-----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, ERBp1DJ3mVQOtVku2sY1vm8ireT3kOBPhkLreo9oiAZ8NXRZ4wmS7KciR1GNXP0L skZIjiGWhWyNdSsU32ggzg== 0000950135-98-003248.txt : 19980515 0000950135-98-003248.hdr.sgml : 19980515 ACCESSION NUMBER: 0000950135-98-003248 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980514 SROS: AMEX 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-Q SEC ACT: SEC FILE NUMBER: 001-13738 FILM NUMBER: 98619419 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-Q 1 PSYCHEMEDICS, INC. FORM 10-Q (PERIOD END 03/31/98) 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For quarterly period ended MARCH 31, 1998 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________________ to ________________ Commission file number 1-13738 PSYCHEMEDICS CORPORATION (exact name of Issuer as specified in its charter) Delaware 58-1701987 (State or other jurisdiction of (I.R.S. Employer incorporation of organization) Identification No.) 1280 Massachusetts Ave., Suite 200, Cambridge, MA 02138 (Address of principal executive offices) (Zip Code) Issuer's telephone number, including area code (617-868-7455) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Number of shares outstanding of only class of Issuer's Common Stock as of May 12, 1998: Common Stock $.005 par value (22,415,325 shares). Page 1 of 28 2 PSYCHEMEDICS CORPORATION Part I FINANCIAL INFORMATION PAGE NO. Item 1 Financial Statements Condensed Balance Sheets as of March 31, 1998 and December 31, 1997 3 Condensed Statements of Income for the three month periods ended March 31, 1998 and 1997 4 Condensed Statements of Cash Flows for the three month periods ended March 31, 1998 and 1997 5 Notes to Condensed Financial Statements 6 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 7-8 Part II OTHER INFORMATION Item 6 Exhibits and Reports on Form 8K 9 SIGNATURES 10 EXHIBIT INDEX 11 Page 2 of 28 3 PSYCHEMEDICS CORPORATION CONDENSED BALANCE SHEETS (UNAUDITED)
MARCH DECEMBER 31, 1998 31, 1997 ----------- ----------- ASSETS CURRENT ASSETS Cash and cash equivalents $ 1,749,679 $ 585,142 Short-term investments 9,665,654 9,446,418 Accounts receivable 3,085,363 3,784,488 Inventories 490,836 500,325 Prepaid expenses and other current assets 1,098,461 895,874 ----------- ----------- Total current assets 16,089,993 15,212,247 ----------- ----------- PROPERTY AND EQUIPMENT Equipment and leasehold improvements, at cost 6,865,880 6,241,516 ----------- ----------- Less-Accumulated depreciation and amortization (3,230,771) (3,021,842) ----------- ----------- 3,635,109 3,219,674 ----------- ----------- OTHER ASSETS - NET 447,927 423,318 =========== =========== $20,173,029 $18,855,239 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 647,491 $ 196,259 Accrued expenses 832,860 438,063 Deferred revenue 1,699,820 1,488,010 ----------- ----------- Total current liabilities 3,180,171 2,122,332 ----------- ----------- 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 22,404,015 and 22,382,720 shares in 1998 and 1997, respectively 112,020 111,913 Paid-in capital 23,650,534 23,581,549 Accumulated deficit (5,338,832) (5,537,505) Less - Treasury stock, at cost; 183,683 shares in 1998 and 1997 (1,005,439) (1,005,439) Less - Receivable from officer (425,425) (417,611) ----------- ----------- Total shareholders' equity 16,992,858 16,732,907 ----------- ----------- $20,173,029 $18,855,239 =========== ===========
See accompanying notes to financial statements and management's discussion and analysis of financial condition and results of operations. Page 3 of 28 4 PSYCHEMEDICS CORPORATION CONDENSED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED MARCH 31, ---------------------------- 1998 1997 ----------- ----------- REVENUE $ 4,121,903 $ 3,253,743 DIRECT COSTS 1,694,888 1,321,872 ----------- ----------- Gross profit 2,427,015 1,931,871 ----------- ----------- EXPENSES: General and administrative 607,966 532,653 Marketing and selling 768,022 657,443 Research and development 106,993 108,908 ----------- ----------- 1,482,981 1,299,004 ----------- ----------- OPERATING INCOME 944,034 632,867 OTHER INCOME 136,384 125,592 ----------- ----------- NET INCOME BEFORE INCOME TAXES 1,080,418 758,459 PROVISION FOR INCOME TAXES 439,140 121,352 ----------- ----------- NET INCOME $ 641,278 $ 637,107 =========== =========== BASIC NET INCOME PER SHARE $ 0.03 $ 0.03 =========== =========== DILUTED NET INCOME PER SHARE $ 0.03 $ 0.03 =========== =========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 22,210,334 21,832,664 =========== =========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING, ASSUMING DILUTION 22,693,908 22,755,427 =========== ===========
See accompanying notes to financial statements and management's discussion and analysis of financial condition and results of operations. Page 4 of 28 5 PSYCHEMEDICS CORPORATION CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED ENDED MARCH 31, ---------------------------- 1998 1997 ---------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 641,278 $ 637,107 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 223,929 136,287 Changes in assets and liabilities: Receivables 691,311 (266,606) Inventories 9,489 (139,336) Prepaid expenses and other current assets (202,587) (209,951) Accounts payable 451,232 103,212 Accrued expenses 394,797 40,590 Deferred revenue 211,810 ---------- ----------- Net cash provided by operating activities 2,421,259 301,303 ---------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: (Purchases) sales of short-term investments - net (219,236) (997,352) (Purchases) sales of property and equipment (624,364) (240,849) (Increase) decrease in other assets - net (39,609) 12,478 ---------- ----------- Net cash used in investing activities (883,209) (1,225,723) ---------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from the issuance of common stock 69,092 485,581 Cash dividends paid (442,605) (436,468) ---------- ----------- Net cash provided by (used in) financing activities (373,513) 49,113 ---------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,164,537 (875,307) ---------- ----------- CASH AND CASH EQUIVALENTS, beginning of period 585,142 1,462,678 ---------- ----------- CASH AND CASH EQUIVALENTS, end of period $1,749,679 $ 587,371 ========== ===========
