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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
Commission file number 1-11394
MEDTOX SCIENTIFIC, INC.
(Exact name of Registrant as specified in its charter)
Delaware 95-3863205
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
402 West County Road D, St. Paul, Minnesota 55112
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (651) 636-7466
Securities registered pursuant to Section
12(b) of the Act:
Common Stock, par value $.15 per share
(Title of Class)
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-K (229.405 of this chapter) 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]
The aggregate market value of Common Stock of the Registrant, $.15 par value
("Common Stock"), held by non-affiliates of the Registrant is approximately
$25,779,000 as of March 15, 2000, based upon a price of $8.875 which price is
equal to the closing price for the Common Stock on the American Stock Exchange.
The number of shares of Common Stock outstanding as of March 15, 2000, was
2,904,659
Documents Incorporated by Reference:
Part of Form 10-K into
Document which incorporated
Portions of the Registrant's Proxy
Statement to be filed by April 10,2000..............................Part III
Such Proxy Statement, except for portions thereof which have been specifically
incorporated by reference, shall not be deemed "filed" as part of this report on
Form 10-K.
This document contains 86 pages and the Exhibit Index appears at page 33 hereof.
MEDTOX SCIENTIFIC, INC.
FORM 10-K ANNUAL REPORT
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
Table of Contents
ITEM NO. PAGE
Part I
1. Business. . . . . . . . . . . . . . . . . . . . . . . . . . 4
2. Properties. . . . . . . . . . . . . . . . . . . . . . . . . 12
3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . 12
4. Submission of Matters to a Vote of
Security Holders . . . . . . . . . . . . . . . . . . . . . 13
Part II
5. Market for the Registrant's Common Equity
and Related Stockholder Matters. . . . . . . . . . 15
6. Selected Financial Data . . . . . . . . . . . . . . . . . 16
7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations. . . . . . . . . . . . . . . . . . . . . . . 17
8. Financial Statements and Supplementary
Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
9. Changes in and Disagreements With
Accountants on Accounting
and Financial Disclosure . . . . . . . . . . . . . . . 26
Part III
10. Directors and Executive Officers
of the Registrant. . . . . . . . . . . . . . . . . . . . . . 27
11. Executive Compensation. . . . . . . . . . . . . . . . 27
12. Security Ownership of Certain Beneficial
Owners and Management. . . . . . . . . . . . . . 27
13. Certain Relationships and Related
Transactions . . . . . . . . . . . . . . . . . . . . . . . 27
Part IV
14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K. . . . . . . . . . . . . . 28
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
PART I
Cautionary Statement Identifying Important Factors
That Could Cause the Company's Actual Results to Differ
From Those Projected in Forward Looking Statements
In connection with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, readers of this document and any
document incorporated by reference herein, are advised that this document and
documents incorporated by reference into this document contain both statements
of historical facts and forward looking statements. Forward looking statements
are subject to certain risks and uncertainties, which could cause actual results
to differ materially from those indicated by the forward looking statements.
Examples of forward looking statements include, but are not limited to (i)
projections of revenues, income or loss, earning or loss per share, capital
expenditures, dividends, capital structure and other financial items, (ii)
statements of the plans and objectives of the Company or its management or Board
of Directors, including the introduction of new products, or estimates or
predictions of actions by customers, suppliers, competitors or regulatory
authorities, (iii) statements of future economic performance, and (iv)
statements of assumptions underlying other statements and statements about the
Company or its business.
This document and any documents incorporated by reference herein also
identify important factors which could cause actual results to differ materially
from those indicated by the forward looking statements. These risks and
uncertainties include price competition, the decisions of customers, the actions
of competitors, the effects of government regulation, possible delays in the
introduction of new products, customer acceptance of products and services, and
other factors which are described herein and/or in documents incorporated by
reference herein.
The cautionary statements made pursuant to the Private Litigation
Securities Reform Act of 1995 above and elsewhere by the Company should not be
construed as exhaustive or as any admission regarding the adequacy of
disclosures made by the Company prior to the effective date of such Act. Forward
looking statements are beyond the ability of the Company to control and in many
cases the Company cannot predict what factors would cause results to differ
materially from those indicated by the forward looking statements.
ITEM 1. BUSINESS.
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1. General.
MEDTOX Scientific, Inc. (formerly EDITEK, Inc.), a Delaware corporation,
was organized in September, 1986 to succeed the operations of a predecessor
California corporation. MEDTOX Scientific, Inc. and its subsidiaries, MEDTOX
Laboratories, Inc. and MEDTOX Diagnostics, Inc., are referred to herein as "the
Company". MEDTOX Laboratories, Inc. is a toxicology laboratory which provides
forensic toxicology, clinical toxicology, and heavy metals analyses. MEDTOX
Diagnostics, Inc. develops, manufactures and markets on-site diagnostic and
screening tests which are used to detect substances in humans, foodstuffs,
animals, feed and the environment. The Company is transitioning these operating
units into a broader service organization by coupling the underlying laboratory
analysis and point-of-care devices with logistics management, data management
and overall program management services.
The Company entered the laboratory business on February 11,
1994 when it completed the acquisition of Princeton Diagnostic Laboratories of
America, Inc. ("PDLA"). On January 30, 1996, the Company acquired the assets and
certain liabilities of the predecessor of MEDTOX Laboratories, Inc. MEDTOX
Laboratories, Inc. is now a wholly owned subsidiary. For the fiscal year ended
December 31, 1999, sales from Laboratory Services accounted for 88.5% of the
Company's revenues. Revenue from the sale of the Company's on-site diagnostic
and screening tests and other products, including contract manufacturing
services, accounted for 11.5% of the total revenues of the Company for the year
ended December 31, 1999.
2. Principal Services, Products, and Markets.
General. The Company has two reportable segments: "Laboratory Services" and
"Products Sales." Laboratory Services include forensic toxicology, clinical
toxicology, and heavy metal analyses as well as logistics, data, and overall
program management services. Product Sales include sales of a variety of on-site
screening products and contract manufacturing.
Laboratory Services
A. Employment Drug Testing Laboratory Services. The primary
source of revenues of the Company is the provision of laboratory testing
services for the identification of drugs of abuse. These tests are conducted
using methodologies such as various immunoassays, gas liquid chromatography, and
gas chromatography/mass spectrometry. MEDTOX Laboratories, Inc. was one of the
charter laboratories to be certified by the federal government to perform
mandated drug testing on regulated employees. It pioneered security and chain of
custody procedures, including sample bar coding as well as stereospecific
confirmation methods that assist in maintaining the integrity of the specimens
and the confidentiality of the test results.
The Company's customers for substance abuse testing include
public and private corporations. In addition to public and private corporations,
substance abuse testing is also conducted on behalf of service firms such as
drug treatment counseling centers, occupational health clinics, third party
administrators and hospitals.
B. Clinical Toxicology. The Company has a fully certified
clinical toxicology reference laboratory specializing in esoteric therapeutic
drug monitoring and emergency toxicology. The tests performed in the clinical
laboratory are conducted using methodologies such as various immunoassays, gas
liquid chromatography, high performance liquid chromatography, gas
chromatography/mass spectrometry and tandem mass spectrometry. The Company
performs the analyses of many classes of drugs including: analgesic,
antianxiety, anticholinergic, anticoagulant, anticonvulsant, antidepressant,
antidiabetic, antiemetic, antihistamine, antiinflammatory, antimicrobial,
antipsychotic, bronchodilator, cardiovascular, stimulant, decongestant,
immunosuppressant, local anesthetic, muscle relaxant, narcotic analgesic, and
sedative medications.
The Company's clients for this market consist of hospitals,
clinics and other laboratories. Laboratory specimens are delivered to the
Company from clients across the country by the Company's own couriers,
contracted delivery services and commercial overnight couriers.
C. Heavy Metal, Trace Element, and Solvent Analyses. The Company operates a
laboratory in which blood and urine are tested for heavy metals, trace elements,
and solvents. The tests are performed using the methodologies such as flame and
flameless atomic absorption, inductively coupled plasma-mass spectrometry, and
gas chromatography.
The Company's clients for this market are other laboratories,
occupational health clinics and companies which need to test patients or
employees monitored for excess exposure to hazardous materials.
D. Logistics, Data, and Program Management Services. The
Company also provides services in the areas of logistics management, data
management, and program management. These services support the Company's
underlying business of laboratory analysis and provide added value to its
clients. Value-added services include courier services for medical specimen
transportation, management programs for on-site drug testing, data collection
and reporting services, coordination of specimen collection sites, and medical
surveillance program management.
Product Sales
The Company's on-site products are easy to use, inexpensive,
point-of-care tests. The tests are capable of rapidly detecting the presence of
a number of substances in human urine or blood samples, foodstuffs, animals,
feed and the environment without the necessity of instruments or technical
personnel.
In 1998, the Company received FDA 510(k) clearance on the
first of its second-generation on- site test products, PROFILE(R)-II.
PROFILE(R)-II, is a five-drug lateral flow device for the detection of
drugs-of-abuse in human urine. This single-step, immunoassay device has been
combined with the Company's data delivery system and laboratory confirmation
capability to produce the PROFILE(R)-II Test System. This integrated on-site
testing system is currently being marketed to occupational health clinics,
corporate clients, third party administrators, and drug abuse counseling and
treatment centers.
In addition to the PROFILE(R)-II, the Company's
second-generation products also include VERDICT(R)-II on-site screening devices.
VERDICT(R)-II products are manufactured in one, two and three drug
configurations. Target markets include criminal justice, temporary service
companies, the construction industry and drug rehabilitation facilities.
The Company continues to market the EZ-SCREEN(R) tests. These
tests are qualitative assays utilized in agricultural diagnostics to detect
mycotoxins and antibiotic residues. Mycotoxins are hazardous substances produced
by fungal growth and frequently contaminate corn, wheat, rye, barley, peanuts,
tree nuts, cottonseed, milk, rice, and livestock feeds. The EZ-SCREEN
agridiagnostic tests are marketed to regulatory authorities and producers of
foodstuffs and feeds.
The Company distributes on-site tests for the detection of
alcohol with the EZ-SCREEN(R) Breath Alcohol Test. The test consists of a small
tube containing chemically treated crystals that change color in the presence of
alcohol. The Company purchases the Breath Alcohol Test through a distribution
agreement.
3. Marketing and Sales.
The Company believes that the combined operations of the
Laboratory Services and the on-site test kits manufactured by the Company have
created synergy in the marketing of comprehensive, on-site and laboratory
testing programs to a common customer base. The Company is in a position to
offer a full line of products and services for the substance abuse testing and
occupational medicine marketplace, including (1) on-site tests for the detection
of substance of abuse drugs (2) on-site qualitative and quantitative
determination of alcohol intoxication (both disposable and electronic instrument
detection devices); (3) SAMHSA certified laboratory testing (screening and
confirmation); (4) biological monitoring of occupational toxins; (5)
consultation; and (6) logistic, data management and program management services.
The Company currently markets these products and all
laboratory services through its dedicated sales force, through independent third
party administrators and through occupational health clinics.
Major Customers. The Company had no single customer whose
sales amounted to more than 10% of its total revenues during the year ended
December 31, 1999. One customer's sales amounted to approximately 6% of the
revenues of MEDTOX Laboratories, Inc. while sales to the United States
government and its agencies, primarily the United States Department of
Agriculture ("USDA"), amounted to approximately 6% of the revenues of MEDTOX
Diagnostics, Inc.
4. New Products, Research and Development.
Laboratory Services. The research and development group for
Laboratory Services develops new assays for new drug entities, develops new
assays for existing metabolites of drugs and other toxins, and improves existing
assays with the goal of improving the assays' robustness, sensitivity, accuracy,
precision, specificity, and cost. Numerous new laboratory-based assays were
developed during 1999 using immunochemistry, liquid chromatography (LC), gas
chromatography (GC), gas chromatography with mass spectrometry (GC/MS), atomic
absorption (AA), inductively coupled plasma mass spectrometry (ICP/MS), and
tandem mass spectrometry (LC/MS/MS). The many new tests developed during 1999
expand the Company's capabilities in the esoteric reference clinical toxicology
market (providing sophisticated testing for hospitals and other reference
laboratories), expand our capabilities and laboratory services in biological
monitoring of toxins in the workplace, expand our capabilities of detecting
drugs of abuse for clinical and workplace analysis, and also expand our
capabilities in pharmaceutical research analysis. During 1998, Laboratory
Services developed a medical diagnostic laboratory to service multi-site
clinical trials for the pharmaceutical industry and also provide broader
services to its industrial toxicology and occupational medicine clients.
Business generated by these expanded laboratory services to industrial clients
is already becoming more significant. During 1999, development work for the
Company's new line of nutritional assays was substantially completed. These
assays include analysis of vitamins, amino acids, trace elements, measures of
oxidative stress, and activities of free radical scavenging enzymes. This work
allows Laboratory Services to assess an individual's level of oxidative stress,
their ability to overcome that oxidative stress, any nutritional deficiencies,
and monitor supplementation to improve their ability to overcome that stress.
This area of testing is being shown to be important in the detection of
susceptibility to cancers, cardiac diseases, dementias, macular degeneration,
and is related to the development of serious adverse effects of drugs.
Product Sales. Primary research and development efforts of the
Company during 1999 focused on the development of tests to extend the Product
Sales offerings in the single-step PROFILE(R)-II immunochromatographic assay
product line produced by the Company. These product line extensions include
VERDICT(R)-II intended primarily for the criminal justice market and
PROFILE(R)-ER intended for the emergency room market.
