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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, 2000
[ ] 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.
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(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
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (651) 636-7466
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Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $.15 per share
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(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
$26,519,633 as of March 20, 2001, based upon a price of $7.80 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 20, 2001, was
3,537,179.
MEDTOX SCIENTIFIC, INC.
FORM 10-K ANNUAL REPORT
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
Table of Contents
ITEM NO. PAGE
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Part I
1. Business. . . . . . . . . . . . . . . . 4
2. Properties. . . . . . . . . . . . . . . 11
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. . . . . . . . . . 14
6. Selected Financial Data . . . . . . . . . . . . . . . . . 15
7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations. . . . . . . . . . . . . . . . . . . . . . 16
8. Financial Statements and Supplementary
Data . . . . . . . . . . . . . . . . . . . . . . . . . . 23
9. Changes in and Disagreements With
Accountants on Accounting
and Financial Disclosure . . . . . . . . . . . . . . . 23
Part III
10. Directors and Executive Officers . . . . . . . . . . . 24
11. Executive Compensation. . . . . . . . . . . . . . . . 26
12. Security Ownership of Certain Beneficial
Owners and Management. . . . . . . . . . . . . . 33
13. Certain Relationships and Related
Transactions . . . . . . . . . . . . . . . . . . . . . 34
Part IV
14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K. . . . . . . . . . . . . . 35
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
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, earnings 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". The Company is engaged primarily in two distinct, but very much
related businesses. The business of manufacturing and distribution of diagnostic
devices is carried on by MEDTOX Diagnostics, Inc. from its facility in
Burlington, North Carolina and the business of forensic and clinical laboratory
services is conducted by MEDTOX Laboratories, Inc. at its facility in St. Paul,
Minnesota. For the year ended December 31, 2000, sales from the forensic and
clinical laboratory services conducted by MEDTOX Laboratories, Inc. accounted
for 81% of the Company's revenues. Revenue from the manufacture and distribution
of diagnostic devices and other similar products, including some contract
manufacturing conducted by MEDTOX Diagnostics, Inc. accounted for 19% of the
total revenues of the Company for the year ended December 31, 2000.
2. Principal Services, Products, and Markets.
General. The Company has two reportable segments: "Laboratory Services"
conducted by the Company's wholly owned subsidiary, MEDTOX Laboratories, Inc.
and "Products Sales" conducted by the Company's wholly owned subsidiary MEDTOX
Diagnostics, Inc. 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. For financial information
relating to the Company's segments, see Note 3 of Notes to the Consolidated
Financial Statements.
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 has taken a leadership role in the development and
distribution of diagnostic drug screening devices. The demand for fast,
inexpensive screening technology that detects the presence of a number of
substances in human urine, blood samples and other biological specimens
continues to increase.
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.
The Company also manufactures and distributes the
VERDICT(R)-II line of diagnostic drug screening products within the criminal
justice, temporary service and drug rehabilitation markets. In 2000, the Company
developed 10 additional panel configurations within the VERDICT(R)-II product
line, giving the company 12 FDA 510(k)-cleared products in all. These devices
are sold in multiple assay configurations, providing clients with flexibility in
terms of drug panel options and potential cost savings.
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(R)
agridiagnostic tests are marketed to regulatory authorities and producers of
foodstuffs and feeds.
The Company distributes diagnostic 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 EZ-SCREEN(R) Breath Alcohol Test through a
distribution agreement.
3. Marketing and Sales.
The Company believes that the combined operations of the
Laboratory Services business and the on-site test kits manufactured by the
Product Sales segment 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) SAMHSA certified laboratory
testing (screening and confirmation); (3) biological monitoring of occupational
toxins; (4) consultation; and (5) logistic, data management and program
management services.
The Company has expanded its sales effort in the pharmaceutical market by
offering testing services for Phase 1-3 clinical trials and working with
sponsors and Clinical Research Organization's (CRO's) on assay development and
bio-analytical studies. In addition, the Company has begun to market clinical
chemistry testing services to clinics, hospitals and physician offices on a
regional basis.