See accompanying notes to financial statements and management's discussion and analysis of financial condition and results of operations. Page 5 of 28 6 PSYCHEMEDICS CORPORATION NOTES TO FINANCIAL STATEMENTS March 31, 1998 1. Interim Financial Statements The accompanying unaudited interim financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission for reporting on Form 10-Q. Accordingly, certain information and footnote disclosure required for complete financial statements are not included herein. It is recommended that these financial statements be read in conjunction with the financial statements and related notes of Psychemedics Corporation (the "Company") as reported in the Company's Annual Report on Form 10-K for the year ended December 31, 1997. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of financial position, results of operations, and cash flows at the dates and for the periods presented have been included. The balance sheet presented as of December 31, 1997 has been derived from the financial statements that have been audited by the Company's independent public accountants. The results of operations for the three months ended March 31, 1998 may not be indicative of the results that may be expected for the year ending December 31, 1998, or any other period. 2. Basic and Diluted Net Income Per Share Basic net income per share was 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. Dilutive common equivalent shares outstanding during the period have been determined in accordance with the treasury-stock method. Common equivalent shares consist of common stock issuable upon the exercise of outstanding options. Basic and diluted weighted average common shares outstanding are as follows:
March March 31, 1998 31, 1997 ---------- ---------- Weighted average common shares 22,210,334 21,832,664 Effect of dilutive common stock options 483,574 922,763 ---------- ---------- Weighted average common shares outstanding, assuming dilution 22,693,908 22,755,427 ========== ==========
3. Revenue Recognition Revenues for all product offerings are recognized upon reporting drug test results to the customer. During the second quarter of 1997, the Company began offering its personal drug testing service, "PDT-90" through retail drug stores. At March 31, 1998 and December 31, 1997, the Company had approximately $1,700,000 and $1,488,000, respectively, of deferred revenue related to the PDT-90 service, principally due to receiving payments prior to the performance of the related test. Page 6 of 28 7 Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FACTORS THAT MAY AFFECT FUTURE RESULTS From time to time, information provided by the Company or statements made by its employees may contain "forward-looking" information which involves risks and uncertainties. In particular, statements contained in this report which are not historical facts (including but not limited to the Company's expectations regarding revenues, business strategy, anticipated operating results, cash dividends and anticipated cash requirements) may be "forward looking" statements. The Company's actual results may differ from those stated in any "forward looking" statements. Factors that may cause such differences include, but are not limited to, risks associated with the continued expansion of the Company's sales and marketing network, development of markets for new products and services offered by the Company, the economic health of principal customers of the Company, financial and operational risks associated with possible expansion of testing facilities used by the Company, government regulation (including, but not limited to, Food and Drug Administration regulations), competition and general economic conditions. OVERVIEW Psychemedics Corporation was incorporated in 1986. The Company utilizes a patented hair analysis method involving radioimmunoassay technology to analyze human hair to detect abused substances. The founder of the Company has granted to the Company an exclusive license to all his rights in this hair analysis technology, including his rights to the drug extraction method. RESULTS OF OPERATIONS Revenue was $4,121,903 in the first quarter of 1998 as compared to $3,253,743 in the first quarter of 1997, representing an increase of 27%. The revenue increase was due primarily to increases in volume from both new and existing clients offset by average price decreases of 3% primarily as a result of volume discounts granted to large customers. Gross margin was 59% of sales in the first quarter of 1998, consistent with the year earlier period. Increased efficiencies resulting from the greater volume of the first quarter of 1998 when compared to the first quarter of 1997 offset the aforementioned average price decrease of 3%, causing the gross margin percentage to remain flat. General and administrative ("G&A") expenses were $607,966 for the three months ended March 31, 1998 as compared to $532,653 for the three months ended March 31, 1997, representing an increase of 14%. As a percentage of revenue, G&A expenses declined to 15% in the first quarter of 1998 from 16% in the first quarter of 1997, primarily because of the higher revenues in 1998. Marketing and selling expenses for the three month period ended March 31, 1998 increased $110,579, to $768,022, an increase of 17%. This increase was primarily due to additions to the Company's sales staff and expanded marketing activities related to Page 7 of 28 8 the corporate market. Although total marketing and selling expenses increased by 17%, they decreased as a percentage of revenue from 20% in the first quarter of 1997 to 19% in the first quarter of 1998. The Company expects to continue to aggressively promote its drug testing services during the remainder of 1998 and in future years in order to expand its client base. Other income for the three month period ended March 31, 1998 represented primarily interest earned on cash equivalents and short-term investments. The increase in 1998 was primarily due to higher investment balances coupled with increased yields on these investments. Net income before income taxes increased by $321,959 to $1,080,418 when compared to the year earlier period. However, net income remained relatively flat at $641,278 for the first three months of 1998 as compared to $637,107 for the first quarter of 1997, due to an increased effective tax rate in 1998. The effective tax rate for the first quarter of 1998 was 41% in 1998 versus 16% in 1997, reflecting the reduction in net operating loss carryforwards available to offset the provision for income taxes for financial reporting purposes. LIQUIDITY AND CAPITAL RESOURCES At March 31, 1998, the Company had $11.4 million of cash, cash equivalents and short-term investments. The Company's operating activities generated net cash of $2,421,259 in the three months ended March 31, 1998. Investing activities used $883,209 in the three month period while financing activities used a net amount of $373,513 during the period. The Company's source of funds in the first three months of 1998 was derived almost entirely from cash generated from operations. Operating cash flows increased $2,119,956 in the first three months of 1998, compared to the year earlier period. This was primarily due to improved cash collections of outstanding accounts receivable, as well as an increase in accounts payable and other accrued expenses resulting from fully utilizing vendors' credit terms that were available to the Company. Also, deferred revenue, which represents deliveries to retail outlets of the Company's retail product PDT-90, increased by $211,810. The