France, Italy, the United Kingdom and Spain. This follows the issuance in Europe of the Company's first European patent on the base hair analysis method in 1996, and the issuance in Europe, also in 1996, of a patent on another aspect of the Company's technology, related to the use of detergents to enhance the hair digestion portion of the methodology. In February 2000, a third U.S. patent was issued which extends protection to yet another aspect of the Company's methodology. This patent provides for the use of metal salt to deactivate certain reagents used in the method, thus enhancing efficiency. In October 1998, the Company was informed by the Japanese Patent Office that it had allowed the pending Japanese patent application containing broad claims to the Company's proprietary hair test for drugs of abuse. The Japanese patent, combined with others in place in the United States and Europe, affords the Company the opportunity to eventually expand drugs of abuse hair testing technology throughout the world. Pursuant to an agreement dated January 1987, Werner A. Baumgartner and Annette Baumgartner granted to the Company an exclusive royalty-free worldwide license of all of their rights in and to their inventions relating to radioimmunoassay using hair. Most of Dr. Baumgartner's research on the inventions covered by the 642 Patent was conducted while he was employed by the Veteran's Administration Hospital ("VA"). Dr. Baumgartner has, therefore, also granted to the U.S. government, for all governmental purposes, a nonexclusive, irrevocable, royalty-free license to use the basic invention during the term of the patent with respect to such invention. Certain aspects of the Company's hair analysis method are based on trade secrets owned by the Company. The Company's ability to protect the confidentiality of these trade secrets is dependent upon the Company's internal safeguards and upon the laws protecting trade secrets and unfair competition. In the event that patent protection or protection under the laws of trade secrets were not sufficient and the Company's competitors succeeded in duplicating the Company's products, the Company's business could be materially adversely affected. 5 6 TARGET MARKETS 1. Industry The Company focuses its primary marketing efforts on the private sector, with particular emphasis on job applicant and employee testing. The number of businesses using drug testing to screen job applicants and employees has increased significantly in the last several years. The most recent American Management Association (AMA) survey from 1996 indicated that 81% of surveyed firms were engaged in some form of drug testing, a 277% increase since the initial AMA survey in 1987. The prevalence of drug screening programs reflects a growing concern that drug use contributes to employee health problems and costs (increased absenteeism, reduced productivity, etc.) and in certain industries, safety hazards. It has been estimated that the cost to industry in terms of health care costs and lost productivity is at least $60 billion annually. The principal criticism of employee drug screening programs centers on the effectiveness of the testing program. Most private sector screening programs use urinalysis. Such programs are susceptible to evasive maneuvers and the inability to obtain identical repeat samples in the event of a challenged result. Moreover, many employers, to accommodate concerns of their employees and to avoid infringement of employee privacy rights, conduct their programs on a pre-announced schedule, thereby providing an opportunity for many drug users to abstain in order to escape detection. The Company presents its patented hair analysis method to potential clients as a better technology well suited to employer needs. Field studies and actual client results support the accuracy and effectiveness of the Company's patented technology and its ability to detect even casual drug use. This information provides an employer with greater flexibility in assessing the scope of an applicant's or an employee's drug problem. The Company performs a confirmation test of all positive results through mass spectrometry. The use of mass spectrometry is an industry accepted practice used to confirm positive drug test results of an initial screen. In an employment setting, mass spectrometry confirmation is typically used prior to the taking of any disciplinary action against an employee. The Company offers its clients a five-drug screen with mass spectrometry confirmation of cocaine, PCP, marijuana, methamphetamine, and opiates. 2. Home Use The Company also offers a personal drug testing service, "PDT-90"(R), for parents concerned about drug use by their children. It allows parents to collect a small sample from their child in the privacy of the home and have it tested for drugs of abuse by the Company. The PDT-90 testing service uses the same patented method that is used with the Company's workplace testing service. 3. Research The Company is currently conducting more than forty research investigations worldwide, including studies of: drug abuse in juveniles and children with Attention Deficit Disorders, the relationship of drug use and HIV infection, pre-natal drug exposure and drug abuse among the homeless. Several nationwide treatment evaluation and outcome studies are also using hair analysis results as the primary measure of treatment efficacy. Hair analysis is also being applied in numerous criminal justice studies, including use in pre-trial, probation, parole, and prison testing and community needs assessment research. These projects are being conducted at the nation's leading research institutions, including Boston University, Columbia University Medical School, Duke University, University of Pennsylvania, Massachusetts General Hospital, Harvard University, Yale University and the University of Colorado Health Sciences Center. 6 7 SALES AND MARKETING The Company markets its corporate drug testing services primarily through its own direct sales force. The Company markets PDT-90, its home testing drug service, primarily through retail drug stores. For both its business-to-business and consumer direct services, the Company has undertaken an integrated marketing campaign to enhance the market presence within each respective segment. In 1998, the Company began marketing its testing services over the Internet at several websites. COMPETITION The Company competes directly with numerous commercial laboratories that test for drugs through urinalysis testing. Most of these laboratories, such as Laboratory Corporation of America, have substantially greater financial resources, market identity, marketing organizations, facilities, and numbers of personnel than the Company. The Company has been steadily increasing its base of corporate customers and believes that future success with new customers is dependent on the Company's ability to communicate the advantages of implementing a drug program utilizing the Company's patented hair analysis method. The Company's ability to compete is also a function of pricing. The Company's prices for its tests are generally somewhat higher than prices for tests using urinalysis. However, the Company believes that its superior detection rates, coupled with the customer's ability to test less frequently due to hair testing's wider window of detection (approximately 90 days versus approximately three days with urinalysis) provide more value to the customer. This pricing policy could, however, lead to slower sales growth for the Company. The Company is not aware of any other laboratories with a hair analysis technology that is comparable in effectiveness to the Company's proprietary procedures. The Company is aware of several laboratories that purport to test hair samples using a method, which the Company presumes, includes the use of a form of immunoassay procedures. The Company, however, does not believe that immunoassay testing of hair samples is effective on a commercial basis without using the Company's unique patented method which allows for the efficient release of drugs from the hair through enzyme digestion without destroying the drugs. GOVERNMENT REGULATION The Company is licensed as a Clinical Laboratory by the State of California as well as certain other states. All tests are performed according to the standards established by the Clinical Laboratories Improvement Amendments ("CLIA") and various state licensing statutes. Presently there are no other regulations required for the operation of a clinical laboratory in the State of California. A substantial number of states regulate drug testing. The scope and nature of such regulation varies greatly from state