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, 2000.
4. New Products, Research and Development.
Laboratory Services. The research and development group for
Laboratory Services develops new assays for new drugs and compounds, 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 2000 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
2000 continued to 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.
Much of our new clinical toxicology test development efforts
focused on newly marketed anticonvulsant and antidepressant drugs, further
strengthening our expertise in neurological drug analysis. In 2000, the Company
purchased an additional tandem mass spectrometer (LC/MS/MS) and continued to
move many of existing assays to the new technology, resulting in dramatic
increases in sensitivity, specificity and throughput. A number of multi-drug
screening tests have also been successfully developed utilizing LC/MS/MS
technology. In 2000, efforts have begun to explore the utility of new
immunological techniques for both onsite and laboratory based testing.
Product Sales. In July 2000, the Company filed a 510(k) with
the FDA for an additional test strip that includes benzodiazepines,
barbiturates, methadone and TCA (tricyclic antidepressants). The Company
received pre-marketing approval for this strip in early 2001, incorporated this
test strip with the PROFILE(R)-II test strip, and created the PROFILE(R)-II ER,
a dual-window device that can test for nine substances in a single device. The
PROFILE(R)-II ER will be marketed primarily to hospital laboratories.
The Company continues to develop new and innovative products
and services while expanding the laboratory's test menu to meet the demands of
both the drug testing and clinical markets.
Research and Development Expenses. The Company incurred costs
of $1.1 million, $0.8 million and $1.2 million for research and development
activities in 2000, 1999 and 1998, respectively.
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 supplies. 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 numerous 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(R) and one-step technologies, which include PROFILE(R)-II and
VERDICT(R)-II products. 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(R) and one-step technologies, one expired in 2000,
one expires in 2004, five expire in 2007, and one expires in 2010. The patent
relating 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 12 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 2009. 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, 2000, the Company had several accounts, which were in the
process of being set up where revenues are not expected to be realized until
2001.
Product Sales. At December 31, 2000, 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, 2000 approximately 63
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 patents 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 its margins will be based on its ability to maintain its quality
and customer service strength while maintaining efficiencies and low operating
costs. 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 and 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 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. hasbeen 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. 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 16 different products.
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, recalls, 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(R), PROFILE(R),
PROFILE(R) II, VERDICT(R) and VERDICT(R) 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 for damages resulting from a medical
incident, which arises out of a failure to render professional services. To
date, the Company has not paid any material dollar amounts for claims of this
type 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. Since 1993, the Company has
maintained 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, 2000, the Company had a total of
approximately 453 full-time employee equivalents as compared to approximately
340 full-time employee equivalents at December 31, 1999. Of the approximate 453
employees, 412 work at MEDTOX Laboratories, Inc. while the remaining 41 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 believes that it maintains good relations with its employees.
ITEM 2. PROPERTIES.
The administrative offices and laboratory operations for the Laboratory
Services segment of the Company's business are located primarily in a 53,576
square foot facility in St. Paul, Minnesota. Until March 16, 2001, the Company
leased this space at an annual rent, excluding operating costs, of approximately
$445,000 per year. On March 16, 2001 the Company purchased the entire three
building complex with a total of 129,039 square feet, which included the 53,576
square feet utilized by the Company's Laboratory Services segment. The
purchasing entity was New Brighton Business Center LLC, a wholly owned limited
liability company, established by the Company for the sole purpose of purchasing
the entire three building complex. The selling entity was PHL-OPCO, LP a
Delaware limited partnership, which was an unrelated third party who had
operated the facility as its landlord until the sale to the Company. The
purchase price, exclusive of expenses and closing costs, was $6,350,000 and was
financed by a mortgage loan from Principal Life Insurance Company of Des Moines,
Iowa in the amount of $6,200,000. The mortgage loan has a term of ten years and
is being repaid based on a 20 year amortization schedule with a balloon payment
at the end of the ten year term. The interest rate is fixed at an annual rate of
7.23% for the first five years at which time the rate will be renegotiated by
the parties. The facility includes other commercial tenants who have individual
leases that range from 4 years to less then 1 year in duration. The current
annual rent paid by such third party tenants, excluding their pro-rata share of
operating expenses, is $431,000 per year. In addition, effective September 1,
2001, the Laboratory Services segment entered into a seven-year lease for 30,000
square feet to be used in connection with its courier business and also as
additional warehouse and shipping space. This building is a special purpose
facility and enables the Company to store its vehicles indoors, when
appropriate, and to perform routine maintenance of the vehicles. The annual base
rent on this second facility, exclusive of operating expenses is currently
$10,500 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 for MEDTOX Diagnostics, Inc. For the last several years the Company
has leased approximately 33,000 square feet on a month-to-month basis at an
annual base rent, excluding operating costs, of approximately $121,000.