VERDICT(R)-II consists of a line of simplified Profile(R)-II
devices designed to test for the drugs that the criminal justice system is
primarily concerned with today. MEDTOX has found that its VERDICT(R)-II product
has been well received in this market and increased market penetration is
expected in fiscal 2000. PROFILE(R)-ER is an expanded product which tests for
additional drugs, compared to PROFILE(R)-II. The added drugs are especially
pertinent in the rule-out diagnosis of suspected toxic drugs in emergency room
settings. The Company currently plans to introduce the PROFILE(R)-ER product in
fiscal 2000, following receipt of the appropriate FDA clearances.
5. Raw Materials.
Laboratory Services. The raw materials required by the
laboratory for urine drug testing consist primarily of two types: specimen
collection supplies and reagents for laboratory analysis. The collection
supplies include Drug Testing Custody and Control Forms that identify the
specimen and the client, as well as document the chain-of-custody. Collection
supplies also consist of specimen bottles and shipping boxes. Reagents for drug
testing are primarily immunoassay screening products and various chemicals used
for confirmation testing. The Company believes all of these materials are
available at competitive prices from other suppliers.
Product Sales. The primary raw materials required for the
immunoassay-based test kits produced by the Company consist of antibodies,
antigens and other reagents, plastic injection-molded devices, glass fiber,
nitrocellulose filter materials, and packaging materials. The Company maintains
an inventory of raw materials which, to date, has been acquired primarily from
third parties. Currently, most raw materials are available from several sources.
The Company possesses the technical capability to produce its own antibodies and
has initiated production of antibodies for certain tests. However, if the
Company were to change its source of supply for raw materials used in a specific
test, additional development, and the accompanying costs, may be required to
adapt the alternate material to the specific diagnostic test.
6. Patents, Trademarks, Licensing and Other Proprietary Information.
Laboratory Services. The Company believes that the basic technologies
requisite to the production of antibodies are in the public domain and are not
patentable. The Company intends to rely upon trade secret protection of certain
proprietary information, rather than patents, where it believes disclosure could
cause the Company to be vulnerable to competitors who could successfully
replicate the Company's production and manufacturing techniques and processes.
Product Sales. The Company has a patent pending on the system that it
developed which integrates on-site scientific analysis with state-of-the-art
data collection and delivery. The system is currently being utilized with the
Company's PROFILE(R)-II and VERDICT(R)-II products.
The Company holds nine issued United States patents relating
to on-site testing technology. Eight of these patents generally form the basis
for the EZ-SCREEN and one-step technologies while the other patent relates to
methods of utilizing whole blood as a sample medium on its immunoassay devices.
Of the eight U.S. patents mentioned above which generally form
the basis for the EZ-SCREEN and one-step technologies, one expires in 2000, one
expires in 2004, five expire in 2007, and one expires in 2010. The patent which
relates to the methods of utilizing whole blood as a sample medium expires in
2012.
There can be no guarantee that there will not be a challenge
to the validity of the patents. In the event of such a challenge, the Company
might be required to spend significant funds to defend its patents, and there
can be no assurance that the Company would be successful in any such action.
General. The Company holds approximately 15 registered trade
names and/or trademarks in reference to its products and corporate names. The
trade names and/or trademarks of the Company range in duration from 10 years to
20 years with expiration dates ranging from 2001 to 2008. Applications have also
been made for additional trade names.
7. Seasonality.
Laboratory Services. The Company believes that the laboratory
testing business is subject to seasonal fluctuations in pre-employment
screening. These seasonal fluctuations include reduced volume in the summer
months, year-end holiday periods, and other major holidays. In addition,
inclement weather may have a negative impact on volume thereby reducing net
revenues and cash flow.
Product Sales. The Company does not believe that seasonality is a
significant factor in the sale of its on-site immunoassay testing devices.
8. Backlog.
Laboratory Services. There exists a delay in recognition of
revenues when setting up new accounts for Laboratory Services. The time from
when an account becomes a client of the Company to the time the laboratory
starts receiving specimens may be up to four months. The delay in receiving
samples is primarily due to the necessity of establishing communication
capabilities between the client and the Company, the requirement to ship out
collection kits and forms, and the establishment of a collection site network.
At December 31, 1999, the Company had several accounts which were in the process
of being set up where revenues are not expected to be realized until 2000.
Product Sales. At December 31, 1999, MEDTOX Diagnostics, Inc. did not have
any significant backlog and normally does not have any significant backlog. The
Company does not believe that sales backlog is a significant factor in the
Product Sales segment of its business.
9. Competition.
Laboratory Services. As of December 31, 1999 approximately 66
labs, including MEDTOX Laboratories, Inc. were certified by the Department of
Health and Human Services as having met the standards for Subpart C of Mandatory
Guidelines for Federal Workplace Drug Testing Programs (59 FR 29916, 29925).
Competitors and potential competitors include forensic testing units of large
clinical laboratories and other independent laboratories, specialized
laboratories, and in-house testing facilities maintained by hospitals.
Competitive factors include reliability and accuracy of tests,
price structure, service, transportation and collection networks and the ability
to establish relationships with hospitals, physicians, and users of drug abuse
testing programs. It should be recognized, however, that many of the competitors
and potential competitors have substantially greater financial and other
resources than the Company.
The industry in which the Company competes is characterized by
service issues including, turn-around time of reporting results, price, the
quality and reliability of results, and an absence of patent or other
proprietary protection. In addition, since tests performed by the Company are
not protected by patents or other proprietary rights, any of these tests could
be performed by competitors. However, there are proprietary assay protocols for
the more specialized testing that are unique to the Company.
The Company's ability to successfully compete in the future
and maintain it margins will be based on its ability to maintain its quality and
customer service strength while maintaining efficiencies and low cost
operations. There can be no assurance that price competitiveness will not
increase in importance as a competitive factor in the laboratory testing
business.
Product Sales. The diagnostics market has become highly
competitive with respect to the price, quality and ease of use of various tests
and is characterized by rapid technological and regulatory changes. The Company
has designed its on-site tests as inexpensive, on-site tests for use by
unskilled personnel, and has not endeavored to compete with laboratory-based
systems. Numerous large companies with greater research and development,
marketing, financial, and other capabilities, as well as government-funded
institutions and smaller research firms, are engaged in research, development
and marketing of diagnostic assays for application in the areas for which the
Company produces its products.
The Company has experienced increased competition with respect
to its immunoassay tests from systems and products developed by others, many of
whom compete solely on price. As the number of firms marketing diagnostic tests
has grown, the Company has experienced increased price competition. A further
increase in competition may have a material adverse effect on the business and
future financial prospects of the Company.
10. Government Regulations.
The products and services of the Company are subject to the regulations of
a number of governmental agencies as listed below. It is believed that the
Company is currently in compliance with all regulatory authorities. The Company
cannot predict whether future changes in governmental regulations might
significantly increase compliance costs or adversely affect the time or cost
required to develop and introduce new products.
1. Substance Abuse and Mental Health Services Administration (SAMHSA).
MEDTOX Laboratories, Inc. has been certified by SAMHSA since 1988. SAMHSA
certifies laboratories meeting strict standards under Subpart C of Mandatory
Guidelines for Federal Workplace Drug Testing Programs. Continued certification
is accomplished through periodic inspection by SAMHSA to assure compliance with
applicable regulations.
2. United States Food and Drug Administration (FDA). Certain tests for
human diagnostic purposes must be cleared by the FDA prior to their marketing
for in vitro diagnostic use in the United States. The FDA regulated products
produced by the Company are in vitro diagnostic products subject to FDA
clearance through the 510(k) process which requires the submission of
information and data to the FDA that demonstrates that the device to be marketed
is substantially equivalent to a currently marketed device. This data is
generated by performing clinical studies comparing the results obtained using
the Company's device to those obtained using an existing test product. Although
no maximum statutory response time has been set for review of a 510(k)
submission, as a matter of policy the FDA has attempted to complete review of
510(k) submissions within 90 days. To date, the Company has received 510(k)
clearance for 12 different products and the average time for clearance was 72
days with a maximum of 141 days and a minimum of 20 days. Products subject to
510(k) regulations may not be marketed for in vitro diagnostic use until the FDA
issues a letter stating that a finding of substantial equivalence has been made.
As a registered manufacturer of FDA regulated products, the Company is
subject to a variety of FDA regulations including the Good Manufacturing
Practices (GMP) regulations which define the conditions under which FDA
regulated products are to be produced. These regulations are enforced by FDA and
failure to comply with GMP or other FDA regulations can result in the delay of
pre-market product reviews, fines, civil penalties, recall, seizures,
injunctions and criminal prosecution.
3. Health Care Financing Administration (HCFA). The Clinical Laboratory
Improvement Act (CLIA) introduced in 1992 requires that all in vitro diagnostic
products be categorized as to level of complexity. A request for CLIA
categorization of any new clinical laboratory test system must be made
simultaneously with FDA 510(k) submission. The EZ-SCREEN, PROFILE, PROFILE II,
VERDICT and VERDICT II drugs of abuse tests currently marketed by MEDTOX
Diagnostics, Inc. have been categorized as moderately complex. The complexity
category to which a clinical laboratory test system is assigned may limit the
number of laboratories qualified to use the test system thus impacting product
sales. MEDTOX Laboratories, Inc. is a CLIA licensed laboratory.
4. Drug Enforcement Administration (DEA). The primary business of the
Company involves either testing for drugs of abuse or developing test kits for
the detection of drugs/drug metabolites in urine. MEDTOX Laboratories, Inc. is
registered with the DEA to conduct chemical analyses with controlled substances.
The MEDTOX Diagnostics, Inc. facility in Burlington, N.C. is registered by the
DEA to manufacture and distribute controlled substances and to conduct research
with controlled substances. Maintenance of these registrations requires that the
Company comply with applicable DEA regulations.
5. Additional Laboratory Regulations. The laboratories of MEDTOX
Laboratories, Inc. and certain of its laboratory personnel are licensed or
otherwise regulated by certain federal agencies, states, and localities in which
it conducts business. Federal, state and local laws and regulations require
MEDTOX Laboratories, Inc. among other things, to meet standards governing the
qualifications of laboratory owners and personnel, as well as the maintenance of
proper records, facilities, equipment, test materials, and quality control
programs. In addition, the laboratories are subject to a number of other
federal, state, and local requirements which provide for inspection of
laboratory facilities and participation in proficiency testing, as well as
govern the transportation, packaging, and labeling of specimens tested by either
laboratory. The laboratories are also subject to laws and regulations
prohibiting the unlawful rebate of fees and limiting the manner in which
business may be solicited.
The laboratory receives and uses small quantities of hazardous chemicals
and radioactive materials in their operations and are licensed to handle and
dispose of such chemicals and materials. Any business handling or disposing of
hazardous and radioactive waste is subject to potential liabilities under
certain of these laws.
11. Product and Professional Liability.
Laboratory Services. The Company's laboratory testing services
are primarily diagnostic and expose the Company to the risk of liability claims.
The Company's laboratories have maintained continuous professional and general
liability insurance since 1984. The insurance policy covers those amounts the
Company is legally obligated to pay from damages resulting from a Medical
Incident, which arises out of a Failure to Render Professional Services. To
date, the Company has not had any substantial product liability and no material
professional service claims are currently pending.
Product Sales. Manufacturing and marketing of products by the
Company entail a risk of product liability claims. In August, 1993, the Company
procured insurance coverage against the risk of product liability arising out of
events after such date, but such insurance does not cover claims made after that
date based on events that occurred prior to that date. The insurance policy
covers damages that the Company is legally obligated to pay as a result from
bodily injury and property damage. Consequently, for uncovered claims, the
Company could be required to pay any and all costs associated with any product
liability claims brought against it, the cost of defense whatever the outcome of
the action, and possible settlement or damages if a court rendered a judgment in
favor of any plaintiff asserting such a claim against the Company. Damages may
include punitive damages, which may substantially exceed actual damages. The
obligation to pay such damages could have a material adverse effect on the
Company and exceed its ability to pay such damages. No product liability claims
are pending.
12. Employees.
As of December 31, 1999, the Company had a total of
approximately 340 full time employee equivalents as compared to approximately
315 full time employee equivalents at December 31, 1998. Of the approximate 340
employees, 309 work at and for MEDTOX Laboratories, Inc. while the remaining 31
work at MEDTOX Diagnostics, Inc.
The Company's employees are not covered by any collective
bargaining agreements and the Company has not experienced any work stoppages.
The Company considers its relations with its employees to be good.
ITEM 2. PROPERTIES.
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The administrative offices and laboratory operations for the
Laboratory Services segment of the Company's business are located in a 53,576
square foot facility in St. Paul, Minnesota. The facility is rented under a
lease which expires in March 2002. The current annual rent, excluding operating
costs, for this facility is $445,000 per year.
The operations for the Product Sales segment of the Company's
business are located in Burlington, North Carolina where the Company maintains
the offices, research and development laboratories, production operations, and
warehouse of MEDTOX Diagnostics, Inc. There the Company leases approximately
33,000 square feet. The current annual rent, excluding operating cost, paid by
the Company for this facility is approximately $121,000. This facility is
currently leased from Dr. Samuel C. Powell, a member of the Board of Directors
of the Company. The Company is currently leasing the space on a month-to-month
basis and intends to negotiate a new lease with Dr. Powell in the near future.
The Company believes it is renting these facilities on terms as favorable as
those available from third parties for equivalent premises. In the opinion of
management, comparable alternative facilities could be obtained without
disruption of the business if a new lease with Dr. Powell is not negotiated.
The Company leases administrative offices and laboratory
facilities in an approximately 22,000 square foot facility in South Plainfield,
New Jersey. The rent payment, excluding operating costs, is $170,000 per year.
The facility is currently idle but the lease terminates at the end of April
2000. The costs of the facility were considered in the Company's restructuring
charge in 1996.
The Company believes that its existing facilities are adequate
for the purposes being used to accommodate its product development, and
manufacturing and laboratory testing requirements.
ITEM 3. LEGAL PROCEEDINGS.