to state and is subject to change from time to time. The Company addresses state law issues on an ongoing basis. In November 1999, the Oklahoma State Department of Health approved employment drug testing using hair analysis and the Company was granted a license specific to hair analysis. As of March 15, 2000, the Company was the only clinical laboratory to have received such a license in Oklahoma. Shortly after the introduction of the Company's PDT-90 drug testing service in 1995, the United States Food and Drug Administration ("FDA") attempted to assert jurisdiction over the Company's PDT-90 service by claiming that the collection envelope distributed as part of the service was a medical device. This ultimately led to the Company filing suit 7 8 against the FDA contesting the FDA's position. In March 1996, the FDA agreed to withdraw its claims against the Company in exchange for the Company's agreement to discontinue its lawsuit. On March 5, 1998, the FDA issued a proposed rule applicable to companies that market "drugs of abuse test sample collection systems". Under the proposed rule, companies engaged in the business of testing for drugs of abuse using a test (screening assay) previously recognized by the FDA would be able to market their test sample collection systems without pre-market approval or clearance by the FDA so long as the test is conducted at a laboratory that is recognized by laboratory certification agencies designated by the FDA and certain labeling and product information procedures are followed. To date, the FDA has recognized urine-screening assays that existed prior to the 1976 Medical Device Amendments to the Federal Food, Drug and Cosmetic Act, as well as subsequent assays which have demonstrated substantial equivalence to such previously existing assays. Under the FDA's proposed rule, companies engaged in the business of testing for drugs of abuse using assays not yet recognized by the FDA would be required to submit their assay to the FDA for recognition prior to marketing. In addition, the laboratory performing the tests would be required to be certified by a recognized agency. In the proposed rule, the FDA states that it intends to implement the proposed new policy through notice and comment rulemaking. The proposed rule includes a transitional period of one year following the publication of a final rule in order for companies not currently in compliance with the proposed requirements to obtain the necessary data they need for submission to the FDA. As of March 15, 2000, a final rule had not yet been published. There is a risk that, if the rule as proposed becomes final, the Company may be required to apply to the FDA for recognition of the Company's screening assays, and if such application were denied (and if such denial were upheld on appeal), the Company's business would be materially adversely affected. The Company believes that its proprietary method of detecting drugs of abuse using hair samples includes accurate and reliable screening assays and should, therefore, be recognized by the FDA if necessary. However, the Company maintains that the FDA lacks statutory authority to regulate its hair testing service as a medical device. SCIENTIFIC ADVISORY BOARD The Company has established a Scientific Advisory Board which consults with management of the Company to examine and evaluate the progress of the Company's research and development activities, to promote independent validation studies of the Company's patented hair analysis method technology, and to assist in accelerating acceptance of the technology in both the public and private sectors. The Chairman of the Scientific Advisory Board is Dr. Robert DuPont. Dr. DuPont's career has included numerous positions in the psychiatric and substance abuse field, including Director, Special Action Office for Drug Abuse Prevention - - The White House; the first Director, National Institute on Drug Abuse; President, American Council for Drug Education; and President, Phobia Society of America. Dr. DuPont has received several national awards and presently serves as President: Institute for behavior and Health, Inc.; Vice President, Bensinger, DuPont and Associates, a national drug and alcohol abuse consulting firm; and he maintains a private practice in psychiatry. Dr. DuPont has also been granted options to acquire shares of the Company's common stock. Other members of the Scientific Advisory Board are Edward C. Senay, M.D., a Professor in the Department of Psychiatry at the University of Chicago, and Arthur McBay, Ph.D., a Forensic Toxicologist and former Professor of Pharmacy at the University of North Carolina. RESEARCH AND DEVELOPMENT The Company is continuously engaged in research and development activities. During the years ended December 31, 1999, 1998 and 1997, $526,212, $499,895, and $437,626, respectively, were expended for research and development. The Company continues to perform research activities to develop new products and services and to improve existing products and services utilizing the Company's proprietary technology. 8 9 Additional research using the Company's proprietary technology is being conducted by outside research organizations through government-funded studies. The Company's research includes "controlled studies" to determine the advantages of hair testing in the forensic and criminal justice markets. The Company has also furnished technical assistance to several distinguished independent researchers whose studies have been funded through government grants. Many such studies are currently in progress. The Company continues to conduct its own research toward the development of new inventions, services and products derived from the Company's patented technology. SOURCES AND AVAILABILITY OF RAW MATERIALS Since its inception, the Company has purchased raw materials for its laboratory services from outside suppliers. The most critical of these raw materials are the radio-labeled drugs which the Company purchases from a single supplier, although other suppliers of radio-labeled drugs exist. The Company has entered into an agreement with its principal supplier to purchase certain proprietary information regarding the manufacture of such radio-labeled drugs owned by the supplier in the event that the supplier ceases to be able to supply such radio-labeled drugs to the Company. EMPLOYEES As of December 31, 1999, the Company had 123 full-time equivalent employees, of whom four full-time employees were in research and development. None of the Company's employees is subject to a collective bargaining agreement. ITEM 2. PROPERTIES. The Company maintains its corporate office and northeast sales office at 1280 Massachusetts Avenue, Cambridge, Massachusetts; the office is leased through September 2003. The Company leases 18,000 square feet of space in Culver City, California, for laboratory purposes. This facility is leased through December 31, 2005 with an option to renew for an additional two years. The Company also leases an additional 5,400 square feet of space in Culver City, California for customer service and information technology purposes. This office space is leased through December 31, 2005. ITEM 3. LEGAL PROCEEDINGS. The Company is involved in various suits and claims in the ordinary course of business. The Company does not believe that the disposition of any such suits or claims will have a material adverse effect on the continuing operations or financial position of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. 9 10 PART II ------- ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS. The Company's common stock is traded on the American Stock Exchange under the symbol "PMD". As of March 15, 2000, there were 406 record holders of the Company's common stock. The following table sets forth for the periods indicated the range of prices for the Company's common stock as reported by the American Stock Exchange and dividends declared by the Company.
Calendar Period High Low Dividends - --------------- ---- --- --------- 1999 - ---- Fourth Quarter $ 5 $ 4 1/8 $ 0.04 Third Quarter $ 5 1/8 $ 4 1/8 $ 0.04 Second Quarter $ 5 3/8 $ 4 $ 0.04 First Quarter $ 5 5/16 $ 4 $ 0.04 1998 - ---- Fourth Quarter $ 5 1/8 $ 4 1/16 $ 0.03 Third Quarter $ 5 5/16 $ 4 1/8 $ 0.03 Second Quarter $ 5 7/8 $ 4 3/4 $ 0.03 First Quarter $ 6 $ 5 5/16 $ 0.02
Future cash dividends may be declared at the discretion of the Board of Directors. ITEM 6. SELECTED FINANCIAL DATA The following selected financial data has been derived from the financial statements of the Company and should be read in conjunction with, and is qualified in its entirety by reference to, the financial statements and related notes thereto.