non-cash effect of depreciation and amortization in the 1998 and 1997 periods was $223,929 and $136,287, respectively. Capital expenditures in the first three months of 1998 were $624,364. The expenditures primarily consisted of new equipment, including laboratory and computer equipment. The Company believes that within the next two years it may be required to expand its existing laboratory or develop a second laboratory, the cost of which is currently believed to range from $2 million to $4 million. During the three month period ended March 31, 1998, the Company distributed $442,605 in cash dividends to its shareholders. In addition, on May 4, 1998, the Company declared a cash dividend of $0.03 per share payable on May 29, 1998 to holders of record on May 15, 1998. On May 4, 1998 the Company also announced that it was increasing by 500,000 shares the number of shares authorized for repurchase in the open market under the Company's Stock Repurchase Program. At March 31, 1998, the Company's principal sources of liquidity included an aggregate of $11.4 million of cash, cash equivalents and short-term investments. Management currently believes that such funds, together with cash generated from operations, should be adequate to fund anticipated working capital requirements and capital expenditures in the near term. Depending upon the Company's results of operations, its future capital needs and available marketing opportunities, the Company may use various financing sources to raise additional funds. Such sources could potentially include joint ventures, issuances of common stock or debt financing. At March 31, 1998, the Company had no long-term debt. Page 8 of 28 9 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. See Exhibit Index included at Page 11 of this Report (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter for which this report is filed. Page 9 of 28 10 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Psychemedics Corporation Date: May 12, 1998 By: /s/ Raymond C. Kubacki, Jr. --------------------------------------- Raymond C. Kubacki, Jr. President and Chief Executive Officer Date: May 12, 1998 By: /s/ Peter C. Monson --------------------------------------- Peter C. Monson Vice President, Treasurer & Controller Page 10 of 28 11 PSYCHEMEDICS CORPORATION FORM 10-Q MARCH 31, 1998 EXHIBIT INDEX PAGE NO. 10.1 Promissory Note from Raymond C. Kubacki, Jr. dated January 6, 1997 12-13 10.2 Pledge Agreement between Raymond C. Kubacki, Jr. and Psychemedics Corporation dated January 6, 1997 14-18 10.3 Pledge Agreement between Raymond C. Kubacki, Jr. and Psychemedics Corporation dated November 12, 1997 19-23 10.4 Promissory Note from Raymond C. Kubacki, Jr. dated November 12, 1997 24-26 10.5 January 6, 1998 First Amendment To Promissory Note dated January 6, 1997 27-28 27. Financial Data Schedule Page 11 of 28 EX-10.1 2 PROMISSORY NOTE DATED JANUARY 6, 1997 1 Exhibit 10.1 PROMISSORY NOTE $209,892.00 Cambridge, Massachusetts January 6, 1997 FOR VALUE RECEIVED, the undersigned RAYMOND C. KUBACKI, JR. hereby promises to pay to the order of PSYCHEMEDICS CORPORATION, a Delaware corporation (the "Company"), in accordance with and subject to the terms and conditions set forth herein, on or before January 6, 1998, the principal sum of TWO HUNDRED NINE THOUSAND EIGHT HUNDRED TWO DOLLARS AND 00/100 ($209,892.00), or so much thereof as may from time to time be outstanding, and to pay interest on the unpaid portion of such principal amount at the rate of 5.88 % PER ANNUM until such principal amount and all accrued unpaid interest thereon shall have been paid. Interest accrued on the unpaid balance of principal from time to time outstanding shall be payable together with payment of principal. Each payment made under this Note shall be applied first to interest then due and then to principal. This Note is secured by a pledge of certain shares of Common Stock of the Company owned by the undersigned more particularly described in the Pledge Agreement dated as of the date hereof (the "Pledge Agreement") by and between the undersigned and the Company. The Pledge Agreement is intended to provide additional security to the Company for the obligations of the undersigned under this Note and is not intended to limit in any way the obligations of the undersigned under this Note which is a full recourse obligation of the undersigned. The undersigned, and each endorser and guarantor of this Note, hereby waives demand, presentment for payment, notice of dishonor and protest, and all other formalities provided by law. The undersigned hereby agrees that no delay or omission on the part of the holder hereof in exercising any right or remedy hereunder shall constitute a waiver of such right or remedy or of any other right or remedy hereunder. The occurrence of any of the following events shall constitute an Event of Default under this Note: Page 12 of 28 2 1. Failure of the undersigned to pay when due any payment of principal or interest herein required, which failure continues unremedied for thirty (30) days; 2. An Event of Default under the Pledge Agreement; 3. the death, dissolution, liquidation, or termination of existence of the undersigned or of any endorser or guarantor hereof; or 4. the making of an assignment for the benefit of creditors by, the insolvency of, the appointment of a receiver of any part of the property of, or the filing of a petition in bankruptcy or the commencement of any proceeding under any bankruptcy or insolvency law or any law relating to the relief of debtors, readjustment of indebtedness, reorganization, composition or extension by or against, the undersigned or any endorser or guarantor hereof. Upon the occurrence of an Event of Default under this Note, the outstanding principal balance hereof, together with any accrued unpaid interest thereon, and together with all reasonable costs of collection, including reasonable attorneys' fees, shall become immediately due and payable at the option of the holder hereof. Failure on the part of the holder hereof to exercise said option shall not constitute a waiver of the right of the holder hereof to exercise said option in the event of any subsequent Event of Default. Payments of principal and interest hereunder shall be made at 1280 Massachusetts Avenue, Suite 200, Cambridge, Massachusetts 02138, or such other address as the holder hereof may designate from time to time. The undersigned shall have the right to prepay all or any part of the principal sum secured hereby at any time or from time to time without premium or penalty. This Note shall take effect as an instrument under seal and shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts. EXECUTED as of the date set forth above. /s/ Raymond C. Kubacki, Jr. ---------------------------------- Raymond C. Kubacki, Jr. Signed in the presence of: - ------------------------------ Page 13 of 28 EX-10.2 3 PLEDGE AGREEMENT DATED JANUARY 6,1997 1 Exhibit 10.2 