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In February, 1999 the Company settled a claim of patent
infringement brought against the Company by United States Drug Testing
Laboratories on August 20,1996. The Company, while denying any infringement, has
settled the case by paying United States Drug Testing Laboratories $17,500 and
issuing United States Drug Testing Laboratories 2,500 shares of common stock.
The Company had previously accrued for this contingency. Accordingly, the
settlement of this matter did not affect results of operations for the year
ending December 31, 1999. Under the MEDTOX Laboratories acquisition agreement,
pursuant to which the Company originally acquired MEDTOX Laboratories, Inc., the
sellers of MEDTOX Laboratories, Inc. agreed to remain liable for any and all
damages for any patent infringement which was alleged to have occurred prior to
the closing of the Company's purchase of MEDTOX Laboratories, Inc. The
acquisition agreement also provided for the sellers to indemnify and hold the
Company harmless from and against any damages, loss, liability or expense,
including reasonable attorneys' fees and court costs in connection with any
infringement which was alleged to have occurred before the closing date. It is
the Company's opinion that it is entitled to recover $79,000 in damages from the
sellers in accordance with the above referenced provisions of the acquisition
agreement. The Company has made a formal demand on the sellers for payment of
this $79,000 and plans to commence an arbitration proceeding against the sellers
if payment of the $79,000 is not made.
On January 31, 1997, the Company filed suit in Federal
District Court in Minnesota against Morgan Capital LLC, David Bistricer and Alex
Bistricer alleging violation of Section 16b of the Securities and Exchange Act
of 1934 and seeking recovery of more than $500,000 in short-swing profits.
Messrs. David and Alex Bistricer are former directors of the Company. On August
4, 1997, the U.S. District Court dismissed the Company's complaint and on
October 29, 1997, the Company filed an appeal of that decision to the United
States Court of Appeals for the Eighth Circuit. On July 21, 1998, the Eighth
Circuit reversed the District Court dismissal and remanded the case to the
District Court. On June 3, 1999 the U.S. District Court found that Morgan
Capital had violated Section 16(b) and ordered Morgan Capital to pay the Company
damages of $551,000 plus interest. The parties are now engaged in discovery
regarding the individual claims by the Company against David and Alex Bistricer
personally. Once the claims against the Bistricers have been adjudicated, it is
anticipated that Morgan Capital and the Bistricers will appeal any damage awards
to the Eighth Circuit unless the parties are able to reach a final settlement of
all claims. The Company has not recorded a receivable for this amount due to the
uncertainty of this matter.
In May of 1999 the Company settled a lawsuit brought against
the Company by a previous landlord in the Circuit Court of Cook County,
Illinois. The landlord alleged that the Company breached the terms of a lease
the Company was required to assume in connection with an asset acquisition. The
Company settled this matter for $685,000 which was less then the $850,000 the
Company had previously accrued for this contingency at December 31, 1998. The
difference between the original accrual and the actual settlement amount was
recorded in the second quarter of 1999 as a reduction in restructuring costs.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.
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The Company held a special meeting of stockholders on February
22, 1999 to adopt and approve an amendment of the Company's Certificate of
Incorporation providing for a one-for- twenty reverse stock split of outstanding
Common Stock of the Company. The amendment was approved by a vote of 2,309,935
in favor and 162,644 against. The reverse split was effective on February 23,
1999 and the common stock began trading on the new basis February 24, 1999. All
shares and per share amounts presented in the Annual Report on Form 10-K have
been adjusted to reflect the reverse split.
The Annual Meeting (the "1999 Annual Meeting") of the
stockholders of the Company was held on September 16, 1999. At that meeting, by
a vote of 1,468,805 shares in favor and 120,703 shares against, the stockholders
approved an amendment to Article FIFTH of the Company's Certificate of
Incorporation to provide for the classification of the Board of Directors into
three classes of directors with staggered terms of office. With respect to this
matter, 1,313,739 shares abstained or did not vote. At that meeting, the
stockholders then elected the following individuals to serve on the Board of
Directors of the Company until their respective successors are duly elected and
qualified in the following classifications: Class I, to hold office until the
Annual Meeting in 2000, Miles E. Efron and Samuel C. Powell, Ph.D; Class II, to
hold office until the Annual Meeting in 2001, James W. Hansen; and Class III to
hold office until the Annual Meeting in 2002, Richard A. Braun and Harry G.
McCoy, Pharm.D. Also by a vote of 2,404,280 shares in favor and 146,104 shares
against, the stockholders of the Company approved an amendment to the Company's
Employee Stock Purchase Plan to increase from 25,000 to 150,000 the number of
shares authorized to be issued pursuant to that Plan. With respect to this
matter, 352,863 shares abstained or did not vote. Finally, by a vote of
2,333,440 shares in favor and 238,818 shares against, the stockholders of the
Company approved an amendment to Article FOURTH of the Company's Certificate of
Incorporation to increase its number of authorized common stock from 3,750,000
shares to 7,400,000 shares. With respect to this matter, 330,989 shares
abstained or did not vote.
During fiscal year 1999, no other matters were submitted to a
vote of the securities holders of the Company.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
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Common Stock
Since September 27, 1993, the Common Stock has been listed on the American
Stock Exchange and is currently trading under the symbol "TOX". From September
16, 1992 to September 26, 1993 the Common Stock was traded in and quoted in the
Emerging Company Marketplace of the American Stock Exchange ("ECM") under the
trading symbol "EDI.EC". As of March 15, 2000, the number of holders of record
of the Common Stock was 2,658. The following tables set forth, for the calendar
quarters indicated, the high and low closing price per share for the Common
Stock, as reported by the American Stock Exchange. The quotations shown
represent inter dealer prices without adjustment for retail markups, markdowns
or commissions, do not necessarily reflect actual transactions, and have been
adjusted for the 1:20 reverse split which took effect on February 24, 1999.
2000: (through March 15, 2000) High Low
---- ---- ---
First Quarter................... 10 1/8 8 1/2
1999: High Low
---- ---- ---
First Quarter... ................. 5 2 9/16
Second Quarter............... 7 1/2 2 5/8
Third Quarter........................... 10 1/16 6 1/2
Fourth Quarter.................. 9 5/8 7 1/4
1998:
First Quarter............................ 7 1/2 5
Second Quarter........................ 8 3/4 5
Third Quarter........................... 8 3/4 5
Fourth Quarter......................... 7 1/2 3 3/4
On March 15, 2000, the closing price of the Common Stock as
reported by the American Stock Exchange was $8 7/8.
No cash dividends have been declared or paid by the Company since
its inception and management of the Company has no plans to pay a cash dividend
in the foreseeable future. The Company's financial covenants under its debt
instrument may effectively preclude the Company from paying cash dividends.
On September 18, 1998, the Company's Board of Directors
authorized and declared a dividend of one preferred share purchase right for
each share of common stock then outstanding. Subsequent to that date the Company
maintains a plan in which one preferred share purchase right (Right) exists for
each common share of the Company. These Rights are exercisable only if a person
or group acquires beneficial ownership of 20 percent or more of the Company's
outstanding common stock.
Series A Preferred Stock
To help finance the acquisition of the predecessor to MEDTOX
Laboratories, Inc. and provide working capital, the Company issued 407 shares of
Series A Preferred Stock in January 1996. There are currently no remaining
shares of Series A Preferred Stock outstanding.
The Series A Preferred Stock was convertible into shares of
Common Stock, at any time from March 30, 1996, the 60th day after the shares of
Series A Preferred Stock were first issued by the Company (the "Initial
Conversion Date"), until January 30, 1998, the second anniversary of the Initial
Preferred Issuance Date, at which time all conversion rights terminated. The
Series A Preferred Stock had no voting power and had certain liquidation
preference and dividend rights. The number of shares of Common Stock issuable
upon conversion of a share of Series A Preferred Stock equaled the number
derived by dividing (i) the purchase price of the Series A Preferred Stock
($50,000 per share) by the lesser of (i) $2.775 (based on pre-reverse split
market price) or (ii) 75% of the Market Price of the Common Stock on the day the
shares of Series A Preferred Stock were converted into Common Stock. "Market
Price" is defined for this purpose as the daily average of the closing bid
prices quoted on the American Stock Exchange or other exchange on which the
Common Stock is traded for the five trading days immediately preceding the date
the shares are converted.
No dividends on the Series A Preferred Stock were declared or
paid prior to their conversion to Common Stock.
Subordinated Debt
As of December 31, 1999 the Company had received $575,000 from
private placements of subordinated debt, with a maturity date of March 31, 2001.
$175,000 was received in the fourth quarter of 1998 with the remaining $400,000
received in the first quarter of 1999. The debt carries an interest rate of 12%
and has accompanying warrants to purchase a number of shares of common stock
equal to 25% of the notes purchased at an exercise price per share of $3.25.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data is derived from the
consolidated financial statements of the Company and should be read in
conjunction with the consolidated financial statements, related notes, and other
financial information included herein.
In evaluating financial performance, management focuses on net income as a
segment's measure of profit or loss. The accounting policies of the segments are
the same as those described in the summary of significant accounting policies
included in Note 1 to the Consolidated Financial Statements.
SEGMENT INFORMATION (IN THOUSANDS)
Lab Services Product Sales Total
1999
NET REVENUES 31,012 3,991 35,003
SEGMENT INCOME (LOSS) 1,440 (21) 1,419
DILUTED EARNINGS PER COMMON SHARE 0.48
SEGMENT ASSETS 24,269 2,002 26,271
Lab Services Product Sales Total
1998
NET REVENUES 27,070 2,505 29,575
SEGMENT LOSS (1,391) (906) (2,297)
DILUTED LOSS PER COMMON SHARE (0.79)
SEGMENT ASSETS 23,289 1,311 24,600
1997
NET REVENUES 25,899 2,695 28,594
SEGMENT INCOME (LOSS) 430 (405) 25
DILUTED EARNINGS PER COMMON SHARE 0.01
SEGMENT ASSETS 23,469 1,412 24,881
1996
NET REVENUES 23,541 3,047 26,588
SEGMENT LOSS (9,155) (3,653) (12,808)
DEEMED DIVIDEND ON PREF. STOCK (6,783)
DILUTED LOSS PER COMMON SHARE (0.59)
SEGMENT ASSETS 22,479 1,601 24,080
1995
NET REVENUES 4,612 2,914 7,526
SEGMENT LOSS (2,614) (7,283) (9,897)
DILUTED LOSS PER COMMON SHARE (0.77)
SEGMENT ASSETS 1,751 2,187 3,938
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
General
The Company commenced operations in June 1983 and until 1986
was a development stage company. The Company became engaged in the manufacture
and sale of products as a result of its acquisition of Granite Technological
Enterprises, Inc. in June 1986. The Company began the manufacture and sale of
its EZ-SCREEN diagnostic tests in 1985 and introduced its patented one-step
assay, VERDICT and RECON, in 1993. In February 1994, the Company completed the
acquisition of PDLA. In January 1996, the Company completed the acquisition of
the assets of the predecessor of MEDTOX Laboratories, Inc. Since inception, the
Company has financed its working capital requirements primarily from the sale of
equity securities and more recently through debt financing.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Laboratory Services
Revenues from Laboratory Services for the year ended December
31, 1999 were $31,012,000 as compared to $27,070,000 for the year ended December
31, 1998. The increase of 14.6% was primarily attributable to an increase of
19.2% in laboratory tests for employment drug testing services. This increase
was due to increased sales from current clients as well as new clients. Revenue
from the increase in test volume was partially offset by an 8.0% decrease in
average per unit prices.
The gross margin from the revenues generated from the
Laboratory Services was 33.7% for the year ended December 31, 1999 as compared
to a gross margin of 30.9% for the same period in 1998. The increase in gross
margin was primarily due to cost savings and improvements in the efficiency of
laboratory operations which more than offset the 8.0% decrease in average per
unit prices.
Selling, general and administration expenses for the year
ended December 31, 1999 were $8,092,000, compared to $7,929,000 for the year
ended December 31, 1998. The increase of $163,000 or 2.1% in 1999 was primarily
the result of increased costs in the sales and marketing area related to the
increased sales volume. However, these increases were substantially offset by
the overall reduction in general and administrative expenses due to the
Company's continued efforts to reduce and monitor operating costs.
Research and development expenses incurred during the year
ended December 31, 1999 were $316,000 as compared to $522,000 for the same
period in 1998. This decrease of $206,000 was primarily the result of a fewer
number of laboratory-based assays being develop in 1999 as compared to those
developed in 1998.
The Laboratory Services segment for the year ended December
31, 1999, incurred interest and financing costs of $752,000, compared to costs
of $615,000 incurred during the year ended December 31, 1998. This increase of
$137,000 or 22.3% was primarily due to the increase in debt attributable to this
segment of the Company's operations.
The Company used $686,000 of its restructuring reserve in fiscal
1999, which reduced the remaining balance of this reserve to $469,000 as of
December 31, 1999. The reduction in the restructuring reserve in fiscal 1999
were due to payments of $522,000 and a decrease in the reserve by an additional
$164,000, as a result of the settlement of certain litigation brought against
the Company for less than the Company had previously accrued for this
contingency in 1998. The $164,000 adjustment was recorded in the second quarter
of 1999 as a reduction in restructuring costs.
As a result of the above, the net income for the Laboratory
Services segment of the Company for the year ended December 31, 1999 was
$1,440,000 compared to a net loss of ($1,391,000), for the year ended December
31, 1998.
Product Sales
Revenues from Product Sales segment for the year ended
December 31, 1999 increased by 59.3% to $3,991,000 as compared to $2,505,000 for
the year ended December 31, 1998. The increase was primarily attributable to the
significant growth in sales of the PROFILE(R)- II and VERDICT(R)- II on-site
testing kits.