Effective March 28, 2001, the Company entered into a 10-year lease of the entire
building (approximately 39,500 square feet) at the same location for an annual
base rent of $197,000, exclusive of operating expenses. This facility has always
been owned and leased to the Company by Dr. Samuel C. Powell, a member of the
Board of Directors of the Company. In addition, under the lease the Company will
have up to $600,000 to spend on tenant improvements of the building, which will
then be amortized over the 10-year life of the lease as additional rent at an
assumed annual interest rate of 9.5%. The Company believes it is renting this
facility in Burlington on terms as favorable as those available from third
parties for equivalent premises.
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.
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 parties have agreed that the matter may be arbitrated in
Minneapolis, Minnesota rather then in Chicago as required by the original
acquisition agreement. Management expects this matter will be resolved prior to
the end of calendar year 2001.
In January 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. On or about September 30, 2000 the parties
entered into a Stipulation and Mutual Release dismissing with prejudice all
claims and counterclaims between the parties regarding the transaction other
then the Company's Section 16(b) claim against the former stockholder, Morgan
Capital. The parties entered into this Stipulation along with an Escrow
Agreement requiring Morgan Capital to deposit into escrow 72,500 shares of
publicly registered common stock of the Company as collateral to secure payment
by Morgan Capital of the judgment to be entered in favor of the Company in the
amount of $675,000 plus any post-judgment interest. The Federal District Court
entered such judgment in favor of the Company on October 17, 2000. Morgan
Capital subsequently appealed the Federal District Court's decision to the
Eighth Circuit Court of Appeals. The parties have completed and filed their
respective appeal briefs with the Eighth Circuit Court of Appeals. The parties
are now awaiting the scheduling of oral arguments which should occur sometime in
2001. The Company has not recorded a receivable for this amount due to the
uncertainty of this matter.
In March 2000, the Company was served with a copy of a
complaint filed against the Company in the Circuit Court of Cook County,
Illinois, by the Plaintiff, The Methodist Medical Center of Illinois. The
Plaintiff is alleging that the Company interfered with various contractual
relationships of the Plaintiff in connection with the referral of certain
customers to the Company by other defendants previously sued by the Plaintiff in
the same action. The Company has filed a cross claim against the other
defendants in the litigation based on such defendants' contractual obligation to
indemnify the Company against any damages, costs or expense (including attorney
fees) incurred by the Company, arising out of any claim of contractual
interference by the Company in connection with the referral of the customers to
the Company by such defendants. The parties are now engaged in pretrial
discovery while at the same time settlement negotiations are underway between
the parties. While it is too early to be confident as to the ultimate resolution
of this matter, in light of the nature of plaintiff's claims, the nature of the
discovery to date, the co-defendants indemnification obligation and the relative
positions of the parties during the settlement discussion, management does not
expect the ultimate resolution of this matter to have a material impact on the
Company's financial condition or results of operations.