PLEDGE AGREEMENT PLEDGE AGREEMENT made as of January 6, 1997, by and between RAYMOND C. KUBACKI, JR. (the "Pledgor") and PSYCHEMEDICS CORPORATION, a Delaware corporation (the "Pledgee"). RECITALS WHEREAS, in order to permit Pledgor to exercise on the date hereof certain incentive stock options granted to the Pledgor by the Pledgee on January 7, 1992, which expire on January 7, 1997, Pledgor executed and delivered to Pledgee a Promissory Note dated the date hereof (the "Term Note") in the aggregate original principal amount of $209,892.00; and WHEREAS, as security for his obligations under the Term Note, Pledgor has agreed to pledge to Pledgee the shares of the capital stock of Pledgee issued upon the exercise of said options; NOW, THEREFORE, in consideration of the premises, the Pledgor and the Pledgee hereby agree as follows: 1. DEFINED TERMS. The following terms shall have the following meanings: "Code" means the Uniform Commercial Code from time to time in effect in the Commonwealth of Massachusetts. "Collateral" means the Pledged Securities and all Proceeds. "Event of Default" means (i) a default under the Term Note; or (ii) a breach by the Pledgor of any agreement, covenant or representation contained in this Pledge Agreement. "Obligations" means the unpaid principal of and interest on the Term Note and all other obligations and liabilities of the Pledgor to Pledgee under the Term Note. "Pledge Agreement" means this Pledge Agreement, as amended, supplemented or otherwise modified from time to time. "Pledged Securities" means the Eighty Seven Thousand Eight Hundred Twenty One (87,821) shares of the Common Stock, $.005 par value, of Psychemedics Corporation purchased by the Pledgor from Pledgee as of the date hereof, together with all stock certificates, instruments, options or rights of any nature whatsoever which may be issued or granted to the Pledgor in respect of the Pledged Securities, while this Pledge Agreement in effect. "Proceeds" means all "proceeds" as such term is defined in Section 9-306(1) of the Code and, in any event, shall include, without limitation, any and all proceeds from any subsequent sale of any of the Pledged Securities, and all cash, securities or other property paid or distributed upon or in respect of the Pledged Securities by ordinary or special dividend or other distribution, or other income from the Pledged Securities, collections thereon or distributions with respect thereto. Page 14 of 28 2 2. PLEDGE; GRANT OF SECURITY INTEREST. The Pledgor hereby delivers to Pledgee all the Pledged Securities and hereby grants to Pledgee a security interest in the Collateral, as collateral security for the prompt and complete payment and performance when due of the Obligations. 3. STOCK POWERS. Concurrently with the delivery to Pledgee of each certificate or instrument representing the Pledged Securities, the Pledgor shall deliver an undated stock power or other transfer document covering such certificate or instrument, duly executed in blank. 4. COVENANTS. The Pledgor and the Pledgee covenant and agree that, from and after the date of this Pledge Agreement until the Obligations are paid in full: (a) Any cash (less an amount equal to any income taxes payable by Pledgor with respect thereto), securities or other property paid or distributed upon or in respect of the Pledged Securities shall be paid over to Pledgee in payment of the Obligations until the Obligations are paid in full. (b) The Pledgor may sell the Collateral from time to time prior to the maturity date of the Term Note at a price per share not less than the current market value in effect on the date of such sale, or the last sale price on the trading day next preceding the date of such sale, as reported on the American Stock Exchange, PROVIDED, HOWEVER, that the Pledgor shall pay over to the Pledgee any Proceeds thereof (less an amount equal to any income taxes payable by Pledgor with respect thereto) in payment of the Obligations until the Obligations are paid in full, and shall instruct any broker conducting a sale of any of the Pledged Securities to pay over such Proceeds (less an amount equal to any income taxes payable by Pledgor with respect thereto) directly to the Pledgee in payment of the Obligations until the Obligations are paid in full. (c) Except to the extent provided in Paragraph 4(B) above, the Pledgor shall not, without the prior written consent of the Pledgee, assign, transfer, exchange or otherwise dispose of, or grant any option with respect to the Collateral, or create, incur or permit to exist any lien or option in favor of, or any claim of any person or entity with respect to, any of the Collateral, or any interest therein, except for Pledgee's interest as pledgee hereunder. The Pledgor will defend the right, title and interest of Pledgee as pledgee hereunder in and to the Collateral against the claims and demands of all person or entities whomsoever. (d) The Pledgor agrees to pay, and to save Pledgee harmless from, any and all liabilities with respect to, or resulting from any delay in paying any and all stamp, excise, sales or other taxes (exclusive of taxes based on income, gross receipts, franchise rights and related items) which may be payable or determined to be payable with respect to any of the Collateral or in connection with any of the transactions contemplated by this Pledge Agreement. 5. VOTING RIGHTS. Unless an Event of Default shall have occurred, the Pledgor shall be permitted to exercise all voting rights with respect to the Pledged Securities to the extent permitted by law. 6. RIGHTS AND REMEDIES OF PLEDGEE. Upon the occurrence of an Event of Default as defined herein, Pledgee, at its option, and without further notice to Pledgor, shall have the right to do one or more of the following: Page 15 of 28 3 (a) transfer the Pledged Securities immediately into the name of Pledgee or its nominee; (b) vote or direct the voting of the Pledged Securities and receive all dividends and distributions declared thereon; (c) upon giving not less than five (5) days notice, which notice shall be deemed reasonable and proper, sell or otherwise dispose of the Pledged Securities at public or private sale or on any exchange, or otherwise, and apply the proceeds thereof in accordance with applicable law; or (d) pursue any right or remedy of a secured party under the Code. Pledgor hereby irrevocably appoints Pledgee its attorney-in-fact for purposes of executing and delivering any instrument or document necessary or desirable for the exercise of any of the foregoing rights and remedies. Such rights and remedies may be exercised with respect to all or any part of the Pledged Securities at one or more times in addition to such other rights and remedies as Pledgee may have either at law or in equity. The Pledgor will pay all of the costs and expenses, including reasonable attorneys fees, of enforcing the pledge contained herein. No sale of the Pledged Securities shall