Product Sales include the sales generated from substance abuse
testing products, which incorporates the EZ-SCREEN PROFILE, PROFILE(R)- II,
VERDICT and VERDICT(R)- II on-site test kits and other ancillary products for
the detection of abused substances. Sales from these products increased 90.5% to
$2,471,000 for the year ended December 31, 1999 compared to sales of $1,297,000
in 1998. The Company believes that the introduction of PROFILE(R)- II and
VERDICT(R)- II, its new generation of on-site test kits along with its patent
pending "test system" has placed the Company in a strong position to compete
successfully in the on-site drug screening market.
Product Sales also include sales of agricultural diagnostic
products. Sales of these products increased 19.7% to $548,000 for the year ended
December 31 1999, compared to $458,000 in 1998. The primary reason for the
increase of $90,000 was the result of increased purchases by the USDA for the
Company's products. The USDA's needs for the Company's products vary from year
to year and sales to the USDA are expected fluctuate accordingly.
Sales of contract manufacturing services, microbiological and
associated products increased 29.6% to $972,000 for the year ended December 31,
1999 compared to $750,000 in 1998. This increase was due to increased revenues
from both historical customers and new customers.
Gross margins from Product Sales for the year ended December
31, 1999 were 45.5% compared to 33.3% for the year ended December 31, 1998. The
increase in gross margin from Product Sales was due to the substantial increase
in overall sales of products with a higher gross margin, particularly the
substance abuse testing products.
Revenues from interest and other income for the years ended
December 31, 1999 and December 31, 1998 was approximately $1,000 for both years.
Selling, general and administration expenses for products
sales during the year ended December 31, 1999 were $1,256,000 compared to
$1,045,000 for the year ended December 31, 1998. The increase of $211,000 or
20.2% was primarily due to increased sales and marketing expenses as a result of
implementation costs associated with the introduction and sale of the Company's
new generation on-site products.
Research and development expenses incurred during the year
ended December 31, 1999 were $518,000 as compared to $631,000 for the same
period in 1998. The decrease of $113,000 or 17.9% was primarily the result of
the completion of a significant portion of the development costs associated with
the Company's new generation of on-site products.
For the year ended December 31, 1999, the Product Sales
segment incurred interest and financing costs of $65,000 as compared to $59,000
for the same period in 1998.
As a result of the above, the Product Sales segment net loss
for the year ended December 31, 1999 was ($21,000), compared to the net loss of
($906,000) for the year ended December 31, 1998.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Laboratory Services
Revenues from Laboratory Services for the year ended December
31, 1998 were $27,070,000 as compared to $25,899,000 for the year ended December
31, 1997. The increase of 4.5% was primarily attributable to increase of 16.5%
in laboratory samples for employment drug testing services. This increase was
due to increased sales from current clients as well as new clients. Revenue from
increase in sample volume was partially offset by an 11.3% decrease in average
per unit prices.
The gross margin from the revenues generated from the
laboratory services was 30.9% for the year ended December 31, 1998 as compared
to a gross margin of 37.5% for the same period in 1997. The decline in gross
margin was primarily due to increased costs related to implementation of new
tests and a decrease in the average selling price per laboratory sample. The
decrease in average realized selling price was partially offset by savings
realized from cost savings and improvements in the efficiency of laboratory
operations.
Selling, general and administration expenses for the year
ended December 31, 1998 were $7,929,000, compared to $7,780,000 for the year
ended December 31, 1997. The increase of $149,000 or 1.9% in 1998 was the result
of increased costs in several areas including; $379,000 in increased
depreciation expense, $133,000 in increased group insurance costs, a $123,000
increase in computer information systems expense, and severance expenses
totaling $167,000 related to staff resizing. These increases were partially
offset by savings of $564,000 realized from reduced sales and marketing expenses
due to a restructuring of the sales and marketing group and an overall effort to
reduce and monitor costs.
Research and development expenses incurred during the year
ended December 31, 1998 were $522,000 as compared to $502,000 for the same
period in 1997. This increase of $20,000 was primarily the result of increased
in personnel costs due to scheduled salary increases.
The Laboratory Services segment for the year ended December
31, 1998, incurred interest and financing costs of $615,000, compared to costs
of $609,000 incurred during the year ended December 31, 1997.
The Company's restructuring reserve increased by $712,000 for the
year ended December 31, 1998 as compared to the period ended December 31, 1997.
The increase in the reserve was due to an increase in the projected litigation
and settlement expenses relating to a lawsuit brought by a previous landlord in
the Circuit Court of Cook County, Illinois. In December 1998, the Court granted
summary judgment against the Company on the issue of liability. The Company
settled this matter in May 1999 for $685,000.
As a result of the above, the net loss for the Laboratory
Services segment of the Company for the year ended December 31, 1998 was
($1,391,000), compared to the net income of $430,000 for the year ended December
31, 1997.
Product sales
Revenues from Product Sales for the year ended December 31,
1998 decreased 7.1% to $2,505,000 as compared to $2,695,000 for the year ended
December 31, 1997. The decrease was primarily attributable to decreased sales in
substance abuse testing products and agricultural diagnostic products.
Product sales include the sales generated from substance abuse
testing products, which incorporates the EZ-SCREEN, PROFILE and VERDICT on-site
test kits and other ancillary products for the detection of abused substances.
Sales from these products decreased 15.0% to $1,297,000 for the year ended
December 31, 1998 compared to sales of $1,525,000 in 1997. The Company believes
that the decrease in product sales was primarily due to increased competition
from products perceived as more user friendly than the Company's traditional
products. The Company also believes that the introduction of its new generation
of on-site test kits along with its patent pending "test system" has placed the
Company in strong position to compete successfully in the on-site drug screening
market. The first of these next generation test kits, PROFILE(R)- II, received
pre-market 510(k) clearance from the U.S. Food & Drug Administration in the
fourth quarter of 1998.
Product sales also include sales of agricultural diagnostic
products. Sales of these products decreased 37.8% to $458,000 for the year ended
December 31 1998, compared to $736,000 in 1997. The primary reason for the
decrease of $278,000 was the result of decreased purchases by the USDA for the
Company's products. The USDA's needs for the Company's products vary from year
to year and sales to the USDA are expected fluctuate accordingly.
Sales of contract manufacturing services, microbiological and
associated products increased 72.8% to $750,000 for the year ended December 31,
1998 compared to $434,000 in 1997. This increase was due to increased revenues
from both historical customers and new customers added in late 1997.
Gross margins from Product Sales for the year ended December 31, 1998 were
33.3% compared to 37.0% for the year ended December 31, 1997. The decrease in
gross margin from product sales was due to lower overall sales of products and
increased manufacturing costs related to new product development.
Revenues from interest and other income for the year ended
December 31, 1998 were $1,000 compared to $6,000 for the year ended December 31,
1997.
Selling, general and administration expenses for products
sales during the year ended December 31, 1998 were $1,045,000, compared to
$946,000 for the year ended December 31, 1997. The increase of $99,000 or 10.5%
was primarily the result of implementation costs associated with the
introduction of the Company's new generation on-site products.
Research and development expenses incurred during the year
ended December 31, 1998 were $631,000 as compared to $463,000 for the same
period in 1997. The increase of $169,000 or 36.5% was primarily the result of
costs associated with the development of the Company's new generation on-site
products.
For the year ended December 31, 1998, the Product Sales
segment incurred interest and financing costs of $59,000. There were no interest
charges incurred by this segment during the year ended December 31, 1997. The
interest and finance costs were the result of the funds borrowed by the Company
to fund asset purchases and working capital requirements.
As a result of the above, the product sales segment net loss
for the year ended December 31, 1998 was ($906,000), compared to a net loss of
($405,000) for the year ended December 31, 1997.
Material Changes in Financial Condition
Laboratory Services
At December 31, 1999, net accounts and notes receivable for
Laboratory Services were $6,318,000. This $748,000, or 13.4% increase as
compared to $5,570,000 at December 31, 1998 was a result of an increase in gross
billings prior to pass through costs, in the fourth quarter of 1999 as compared
to the same quarter in 1998.
Inventories were $734,000 at December 31, 1999 compared to
$432,000 at December 31, 1998. This $302,000 or 69.9% increase was largely
attributable to the stockpiling of additional inventory to protect against
delivery problems from key suppliers due to "Year 2000" problems that did not
materialize.
Prepaid expenses and other assets were $914,000 at December
31, 1999 as compared to $503,000 at December 31, 1998. This $411,000 or 81.7%
increase was primarily the result of the down payment on a consultant's
contract, deposits on items of equipment which were not yet operational as of
year end and an increase in prepaid supplies in part in anticipation of
potential delivery problems due to "Year 2000" problems that did not
materialize.
The balance of gross equipment and improvements at December
31, 1999 was $11,299,000 as compared to a balance of $10,275,000 at December 31,
1998. This $1,024,000, or 10.0% increase was the result of purchases of
equipment and capital improvements for the laboratory operation to improve
efficiencies and reduce operating costs.
Goodwill, net of accumulated amortization, totaled $13,161,000
and $14,007,000 as of December 31, 1999 and 1998 respectively. The Company
periodically undertakes a review of the value of the remaining goodwill
associated with the acquisition of MEDTOX Laboratories, Inc., to determine if
the value is supported by the projected future undiscounted cash flows.
Utilizing an undiscounted cash flow analysis, the Company determined that the
carrying value of the remaining goodwill associated with the MEDTOX
Laboratories, Inc. acquisition is supported by the projected cash flows at
December 31, 1999.
As of December 31, 1999, accounts payable totaled $3,518,000
compared to $3,345,000 at December 31, 1998. The increase of $173,000, or 5.2%
is primarily due to the 22.9% increase in laboratory sales in the fourth quarter
of 1999 as compared to the same period in 1998.
Accrued expenses were $1,419,000 at December 31, 1999, as
compared to $1,586,000 at December 31, 1998. The decrease of $167,000, was the
result of decrease in the accrual for various employee related expense incurred
in 1998, due to severance packages and moving allowances.
At December 31, 1999, the Laboratory Services segment had a
total balance of capital leases payable of $595,000, compared to a balance of
$702,000 at December 31, 1998. The decrease in the balance of the capital leases
payable was the result of the amortization of existing capital leases in 1999
and the emphasis on the use of bank financing for most of the Company's capital
equipment needs.
At December 31, 1999, Laboratory Services had a total balance of
restructuring accruals of $469,000 compared to a balance of $1,155,000 at
December 31, 1998. The decrease in the balance of the restructuring accruals of
$686,000, or 59.4%, was the result of the payment of various restructuring
expense during the year plus the reduction in the accrual to reflect the
settlement of certain pending litigation for an amount less than what the
Company had initially accrued for such litigation.
At December 31, 1999, Laboratory Services had a total loan
balance owed to the Company's financial lender of $5,952,000, compared to a
total balance of $5,120,000 owed at December 31, 1998. The net increase of
$832,000, or 16.3%, was primarily the result of increased borrowings by the
Company from its line of credit to pay operating expenses as well as to fund the
purchases of certain assets to improve operating efficiencies.
At December 31, 1999 the Company had a total of $537,000 in
12% subordinated debentures outstanding as compared to $148,000 as of December
31, 1998. This increase was the result of additional sales of the subordinated
debentures in the first quarter of 1999. The proceeds from the debentures were
used to fund operations and make capital purchases in 1999 in the Laboratory
Services segment.
Product Sales
At December 31, 1999, net accounts receivable for Product
Sales were $789,000. This $372,000, or 89.2% increase as compared to $417,000 at
December 31, 1998 was a result of a similar percentage increase in billings in
the fourth quarter of 1999 as compared to the same quarter in 1998.
Inventories were $818,000 at December 31, 1999 compared to
$675,000 at December 31, 1998. This increase of $143,000 was largely
attributable to the need to increase inventory to support the substantial
increase in product sales in 1999 and also due to the stockpiling of additional
inventory to protect against delivery problems from key suppliers due to "Year
2000" problems that did not materialize.
Prepaid expenses and other assets were $145,000 at December
31, 1999 as compared to $21,000 at December 31, 1998. The increase of $124,000
is primarily the result of the deposits made on equipment purchased but not yet
operational as of year end and prepayment of certain supplies expenses for items
that will actually be used in subsequent periods.
The balance of gross equipment and improvements at December
31, 1999 was $2,875,000 as compared to a balance of $2,787,000 at December 31,
1998. The increase of $88,000 was the result of equipment purchases during the
year.
As of December 31, 1999, accounts payable totaled $164,000
compared to $186,000 at December 31, 1998. The decrease of $22,000, or 11.8%, is
primarily the result more timely payment of outstanding invoices by this segment
of the Company.
Accrued expenses were $135,000 at December 31, 1999, as
compared to $138,000 at December 31, 1998.
At December 31, 1999, the Product Services had a total loan
balance owed to its financial lender of $692,000, compared to a total balance of
$752,000 owed at December 31, 1998. The net decrease of $60,000, or 8.0%, was
the result of payments made during the year and the lower level of financing
required by the Product Sales segment of the business due to its particularly
strong sales growth in 1999.
Liquidity and Capital Resources
The working capital requirements of the Company have been
funded primarily by cash received from debt financing. Cash and cash equivalents
at December 31, 1999 were $576,000, compared to $0 as of December 31, 1998.
The Company is relying on expected positive cash flow from
operations, its line of credit, in addition to funds received from private
placements of subordinated debt (see discussion below) to fund its future
working capital and asset purchases. The amount of credit on the revolving line
of credit is based primarily on the receivables of the Company and, as such,
varies with the accounts receivable, and to a lesser degree the inventory of the
Company. As of December 31, 1999, the Company had total availability of
$5,228,000 on its line of credit of which $4,208,000 was borrowed, leaving a net
availability of $1,020,000 as of December 31, 1999.