In January 2001, the Company was contacted by counsel for one
of the Company's shareholders who had purchased stock in the Company's private
placement in August 2000. The shareholder's counsel expressed the view that the
decline in the Company's stock in December was directly attributable to the
Company's announcement of a charge to earnings in the fourth quarter due to the
bankruptcy filings of two of its customers. Counsel has asserted that since the
bankruptcy filing by one of the customers had occurred prior to the closing of
the private placement, the Company should have disclosed the fact of that filing
in connection with the private placement. The Company is unable to ascertain
whether the shareholder will actually pursue this matter through litigation.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of the security holders
during the fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
Common Stock
Since September 27, 1993, the Company's common stock has been
listed on the American Stock Exchange and is currently trading under the symbol
"TOX". As of March 20, 2001, the number of holders of record of the Common Stock
was 2,696. 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: High Low
First Quarter............................. $10.13 $ 8.13
Second Quarter........................ 10.13 7.00
Third Quarter........................... 13.13 10.50
Fourth Quarter......................... 12.25 5.88
1999:
First Quarter............................. $ 5.00 $ 2.56
Second Quarter........................ 7.50 2.63
Third Quarter........................... 10.06 6.50
Fourth Quarter......................... 9.63 7.25
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 no remaining shares of
Series A Preferred Stock outstanding as of December 31, 2000.
No dividends on the Series A preferred stock were declared or
paid prior to their conversion to common stock, which occurred on or before
January 30, 1998.
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 thousands, except share and per share data)
2000 1999 1998 1997 1996
STATEMENT OF OPERATIONS DATA:
Revenues $ 42,880 $ 35,003 $ 29,575 $ 28,594 $ 26,498
Cost of revenues 27,847 22,749 20,360 17,888 17,495
Selling, general, and administrative 15,480 9,348 8,974 9,510 11,725
Research and development 1,123 834 1,153 965 1,280
Restructuring costs (a) -- (164) 712 (397) 2,449
Goodwill write-off (b) -- -- -- -- 6,117
Other expense 991 817 673 603 241
--------- --------- --------- --------- ---------
(Loss) income from operations $ (2,561) $ 1,419 $ (2,297) $ 25 $ (12,809)
Preferred stock deemed dividend -- -- -- -- (6,783)
(Loss) income from operations applicable to --------- --------- --------- --------- ---------
common stockholders $ (2,561) $ 1,419 $ (2,297) $ 25 $ (19,592)
========== ========== ======== ====== ==========
Basic (loss) earnings from operations per common
share $ (0.81) $ 0.49 $ (0.79) $ 0.01 $ (11.71)
========= ========= ========== ========= =========
Diluted (loss) earnings from operations per common
share $ (0.81) $ 0.48 $ (0.79) $ 0.01 $ (11.71)
========= ========= ========== ========= =========
Weighted average number of shares outstanding:
Basic 3,142,588 2,902,087 2,893,399 2,566,966 1,672,793
Diluted 3,142,588 2,985,107 2,893,399 2,566,966 1,672,793
BALANCE SHEET DATA:
Total assets $ 30,024 $ 26,271 $ 24,600 $ 24,881 $ 24,079
Long-term obligations 2,898 2,146 2,301 295 --
Total stockholders' equity 15,410 12,790 11,326 13,571 13,548
SEGMENT DATA:
Net revenues:
Laboratory Services $ 34,797 $ 31,012 $ 27,070 $ 25,899 $ 23,541
Product Sales 8,083 3,991 2,505 2,695 3,047
--------- --------- --------- ---------- ---------
Total net revenues $ 42,880 $ 35,003 $ 29,575 $ 28,594 $ 26,588
========= ========= ========= ========== =========
Segment (loss) income:
Laboratory Services $ (3,374) $ 1,440 $ (1,391) $ 430 $ (9,155)
Product Sales 813 (21) (906) (405) (3,653)
--------- ---------- ---------- ---------- ----------
Total segment (loss) income $ (2,561) $ 1,419 $ (2,297) $ 25 $ (12,808)
========== ========== ========== ========== ==========
Assets:
Laboratory Services $ 26,498 $ 24,269 $ 23,289 $ 23,469 $ 22,479
Product Sales 3,526 2,002 1,311 1,412 1,600
--------- --------- --------- --------- ---------
Total assets $ 30,024 $ 26,271 $ 24,600 $ 24,881 $ 24,079
========= ========= ========= ========= ==========
(a) During 1996, the Company recorded restructuring costs of $2.5 million
as a result of the consolidation of the laboratory operations of PDLA
into the laboratory operations of MEDTOX, the sale of the former
operations of Bioman, and the reduction of its work force at certain of
its facilities. Amounts reported as restructuring costs in 1999, 1998
and 1997 represent revaluations to the original restructuring reserve
recorded in 1996.