be made in violation of federal and state securities laws. 7. AMENDMENTS WITH RESPECT TO THE OBLIGATIONS. The Pledgor shall remain obligated hereunder, and the Collateral shall remain subject to the lien granted hereby, notwithstanding that, without any reservation of rights against the Pledgor, and without notice to or further assent by the Pledgor, any demand for payment of any of the Obligations continued, and the Obligations, or the liability of the Pledgor upon or for any part thereof, or any collateral security therefor, may, from time to time, in whole or in part, be renewed, extended, amended, modified, accelerated, compromised, waived, surrendered or released by Pledgee, and the Term Note may be amended, modified, supplemented or terminated, in whole or in part, as Pledgee may deem advisable from time to time, and any other collateral at any time held by Pledgee for the payment of Obligations may be sold, exchanged, waived, surrendered or released. Pledgee shall have no obligation to protect, secure, perfect or insure any other lien at any time held by him as security for the Obligations or any property subject thereto. The Pledgor hereby expressly waives any and all notice of the creation, renewal, extension or accrual of any of the Obligations and notice of or proof of reliance by Pledgee upon this Pledge Agreement. The Pledgor hereby expressly waives diligence, presentment, protest, demand for payment and notice of default or nonpayment to or upon the Pledgor with respect to the Obligations. 8. LIMITATION ON DUTIES REGARDING COLLATERAL. Pledgee's sole duty with respect to the custody, safekeeping and physical preservation of the Collateral in its possession, under Section 9-207 of the Code or otherwise, shall be to deal with it in the same manner as Pledgee deals with similar securities, instruments and property for his own account. Pledgee shall not be liable for failure to demand, collect or realize upon any of the Collateral or for any delay in doing so or shall be under any obligation to sell or otherwise dispose of any Collateral upon the request of the Pledgor or otherwise. Pledgee shall release the Pledged Securities to Pledgor for the purposes of enabling the Pledgor to effect a sale of the Pledged Securities in accordance with and subject to the provisions of Paragraph 4(B) hereof. 9. POWERS COUPLED WITH AN INTEREST. All authorizations and agencies herein contained with respect to the Collateral are irrevocable and powers coupled with an interest. Page 16 of 28 4 10. SEVERABILITY. Any provision of this Pledge Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 11. SECTION HEADINGS. The paragraph headings used in this Pledge Agreement are for convenience of reference only and are not to affect the construction hereof or to be taken into consideration in the interpretation hereof. 12. NO WAIVER; CUMULATIVE REMEDIES. Pledgee shall not by any act (except by a written instrument pursuant to Paragraph 13 hereof), delay, indulgence, omission or otherwise be deemed to have waived any right or remedy hereunder or to have acquiesced in any default or Event of Default or in any breach of any of the terms and conditions hereof. No failure to exercise, nor any delay in exercising, on the part of Pledgee, any right, power or privilege hereunder shall operate as a waiver thereof. No single or partial exercise of any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege. A waiver by Pledgee of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which Pledgee would otherwise have on any future occasion. The rights and remedies herein provided are cumulative, may be exercised singly or concurrently and are not exclusive of any rights or remedies provided by law. 13. WAIVERS AND AMENDMENTS; SUCCESSORS AND ASSIGNS; GOVERNING LAW. None of the terms or provisions of this Pledge Agreement, may be waived, amended, supplemented or otherwise modified except by a written instrument executed by the Pledgor and Pledgee, PROVIDED that any provision of this Pledge Agreement may be waived in writing by Pledgee in a letter or agreement executed by Pledgee or by telex or facsimile transmission from Pledgee. This Pledge Agreement shall be binding upon the successors and assigns of the Pledgor and shall inure to the benefit of Pledgee and its successors and assigns. This Pledge Agreement shall be governed by, and construed and interpreted in accordance with, the laws of the Commonwealth of Massachusetts. 14. NOTICES. Any notice or other communication hereunder to Pledgor or Pledgee shall be given in writing by (a) personal delivery (confirmed by the courier delivery service), (b) expedited delivery with proof of delivery, (c) telefax and confirmed in writing by regular first class mail, or (d) first class registered or certified mail, postage prepaid, return receipt requested, to the addresses indicated below: Pledgor: Raymond C. Kubacki, Jr. 438 South Street Carlisle, Massachusetts 01741 Pledgee: Psychemedics Corporation 1280 Massachusetts Avenue, Suite 200 Cambridge, Massachusetts 02138 Attn: Treasurer Copy to: Patrick J. Kinney, Jr., Esquire Lynch, Brewer, Hoffman & Sands, LLP 101 Federal Street, 22nd Floor Boston, Massachusetts 02110-1800 Page 17 of 28 5 Any notice provided for herein shall become effective only upon and at the time of first receipt by the party to whom it is given, unless such notice is only mailed by certified mail, return receipt requested, in which case it shall be deemed to be received three (3) business days after the date that it is mailed. Any party may, by proper written notice hereunder to the other party, change the individual address to which such notice shall thereafter be sent. 15. COUNTERPARTS. This Pledge Agreement may be executed in several counterparts, each of which shall constitute an original, but all of which, when taken together, shall constitute but one agreement. IN WITNESS WHEREOF, the parties hereto have caused this Pledge Agreement to be duly executed and delivered as of the date first above. THE PLEDGOR: /s/ Raymond C. Kubacki, Jr. -------------------------------------- Raymond C. Kubacki, Jr. THE PLEDGEE: PSYCHEMEDICS CORPORATION By /s/ Bruce M. Stillwell ----------------------------------- Bruce M. Stillwell Page 18 of 28 EX-10.3 4 PLEDGE AGREEMENT DATED NOVEMBER 12, 1997 1 Exhibit 10.3 PLEDGE AGREEMENT PLEDGE AGREEMENT made as of November 12, 1997, by and between RAYMOND C. KUBACKI, JR. (the "Pledgor") AND PSYCHEMEDICS CORPORATION, a Delaware corporation (the "Pledgee"). RECITALS WHEREAS, in order to permit Pledgor to exercise on the date hereof certain non-qualified stock options granted to the Pledgor by the Pledgee on November 13, 1992, which expire on November 13, 1997, Pledgor executed and delivered to Pledgee a Promissory Note dated the date hereof (the "Term Note") in the aggregate original principal amount of $211,232; and WHEREAS, as security for his obligations under the Term Note, Pledgor has agreed to pledge