On January 14, 1998, the Company entered into a Credit
Security Agreement (the "Wells Fargo Credit Agreement") with Wells Fargo
Business Credit (Wells Fargo). The Wells Fargo Credit Agreement as amended,
consists of (i) a term loan of $2,125,000, bearing interest at prime + 1.25%:
(ii) an overadvance term loan of $700,000, bearing interest at prime + 3%; (iii)
a revolving line of credit equal to the lesser of $6,000,000 or 80% of the
Company's eligible trade accounts receivable, bearing interest at prime + 1%,
and (iv) a note of up to $1,200,000, for the purchase of capital equipment
bearing interest at prime + 1.25%.
As of December 31, 1999 the Company received $175,000 from
private placements of subordinated debt. The notes require payment of the
principal amount on December 31, 2001. Interest at 12% per annum is paid
semiannually on June 30 and December 31. In connection with the issuance of the
subordinated notes, the Company issued warrants to purchase a number of shares
of common stock equivalent to 25% of the face amount of the subordinated notes
divided by the warrant exercise price per share. The warrants are exercisable
form December 15, 1999 to December 31, 2001 and the initial warrant exercise
price was $5.00 per share. In February 1999, the warrant agreements were amended
to decrease the exercise price to $3.25 per share. The Company has determined
the value of the warrants at the date of grant to be $27,000. The value of the
warrants has been accounted for as additional paid-in-capital and deducted from
the principal of the subordinated notes as discount on debt issued.
During the first quarter or 1999, the Company received an additional
$400,000 from private placement of subordinated debt under the same terms as the
December 1998 debt issuance. The Company has determined the value of the
warrants as of the date of the loan to be $29,000. The value of the warrants has
been accounted for as additional paid-in-capital and deducted from the principal
of the subordinated notes as discount on debt issued
The funds received from the Wells Fargo Credit Agreement and
the private placements of subordinated debt were used to fund the working
capital needs of the Company.
In the short term, the Company believes that the
aforementioned capital along with additional funds received from the
subordinated debt offering will be sufficient to fund the Company's planned
operations through 2000. While there can be no assurance that the available
capital will be sufficient to fund the future operations of the Company beyond
2000, the Company believes that consistent profitable operations, as well as
access to capital, will be the primary basis for funding the operations of the
Company for the long term.
The Company continues to follow a plan which includes (i)
continuing to aggressively monitor and control costs, (ii) increasing revenue
from sales of the Company's existing products and services (iii) the development
of new products and services, as well as (iv) continue to selectively pursue
synergistic acquisitions to increase the Company's critical mass. There can be
no assurance that costs can be controlled, revenues can be increased, financing
may be obtained, acquisitions successfully consummated, or that the Company will
be profitable.
Impact of Year 2000
The "Year 2000" issue arose from the fact that many computer
systems relied at one time on a two-digit date code to identify the year (e.g.
98 to represent 1998) and, thus, there was concern that these systems may not be
able to differentiate between the year 2000 and the year 1900. If not corrected,
there was serious concern that systems processing date-dependent information
might fail or create erroneous results, causing disruptions of operations,
including, but not limited to, a temporary inability to process transactions,
report results, send invoices, or engage in similar normal business activity.
The Company created a task force representing all departments with the goal
of achieving an uninterrupted transition into calendar year 2000. The Company
has no products with embedded computer chips or date-sensitive controls and,
therefore, does not believe there are any "Year 2000" compatibility issues with
the Company's products. The Company has been in communication with its key
suppliers regarding "Year 2000" issues. No interruptions in operations were
caused by any key suppliers of the Company. The Company believes that it will
not experience any significant operational problems due to "Year 2000" issues
for its key suppliers in the future.
To date, the Company has not experience any material
consequences as a result of the "Year 2000" issue. The Company does not
anticipate that it will experience any material impact in the future as a result
of the "Year 2000" issue. However, there can be no assurances that such
consequences will not occur with the passage of time. The Company continues to
monitor all of its computer operating systems and related processes to guard
against interruption to the operation of its computer systems.
The Company has used primarily internal resources and delayed
other projects while completing its "Year 2000" readiness program. Updates to
internally supported software were generally covered by existing service
contracts. The total cost of the Company's "Year 2000" efforts through the end
of 1999 were less than $50,000 and relate primarily to software license fees and
new hardware and equipment updates. This amount excludes costs associated with
internal work done by Company employees.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK.
Market risk is the risk that the Company will incur losses due
to adverse changes in interest rates or currency exchange rates and prices. The
Company's primary market risk exposures are to changes in interest rates. During
1999, 1998 and 1997, the Company did not have sales denominated in foreign
currencies nor did it have any subsidiaries located in foreign countries. As
such, the Company is not exposed to market risk associated with currency
exchange rates and prices.
The Company had $575,000 and $175,000 of subordinated notes
outstanding as of December 31, 1999 and 1998, respectively, at a fixed interest
rate of 12% per annum. The Company also had capital leases at various fixed
rates. These financial instruments are subject to interest rate risk and will
increase or decrease in value if market interest rates change.
The Company had approximately $6.6 million and $5.9 million
outstanding on its line of credit and long-term debt issued under the Wells
Fargo Credit Agreement as of December 31, 1999 and 1998. The debt under the
Wells Fargo Credit Agreement is held at variable interest rates. The Company has
cash flow exposure on its committed and uncommitted line of credit and long-term
debt due to its variable prime rate pricing. At December 31, 1999 and 1998, a 1%
change in the prime rate would not materially increase or decrease interest
expense or cash flows.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
-------------------------------------------
Reference is made to the financial statements, financial
statement schedules and notes thereto included later in this report under Item
14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Effective May 27, 1998, the Registrant terminated Ernst & Young LLP as its
independent accounting firm. The termination of Ernst & Young LLP was approved
by the Audit Committee of the Board of Directors of the Registrant. There were
no disagreements with Ernst & Young LLP during the last fiscal year ending
December 31, 1997. Accordingly, Ernst & Young LLP has not advised the Registrant
of (i) the absence of the internal controls necessary for the Registrant to
develop reliable financial statements, (ii) any information which would cause
Ernst & Young LLP to no longer rely on management's representations, or that
Ernst & Young LLP was unwilling to be associated with the financial statements
prepared by management, (iii) any need to expand significantly the scope of its
audit, or any information that if further investigated may (a) materially impact
the fairness or reliability of either a previously issued audit report or the
underlying financial statements or any financial statements for any fiscal
period subsequent to the date of the most recent financial statements covered by
an audit report or (b) cause it to be unwilling to rely on management's
representations or be associated with the Registrant's financial statements, or
(iv) any information that has come to the attention of Ernst & Young LLP that it
concluded materially impacts the fairness or reliability of either (a) a
previously issued audit report or the underlying financial statements or (b) any
financial statements issued or to be issued covering any fiscal period
subsequent to the date of the most recent financial statements covered by an
audit report.
Effective June 3, 1998, the Registrant engaged Deloitte &
Touche LLP as its independent accounting firm. Neither the Registrant or any of
its subsidiaries has had any prior relationships with Deloitte & Touche LLP.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
This information will be contained in the Definitive Proxy
Statement with respect to the 2000 Annual Meeting of
Stockholders of MEDTOX Scientific, Inc., to be filed with the
Securities and Exchange Commission within 120 days following
the end of the fiscal year ended December 31, 1999.
ITEM 11. EXECUTIVE COMPENSATION.
This information will be contained in the Definitive Proxy
Statement with respect to the 2000 Annual Meeting of
Stockholders of MEDTOX Scientific, Inc., to be filed with the
Securities and Exchange Commission within 120 days following
the end of the fiscal year ended December 31, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
This information will be contained in the Definitive Proxy
Statement with respect to the 2000 Annual Meeting of
Stockholders of MEDTOX Scientific, Inc., to be filed with the
Securities and Exchange Commission within 120 days following
the end of the fiscal year ended December 31, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
This information will be contained in the Definitive Proxy
Statement with respect to the 2000 Annual Meeting of
Stockholders of MEDTOX Scientific, Inc., to be filed with the
Securities and Exchange Commission within 120 days following
the end of the fiscal year ended December 31, 1999.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, REPORTS ON FORM 8-K.
- ----------------------------------------------------------------------
a. (i) Financial Statements Page
--------------------
Reports of Independent Auditors................... 35
Consolidated Balance Sheets at December
31, 1999 and 1998................................. 37
Consolidated Statements of Operations
for the years ended December 31,
1999, 1998 and 1997............................... 38
Consolidated Statements of Stockholders'
Equity for the years
ended December 31, 1999,
1998 and 1997..................................... 39
Consolidated Statements of Cash
Flows for the years ended
December 31, 1999, 1998 and 1997........... 40
Notes to Consolidated Financial
Statements......................................... 41
(ii) Consolidated Financial Statement Schedules
Schedule II - Valuation and
Qualifying Accounts ............................... 52
All other financial statement schedules normally required under Regulation S-X
are omitted as the required information is inapplicable.
(iii) Exhibits
3.1 Bylaws of the Registrant (incorporated by reference to Exhibit 4.2
filed with the Registrant's Report on Form 10-Q for the quarter ended December
31, 1986).
3.2 Restated Certificate of Incorporation of the Registrant filed with the
Delaware Secretary of State on July 29, 1994 (incorporated by reference to
Exhibit 3.8 filed with the Registrant's Form 10-K for fiscal year ended December
31, 1994).
3.3 Certificate of Amendment of Certificate of Incorporation of the
Registrant, filed with the Delaware Secretary of State on November 27, 1995.
3.4 Amended Certificate of Designations of Preferred Stock (Series A
Convertible Preferred Stock) of the Registrant, filed with the Delaware
Secretary of State on January 29, 1996 (incorporated by reference to Exhibit 3.1
filed with the Registrant's report on Form 8-K dated January 30, 1996.)
3.5 Certificate of Amendment of Certificate of Incorporation of MEDTOX
Scientific, Inc. filed with Delaware Secretary of State on September
17,1998
10.2 Registrant's Stock Option Plan (as amended and restated) (incorporated
by reference to Exhibit 10.2 filed with the Registrant's Report on Form 10-K for
the fiscal year ended December 30, 1990).
10.3 Second Amendment dated December 31, 1986 to Exclusive License
Agreement amending and restating exclusive license granted by the Registrant to
Disease Detection International, Inc. (incorporated by reference to Exhibit
10.25 filed with the Registration Statement on Form S-1 dated August 26, 1987,
Commission File No. 33-15543).
10.5 Non-Qualified Stock Option Agreement between the Registrant and James
D. Skinner dated as of July 1, 1987 (incorporated by reference to Exhibit 10.26
filed with the Registrant's Registration Statement on Form S-1 dated August 26,
1987, Commission File No. 33-15543).
10.6 Non-Qualified Stock Option Agreement between the Registrant and James
D. Skinner (incorporated by reference to Exhibit 10.17 filed with the
Registrant's Form 10-K for the fiscal year ended December 31, 1988).
10.7 Non-Qualified Stock Option Agreement between the Registrant and James
D. Skinner dated as of August 10, 1988 (incorporated by reference to Exhibit
10.18 filed with the Registrant's Form 10-K for the fiscal year ended December
31, 1987).
10.8 Lease Agreement, dated as of June 1, 1989 between Samuel C. Powell, as
lessor, and EDITEK, as lessee relating to premises located at 1238 Anthony Road,
Burlington, North Carolina (incorporated by reference as filed with the
Registrant's report on Form 10-Q for the quarter ended June 30, 1989).
10.12 Stock Option Agreement dated May 4, 1990 between the Registrant and
Samuel C. Powell amending and restating the Non-Qualified Stock Option Agreement
between the Registrant and Samuel C. Powell dated as of May 23, 1988.
(Incorporated by reference to Exhibit 10.34 filed with the Registrant's Form
10-K for the fiscal year ended December 31, 1990).
10.13 Loan Modification Agreement dated May 3, 1990 between the Registrant
and James D. Skinner regarding the Promissory Note dated as of September 10,
1988 by James D. Skinner to the Registrant. (Incorporated by reference to
Exhibit 10.36 filed with the Registrant's Form 10-K for the fiscal year ended
December 31, 1990).
10.14 Stock Purchase Agreements dated as of July 19, 1991 between the
Registrant and Walter O. Fredericks, Peter J. Heath, Samuel C. Powell, and James
D. Skinner. (Incorporated by reference to Exhibit (a) filed with the
Registrant's Form 10-Q for the quarter ended June 30, 1991).
10.15 Form of Stock Purchase Agreement dated as of September 3, 1992
between the Registrant and Purchasers of EDITEK's common stock in a private
placement on September 3, 1992. (Incorporated by reference in Exhibit 10.46
filed with the Registrant's Form 10-K for the fiscal year ended December 31,
1992).
10.16 Agreement and Plan of Merger between the Registrant, PDLA Acquisition
Corporation, and Princeton Diagnostic Laboratories of America, Inc. dated
October 12, 1993. (Incorporated by reference to Exhibit (a) filed with the
Registrant's Form 10-Q for the quarter ended December 31, 1993.)
10.17 Registrant's Amended and Restated Stock Option Plan for non-employee
directors (incorporated by reference to Exhibit 4 filed with the Registrant's
Registration Statement on Form S-8 dated February 21, 1995, Commission File No.
33-89646).
10.18 Registrant's Equity Compensation Plan (incorporated by reference to
Exhibit 4 filed with the Registrant's Registration Statement on Form S-8 dated
November 11, 1993, Commission File No. 33-71490).
10.19 Registrant's Amended and Restated Qualified Employee Stock Purchase
Plan (incorporated by reference to Exhibit 4 filed with the Registrant's
Registration Statement on Form S-8 dated November 11, 1993, Commission File No.
33-71596).
10.20 Non-Qualified Stock Option Agreement between the Registrant an Mark
D. Dibner dated January 14, 1993 (incorporated by reference to Exhibit 4.2 filed
with the Registrant's Registration Statement on Form S-8 dated February 21,
1995, Commission File No. 33-89646).