(b) Represents the impairment of goodwill associated with the acquisition
of MEDTOX in 1996.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
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 wholly-owned
subsidiaries, MEDTOX Laboratories, Inc. and MEDTOX Diagnostics, Inc., are
referred to herein as "the Company". The Company is engaged primarily in two
distinct, but very much related businesses. The business of manufacturing and
distribution of diagnostic devices is carried on by MEDTOX Diagnostics, Inc.
from its facility in Burlington, North Carolina and the business of forensic and
clinical laboratory services is conducted by MEDTOX Laboratories, Inc. at its
facility in St. Paul, Minnesota.
The Company has two reportable segments: "Laboratory Services"
conducted by the Company's wholly owned subsidiary, MEDTOX Laboratories, Inc.
and "Products Sales" conducted by the Company's wholly owned subsidiary MEDTOX
Diagnostics, Inc. 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. For the years ended December 31,
2000, 1999 and 1998, Laboratory Services revenue accounted for 81%, 89% and 92%
of the Company's revenues, respectively. Revenue from Product Sales accounted
for 19%, 11% and 8% of the total revenues of the Company for the years ended
December 31, 2000, 1999 and 1998, respectively.
Results of Operations
In 2000, the Company achieved record revenues of $42.9 million, an
increase of 23% over 1999, driven by the continued growth of the VERDICT(R) and
PROFILE(R) product lines and an increase in the number of laboratory tests.
However, a one-time charge to earnings of $0.6 million related to reorganization
of the Company's Laboratory Services segment, a $0.5 million charge to reserve
for potential losses attributable to the Chapter 11 bankruptcy filings of two
customers (included in selling, general, and administrative expenses), coupled
with higher than anticipated operating costs resulted in a net loss of $2.6
million for the year ended December 31, 2000. The following table sets forth the
percentages of total revenues represented by certain items reflected in the
Company's Consolidated Statements of Operations:
YEARS ENDED DECEMBER 31,
2000 1999 1998
- --------------------------------------------------------------------------------
Revenues 100.0% 100.0% 100.0%
Cost of revenues 65.0 65.0 68.8
Operating expenses:
Selling, general, and administrative 36.1 26.7 30.3
Research and development 2.6 2.4 4.0
Restructuring costs - (0.5) 2.4
------ ------- -------
38.7 28.6 36.7
Interest expense 2.3 2.3 2.3
------ ------- -------
Net (loss) income (6.0)% 4.1% (7.8)%
====== ======= =======
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Revenues
Revenues increased 23% to $ 42.9 million in 2000, driven by a $4.1
million, or 103% increase in Product Sales revenues and a $3.8 million, or 12%
increase in Laboratory Services revenues.