to Pledgee the shares of the capital stock of Pledgee issued upon the exercise of said options; NOW, THEREFORE, in consideration of the premises, the Pledgor and the Pledgee hereby agree as follows: 1. DEFINED TERMS. The following terms shall have the following meanings: "Code" means the Uniform Commercial Code from time to time in effect in the Commonwealth of Massachusetts. "Collateral" means the Pledged Securities and all Proceeds. "Event of Default" means (i) a default under the Term Note; or (ii) a breach by the Pledgor of any agreement, covenant or representation contained in this Pledge Agreement. "Obligations" means the unpaid principal of and interest on the Term Note and all other obligations and liabilities of the Pledgor to Pledgee under the Term Note. "Pledge Agreement" means this Pledge Agreement, as amended, supplemented or otherwise modified from time to time. "Pledged Securities" means the net amount of Eighty-two Thousand Five Hundred Twenty-one (82,521) shares of the Common Stock, $.005 par value, of Psychemedics Corporation purchased by the Pledgor from Pledgee as of the date hereof, together with all stock certificates, instruments, options or rights of any nature whatsoever which may be issued or granted to the Pledgor in respect of the Pledged Securities, while this Pledge Agreement in effect. "Proceeds" means all "proceeds" as such term is defined in Section 9-306(1) of the Code and, in any event, shall include, without limitation, any and all proceeds from any subsequent sale of any of the Pledged Securities, and all cash, securities or other property paid or distributed upon or in respect of the Pledged Securities by ordinary or special dividend or other distribution, or other income from the Pledged Securities, collections thereon or distributions with respect thereto. Page 19 of 28 2 2. PLEDGE; GRANT OF SECURITY INTEREST. The Pledgor hereby delivers to Pledgee all the Pledged Securities and hereby grants to Pledgee a security interest in the Collateral, as collateral security for the prompt and complete payment and performance when due of the Obligations. 3. STOCK POWERS. Concurrently with the delivery to Pledgee of each certificate or instrument representing the Pledged Securities, the Pledgor shall deliver an undated stock power or other transfer document covering such certificate or instrument, duly executed in blank. 4. COVENANTS. The Pledgor and the Pledgee covenant and agree that, from and after the date of this Pledge Agreement until the Obligations are paid in full: (a) Any cash (less an amount equal to any income taxes payable by Pledgor with respect thereto), securities or other property paid or distributed upon or in respect of the Pledged Securities shall be paid over to Pledgee in payment of the Obligations until the Obligations are paid in full. (b) The Pledgor may sell the Collateral from time to time prior to the maturity date of the Term Note at a price per share not less than the current market value in effect on the date of such sale, or the last sale price on the trading day next preceding the date of such sale, as reported on the American Stock Exchange, PROVIDED, HOWEVER, that the Pledgor shall pay over to the Pledgee any Proceeds thereof (less an amount equal to any income taxes payable by Pledgor with respect thereto) in payment of the Obligations until the Obligations are paid in full, and shall instruct any broker conducting a sale of any of the Pledged Securities to pay over such Proceeds (less an amount equal to any income taxes payable by Pledgor with respect thereto) directly to the Pledgee in payment of the Obligations until the Obligations are paid in full. (c) Except to the extent provided in Paragraph 4(B) above, the Pledgor shall not, without the prior written consent of the Pledgee, assign, transfer, exchange or otherwise dispose of, or grant any option with respect to the Collateral, or create, incur or permit to exist any lien or option in favor of, or any claim of any person or entity with respect to, any of the Collateral, or any interest therein, except for Pledgee's interest as pledgee hereunder. The Pledgor will defend the right, title and interest of Pledgee as pledgee hereunder in and to the Collateral against the claims and demands of all person or entities whomsoever. (d) The Pledgor agrees to pay, and to save Pledgee harmless from, any and all liabilities with respect to, or resulting from any delay in paying any and all stamp, excise, sales or other taxes (exclusive of taxes based on income, gross receipts, franchise rights and related items) which may be payable or determined to be payable with respect to any of the Collateral or in connection with any of the transactions contemplated by this Pledge Agreement. 5. VOTING RIGHTS. Unless an Event of Default shall have occurred, the Pledgor shall be permitted to exercise all voting rights with respect to the Pledged Securities to the extent permitted by law. 6. RIGHTS AND REMEDIES OF PLEDGEE. Upon the occurrence of an Event of Default as defined herein, Pledgee, at its option, and without further notice to Pledgor, shall have the right to do one or more of the following: Page 20 of 28 3 (a) transfer the Pledged Securities immediately into the name of Pledgee or its nominee; (b) vote or direct the voting of the Pledged Securities and receive all dividends and distributions declared thereon; (c) upon giving not less than five (5) days notice, which notice shall be deemed reasonable and proper, sell or otherwise dispose of the Pledged Securities at public or private sale or on any exchange, or otherwise, and apply the proceeds thereof in accordance with applicable law; or (d) pursue any right or remedy of a secured party under the Code. Pledgor hereby irrevocably appoints Pledgee its attorney-in-fact for purposes of executing and delivering any instrument or document necessary or desirable for the exercise of any of the foregoing rights and remedies. Such rights and remedies may be exercised with respect to all or any part of the Pledged Securities at one or more times in addition to such other rights and remedies as Pledgee may have either at law or in equity. The Pledgor will pay all of the costs and expenses, including reasonable attorneys fees, of enforcing the pledge contained herein. No sale of the Pledged Securities shall be made in violation of federal and state securities laws. 7. AMENDMENTS WITH RESPECT TO THE OBLIGATIONS. The Pledgor shall remain obligated hereunder, and the Collateral shall remain subject to the lien granted hereby, notwithstanding that, without any reservation of rights against the Pledgor, and without notice to or further assent by the Pledgor, any demand for payment of any of the Obligations continued, and the Obligations, or the liability of the Pledgor upon or for any part thereof, or any collateral security therefor, may, from time to time, in whole or in part, be renewed, extended, amended, modified, accelerated, compromised, waived, surrendered or released by Pledgee, and the Term Note may be amended, modified, supplemented or terminated, in whole or in part, as Pledgee may deem advisable from time to time, and any other collateral at any time held by Pledgee for the payment of Obligations may be sold, exchanged, waived, surrendered or released. Pledgee shall have no obligation to protect, secure, perfect or insure any other lien at any time held by him as security for the Obligations or any property subject thereto. The Pledgor hereby expressly waives any and all notice of the creation, renewal, extension or accrual of any of the Obligations and notice of or proof of reliance by Pledgee upon this Pledge Agreement. The Pledgor hereby expressly waives diligence, presentment, protest, demand for payment and notice of default or nonpayment to or upon the Pledgor with respect to the Obligations. 