10.22 Asset Purchase Agreement dated as of July 1, 1995 between the
Registrant and MEDTOX Laboratories, Inc. (incorporated by reference to Exhibit
10.1 filed with the Registrant's Report on Form 8-K dated January 30, 1996).
10.23 Amendment Agreement dated as of January 2, 1996 between the
Registrant and MEDTOX Laboratories, Inc. (incorporated by reference to Exhibit
10.2 filed with the Registrant's Report on Form 8-K dated January 30, 1996).
10.24 Assignment Agreement dated as of January 10, 1996 between and among
the Registrant, MEDTOX Laboratories, Inc. and Psychiatric Diagnostic
Laboratories of America, Inc. (incorporated by reference to Exhibit 10.3 filed
with the Registrant's Report on Form 8-K dated January 30, 1996).
10.25 Amendment Agreement dated as of January 30, 1996 among the
Registrant, MEDTOX Laboratories, Inc. and Psychiatric Diagnostic Laboratories of
America, Inc. (incorporated by reference to Exhibit 10.25 filed with the
Registrant's Report on Form 10-K for the fiscal year ended December 31, 1996.)
10.26 Loan and Security Agreement (together with the Exhibits and Schedules
thereto) by and between the Registrant, Psychiatric Diagnostic Laboratories of
America, Inc., diAGnostix, inc. and Heller Financial, Inc. dated January 30,
1996 (incorporated by reference to Exhibit 10.4 filed with the Registrant's
Report on form 8-K dated January 30, 1996).
10.27 Term Note A executed by the Registrant, Psychiatric Diagnostic
Laboratories of America, Inc. and diAGnostix in favor of Heller Financial, Inc.
dated January 30, 1996 (incorporated by reference to Exhibit 10.5 filed with the
Registrant's Report on Form 8-K dated January 30, 1996).
10.28 Term Note B executed by the Registrant, Psychiatric Diagnostic
Laboratories of America, Inc. and diAGnostix in favor of Heller Financial, Inc.,
dated January 30, 1996 (incorporated by reference to Exhibit 10.6 filed with the
Registrant's Report on Form 8-K dated January 30, 1996).
10.29 Assignment for Security (Patents) executed by the Registrant in favor
of Heller Financial, Inc., dated January 30, 1996 (incorporated by reference to
Exhibit 10.7 filed with the Registrant's Report on Form 8-K dated January 30,
1996).
10.30 Assignment for Security - EDITEK (Trademarks) executed by the
Registrant in favor of Heller Financial, Inc., dated January 30, 1996
(incorporated by reference to Exhibit 10.8 filed with the Registrant's Report on
Form 8-K dated January 30, 1996).
10.31 Assignment for Security - Princeton (Trademarks) executed by
Princeton Diagnostic Laboratories of America, Inc. in favor of Heller Financial,
Inc., dated January 30, 1996 (incorporated by reference to Exhibit 10.9 filed
with the Registrant's Report on Form 8-K dated January 30, 1996).
10.32 Lease Agreement between MEDTOX Laboratories, Inc. and Phoenix Home
Life Mutual Ins. Co. dated April 1, 1992, and amendments thereto (incorporated
by reference to Exhibit 10.10 filed with the Registrant's Report on Form 8-K
dated January 30, 1996).
10.33 Employment Agreement between the Registrant and Harry G. McCoy dated
January 30, 1996. (Incorporated by reference to Exhibit 10.33 filed with the
Registrant's Report on Form 10-K for the fiscal year ended December 31, 1995.)
10.34 Registrant's Amended and Restated Equity Compensation Plan
(increasing shares to 3,000,000). (Incorporated by reference to Exhibit 10.34
filed with the Registrant's Report on Form 10-K for the fiscal year ended
December 31, 1995.)
10.35 Asset Purchase Agreement dated as of May 31, 1995 between the
Registrant, Bioman Products, Inc. and NOVAMANN International, Inc. (Incorporated
by reference to Exhibit 10.35 filed with the Registrant's Report on Form 10-K
for the fiscal year ended December 31, 1995.)
10.36 Securities Purchase Agreement dated January 31, 1996 between the
Registrant and Harry G. McCoy. (Incorporated by reference to Exhibit 10.36 filed
with the Registrant's Report on Form 10-K for the fiscal year ended December 31,
1995.)
10.37 Registration Rights Agreement dated February 1, 1996 between the
Registrant and Harry G. McCoy. (Incorporated by reference to Exhibit 10.37 filed
with the Registrant's Report on Form 10-K for the fiscal year ended December 31,
1995.)
10.38 Agreement regarding rights to "MEDTOX" name dated as of January 30,
1996 between the Registrant and Harry G. McCoy. (Incorporated by reference to
Exhibit 10.38 filed with the Registrant's Report on Form 10-K for the fiscal
year ended December 31, 1995.)
10.39 Warrant Agreement dated as of December 18, 1995 between Samuel C.
Powell and the Registrant. (Incorporated by reference to Exhibit 10.39 filed
with the Registrant's Report on Form 10-K for the fiscal year ended December 31,
1995.)
10.40 Termination and Settlement Agreement dated as of July 3, 1996 between
the Registrant and James D. Skinner. (Incorporated by reference to Exhibit 10.40
filed with the Registrant's Report on Form 10-K for the fiscal year ended
December 31, 1996.)
10.41 Agreement dated as of March 17, 1997 between the Registrant and Harry
G. McCoy whereby Dr. McCoy assigns his rights to the name "MEDTOX" to the
Registrant. (Incorporated by reference to Exhibit 10.41 filed with the
Registrant's Report on Form 10-K for the fiscal year ended December 31, 1996.)
10.42 Employment Agreement dated January 1, 1997 between the Registrant and
Harry G. McCoy. (Incorporated by reference to Exhibit 10.42 filed with the
Registrant's Report on form 10-K for the fiscal year ended December 31, 1997.)
10.43 Employment Agreement dated January 1, 1997 between the Registrant and
Richard J. Braun. (Incorporated by reference to Exhibit 10.43 filed with the
Registrant's Report on form 10-K for the fiscal year ended December 31, 1997.)
b. Reports on Form 8-K
None
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
MEDTOX SCIENTIFIC, INC.
Report on Form 10-K
For year ended December 31, 1999
INDEX TO EXHIBITS FILED SEPARATELY WITH FORM 10-K
EXHIBIT # DESCRIPTION OF EXHIBIT
3.6 Certificate of Amendment of Certificate of Incorporation
of MEDTOX Scientific, Inc. filed with Delaware Secretary of
State on November 19, 1999.
4.1 Form of 12% Subordinated Notes issued by the
Registrant through the first quarter of 1999 to raise
an aggregate amount of $575,000 in subordinate debt,
all with a maturity date of December 31, 2001.
4.2 Form of Warrant accompanying the 12% Subordinated Notes
issued through the first quarter of 1999.
10.44 Employment Agreement dated January 1, 2000 between the
Registrant and Richard J. Braun.
10.45 Employment Agreement dated January 1, 2000 between the
Registrant and Harry G. McCoy.
24.1 Consent of Deloitte & Touche LLP
24.2 Consent of Ernst & Young LLP
27 Financial Data Schedule
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Act of 1934, the Registrant has duly caused this Annual Report to be
signed on its behalf by the undersigned, thereunto duly authorized on the 28th
of March 2000.
MEDTOX Scientific, Inc.
Registrant
By:/s/ Harry G. McCoy, Pharm.D.
----------------------------
Harry G. McCoy, Pharm.D.
President and
Chairman of the Board
Pursuant to the requirements of the Securities Act of 1934,
this Registration Statement has been signed below by the following persons on
behalf of the Registrant in the capacities and on the dates indicated.
Signature Title Date
/s/ Harry G. McCoy, Pharm.D. President, March 28, 2000
Harry G. McCoy and Chairman of the Board
/s/ Richard J. Braun Chief Executive Officer March 28, 2000
Richard J. Braun Director
/s/ James B. Lockhart Vice President, March 28, 2000
James B. Lockhart Chief Financial Officer and
Secretary
/s/ Samuel C. Powell Director March 28, 2000
Samuel C. Powell, Ph.D.
/s/ Miles E. Efron Director March 28, 2000
Miles E. Efron
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors
MEDTOX Scientific, Inc.
We have audited the accompanying consolidated balance sheets of MEDTOX
Scientific, Inc. (the Company) as of December 31, 1999 and 1998 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years then ended. Our audits also included the financial statement schedule
listed in the index as Item 14.a.(ii). These consolidated financial statements
and the financial statement schedule 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 of America. 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 our audits provide a reasonable
basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of MEDTOX Scientific, Inc. as of
December 31, 1999 and 1998 and the results of its operations and its cash flows
for the years then ended, in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, such financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
February 18, 2000
Report of Independent Auditors
Board of Directors and Shareholders
Medtox Scientific, Inc. (formerly EDITEK, Inc.)
We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows for the year ended December 31, 1997 of
Medtox Scientific, Inc. (formerly EDITEK, Inc.). Our audit also included the
financial statement schedule listed in the Index at Item 14(a). These
consolidated financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated results of its operations and its cash
flows for the year ended December 31, 1997 of Medtox Scientific, Inc. (formerly
EDITEK, Inc.), in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the consolidated financial statements taken as a whole, presents
fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
February 18, 2000
MEDTOX SCIENTIFIC, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(In thousands, except for number of shares)
1999 1998
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 576
Accounts receivable:
Trade, less allowance for doubtful accounts ($274 in 1999 and $245 in 1998) 6,982 $ 5,957
Other 125 30
--------- ---------
7,683 5,987
Inventories:
Raw materials 462 444
Work in process 230 151
Finished goods 126 80
Supplies 734 432
--------- ---------
1,552 1,107
Prepaid expenses and other 1,059 524
--------- ---------
Total current assets 10,294 7,618
EQUIPMENT AND IMPROVEMENTS:
Furniture and equipment 12,820 11,779
Leasehold improvements 1,354 1,283
--------- ---------
14,174 13,062
Less accumulated depreciation and amortization (11,358) (10,087)
--------- ---------
2,816 2,975
GOODWILL, net of accumulated amortization of $3,568 in 1999 and $2,697 in 1998 13,161 14,007
--------- ---------
$ 26,271 $ 24,600
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Checks written in excess of bank balances $ 142
Line of credit $ 4,208 3,095
Accounts payable 3,682 3,531
Accrued expenses 1,554 1,724
Current portion of restructuring accrual 384 1,079
Current portion of long-term debt 1,236 1,140
Current portion of capital leases 186 186
--------- ---------
Total current liabilities 11,250 10,897
LONG-TERM PORTION OF RESTRUCTURING ACCRUAL 85 76
LONG-TERM DEBT 1,737 1,785
LONG-TERM PORTION OF CAPITAL LEASES 409 516
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value; authorized shares, 1,000,000; none
issued and outstanding
Common stock, $0.15 par value; authorized shares, 7,400,000; issued
and outstanding shares, 2,904,410 in 1999 and 2,899,669 in 1998 436 435
Additional paid-in capital 59,859 59,815
Accumulated deficit (47,329) (48,748)
Treasury stock (176) (176)
--------- ---------
Total stockholders' equity 12,790 11,326
--------- ---------
$ 26,271 $ 24,600
See notes to consolidated financial statements.
MEDTOX SCIENTIFIC, INC.
CONSOLIDATED STATEMENTS OF operations YEARS ENDED december 31, 1999, 1998, AND
1997 (In thousands, except share and per share data)
1999 1998 1997
REVENUES:
Laboratory service revenues $ 31,012 $ 27,070 $ 25,899
Product sales 3,991 2,505 2,695
Interest and other income 1 6
------------ ------------ ------------
35,003 29,576 28,600
COSTS AND EXPENSES:
Cost of services 20,572 18,689 16,191
Cost of sales 2,177 1,671 1,697
Selling, general, and administrative 9,348 8,974 9,510
Research and development 834 1,153 965
Interest and financing costs 817 674 609
Restructuring costs (164) 712 (397)
------------ ------------ ------------
33,584 31,873 28,575
------------ ------------ ------------
NET INCOME (LOSS) $ 1,419 $ (2,297) $ 25
============ ============ ============
BASIC EARNINGS (LOSS) PER COMMON SHARE $ 0.49 $ (0.79) $ 0.01
============ =========== ============
WEIGHTED AVERAGE NUMBER OF BASIC COMMON
SHARES OUTSTANDING 2,902,087 2,893,399 2,566,966
=========== =========== ===========
DILUTED EARNINGS (LOSS) PER COMMON SHARE $ 0.48 $ (0.79) $ 0.01
============ =========== ============
WEIGHTED AVERAGE NUMBER OF DILUTED
COMMON SHARES OUTSTANDING 2,985,107 2,893,399 2,566,966
============ ============ ============
See notes to consolidated financial statements.
MEDTOX SCIENTIFIC, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except for number of shares)
Preferred Stock Common Stock Additional
Par Par Paid-in Accumulated Treasury
Shares Value Shares Value Capital Deficit Stock Total
BALANCE AT DECEMBER 31, 1996 238 1,277,790 $ 192 $ 60,008 $(46,476) $ (176) $ 13,548
Stock issued for MEDTOX
Laboratories, Inc. acquisition 417,292 62 (62)
Sale of common stock 10,524 2 73 75
Conversion of preferred stock
to common stock (234) 1,135,803 170 (247) (77)
Net income 25 25
---- --------- ------- -------- -------- -------- --------
BALANCE AT DECEMBER 31, 1997 4 2,841,409 426 59,772 (46,451) (176) 13,571
Sale of common stock 4,927 1 24 25
Conversion of preferred stock to
common stock (4) 53,333 8 (8)
Value of warrants issued 27 27
Net loss (2,297) (2,297)
---- --------- ------- -------- -------- -------- --------
BALANCE AT DECEMBER 31, 1998 2,899,669 435 59,815 (48,748) (176) 11,326
Sale of common stock 2,241 6 6
Stock issued for settlement 2,500 1 9 10
Value of warrants issued 29 29
Net income 1,419 1,419
---- ------ --------- ------- -------- -------- -------- --------
BALANCE AT DECEMBER 31, 1999 - $ - 2,904,410 $ 436 $ 59,859 $(47,329) $ (176) $ 12,790
==== ====== ========= ======= ======== ======== ======== ========
See notes to consolidated financial statements.