AS OF AND FOR THE YEARS ENDED ---------------------------------------------------------------- DECEMBER 31, ---------------------------------------------------------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- (IN THOUSANDS, EXCEPT FOR PER SHARE DATA) Revenue $19,623 $17,670 $15,398 $12,214 $10,111 Gross profit $11,169 $10,201 $ 9,341 $ 7,233 $ 5,422 Income from operations $ 3,547 $ 3,307 $ 3,056 $ 2,409 $ 1,301 Net income $ 2,326 $ 2,397 $ 2,501 $ 2,492 $ 1,559 Basic net income per share $ 0.11 $ 0.11 $ 0.11 $ 0.12 $ 0.07 Diluted net income per share $ 0.11 $ 0.11 $ 0.11 $ 0.11 $ 0.07 Total Assets $14,191 $19,083 $18,855 $15,745 $10,217 Working Capital $ 8,184 $11,609 $13,090 $11,403 $ 6,789 Shareholders' Equity $11,806 $15,883 $16,733 $14,296 $ 9,484 Cash dividends declared per common share $ 0.16 $ 0.11 $ 0.08 $ 0.02 --
10 11 ITEM 7. 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. RESULTS OF OPERATIONS Revenue was $19.6 million in 1999, as compared to $17.7 million in 1998 and $15.4 million in 1997, representing increases of 11% in 1999 and 15% in 1998 above prior year levels. These increases were due primarily to increases in volume from both new and existing clients of 10% in 1999 and 17% in 1998. An average price increase of 1% also added to revenue growth in 1999 as the Company added new customers that were not subject to volume discounts. The 17% increase in volume in 1998 was offset by an average price decrease of 2% in 1998 primarily as the result of volume discounts granted to large customers. Gross margin was 57% of sales in 1999 compared to 58% of sales in 1998 and 61% in 1997. The decrease in 1999 and 1998 was due primarily to the addition of production capacity during the latter part of 1998, in anticipation of future sample volume increases. General and administrative ("G&A") expenses represented 16% of revenue in 1999 and 1998, as compared to 15% of revenue in 1997. G&A expenses increased by $159,000 to $3.1 million from 1998 to 1999 and increased by $634,000 to $2.9 million from 1997 to 1998. The increase in G&A expenses for 1999 was due primarily to greater personnel costs, costs related to the implementation of a new billing system and increased facilities expenses (rent, taxes). Approximately half of the 1998 increase was personnel related and consisted primarily of additions to staff and costs pertaining to the introduction of a 401(k) retirement plan. Greater professional fees for legal and accounting services also contributed to the increase for 1998. Marketing and selling expenses for the year ended December 31, 1999 increased to 21% of revenue versus 20% in 1998 and 23% in 1997. Marketing and selling expenses increased by $542,000 to $4.0 million from 1998 to 1999, and decreased by $87,000 to $3.5 million from 1997 to 1998. The increase in 1999 was primarily due to greater customer service and marketing costs resulting from the Company's growth. Although the Company continued to expand marketing activities related to the corporate market in 1998, total marketing and selling expenses decreased from 1997 levels because a significant amount of expenditures made in the second quarter of 1997 to initially penetrate the retail home testing market were non-recurring. The Company expects to continue to aggressively promote its drug testing services in future years in order to expand its client base. Research and development expenses increased by $26,000 from 1998 to 1999 and $62,000 from 1997 to 1998, but remained constant as a percentage of revenue at 3% in 1999, 1998 and 1997. 11 12 Net interest income decreased by $173,000 in 1999 as compared to 1998, due to lower average investment balances in 1999 as compared to 1998 along with decreased yields on these investments. Net interest income increased by $43,000 in 1998, as compared to 1997, due to slightly higher average investment balances in 1998, as compared to 1997 and improved cash management procedures that were put in place during 1998. During 1999, the Company recorded a tax provision of $1.6 million, reflecting an effective tax rate of 40.9%, as compared to tax provisions of $1.5 million and $1.1 million and effective tax rates of 38.0% and 30.0% for the years ended December 31, 1998 and December 31, 1997, respectively. The increases in the effective tax rate in 1999 and 1998 resulted from the reduction in net operating loss carryforwards available to offset the provision for income taxes, partially offset by tax credits generated in 1998. LIQUIDITY AND CAPITAL RESOURCES At December 31, 1999, the Company had $5.8 million of cash, cash equivalents and short-term investments, compared to $9.8 million at December 31, 1998. The Company's operating activities generated net cash of $2.9 million in 1999, $5.0 million in 1998, and $2.1 million in 1997. Investing activities generated $3.7 million in 1999, and used $1.6 million in 1998 and $2.5 million in 1997. Financing activities used $6.4 million in 1999, $3.3 million in 1998, and $501,000 in 1997. Operating cash flows decreased by $2.1 million in 1999 as compared to 1998, due primarily to a significant decrease in deferred revenue, lesser decreases in accounts payable and accrued expenses and an increase in accounts receivable. Net income in 1999 was $71,000 less than the 1998 amount, which also contributed to the decrease in operating cash flows for 1999. The non-cash effect of depreciation and amortization in 1999, 1998 and 1997 was $1,323,000, $991,000, and $696,000, respectively. Capital expenditures in 1999 were $496,000, a decrease of $1.4 million from 1998 expenditures of $1.9 million. The expenditures related principally to new equipment, including laboratory and computer equipment. The Company currently plans to make capital expenditures of approximately $800,000 in 2000, 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. During 1999, the Company repurchased a total of 638,800 shares for treasury at an aggregate cost of $2.9 million. In 1998, 349,981 shares were repurchased for treasury at an aggregate cost of $1.6 million. The Company distributed $3,486,268 and $2,444,957 of cash dividends to its shareholders in 1999 and 1998, respectively. The Company commenced paying cash dividends in 1997 and distributed $2,194,832 (including $437,221 of dividends declared in 1996) during the year ended December 31, 1997. At December 31, 1999, the Company's principal sources of liquidity included $5.8 million of cash, cash equivalents and short-term investments. Management currently believes that such funds, together with future operating profits, 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, issuance of common stock or debt financing. At December 31, 1999, the Company had no debt. 12 13 IMPACT OF YEAR 2000 ISSUE The Year 2000 issue results from computer programs written using two digits rather than four to define the applicable year. Any of the Company's computer programs or hardware and equipment that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. With regards to the Year 2000 issue, the Company has not experienced any problems with any of the existing software used in its internal systems and operations or with the various hardware and equipment components used in its laboratory operations. The Company has not experienced any material shipment delays from its major product suppliers or any material payment delays from its major customers due to Year 2000 issues. However, there can be no assurance that these third parties will not experience Year 2000 problems or that any problems would not have a material effect on the Company's business. Because the cost and timing of Year 2000 compliance by third parties such as suppliers, customers and service providers is not within the Company's control, no assurance can be given with respect to the cost or timing of such efforts or any potential adverse effects on the Company of any failure by these third parties to achieve Year 2000 compliance. ITEM 7A. 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 December 31, 1999, 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. ITEM 8. FINANCIAL STATEMENT AND SUPPLEMENTARY DATA The financial statements and financial statement schedule are included in this report on pages F-1 through F-15. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 13 14 PART III -------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Following is a list that sets forth as of March 15, 2000 the names, ages and positions within the Company of all of the Executive Officers of the Company persons chosen to become executive officers of the Company, and the Directors of the Company. Each such director has been nominated for reelection at the Company's 2000 Annual Meeting, to be held on May 11, 2000 at 2:00 P.M. at the Charles Hotel, 1 Bennett Street, Cambridge, Massachusetts.