8. LIMITATION ON DUTIES REGARDING COLLATERAL. Pledgee's sole duty with respect to the custody, safekeeping and physical preservation of the Collateral in its possession, under Section 9-207 of the Code or otherwise, shall be to deal with it in the same manner as Pledgee deals with similar securities, instruments and property for his own account. Pledgee shall not be liable for failure to demand, collect or realize upon any of the Collateral or for any delay in doing so or shall be under any obligation to sell or otherwise dispose of any Collateral upon the request of the Pledgor or otherwise. Pledgee shall release the Pledged Securities to Pledgor for the purposes of enabling the Pledgor to effect a sale of the Pledged Securities in accordance with and subject to the provisions of Paragraph 4(B) hereof. 9. POWERS COUPLED WITH AN INTEREST. All authorizations and agencies herein contained with respect to the Collateral are irrevocable and powers coupled with an interest. Page 21 of 28 4 10. SEVERABILITY. Any provision of this Pledge Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 11. SECTION HEADINGS. The paragraph headings used in this Pledge Agreement are for convenience of reference only and are not to affect the construction hereof or to be taken into consideration in the interpretation hereof. 12. NO WAIVER; CUMULATIVE REMEDIES. Pledgee shall not by any act (except by a written instrument pursuant to Paragraph 13 hereof), delay, indulgence, omission or otherwise be deemed to have waived any right or remedy hereunder or to have acquiesced in any default or Event of Default or in any breach of any of the terms and conditions hereof. No failure to exercise, nor any delay in exercising, on the part of Pledgee, any right, power or privilege hereunder shall operate as a waiver thereof. No single or partial exercise of any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege. A waiver by Pledgee of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which Pledgee would otherwise have on any future occasion. The rights and remedies herein provided are cumulative, may be exercised singly or concurrently and are not exclusive of any rights or remedies provided by law. 13. WAIVERS AND AMENDMENTS; SUCCESSORS AND ASSIGNS; GOVERNING LAW. None of the terms or provisions of this Pledge Agreement, may be waived, amended, supplemented or otherwise modified except by a written instrument executed by the Pledgor and Pledgee, PROVIDED that any provision of this Pledge Agreement may be waived in writing by Pledgee in a letter or agreement executed by Pledgee or by telex or facsimile transmission from Pledgee. This Pledge Agreement shall be binding upon the successors and assigns of the Pledgor and shall inure to the benefit of Pledgee and its successors and assigns. This Pledge Agreement shall be governed by, and construed and interpreted in accordance with, the laws of the Commonwealth of Massachusetts. 14. NOTICES. Any notice or other communication hereunder to Pledgor or Pledgee shall be given in writing by (a) personal delivery (confirmed by the courier delivery service), (b) expedited delivery with proof of delivery, (c) telefax and confirmed in writing by regular first class mail, or (d) first class registered or certified mail, postage prepaid, return receipt requested, to the addresses indicated below: Pledgor: Raymond C. Kubacki, Jr. 438 South Street Carlisle, Massachusetts 01741 Pledgee: Psychemedics Corporation 1280 Massachusetts Avenue, Suite 200 Cambridge, Massachusetts 02138 Attn: Treasurer Copy to: Patrick J. Kinney, Jr., Esquire Lynch, Brewer, Hoffman & Sands, LLP 101 Federal Street, 22nd Floor Boston, Massachusetts 02110-1800 Page 22 of 28 5 Any notice provided for herein shall become effective only upon and at the time of first receipt by the party to whom it is given, unless such notice is only mailed by certified mail, return receipt requested, in which case it shall be deemed to be received three (3) business days after the date that it is mailed. Any party may, by proper written notice hereunder to the other party, change the individual address to which such notice shall thereafter be sent. 15. COUNTERPARTS. This Pledge Agreement may be executed in several counterparts, each of which shall constitute an original, but all of which, when taken together, shall constitute but one agreement. IN WITNESS WHEREOF, the parties hereto have caused this Pledge Agreement to be duly executed and delivered as of the date first above. THE PLEDGOR: THE PLEDGOR: /s/ Raymond C. Kubacki, Jr. -------------------------------------- Raymond C. Kubacki, Jr. THE PLEDGEE: PSYCHEMEDICS CORPORATION By /s/ Bruce M. Stillwell ----------------------------------- Bruce M. Stillwell Page 23 of 28 EX-10.4 5 PROMISSORY NOTE DATED NOVEMBER 12, 1997 1 Exhibit 10.4 PROMISSORY NOTE $211,232.00 Cambridge, Massachusetts November 12, 1997 FOR VALUE RECEIVED, the undersigned RAYMOND C. KUBACKI, JR. hereby promises to pay to the order of PSYCHEMEDICS CORPORATION, a Delaware corporation (the "Company"), in accordance with and subject to the terms and conditions set forth herein, on or before November 12, 1998, the principal sum of TWO HUNDRED ELEVEN THOUSAND TWO HUNDRED THIRTY-TWO DOLLARS AND 00/100 ($211,232.00), or so much thereof as may from time to time be outstanding, and to pay interest on the unpaid portion of such principal amount at the rate of 5.94 % PER ANNUM until such principal amount and all accrued unpaid interest thereon shall have been paid. Interest accrued on the unpaid balance of principal from time to time outstanding shall be payable together with payment of principal. Each payment made under this Note shall be applied first to interest then due and then to principal. This Note is secured by a pledge of certain shares of Common Stock of the Company owned by the undersigned more particularly described in the Pledge Agreement dated as of the date hereof (the "Pledge Agreement") by and between the undersigned and the Company. The Pledge Agreement is intended to provide additional security to