MEDTOX SCIENTIFIC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(In thousands)
1999 1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,419 $ (2,297) $ 25
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,124 2,094 2,083
Provision for losses on accounts receivable 29 42 156
Gain on sale of equipment (4)
Changes in operating assets and liabilities:
Accounts receivable (1,148) (476) (1,156)
Inventories (445) 35 148
Prepaid expenses and other (535) (109) (275)
Accounts payable and accrued expenses (19) 161 627
Restructuring accruals (687) 369 (1,017)
-------- -------- ---------
Net cash provided by (used in) operating activities 738 (185) 591
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment and improvements (1,119) (949) (1,315)
Proceeds from sale of equipment 4
-------- -------- --------
Net cash used in investing activities (1,119) (945) (1,315)
CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease) increase in checks in excess of bank balances (142) 142
Net proceeds from sale of common stock 6 25 (2)
Proceeds from line of credit and long-term debt 39,211 36,669 2,135
Principal payments on line of credit and long-term debt (38,049) (35,646) (1,346)
Principal payments on capital leases (107) (118) (87)
Other 38
-------- ------- -------
Net cash provided by financing activities 957 1,072 700
-------- -------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 576 (58) (24)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR - 58 82
-------- -------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 576 $ - $ 58
======== ======== =========
SUPPLEMENTAL NONCASH ACTIVITIES:
During 1999 and 1998, the Company entered into capital lease agreements totaling
$101,000 and $414,000, respectively.
See notes to consolidated financial statements.
MEDTOX SCIENTIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
1. Summary of significant accounting policies
The Company - The consolidated financial statements include the accounts
of MEDTOX Scientific, Inc. and its wholly owned subsidiaries, MEDTOX
Laboratories, Inc. (MEDTOX Laboratories) and MEDTOX Diagnostics, Inc.
(MEDTOX Diagnostics) (collectively referred to as the Company).
MEDTOX Laboratories provides laboratory analyses, logistics management,
data management, and program management services. Laboratory analyses
including clinical testing services for the detection of substances of
abuse and other toxins in biological fluids and tissues. Logistics,
data, and program management services include courier services for
medical specimen transportation, management programs for on-site drug
testing, data collection and reporting services, coordination of
specimen collection sites, and medical surveillance program management.
MEDTOX Diagnostics is engaged in the research, development, and sale of
products based upon enzyme immunoassay technology for the detection of
antibiotic residues, mycotoxins, drugs of abuse and other hazardous
substances as well as distribution of agridiagnostic and food safety
testing products.
All significant intercompany transactions and balances have been
eliminated.
Cash Equivalents - Cash equivalents include highly liquid investments
maturing within three months of purchase.
Trade Accounts Receivable - Sales are made to local and national
customers including corporations, clinical laboratories, government
agencies, medical professionals, law enforcement agencies, and health
care facilities. Concentration of credit risk is limited due to the
large number of customers to which the Company sells its products and
services. The Company extends credit based on an evaluation of the
customer's financial condition, and receivables are generally unsecured.
The Company provides an allowance for doubtful accounts equal to the
estimated losses expected to be incurred in the collection of accounts
receivable.
Inventories - Inventories are valued at the lower of cost (first-in,
first-out method) or market.
Equipment and Improvements - Equipment and improvements are stated at
cost. Provisions for depreciation have been computed using the
straight-line method to amortize the cost of depreciable assets over
their estimated useful lives. Leasehold improvements are amortized over
the lesser of the lease term or the economic useful lives of the
improvements.
Revenue Recognition - Sales are recognized in the statement of
operations when products are shipped or services are rendered.
Research and Development - Research and development expenditures are
charged to expense as incurred.
Income Taxes - The Company uses the liability method of accounting for
income taxes. Under this method, deferred tax assets and liabilities are
determined based on differences between the financial reporting and tax
bases of assets and liabilities and are measured using the enacted tax
rates and laws that will be in effect when the differences are expected
to reverse.
Earnings (Loss) per Share - Earnings (loss) per share of common stock
amounts are based on the weighted average number of shares of common
stock outstanding, as well as shares of common stock that would have
been issued and outstanding in certain transactions had the Company had
the necessary number of authorized shares of common stock. All other
common stock equivalents were anti-dilutive and therefore were not
included in the computation of earnings (loss) per share for all periods
presented.
Goodwill - Goodwill is amortized on a straight-line basis over 20 years.
The carrying value of goodwill is reviewed if the facts and
circumstances suggest that it may be impaired. If this review indicates
that goodwill will not be recoverable, as determined based on the
undiscounted cash flows of the entity acquired over the remaining
amortization period, the Company's carrying value of the goodwill is
reduced by the estimated shortfall of cash flows. Based on the Company's
analysis of future cash flows, the carrying value of goodwill appeared
recoverable as of December 31, 1999 and 1998.
Impairment of Long-Lived Assets - The Company periodically evaluates the
carrying value of long-lived assets for potential impairment. The
Company considers projected future operating results, cash flows,
trends, and other circumstances in making such estimates and
evaluations. When the carrying value of any long-lived asset exceeds its
projected undiscounted cash flows, an impairment is recognized to reduce
the carrying value to its fair market value.
Use of Estimates - The preparation of the consolidated financial
statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the
amounts reported in the consolidated financial statements and
accompanying notes. Actual results could differ from those estimates.
Reclassifications - Certain reclassifications have been made to the 1998
and 1997 consolidated financial statements to conform with the 1999
presentation. These reclassifications had no effect on net income (loss)
or total stockholders' equity as previously reported.
Stock-Based Compensation - Statement of Financial Accounting Standards
(SFAS) No. 123, Accounting for Stock-Based Compensation, requires
companies to measure employee stock compensation plans based on the fair
value method of accounting. However, the statement allows the
alternative of continued use of Accounting Principles Board Opinion
(APBO) No. 25, Accounting for Stock Issued to Employees, with pro forma
disclosure of net income and earnings per share determined as if the
fair value method had been applied in measuring compensation cost. The
Company elected the continued use of APBO No. 25.
Comprehensive Earnings - Comprehensive earnings is a measure of all
nonowner changes in shareholders' equity and includes such items as net
earnings, certain foreign currency translation items, minimum pension
liability adjustments, and changes in the value of available-for-sale
securities. In 1999, 1998, and 1997, comprehensive earnings for the
Company were equivalent to net earnings as reported.
Derivative Instruments and Hedging Activities - SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities, was issued in June
1998 and establishes accounting and reporting standards for derivative
instruments. The statement requires recognition of all derivatives as
either assets or liabilities in the statement of financial position
measured at fair value and will be effective in fiscal year 2001. The
Company has not yet completed its analysis of the impact SFAS No. 133
will have on its consolidated financial statements.
2. SEGMENTS
The Company has two reportable segments: Lab Services and Product Sales.
The Lab Services segment consists of MEDTOX Laboratories. Services
provided include forensic toxicology, clinical toxicology, heavy metals
analyses, courier delivery, and medical surveillance. The Product Sales
segment consist of MEDTOX Diagnostics. Products manufactured include
easy to use, inexpensive, on-site drug tests such as PROFILE II,
EX-SCREEN, EX-QUANT, and VERDICT II.
In evaluating financial performance, management focuses on net income as
a segment's measure of profit or loss. The accounting policies of the
segments are the same as those described in the summary of significant
accounting policies (see Note 1).
Segment Information
(In thousands) Lab Services Product Sales Total
1999:
Net revenues $ 31,012 $ 3,991 $ 35,003
Segment income (loss) 1,440 (21) 1,419
Segment assets 24,269 2,002 26,271
1998:
Net revenues 27,070 2,505 29,575
Segment loss (1,391) (906) (2,297)
Segment assets 23,289 1,311 24,600
1997:
Net revenues 25,899 2,695 28,594
Segment income (loss) 430 (405) 25
Segment assets 23,469 1,412 24,881
3. DEBT
Long-term debt consisted of the following at December 31:
1999 1998
Term loan, due November 2001, 9.75% at December 31, 1999 $ 1,358 $ 2,066
Overadvance term loan, due June 2000, 11.50% at December 31, 1999 350 358
Capex note, due November 2001, 9.75% at December 31, 1999 649 347
Subordinated notes, due December 2001, 12% at December 31, 1999 537 148
Note payable to bank, paid in 1999 6
Various vehicle loans, due from October 2002 through
December 2002, 2.90% to 7.49% 79
--------- ---------
2,973 2,925
Less current portion 1,236 1,140
--------- ---------
$ 1,737 $ 1,785
========= =========
Long-term debt maturities at December 31, 1999 were as follows:
2000 $ 1,236
2001 1,711
2002 26
---------
$ 2,973
On January 14, 1998, the Company entered into a Credit Security
Agreement (the Wells Fargo Credit Agreement) with Wells Fargo Business
Credit (Wells Fargo). The Wells Fargo Credit Agreement, as amended,
consists of (i) a term loan of $2,125,000 bearing interest at prime +
1.25%; (ii) an overadvance term loan of $700,000 bearing interest at
prime + 3%; (iii) a revolving line of credit of not more than $6,000,000
or 80% of the Company's eligible trade accounts receivable bearing
interest at prime + 1%; and (iv) a capex note of up to $1,200,000 for
the purchase of capital equipment bearing interest at prime + 1.25%. At
December 31, 1999, $4,208,000 was outstanding under the revolving line
of credit, and $1,020,000 was available to be advanced under the
borrowing base formula. The Wells Fargo Credit Agreement is secured by
virtually all of the Company's assets, including equipment, general
intangibles, inventories, and receivables.
The Wells Fargo Credit Agreement requires the Company to comply with
certain covenants and maintain certain quarterly financial ratios as to
minimum debt service coverage and maximum debt to book net worth. It
also sets minimum quarterly net income and book net worth levels which
restrict the payment of dividends. As of December 31, 1999, the Company
was in compliance with the provisions of the financial covenants of the
Wells Fargo Credit Agreement.
On December 31, 1998, the Company received $175,000 from private
placements of subordinated debt. The notes require payment of the
principal amount on December 31, 2001. Interest at 12% per annum is paid
semiannually on June 30 and December 31. In connection with the issuance
of the subordinated notes, the Company issued warrants to purchase a
number of shares of common stock equivalent to 25% of the face amount of
the subordinated notes divided by the exercise price of $5.00 per share.
The warrants are exercisable from December 15, 1999 to December 31,
2001. In February 1999, the warrant agreements were amended to decrease
the exercise price to $3.25 per share. The Company has determined the
value of the warrants at the date of grant to be $27,000. The value of
the warrants has been accounted for as additional paid-in capital and
deducted from the principal of the subordinated notes as discount on
debt issued.
During the first quarter of 1999, the Company received an additional
$400,000 from private placements of subordinated debt under the same
terms as the December 1998 debt issuances. The Company has determined
the value of the warrants at the date of grant to be $29,000. The value
of the warrants has been accounted for as additional paid-in capital
deducted from the principal of the subordinated notes as discount on
debt issued.
Interest paid for all outstanding debt was $784,000, $599,000, and
$576,000 for the years ended December 31, 1999, 1998, and 1997,
respectively.
4. STOCKHOLDERS' EQUITY
The Board of Directors declared a one-for-twenty reverse stock split
effective February 20, 1999. Accordingly, all stock option, warrant,
share, and per share data included in the consolidated financial
statements have been restated to reflect the reverse split.
As part of the purchase price paid by the Company for the acquisition of
MEDTOX Laboratories in January 1996, the Company issued 125,865 shares
of common stock. In connection with the issuance of the common shares,
the Company agreed that if, after the closing date of the MEDTOX
Laboratories acquisition, the market value of the Company's common stock
declined below approximately $39.60 per share, the Company would issue
additional shares of common stock (Additional Shares) to shareholders of
MEDTOX Laboratories who retain their shares of common stock at specified
dates through November 19, 1997 (the Repricing Dates). The following is
a summary of the price resets, the market price per share used for
purposes of calculating the reset quantity of shares, and the quantity
of additional shares that were issued in 1997:
Market Price Related Shares
Repricing Date to Repricing Date Issued
May 23, 1996 $31.20 55,953
November 22, 1996 $19.00 64,673
March 27, 1997 $8.25 257,898
November 19, 1997 $7.50 38,768
-----------
417,292
===========
At December 31, 1999, shares of common stock reserved for future
issuance upon exercise of outstanding common stock warrants are as
follows:
Number of
Exercise Price Period Shares
Per Share Exercisable Reserved
Subordinated notes 12% $ 3.25 December 15, 1999 to
December 31, 2001 44,230
In addition, at December 31, 1999, 417,054 shares of common stock were
reserved for future issuances under the stock option plans discussed in
Note 5.
On September 18, 1998, the Company's Board of Directors authorized and
declared a dividend of one preferred share purchase right for each
common share then outstanding. Subsequent to that date the Company
maintains a plan in which one preferred share purchase right (Right)
exists for each common share of the Company. Each Right entitles its
holder to purchase one one-hundredth of a share of a new series of
junior participating preferred stock at an exercise price of $29.80,
subject to adjustment. The Rights are exercisable only if a person or
group acquires beneficial ownership of 20 percent or more of the
Company's outstanding common stock.