NAME AGE POSITION - ---- --- -------- Raymond C. Kubacki, Jr. 55 Chief Executive Officer, President, Director Werner A. Baumgartner, Ph.D. 64 Chairman of the Board, Director A. Clinton Allen 56 Vice Chairman of the Board, Director Peter C. Monson 44 Vice President, Treasurer, Controller William Thistle, Esq. 50 Vice President, General Counsel Michael I. Schaffer, Ph.D 55 Vice President, Laboratory Operations Michael J. Lamb 50 Vice President, Sales Donald F. Flynn 60 Director, Audit Committee member, Options Committee member Walter S. Tomenson, Jr. 53 Director, Audit Committee member, Options Committee member Fred J. Weinert 52 Director, Audit Committee member, Options Committee member
All Directors hold office until the next annual meeting of stockholders or until their successors are elected. Officers serve at the discretion of the Board of Directors. Mr. Kubacki has served as President and Chief Executive Officer and as a Director of the Company since July 1991. Prior to joining the Company, he served as Vice President-National Accounts and Director of Sales and Marketing for Reliance COMM/TEC Corporation, a subsidiary of Reliance Electric Co. Dr. Baumgartner, a founder of the Company, has served as Chairman of the Board and a Director of the Company since its organization in September 1986. Dr. Baumgartner has served as the Company's Director of Scientific and Regulatory Affairs since May 1989. Dr. Baumgartner received his Ph.D. in physical chemistry in 1963 from the University of New South Wales, Sydney, Australia, and has been engaged in physical 14 15 and biophysical chemistry research since 1960, holding research and teaching positions at University of New South Wales; Long Beach State University; Jet Propulsion Laboratory at California Institute of Technology; University of California, Los Angeles; and University of Southern California. Dr. Baumgartner has been the director of the Radioimmunoassay and In Vitro Laboratory of the Nuclear Medicine Service, Veterans Administration Hospital, Wadsworth, Los Angeles, California, since 1976, serving in such capacity on a part-time basis since February 1987. Mr. Allen has served as Vice Chairman and as a Director of the Company since 1989. He is also Chairman and Chief Executive Officer of A.C. Allen & Company, Inc., an investment banking consulting firm located in Cambridge, Massachusetts. He is a director of Swiss Army Brands, Inc., Legal Club of America, Inc., Steinway Musical Instruments, Inc., Response USA Inc., Diversified Corporate Resources, Inc., and The DeWolfe Companies, Inc., where he serves as Vice Chairman. Mr. Monson joined the Company effective March 30, 1998 as Vice President, Treasurer and Controller. From November 1996 until joining the Company, Mr. Monson was a financial consultant to several different companies, most recently with GTE Internetworking. From 1994 to 1996, Mr. Monson was Chief Financial Officer of Bet Systems, Inc. From 1991 to 1994, Mr. Monson was the Corporate Controller and Treasurer of Gamma International, Ltd., a publicly traded gaming company. Mr. Thistle joined the Company in September 1995 as Vice President and General Counsel. Prior to joining the Company, he served as Associate General Counsel for MGM Grand in Las Vegas from 1993 to 1995. From 1989 to 1993, Mr. Thistle was Associate General Counsel for Harrah's Casino Resorts. Mr. Thistle is on the Legal Advisory Board of the Institute for a Drug Free Workplace and is a board member of the Drug and Alcohol Testing Industry Association ("DATIA"). Dr. Schaffer joined the Company in April 1999 as Vice President of Laboratory Operations. Prior to joining the Company, he served as Director of Toxicology, Technical Manager and Responsible Person for the Leesburg, Florida laboratory of SmithKline Beecham Clinical Laboratories, from 1990 to 1999. Dr. Schaffer has been an inspector for the Substance Abuse and Mental Health Services Administration's National Laboratory Certification Program since 1989. Dr. Schaffer was also a member of the Board of Directors of the American Board of Forensic Toxicologists from 1990 to 1999. Mr. Lamb joined the Company in June 1997 as Vice President, Sales. Prior to joining the Company, he served as Director, Sales and Marketing for Polaroid Corporation located in Cambridge, Massachusetts, from 1990 to 1996. From 1986 to 1990, Mr. Lamb was Director, National Accounts for Polaroid Corporation, U.S.A. Mr. Flynn has been the sole stockholder of Flynn Enterprises, Inc., a venture capital, hedging and consulting firm based in Chicago, Illinois since its inception in February 1988. He was the Vice Chairman of the Blue Chip Casino, Inc., an owner and operator of a riverboat gaming vessel in Michigan City, Indiana from February 1997 until November 1999 when Blue Chip was sold to Boyd Gaming Corporation. Mr. Flynn also was Chairman of the Board from July 1992 until February 1996 and Chief Executive Officer from July 1992 until May 1995 of Discovery Zone, Inc., an operator of indoor entertainment and fitness facilities for children. On March 25, 1996, Discovery Zone, Inc. filed a voluntary petition under Chapter 11 of the U.S. Bankruptcy Code. Discovery Zone emerged from bankruptcy with a Plan of Reorganization that was approved by the Bankruptcy Court in July 1997. From 1972 to 1990, Mr. Flynn served in various positions with Waste Management, Inc. including Senior Vice President and Chief Financial Officer. Mr. Flynn serves as a Director of Extended Stay America, Inc., an owner and operator of extended-stay lodging facilities. Mr. Flynn has been a director of the Company since 1989. 15 16 Mr. Tomenson has been Managing Director and Chairman of Client Development of Marsh, Inc. since 1998. From 1993 to 1998, he was chairman of FINPRO, the financial services division of Marsh, Inc. In addition, he is a member of the Board of Directors of Marsh, Inc. Mr. Tomenson is a Director of Ronald McDonald House and a Trustee of the Children's Oncology Society of New York, Inc. He is a Director of the Trinity College School Fund, Inc. He also serves on the Executive Council of the Inner-City Scholarship Fund. Mr. Weinert is the majority shareholder and serves as CEO of San Telmo, Inc., Barrington Services Group, Inc., San Telmo L.L.C. and H20 Plus, S.R.L. From 1989 to 1995, he was President of H20 Plus L.P., MW Partners, and Century Entertainment Ltd. Previous to that, he was President of Waste Management International, Inc. from 1983 to 1989. For the last 15 years he has served on the Business Advisory Council for the University of Dayton. Mr. Weinert has been a director of the Company since 1991. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Based solely on its reviews of copies of reports filed pursuant to Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or written representations from persons required to file such reports ("Reporting Persons"), the Company believes that, all such filings required to be made by such Reporting Persons were timely made in accordance with the requirements of the Exchange Act ITEM 11. EXECUTIVE COMPENSATION The information required by this item will be set forth in the Proxy Statement of the Company relating to the 2000 Annual Meeting of Stockholders to be held on May 11, 2000 and is incorporated herein by reference. 16 17 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item will be set forth in the Proxy Statement of the Company relating to the 2000 Annual Meeting of Stockholders to be held on May 11, 2000 and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item will be set forth in the Proxy Statement of the Company relating to the 2000 Annual Meeting of Stockholders to be held on May 11, 2000 and is incorporated herein by reference. 17 18 PART IV ------- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) (1) Financial Statements: Page ---- Report of Independent Public Accountants F-1 Balance Sheets as of December 31, 1999 and 1998 F-2 Statements of Income for the Years Ended December 31, 1999, 1998 and 1997 F-3 Statements of Shareholders' Equity for the Years Ended December 31, 1999, 1998 and 1997 F-4 Statements of Cash Flows for the Years Ended December 31, 1999, 1998 and 1997 F-5 Notes to Financial Statements F-6 (2) Schedules None (3) Exhibits (see the Index to Exhibits included elsewhere in this Report) (b) REPORTS ON FORM 8-K None