the Company for the obligations of the undersigned under this Note and is not intended to limit in any way the obligations of the undersigned under this Note which is a full recourse obligation of the undersigned. Page 24 of 28 2 The undersigned, and each endorser and guarantor of this Note, hereby waives demand, presentment for payment, notice of dishonor and protest, and all other formalities provided by law. The undersigned hereby agrees that no delay or omission on the part of the holder hereof in exercising any right or remedy hereunder shall constitute a waiver of such right or remedy or of any other right or remedy hereunder. The occurrence of any of the following events shall constitute an Event of Default under this Note: 1. Failure of the undersigned to pay when due any payment of principal or interest herein required, which failure continues unremedied for thirty (30) days; 2. An Event of Default under the Pledge Agreement; 3. the death, dissolution, liquidation, or termination of existence of the undersigned or of any endorser or guarantor hereof; or 4. the making of an assignment for the benefit of creditors by, the insolvency of, the appointment of a receiver of any part of the property of, or the filing of a petition in bankruptcy or the commencement of any proceeding under any bankruptcy or insolvency law or any law relating to the relief of debtors, readjustment of indebtedness, reorganization, composition or extension by or against, the undersigned or any endorser or guarantor hereof. Upon the occurrence of an Event of Default under this Note, the outstanding principal balance hereof, together with any accrued unpaid interest thereon, and together with all reasonable costs of collection, including reasonable attorneys' fees, shall become immediately due and payable at the option of the holder hereof. Failure on the part of the holder hereof to exercise said option shall not constitute a waiver of the right of the holder hereof to exercise said option in the event of any subsequent Event of Default. Payments of principal and interest hereunder shall be made at 1280 Massachusetts Avenue, Suite 200, Cambridge, Massachusetts 02138, or such other address as the holder hereof may designate from time to time. The undersigned shall have the right to prepay all or any part of the principal sum secured hereby at any time or from time to time without premium or penalty. This Note shall take effect as an instrument under seal and shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts. Page 25 of 28 3 EXECUTED as of the date set forth above. /s/ Raymond C. Kubacki, Jr. ---------------------------------- Raymond C. Kubacki, Jr. Signed in the presence of: - ------------------------------ Page 26 of 28 EX-10.5 6 FIRST AMENDMENT TO PROMISSORY NOTE 1 Exhibit 10.5 FIRST AMENDMENT TO PROMISSORY NOTE FIRST AMENDMENT TO PROMISSORY NOTE dated as of the 6th day of January, 1998 by and between RAYMOND C. KUBACKI, JR. (the "Borrower") and PSYCHEMEDICS CORPORATION (the "Lender"). WHEREAS, the Borrower and the Lender entered into a Promissory Note dated January 6, 1997, (the "Note") in the original principal amount of Two Hundred Nine Thousand Eight Hundred Ninety-two Dollars ($209,892.00); and WHEREAS, the Borrower's obligations under the Note are secured by a pledge of shares of Common Stock of the Lender pursuant to a Pledge Agreement dated January 6, 1997 (the "Pledge Agreement"); NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto hereby agree as follows: 1. AMENDMENT. (a) The Note is hereby amended by deleting the first three paragraphs thereof and inserting in lieu thereof the following: "FOR VALUE RECEIVED, the undersigned RAYMOND C. KUBACKI, JR. hereby promises to pay to the order of PSYCHEMEDICS CORPORATION, a Delaware corporation (the "Company"), in accordance with and subject to the terms and conditions set forth herein, on or before January 6, 1999, the principal sum of TWO HUNDRED SIX THOUSAND THREE HUNDRED SEVENTY-NINE DOLLARS AND 35/100 ($206,379.35), or so much thereof as may from time to time be outstanding, and to pay interest on the unpaid portion of such principal amount at the rate of 5.95 % PER ANNUM until such principal amount and all accrued unpaid interest thereon shall have been paid. Interest accrued on the unpaid balance of principal from time to time outstanding shall be payable together with payment of principal. Each payment made under this Note shall be applied first to interest then due and then to principal. This Note is secured by a pledge of certain shares of Common Stock of the Company owned by the undersigned more particularly described in the Pledge Agreement dated January 6, 1997 (the "Pledge Agreement") by and between the undersigned and the Company. The Pledge Agreement is intended to provide additional security to the Company for the obligations of the undersigned under this Note and is not intended to limit in any way the obligations of the undersigned under this Note which is a full recourse obligation of the undersigned." (b) All references in the Pledge Agreement to the Note shall be deemed to refer to the Note, as modified and amended hereby. 2. RATIFICATION. (a) The terms and provisions of the Note, as modified and amended hereby, are hereby ratified and confirmed by the Borrower in all respects and the Note shall remain in full force and effect in accordance with its terms as so modified and amended. (b) The obligations of the Borrower to repay to the Lender all indebtedness under the Note, as modified and amended hereby, and to pay and perform all of its other obligations to the Lender are and will continue to be secured by the Pledge Agreement and the Lender is and will continue to be entitled to the benefit of all of the rights and remedies thereunder. Page 27 of 28 2 (c) Nothing herein is intended or shall be construed so as to discharge, release, terminate, or otherwise limit or modify any indebtedness, obligations, or liabilities of the Borrower or any collateral security therefor. 3. MISCELLANEOUS. This First Amendment to Promissory Note shall be governed by the laws of the Commonwealth of Massachusetts, shall be construed as a sealed instrument, and shall be binding upon, and inure to the benefit of, the parties hereto and their respective successors and assigns. Executed as a sealed instrument as of the date set forth above. PSYCHEMEDICS CORPORATION (Lender) By: /s/ Bruce M. Stillwell ----------------------------------- Bruce M. Stillwell, Vice President /s/ Raymond C. Kubacki, Jr. ----------------------------------- Raymond C. Kubacki, Jr. (Borrower) Page 28 of 28 EX-27 7 FINANCIAL DATA SCHEDULE
5 3-MOS DEC-31-1998 MAR-31-1998 1,749,679 9,665,654 3,085,363 0 490,836 16,089,993 6,865,880 3,230,771 20,173,029 3,180,171 0 0 0 112,020 16,880,838 20,173,029 4,121,903 4,121,903 1,694,888 1,694,888 1,482,981 0 0 1,080,418 439,410 641,278 0 0 0 641,278 .03 .03
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