5. STOCK OPTION AND PURCHASE PLANS
The Company has stock option plans to provide incentives to eligible
employees, officers, and directors in the form of incentive stock
options, nonqualified stock options, stock appreciation rights,
restricted and unrestricted stock awards, performance shares, and other
stock-based awards. The Compensation Committee of the Board of Directors
determines the exercise price (not to be less than the fair market value
of the underlying stock) at the date of grant. Options generally become
exercisable in installments over a period of one to five years and
expire ten years from the date of grant.
The following table summarizes information about stock options
outstanding at December 31, 1999:
Plan Options Outstanding
-------------------------------
1993 Non- Weighted
Shares Equity employee Average
Available 1983 ISO Compensation Director Exercise
for Grant Plan Plan Plan Price
Balance at December 31, 1996 211,134 10,311 25,318 250 $69.40
Additional shares reserved for issuance 93,817
Granted (11,500) 11,500 8.75
Canceled 14,250 (2,601) (14,250) 63.80
-------- ------- -------- -------
Balance at December 31, 1997 307,701 7,710 11,068 11,750 49.80
Additional shares reserved for issuance 3,496
Granted (97,248) 97,248 10.01
Canceled 38,640 (2,274) (35,307) (3,333) 55.63
-------- ------- -------- -------
Balance at December 31, 1998 252,589 5,436 73,009 8,417 14.43
Additional shares reserved for issuance 284
Granted (220,000) 200,000 20,000 3.39
Canceled 18,145 (508) (18,145) 3.42
-------- ------- -------- -------
Balance at December 31, 1999 51,018 4,928 254,864 28,417 $ 7.12
======== ======= ======== =======
Plan Options Outstanding Options Exercisable
Weighted
Weighted Average Weighted
Average Remaining Average
Range of Number Exercise Contractual Number Exercise
Exercise Prices Outstanding Price Life Exercisable Price
$2.56 - $8.75 278,751 $ 4.53 8 94,081 $ 5.43
$30.00 - $59.99 1,376 53.53 3 1,376 53.53
$60.00 - $89.99 5,686 71.93 2 5,686 71.93
$90.00 - $119.99 625 102.24 3 625 102.24
$120.00 - $149.99 1,271 130.77 3 1,271 130.77
$153.80 500 153.80 3 500 153.80
--------- -------
288,209 7.12 103,539 12.56
Options Outstanding Options Exercisable
------------------------ ---------------------
Weighted Weighted
Range of Average Average
Exercise Number Exercise Number Exercise
Option Plan Prices Outstanding Price Exercisable Price
1983 Incentive Stock Option Plan $48.80 - $143.80 4,928 $97.03 4,928 $ 97.03
1993 Equity Compensation Plan $2.56 - $153.80 254,864 5.43 85,466 7.92
Nonemployee Director Plan $8.75 - $ 92.60 28,417 6.69 13,145 11.04
--------- -------
288,209 7.12 103,539 12.56
Nonqualified Stock Options - At December 31, 1999, 1998, and 1997, the
Company had 102,054, 102,054, and 2,055, respectively, of nonqualified
stock options outstanding to certain current and former officers of the
Company. The weighted average exercise price of nonqualified stock
options outstanding was $10.42, $10.42, and $91.77 at December 31, 1999,
1998, and 1997, respectively. The shares of common stock covered by
nonqualified options are restricted as to transfer under applicable
securities laws.
Qualified Employee Stock Purchase Plan - The Company has a Qualified
Employee Stock Purchase Plan (the Purchase Plan) under which all
employees meeting certain criteria may subscribe to and purchase shares
of common stock. The number of shares of common stock authorized to be
issued under the Purchase Plan is 150,000. The subscription price of the
shares is 85% of the fair market value of the common stock on the day
the executed subscription form is received by the Company. The purchase
price for the shares is the lesser of the subscription price or 85% of
the fair market value of the shares on the day the right to purchase is
exercised. Payment for common stock is made through a payroll deduction
plan.
The Company applies APBO No. 25, Accounting for Stock Issued to
Employees, and related interpretations, in accounting for its
stock-based compensation plan. Accordingly, no compensation expense has
been recognized for its stock option awards, because the exercise price
of all options equals the market price of the stock on the grant date.
Had compensation expense for the Company's stock option awards been
determined based upon their grant date fair value consistent with the
methodology prescribed under SFAS No. 123, Accounting for Stock-Based
Compensation, the Company's net income (loss) and basic and diluted loss
per share would have been $987,000 and $0.34 per share, $(2,746,000) and
$(0.95) per share, and $(87,000) and $(0.03) per share for 1999, 1998,
and 1997, respectively. The fair value of the options at the grant date
was estimated using the Black-Scholes model with the following
assumptions:
1999 1998 1997
Expected life (years) 5 5 5
Interest rate 5.875% 4.25% 6.0%
Volatility 61.9% 90.5% 103.0%
Dividend yield 0% 0% 0%
The weighted average fair value of options granted in 1999, 1998, and
1997 was $1.97, $5.22, and $5.80 per share, respectively.
6. EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted
earnings (loss) per common share (in thousands, except per share
amounts):
1999 1998 1997
Net income (loss) (A) $ 1,419 $ (2,297) $ 25
============== ============= ==============
Weighted average number of basic common
shares outstanding (B) 2,902,087 2,893,399 2,566,966
Dilutive effect of stock options computed
based on the treasury stock method using
average market price 83,020
-------------- -------------- --------------
Weighted average number of diluted
common shares outstanding (C) 2,985,107 2,893,399 2,566,966
============== ============= ==============
Basic earnings (loss) per common share (A/B) $ 0.49 $ (0.79) $ 0.01
============= ============= =============
Diluted earnings (loss) per common share (A/C) $ 0.48 $ (0.79) $ 0.01
============= ============= =============
7. LEASES
The Company leases office and research facilities from a director under
a month-to-month operating lease. Rental payments to the director were
approximately $121,000, $122,000, and $121,000 for the years ended
December 31, 1999, 1998, and 1997, respectively.
The Company leases other offices and facilities and office equipment
under certain operating leases which expire on various dates through
March 2002. Under the terms of the facility leases, a pro rata share of
operating expenses and real estate taxes are charged as additional rent.
See also Note 8 regarding restructuring costs relative to certain
facility leases. The Company subleases one of its facilities to another
party whereby that party makes payments directly to the lessor.
As of December 31, 1999, the Company is obligated for future minimum
lease payments (excluding payments under the leases vacated as part of
the 1997 restructuring discussed in Note 8) without regard for sublease
payments under noncancelable leases as follows (in thousands):
Capital Operating
Leases Leases
2000 $ 249 $ 925
2001 173 641
2002 108 139
2003 64
2004 120
2005 and thereafter 56
------ -------
770 $ 1,705
=======
Amount representing interest 175
------
Present value of net minimum lease payments 595
Less current portion 186
------
Long-term capital lease obligations $ 409
======
Rent expense (including amounts for the facilities leased from the
director) amounted to $773,000, $751,0000, and $582,000 for the years
ended December 31, 1999, 1998, and 1997, respectively.
8. RESTRUCTURING COSTS
In 1996, the Company closed two facilities located in Illinois and New
Jersey and recorded restructuring costs relating to the remaining lease
obligations and to the reduction in its work force at those facilities.
In 1997, restructuring reserves decreased by $1,017,000 to $786,000 at
December 31, 1997, due to payments of $620,000 and a decrease in the
estimate of the required reserve of $397,000 in December 1997 based on
settlement offers received by the Company relative to certain lease
contingencies originally accrued for in 1996.
In 1998, restructuring reserves increased by $369,000 to $1,155,000 at
December 31, 1998, due to payments of $342,000 and an increase in the
estimate of the required reserve of $711,000 in the fourth quarter of
1998 resulting from preliminary unfavorable court rulings relative to
certain lease contingencies originally accrued for in 1996.
In 1999, restructuring reserves decreased by $686,000 to $469,000, due
to payments of $521,000 and a decrease in the reserve of $165,000 due to
a more favorable settlement of certain lease contingencies originally
accrued for in 1998.
9. INCOME TAXES
Deferred income taxes reflect the tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax liabilities and
assets are as follows (in thousands):
1999 1998
Deferred tax liability -
Equipment and improvements $ (163) $ (194)
Deferred tax assets:
Goodwill 1,196 1,421
Medical reserve 11 104
Net operating loss carryforwards 13,379 13,523
Research and experimental credit carryforwards 134 65
Restructuring costs 178 439
Legal reserve 3 68
Other 233 284
------------ -----------
Total net deferred tax assets 14,971 15,710
Valuation allowance for deferred tax assets (14,971) (15,710)
------------ -----------
Net deferred tax asset $ - $ -
============ ===========
Following is a reconciliation of federal income tax at the statutory
rate of 34% to the actual income taxes provided for:
1999 1998 1997
Computed expected federal income tax
expense (benefit) $ 482 $ (781) $ 9
State tax, net of federal effect 40 (134) 1
Permanent differences 10 12 14
Change in valuation allowance (739) (671) 1,129
Adjustment to prior year provision 1,574 (1,153)
Expired net operating loss carryforwards 249
Other (42)
--------- --------- ---------
$ - $ - $ -
========= ========= =========
At December 31, 1999, the Company had net operating loss carryforwards
(NOL) of approximately $35,207,000 which are available to offset taxable
income through 2014 and began to expire in 1999. For financial reporting
purposes, a valuation allowance has been recorded to offset deferred tax
assets that might not be realized.
Section 382 of the Internal Revenue Code restricts the annual
utilization of the NOLs incurred prior to a change in ownership. Such a
change in ownership may have occurred in connection with stock
transactions in 1996, and another change in ownership may have occurred
in connection with the conversion of Series A Preferred Stock in 1997
and 1998. As a result of these changes in ownership, the future
availability of the NOL to offset taxable income is likely substantially
curtailed.
10. EMPLOYEE BENEFIT PLAN
The Company has a defined contribution benefit plan that covers
substantially all employees who meet certain age and length of service
requirements. Contributions to the plan are at the discretion of the
Board of Directors. The 401(k) expense for the years ended December 31,
1999, 1998, and 1997 was $135,000, $98,000, and $152,000, respectively.
11. COMMITMENTS AND CONTINGENCIES
In May 1999, the Company settled a lawsuit in the Circuit Court of Cook
County, Illinois. The suit was brought by a previous landlord who
alleged that the Company breached the terms of a lease in connection
with the asset acquisition of MEDTOX Laboratories. In December 1998, the
Court had granted summary judgment against the Company on the issue of
liability. The Company settled this matter in May 1999 for $685,000. The
Company had previously accrued $850,000 at December 31, 1998 for this
contingency.
In February 1999, the Company settled a claim of patent infringement
with United States Drug Testing Laboratories who asserted the claim
against the Company on August 20, 1996. It was alleged that the Company
infringed two patents allegedly owned by United States Drug Testing
Laboratories relating to forensically acceptable determinations of
gestational fetal exposure to drugs and other chemical agents. The
Company, while denying any infringement, has settled with United States
Drug Testing Laboratories and paid United States Drug Testing
Laboratories $17,500 in cash and issued United States Drug Testing
Laboratories 2,500 shares of common stock.
On January 31, 1997, the Company filed suit in Federal District Court in
Minnesota against a majority shareholder and two former outside
directors of the Company alleging violation of Section 16b of the
Securities Exchange Act of 1934 and seeking recovery of more than
$500,000 in short-swing profits. On August 4, 1997, the U.S. District
Court granted the defendants' Motion to Dismiss the Company's complaint,
ruling that the defendants' conduct did not constitute a violation of
Section 16(b). On October 29, 1997, the Company filed an appeal of that
decision to the United States Court of Appeals for the Eighth Circuit
(Court of Appeals). On July 21, 1998, the Court of Appeals reversed the
U.S. District Court's dismissal and remanded the case back to the U.S.
District Court. On June 3, 1999, the U.S. District Court for the
District of Minnesota ruled in favor of the Company in its claim against
the defendants. The U.S. District Court found that the defendants had
violated Section 16(b) and ordered the defendants to pay the Company
damages of $551,000 plus interest. It is likely that the defendants will
appeal the decision to the Court of Appeals. The Company has not
recorded a receivable for this amount due to the uncertainty of the
matter.
SCHEDULE II-VALUATION & QUALIFYING ACCOUNTS
Balance at Charged to Charged to Balance at
Beginning Costs and Other the End of
of Period Expenses Accounts Deductions Period
------------------------------ -----------------------------------------------
Year ended December 31,1999
Deducted from Asset Accounts
Allowance for Doubtful Accounts $ 245,000 $ 229,000 $ - $ 200,000 (1) $ 274,000
Restructuring Accrual $ 1,155,000 $ (165,000)(5) $ - $ 521,000 (4) $ 469,000
Year ended December 31,1998
Deducted from Asset Accounts
Allowance for Doubtful Accounts $ 515,000 $ 42,000 $ - $ 312,000 (1) $ 245,000
Restructuring Accrual $ 786,000 $ 711,000 (3) $ - $ 342,000 (3) $ 1,155,000
Year ended December 31,1997
Deducted from Asset Accounts
Allowance for Doubtful Accounts $ 358,000 $ 157,000 $ - $ - $ 515,000
Restructuring Accrual $ 1,803,000 $ - $ - $ 1,017,000 (2) $ 786,000
(1) Uncollectible accounts written off, net of recoveries.
(2) Includes reduction of $397,000 of Lease Liability deemed to no longer be an
obligation to the Company. The remainder is due in payments toward the
liability.
(3) Represents payments of lease obligations and an increase of estimate
on future lease payments.
(4) Represents payments of lease obligations.
(5) Represents a decrease in reserves due to a more favorable settlement of
certain lease contingencies originally accrued for in 1998.