19 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) 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 By: /s/ Raymond C. Kubacki, Jr. ----------------------------- Raymond C. Kubacki, Jr. President and Chief Executive Officer Date: March 24, 2000 Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ Raymond C. Kubacki, Jr. March 24, 2000 - ------------------------------------ Raymond C. Kubacki, Jr. President and Chief Executive Officer, Director (Principal Executive Officer) /s/ Peter C. Monson March 24, 2000 - ------------------------------------ Peter C. Monson Vice President, Treasurer, & Controller (Principal Financial and Accounting Officer) /s/ Werner A. Baumgartner, Ph.D. March 24, 2000 - ------------------------------------ Werner A. Baumgartner, Ph.D. Director /s/ A. Clinton Allen March 24, 2000 - ------------------------------------ A. Clinton Allen Director /s/ Donald F. Flynn March 24, 2000 - ------------------------------------ Donald F. Flynn Director /s/ Walter S. Tomenson, Jr. March 24, 2000 - ------------------------------------ Walter S. Tomenson, Jr. Director /s/ Fred J. Weinert March 24, 2000 - ------------------------------------ Fred J. Weinert Director 19 20 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ---------------------------------------- To Psychemedics Corporation: We have audited the accompanying balance sheets of Psychemedics Corporation (a Delaware corporation) as of December 31, 1999 and 1998 and the related statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. 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 financial statements referred to above present fairly, in all material respects, the financial position of Psychemedics Corporation as of December 31, 1999 and 1998 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999 in conformity with accounting principles generally accepted in the United States. ARTHUR ANDERSEN LLP Boston, Massachusetts February 8, 2000 F-1 21 PSYCHEMEDICS CORPORATION BALANCE SHEETS
DECEMBER 31, ----------------------------------- 1999 1998 ---- ---- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 899,387 $ 724,738 Short-term investments 4,938,463 9,088,436 Accounts receivable, net of allowance for doubtful accounts of $312,169 and $377,000 in 1999 and 1998, respectively 3,219,511 3,075,619 Laboratory supplies 449,103 510,016 Deferred tax asset 337,752 585,000 Prepaid expenses and other current assets 557,276 482,388 ------------ ------------ Total current assets 10,401,492 14,466,197 ------------ ------------ PROPERTY AND EQUIPMENT, AT COST: Computer software 1,205,840 1,205,840 Office furniture and equipment 1,510,647 1,277,519 Laboratory equipment 5,144,292 4,968,196 Leasehold improvements 711,707 679,810 ------------ ------------ 8,572,486 8,131,365 Less - Accumulated depreciation and amortization 5,154,038 3,949,128 ------------ ------------ 3,418,448 4,182,237 ------------ ------------ OTHER ASSETS - NET 370,965 434,925 ------------ ------------ $ 14,190,905 $ 19,083,359 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 512,580 $ 675,072 Accrued expenses 473,725 582,754 Accrued income taxes 369,065 162,357 Deferred revenue 862,088 1,436,667 ------------ ------------ Total current liabilities 2,217,458 2,856,850 ------------ ------------ DEFERRED TAX LIABILITY 167,520 344,000 COMMITMENTS (Note 6) 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 and outstanding 22,612,440 and 22,607,290 shares in 1999 and 1998, respectively 113,062 113,036 Paid-in capital 24,414,985 24,403,949 Accumulated deficit (6,746,157) (5,585,453) Less - Treasury stock, at cost; 1,172,464 shares in 1999 and 533,664 shares in 1998 (5,580,293) (2,645,232) Less - Receivable from officer (395,670) (403,791) ------------ ------------ Total shareholders' equity 11,805,927 15,882,509 ------------ ------------ $ 14,190,905 $ 19,083,359 ============ ============
The accompanying notes are an integral part of these financial statements. F-2 22 PSYCHEMEDICS CORPORATION STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, ---------------------------------------------------- 1999 1998 1997 ---- ---- ---- REVENUE $19,622,625 $17,669,975 $15,398,952 COST OF REVENUE 8,453,261 7,468,574 6,057,606 ----------- ----------- ----------- Gross profit 11,169,364 10,201,401 9,341,346 ----------- ----------- ----------- EXPENSES: General and administrative 3,067,062 2,907,803 2,273,780 Marketing and selling 4,029,219 3,486,929 3,573,920 Research and development 526,212 499,895 437,626 ----------- ----------- ----------- 7,622,493 6,894,627 6,285,326 ----------- ----------- ----------- Income from operations 3,546,871 3,306,774 3,056,020 INTEREST INCOME, net 387,693 560,235 517,133 ----------- ----------- ----------- INCOME BEFORE PROVISION FOR INCOME TAXES 3,934,564 3,867,009 3,573,153 PROVISION FOR INCOME TAXES 1,609,000 1,470,000 1,072,000 ----------- ----------- ----------- NET INCOME $ 2,325,564 $ 2,397,009 $ 2,501,153 =========== =========== =========== BASIC NET INCOME PER SHARE $ 0.11 $ 0.11 $ 0.11 =========== =========== =========== DILUTED NET INCOME PER SHARE $ 0.11 $ 0.11 $ 0.11 =========== =========== =========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 21,823,650 22,205,626 21,963,116 WEIGHTED AVERAGE COMMON SHARES OUTSTANDING, ASSUMING DILUTION 22,055,990 22,586,705 22,540,841
The accompanying notes are an integral part of these financial statements. F-3 23 PSYCHEMEDICS CORPORATION STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON STOCK TREASURY STOCK ------------------------- ------------------------ $0.005 PAID-IN ACCUMULATED SHARES PAR VALUE CAPITAL DEFICIT SHARES COST --------------------------------------------------------------------------------------- BALANCE, December 31, 1996 21,758,087 $ 108,790 $ 20,722,137 $ (6,281,047) 66,381 $ (254,063) Exercise of stock options, including tax benefits 624,633 3,123 2,859,412 -- -- -- Cash dividends declared ($0.08 per share) -- -- -- (1,757,611) -- -- Acquisition of treasury stock -- -- -- -- 117,302 (751,376) Net income -- -- -- 2,501,153 -- -- --------------------------------------------------------------------------------------- BALANCE, December 31, 1997 22,382,720 111,913 23,581,549 (5,537,505) 183,683 (1,005,439) Exercise of stock options, including tax benefits 224,570 1,123 822,400 -- -- -- Payments on receivable from officer -- -- -- -- -- -- Cash dividends declared ($0.11 per share) -- -- -- (2,444,957) -- -- Acquisition of treasury stock -- -- -- -- 349,981 (1,639,793) Net income -- -- -- 2,397,009 -- -- --------------------------------------------------------------------------------------- BALANCE, December 31, 1998 22,607,290 113,036 24,403,949 (5,585,453) 533,664 (2,645,232) --------------------------------------------------------------------------------------- Exercise of stock options, including tax benefits 5,150 26 11,036 -- -- -- Payments on receivable from officer -- -- -- -- -- -- Cash dividends declared ($0.16 per share) -- -- -- (3,486,268) -- -- Acquisition of treasury stock -- -- -- -- 638,800 (2,935,061) Net income -- -- -- 2,325,564 -- -- --------------------------------------------------------------------------------------- BALANCE, December 31, 1999 22,612,440 $ 113,062 $ 24,414,985 $ (6,746,157) 1,172,464 $ (5,580,293) =======================================================================================
RECEIVABLE FROM OFFICER TOTAL --------------------------- BALANCE, December 31, 1996 -- $ 14,295,817 Exercise of stock options, including tax benefits (417,611) 2,444,924 Cash dividends declared ($0.08 per share) -- (1,757,611) Acquisition of treasury stock -- (751,376) Net income -- 2,501,153 ---------------------------- BALANCE, December 31, 1997 (417,611) 16,732,907 Exercise of stock options, including tax benefits -- 823,523 Payments on receivable from officer 13,820 13,820 Cash dividends declared ($0.11 per share) -- (2,444,957) Acquisition of treasury stock -- (1,639,793) Net income -- 2,397,009 ---------------------------- BALANCE, December 31, 1998 (403,791) 15,882,509 ---------------------------- Exercise of stock options, including tax benefits -- 11,062 Payments on receivable from officer 8,121 8,121 Cash dividends declared ($0.16 per share) -- (3,486,268) Acquisition of treasury stock -- (2,935,061) Net income -- 2,325,564 ---------------------------- BALANCE, December 31, 1999 $ (395,670) $ 11,805,927 ============================
The accompanying notes are an integral part of these financial statements. F-4 24 PSYCHEMEDICS CORPORATION STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, ------------------------------------------------------- 1999 1998 1997 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 2,325,564 $ 2,397,009 $ 2,501,153 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,323,411 990,807 696,514 Deferred income taxes 70,768 139,000 (380,000) Changes in current assets and liabilities: Accounts receivable (143,892) 708,869 (1,127,072) Laboratory supplies 60,913 (9,691) (269,548) Prepaid expenses and other current assets (74,888) 33,486 (386,046) Accounts payable (162,492) 478,813 (199,175) Accrued expenses (109,029) 361,934 (111,424) Accrued income taxes 206,708 (54,886) (18,040) Deferred revenue (574,579) (51,343) 1,439,485 ----------- ----------- ----------- Net cash provided by operating activities 2,922,484 4,993,998 2,145,847 ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Net sales (purchases) of short-term investments 4,149,973 357,982 (1,075,691) Purchases of property and equipment (495,662) (1,889,849) (1,412,695) Increase in other assets -- (75,128) (33,717) ----------- ----------- ----------- Net cash provided by (used in) investing activities 3,654,311 (1,606,995) (2,522,103) ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from the exercise of stock options, including tax benefits 11,062 823,523 2,444,924 Proceeds from the receivable from officer 8,121 13,820 -- Dividends paid (3,486,268) (2,444,957) (2,194,828) Acquisition of treasury stock (2,935,061) (1,639,793) (751,376) ----------- ----------- ----------- Net cash used in financing activities (6,402,146) (3,247,407) (501,280) ----------- ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 174,649 139,596 (877,536) CASH AND CASH EQUIVALENTS, beginning of year 724,738 585,142 1,462,678 ----------- ----------- ----------- CASH AND CASH EQUIVALENTS, end of year $ 899,387 $ 724,738 $ 585,142 =========== =========== =========== Supplemental Disclosure of Cash Flow Information: - ------------------------------------------------- Cash paid for income taxes $ 1,334,985 $ 1,073,000 $ 156,000 =========== =========== =========== Supplemental Disclosure of Non-Cash Financing Activity: - ------------------------------------------------------- Issuance of common stock for receivable from officer $ -- $ -- $ 417,611 =========== =========== ===========
The accompanying notes are an integral part of these financial statements. F-5 25 PSYCHEMEDICS CORPORATION NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1999 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Company Psychemedics Corporation (the Company) 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 (see Note 3). Management Estimates and Uncertainties The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company is subject to a number of risks and uncertainties similar to those of other companies, such as those 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. Cash Equivalents and Short-Term Investments The Company considers all highly liquid investments with original maturities of 90 days or less from the date of purchase to be cash equivalents. Cash equivalents consist principally of money market accounts at December 31, 1999 and 1998. The Company accounts for investment securities in accordance with Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities. Under SFAS No. 115, investments that the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity and are reported at amortized cost, which approximates fair market value. All short-term investments were classified as held-to-maturity at December 31, 1999 and 1998. Short-term investments have maturities between three months and one year and consist principally of securities issued by the U.S. Government at December 31, 1999 and 1998. F-6 26 PSYCHEMEDICS CORPORATION NOTES TO FINANCIAL STATEMENTS - (CONTINUED) At December 31, 1999 and 1998, held-to-maturity marketable securities consisted of the following:
1999 1998 ------------------------------ ------------------------------ Market Amortized Market Amortized Value Cost Value Cost ------ --------- ------ --------- US Treasury obligations (maturity 3-8 months) $ 868,221 $ 871,308 $3,444,330 $3,437,161 Federal agency obligations (maturity 3-9 months) 4,055,441 4,067,155 4,659,820 4,656,345 Commercial paper obligations (maturity 2 months) -- -- 995,149 994,930 ------------------------------ ------------------------------ $4,923,662 $4,938,463 $9,099,299 $9,088,436 ============================== ==============================
Property and Equipment Property and equipment are stated at cost. Depreciation and amortization are provided over the estimated useful lives of the assets, using the straight-line method. The estimated useful lives of the assets are as follows:
Computer software 5 years Office furniture and equipment 5 to 7 years Laboratory equipment 5 to 7 years Leasehold improvements Lesser of 5 years or life of lease
Other Assets Other assets consist primarily of capitalized legal costs relating to patent applications on the Company's drug extraction method. The Company is amortizing the cost of these patents over 10 years from the date of grant. The Company recorded amortization of $63,960 and $63,521 in 1999 and 1998, respectively. In accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, the Company evaluates the realizability of its patents based on estimated cash flows to be generated from such assets as compared to the original estimates. To the extent an impairment is identified, the Company will recognize a write-down of the related assets. To date, no impairment has been identified. Revenue Recognition Except as described herein, 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 1999, 1998, and 1997, the Company recorded $625,000, $599,000, and $0, respectively, of revenue related to test kits that were sold for which the Company's obligations to provide service was deemed remote. At December 31, 1999 and 1998, the Company had deferred revenue balances of approximately $862,000 and $1,437,000, respectively, reflecting payments for its personal drug testing service received prior to the performance of the related test. F-7 27 PSYCHEMEDICS CORPORATION NOTES TO FINANCIAL STATEMENTS - (CONTINUED) Income Taxes The Company accounts for income taxes in accordance with the provisions of SFAS No. 109, Accounting for Income Taxes. This statement requires the Company to recognize a current tax liability or asset for current taxes payable or refundable and a deferred tax liability or asset for the estimated future tax effects of temporary differences between the financial statement and tax reporting of assets and liabilities to the extent that they are realizable. Deferred tax expense (benefit) results from the net change in deferred tax assets and liabilities during the year. A deferred tax valuation allowance is required if it is more likely than not that all or a portion of the recorded deferred tax assets will not be realized. Research and Development Expenses The Company charges all research and development expenses to operations as incurred. Concentration of Credit Risk SFAS No. 105, Disclosure of Information About Financial Instruments with Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit Risk, requires disclosure of any significant off-balance-sheet and credit risk concentrations. The Company has no significant off-balance-sheet or concentration of credit risk. Financial instruments that potentially subject the Company to concentrations of credit risk are principally cash equivalents, short-term investments and accounts receivable. The Company places its investments in highly rated institutions. Concentration of credit risk with respect to accounts receivable is limited to certain customers to whom the Company makes substantial sales. To reduce risk, the Company routinely assesses the financial strength of its customers and, as a consequence, believes that its accounts receivable credit risk exposure is limited. The Company maintains an allowance for potential credit losses but historically has not experienced any significant losses related to individual customers or groups of customers in any particular industry or geographic area. Significant Customers No single customer accounted for greater than 10% of revenues in 1999 and 1998, respectively. One of the Company's customers accounted for 10% of total revenues in 1997. As of December 31, 1999 and 1998, the same customer accounted for 6% and 10% of total accounts receivable, respectively. Basic and Diluted Net Income per Share In accordance with 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. F-8 28 PSYCHEMEDICS CORPORATION NOTES TO FINANCIAL STATEMENTS - (CONTINUED) Basic and diluted weighted average common shares outstanding are as follows:
1999 1998 1997 ---- ---- ---- Weighted average common shares outstanding 21,823,650 22,205,626 21,963,116 Dilutive common equivalent shares 232,340 381,079 577,725 ---------- ---------- ---------- Weighted average common shares outstanding, assuming dilution 22,055,990 22,586,705 22,540,841 ========== ========== ==========
As of December 31, 1999, 1998 and 1997, options to purchase 752,570, 553,666, and 113,000 common shares, respectively, were outstanding but not included in the dilutive common equivalent share calculation as their effect would have been antidilutive. Financial Instruments SFAS No. 107, Disclosures about Fair Value of Financial Instruments, requires disclosure about the fair value of financial instruments. Financial instruments consist principally of cash equivalents, short-term investments, accounts receivable and accounts payable. The estimated fair value of these financial instruments approximates their carrying value and, except for accounts receivable, is based primarily on market quotes. The Company's cash equivalents and short-term investments are generally money market accounts and securities issued by the U.S. Government. Comprehensive Income Effective January 1, 1998, the Company adopted the provisions of SFAS No. 130, Reporting Comprehensive Income. SFAS No. 130 requires disclosure of all components of comprehensive income on an annual and interim basis. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. The Company's total comprehensive income was the same as reported net income for all periods presented. Segment Reporting The Company adopted SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information, in the fiscal year ended December 31, 1998. SFAS No. 131 establishes standards for reporting information regarding operating segments in annual financial statements and requires selected information for those segments to be presented in interim financial reports issued to stockholders. SFAS No. 131 also establishes standards for related disclosures about products and services and geographic areas. To date, the Company has managed its operations as one segment, drug testing services. As a result, the financial information disclosed herein materially represents all of the financial information related to the Company's principal operating segment. Substantially all of the Company's revenues are generated in the United States. All of the Company's assets are located in the United States. Software Development Costs In March 1998, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. SOP 98-1 requires computer software costs associated with internal use software to be charged to operations as incurred until certain capitalization criteria have been met. The Company adopted SOP 98-1 beginning January 1, 1998. SOP 98-1 had no effect upon adoption. As of December 31, 1999 and 1998, $1,205,540 of software development costs have been capitalized. During the years ended December 31, 1999, 1998 and 1997, $240,848, $43,930 and $20,848 of related amortization was charged to operations, respectively. Derivative Instruments and Hedging Activities F-9 29 PSYCHEMEDICS CORPORATION NOTES TO FINANCIAL STATEMENTS - (CONTINUED) 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 December 31, 1999, 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. Reclassifications Certain amounts in the prior year's financial statements have been reclassified to conform with the current year's presentation. 2. RECEIVABLE FROM OFFICER The amounts receivable from officer represent advances for the purchase of common stock. The notes bear interest at 5.82% and 6.13% and are full recourse. The notes, together with accrued interest, are payable approximately $197,000 on November 12, 2000 and approximately $199,000 on January 6, 2001. F-10 30 PSYCHEMEDICS CORPORATION NOTES TO FINANCIAL STATEMENTS - (CONTINUED) 3. ROYALTY AGREEMENTS The Company has a royalty-free license from the founder for the proprietary rights to the patented hair analysis technology used by the Company in its drug testing services. The Company has two agreements to sublicense its technology, which have not generated significant royalties to date. 4. INCOME TAXES The income tax provisions for the years ended December 31, 1999, 1998 and 1997 consist of the following:
1999 1998 1997 ---- ---- ---- Current - Federal $ 1,181,000 $ 998,000 $ 1,197,400 State 357,000 333,000 254,600 ----------- ----------- ----------- 1,538,000 1,331,000 1,452,000 ----------- ----------- ----------- Deferred - Federal 56,000 104,000 (290,300) State 15,000 35,000 (89,700) ----------- ----------- ----------- 71,000 139,000 (380,000) ----------- ----------- ----------- $ 1,609,000 $ 1,470,000 $ 1,072,000 =========== =========== ===========
The provisions for income taxes differ from the amount computed by applying the statutory federal income tax rate as follows:
1999 1998 1997 ---- ---- ---- Federal statutory rate 34.0% 34.0% 34.0% Increase (decrease) resulting from - State tax provision, net of federal benefit 6.3 5.9 6.3 Utilization of net operating loss carryforwards previously not benefitted -- -- (10.6) Utilization of tax credits (1.3) (5.7) -- Non-deductible expenses 1.9 3.8 3.6 Other, net -- -- (3.3) ---- ---- ---- Effective tax rate 40.9% 38.0% 30.0% ==== ==== ====
The components of the net deferred tax assets included in the accompanying balance sheets are approximately as follows:
1999 1998 ---- ---- Deferred revenue $ 239,000 $ 442,000 Nondeductible reserves and accruals 99,000 143,000 Property basis differences (168,000) (344,000) --------- --------- Net asset $ 170,000 $ 241,000 ========= =========
The long term deferred tax liability on the Company's balance sheet principally represents property basis differences. F-11 31 PSYCHEMEDICS CORPORATION NOTES TO FINANCIAL STATEMENTS - (CONTINUED) 5. STOCK OPTIONS The Company has various stock option plans under which options to acquire shares of the Company's common stock may be granted to directors, officers and certain employees of the Company. Options granted under the plans are non-qualified or incentive stock options, and are granted at a price that is not less than the fair market value of the common stock at the date of grant. These options have lives of five or ten years and vest over periods from zero to ten years. A summary of all stock option transactions for the years ended December 31, 1999, 1998 and 1997 is as follows (in thousands, except per share amounts):
WEIGHTED AVERAGE NUMBER OF SHARES EXERCISE PRICE ---------------- ---------------- Outstanding, December 31,1996 1,907 $ 2.98 Granted 173 6.89 Exercised (625) 2.48 Terminated (31) 4.16 ------ -------- Outstanding, December 31,1997 1,424 4.02 Granted 337 5.17 Exercised (225) 2.27 Terminated (70) 5.14 ------ -------- Outstanding, December 31,1998 1,466 4.43 Granted 391 4.45 Exercised (5) 2.82 Terminated (110) 5.66 ------ -------- Outstanding, December 31,1999 1,742 $ 4.37 ====== ======== Exercisable, December 31,1999 1,122 $ 4.07 ====== ======== Exercisable, December 31,1998 903 $ 3.93 ====== ======== Exercisable, December 31,1997 758 $ 3.04 ====== ========
The following table summarizes information about stock options outstanding at December 31, 1999 (in thousands, except per share amounts):
OPTIONS OUTSTANDING OPTIONS EXERCISABLE --------------------------------------------------- ---------------------------- NUMBER WEIGHTED AVERAGE WEIGHTED NUMBER WEIGHTED EXERCISE PRICE OF REMAINING AVERAGE OF AVERAGE RANGE OPTIONS CONTRACTUAL LIFE EXERCISE PRICE OPTIONS EXERCISE PRICE -------------- ------- ---------------- -------------- ------- -------------- $1.85 221 3.93 $1.85 221 $1.85 2.82 - 3.63 397 5.10 3.00 397 3.00 4.28 - 6.22 1,033 8.01 5.16 438 5.69 7.06 - 7.69 91 7.33 7.41 66 7.30
The weighted average remaining contractual life of options outstanding at December 31, 1999, 1998 and 1997 was 6.79 years, 7.14 years, and 7.63 years, respectively. F-12 32 PSYCHEMEDICS CORPORATION NOTES TO FINANCIAL STATEMENTS - (CONTINUED) Accounting for Stock-Based Compensation SFAS No. 123, Accounting for Stock-Based Compensation, requires the measurement of the fair value of stock options or warrants to be included in the statement of income or disclosed in the notes to financial statements. The Company has determined that it will continue to account for stock-based compensation for employees under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and elect the disclosure-only alternative under SFAS No. 123. The Company has computed the value of options using the Black-Scholes option pricing model prescribed by SFAS No. 123. The assumptions used and the weighted average information for the years ended December 31, 1998, 1997 and 1996 are as follows:
1999 1998 1997 ---- ---- ---- Risk-free interest rates 5.54% 5.15% 6.32% Expected dividend yield 3.5% 2% 1% Expected lives 5 years 5 years 5 years Expected volatility 42.23% 42.68% 69.70% Weighted average grant-date fair value of options granted during the period $1.62 $2.14 $4.44
Had compensation cost for the Company's stock option plans been determined consistent with SFAS No. 123, net income and basic and diluted net income per share would have been approximately as follows:
1999 1998 1997 ---- ---- ---- As reported - Net income $2,325,564 $2,397,009 $2,501,153 Basic net income per share $ 0.11 $ 0.11 $ 0.11 Diluted net income per share $ 0.11 $ 0.11 $ 0.11 Pro forma - Net income $1,719,967 $1,713,342 $1,892,035 Basic net income per share $ 0.08 $ 0.08 $ 0.09 Diluted net income per share $ 0.08 $ 0.08 $ 0.08
6. COMMITMENTS Lease Agreements The Company leases certain of its facilities and equipment under operating lease agreements expiring on various dates through December 2005. Total minimum lease payments, including scheduled increases, are charged to operations on the straight-line basis over the life of the respective lease. Rent expense for the years ended December 31, 1999, 1998 and 1997 was approximately $473,000, $441,000, and $475,000, respectively. F-13 33 PSYCHEMEDICS CORPORATION NOTES TO FINANCIAL STATEMENTS - (CONTINUED) At December 31, 1999, minimum commitments remaining under lease agreements were as follows:
Amount ------ Years ending December 31: 2000 $ 503,000 2001 472,000 2002 460,000 2003 440,000 2004 341,000 Thereafter 354,000 ---------- $2,570,000 ==========
7. EMPLOYEE BENEFIT PLAN On November 1, 1997, the Company adopted the Psychemedics Corporation 401(k) Savings and Retirement Plan (the 401(k) Plan). The 401(k) Plan is a qualified defined contribution plan in accordance with Section 401(k) of the Internal Revenue Code. All employees over the age of 21 who have completed one year of service are eligible to make pre-tax contributions up to a specified percentage of their compensation. Under the 401(k) Plan, the Company may, but is not obligated to, match a portion of the employees' contribution up to a defined maximum. A matching contribution of $99,683 and $94,111 was made in 1999 and 1998, respectively, while no contribution was made in 1997. 8. ACCRUED EXPENSES Accrued expenses consist of the following:
December 31, ------------------------------------- 1999 1998 ---- ---- Accrued payroll and employee benefits $ 371,095 $ 246,277 Other accrued expenses 102,630 336,477 --------- --------- $ 473,725 $ 582,754 ========= =========
F-14 34 PSYCHEMEDICS CORPORATION NOTES TO FINANCIAL STATEMENTS - (CONTINUED) 9. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) The following are selected quarterly financial data for the years ended December 31, 1999 and 1998:
QUARTER ENDED -------------------------------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, 1999 1999 1999 1999 ---------- ---------- ------------- ------------ Revenues $4,680,257 $5,854,999 $4,904,275 $4,183,094 Gross profit 2,737,158 3,567,940 2,708,310 2,155,956 Income from operations 844,764 1,535,736 916,450 249,921 Net income 567,239 960,844 596,595 200,886 Basic net income per share 0.03 0.04 0.03 0.01 Diluted net income per share 0.03 0.04 0.03 0.01
QUARTER ENDED ------------------------------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, 1998 1998 1998 1998 ---------- ---------- ------------- ------------ Revenues $4,121,903 $4,834,720 $4,571,820 $4,141,532 Gross profit 2,427,015 2,924,394 2,623,795 2,226,197 Income from operations 944,034 1,175,911 826,078 360,751 Net income 641,278 782,186 575,409 398,136 Basic net income per share 0.03 0.04 0.03 0.02 Diluted net income per share 0.03 0.03 0.03 0.02
10. ALLOWANCE FOR DOUBTFUL ACCOUNTS A summary of the allowance for doubtful accounts is as follows:
1999 1998 1997 ---- ---- ---- Balance, beginning of period $ 377,000 $ 264,429 $ 163,991 Provision for doubtful accounts 178,377 165,000 162,000 Write-offs (243,208) (52,429) (61,562) --------- --------- --------- Balance, end of period $ 312,169 $ 377,000 $ 264,429 --------- --------- ---------
F-15 35 PSYCHEMEDICS CORPORATION 10-K INDEX TO EXHIBITS
Exhibit Number Description - ------- ----------- 3 Articles of Incorporation and By-Laws ------------------------------------- 3.1 Certificate of Incorporation filed September 24, 1986 - (Incorporated by reference from the Registrant's Registration Statement on Form S-18, File No. 33-10186 LA). 3.2 Amendment to Certificate of Incorporation filed October 29, 1986 - (Incorporated by reference from the Registrant's Registration Statement on Form S-18, File No. 33-10186 LA). 3.3 Amendment to Certificate of Incorporation filed July 12, 1989 - (Incorporated by reference from the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1989.) 3.4 Amendment to Certificate of Incorporation filed August 7, 1990 - (Incorporated by reference from the Registrant's Quarterly Report on Form 10-Q for the Quarter ended September 30, 1990 as amended by a First Amendment on Form 8 filed December 15, 1990.) 3.5 Amendment to Certificate of Incorporation filed May 9, 1991 - (Incorporated by reference from the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1991.) 3.6 By-Laws of the Company - (Incorporated by reference from the Registrant's Registration Statement on Form S-18, File No. 33-10186 LA). 4 Instruments Defining the Rights of Security Holders --------------------------------------------------- 4.1 Specimen Stock Certificate - (Incorporated by reference from the Registrant's Registration Statement on Form S-18, File No. 33-10186 LA).
36 PSYCHEMEDICS CORPORATION 10-K INDEX TO EXHIBITS
Exhibit Number Description - ------- ----------- 10 Material Contracts 10.1 License Agreement with Werner Baumgartner, Ph.D. and Annette Baumgartner dated January 17, 1987 - (Incorporated by reference from the Registrant's Registration Statement on Form S-18, File No. 33-10186 LA). 10.2* 1989 Employee Stock Option Plan, as amended - (Incorporated by reference from the Registrant's 1997 Annual Proxy Statement.) 10.3* 1989 Non-Qualified Stock Option Plan, as amended (Incorporated by reference from the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1996. 10.4* 1991 Non-Qualified Stock Option Plan - (Incorporated by reference from the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1991.) 10.5 Lease dated October 6, 1992 with Mitchell H. Hersch, et. al with respect to premises in Culver City, California - (Incorporated by reference from the Registrant's Annual Report on Form 10-KSB for for the fiscal year ended December 31, 1992.) 10.5.1 Security Agreement dated October 6, 1992 with Mitchell H. Hersch et. al - (Incorporated by reference from the Registrant's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1992.) 10.5.2 First Amendment to Lease dated with Mitchell H. Hersch, et.al California - (Incorporated by reference from the Registrant's Annual Report on Form 10-K for for the fiscal year ended December 31, 1997.) 10.5.3 Second Amendment to Lease dated with Mitchell H. Hersch, et.al. California - (Incorporated by reference from the Registrant's Annual Report on Form 10-K for for the fiscal year ended December 31, 1997.) 10.5.4 Third Amendment to Lease dated December 31, 1997 with Mitchell H. Hersch, et.al. California - (Incorporated by reference from the Registrant's Annual Report on Form 10-K for for the fiscal year ended December 31, 1997.) 10.6* 2000 Employee Stock Option Plan, as amended - (Incorporated by reference from the Registrant's 2000 Annual Proxy Statement.)
37 PSYCHEMEDICS CORPORATION 10-K INDEX TO EXHIBITS
Exhibit Number Description - ------- ----------- 23 Consents of Experts and Counsel 23.1 Consent of Arthur Andersen LLP Filed herewith 27 Financial Data Schedule Filed herewith
*Represents a management contract or compensatory plan in which a director or named executive officer of the Registrant participates. EX-23.1 2 CONSENT OF ARTHUR ANDERSEN LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report dated February 8, 2000, included in this Form 10-K, into Psychemedics Corporation's previously filed Registration Statements File Nos. 33-41787, 33-50712, 33-45332, 33-66942, 33-58970 and 333-12403. ARTHUR ANDERSEN LLP Boston, Massachusetts March 21, 2000 EX-27 3 FINANCIAL DATA SCHEDULE
5 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 899,387 4,938,463 3,219,511 312,169 449,103 10,401,492 8,572,486 5,154,038 14,190,905 2,217,458 0 0 0 113,062 11,805,927 14,190,905 19,622,625 19,622,625 8,453,261 8,453,261 7,622,493 0 0 3,934,564 1,609,000 2,325,564 0 0 0 2,325,564 0.11 0.11
-----END PRIVACY-ENHANCED MESSAGE-----