The growth in Laboratory Services revenues was primarily due to a 7%
increase in laboratory tests for employment drug testing services, partially
offset by a 14% decline in the average price per testing specimen. The erosion
in the average price per testing specimen stemmed from tougher market
conditions, which reduced the average price that the Company could charge new
customers. Despite the overall favorable sales trend, poor weather conditions
and a slowing economy in the fourth quarter of 2000 resulted in lab sample
volume from existing drugs-of-abuse clients to fall well below expectations. As
a result, the Company has undertaken a reorganization, which includes refocusing
the Laboratory operations to ensure that it operates with acceptable gross
margins and targets appropriate markets. As part of the reorganization, the
Company will emphasize the marketing, sales and operations of the Product Sales
business rather than laboratory drugs-of-abuse screening. This includes
converting where possible the drugs-of-abuse laboratory clients to the
PROFILE(R)-II System for on-site screening. As more of the drugs-of-abuse
screening converts away from the Laboratory to the Product Sales business, the
Company will continue to expand and grow the esoteric laboratory business, which
accounted for 25% of Laboratory revenues and grew by 20% in 2000. This is
especially true in the occupational health area and in the Company's support of
pharmaceutical trials.
The Product Sales segment achieved higher sales due to increased sales
of substance abuse testing products and contract manufacturing services,
partially offset by decreased sales of agricultural diagnostic products. Product
sales from substance abuse testing products, which incorporates the
EZ-SCREEN(R), PROFILE(R)-II and VERDICT(R)-II on-site test kits and other
ancillary products for the detection of abused substances, increased $4.0
million to $6.3 million in 2000. This growth reflected the sales and marketing
efforts for the Company's second-generation test kits, PROFILE(R)-II and
VERDICT(R)-II. The VERDICT(R)-II was developed for the prison, probation, parole
and rehabilitation markets. The VERDICT(R)-II product line now consists of 13
different configurations to detect from one to five drugs of abuse. With the
expansion of the sales group and additional device configurations, the Company
expects significant growth of VERDICT(R)-II sales in 2001. The Company continues
to develop new products in this area, including the PROFILE(R)-ER device which
will be introduced in early 2001. The PROFILE(R)-ER device is an on-site, nine
drugs-of-abuse panel, targeted at hospital laboratories for emergency response
screening in drugs-of-abuse overdose situations. The Company received FDA
approval for its PROFILE(R)-ER device and for 10 configurations of its
VERDICT(R)-II product in January 2001.
Sales of contract manufacturing services, microbiological and
associated products increased 31% to $1.3 million due to increased revenues from
both historical customers and new customers. Product sales from agricultural
diagnostic products decreased 15% to $.5 million primarily as a 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
to fluctuate accordingly.
Gross profit
Consolidated gross margin of 35.0% in 2000 remained flat compared to
1999, reflecting improvement in Product Sales gross margin, offset by a decline
in Laboratory Services gross margin.
Laboratory Services gross margin was 29.0% in 2000, down from 33.7% in
1999. The erosion of the gross margin was primarily attributable to a 14%
decline in the average price per testing specimen. The drop in the average price
per testing specimen stemmed from competitive market conditions, which
restricted the average price that the Company could charge new customers. Gross
margin was also impacted by an increase in the Company's employee health
insurance costs.
Gross margin from Product Sales improved from 45.5% to 61.2% in 2000,
driven by an increased mix of higher margin products and efficiencies gained at
the production facility.
The Company anticipates that accelerating both the sales efforts and
converting drugs-of-abuse laboratory testing to the PROFILE(R)-II on-site
testing system should have a significant positive impact on the Company's
consolidated gross margin in 2001. However, the Company remains vulnerable to
any major overall economic downturn, such as the one experienced in the fourth
quarter of 2000.
Selling, general and administrative expenses
Selling, general and administrative expenses were $15.5 million, or
36.1% of revenues in 2000, compared to $9.3 million or 26.7% of revenues in
1999. The increase, in both the absolute amount and percentage of revenues, was
primarily the result of the buildup of the Company's sales and marketing group
throughout 2000, which affected both the Laboratory Services and the Product
Sales segments. While this effort impacted earnings in 2000, the Company
anticipates a fully staffed sales and marketing group for all of 2001, without
any significant additional increase in expenses.
The Company also incurred a one-time charge of $0.6 million related to
the reorganization of its laboratory operations. The charge primarily
represented severance and other costs associated with certain management
changes. Additionally, the Company recorded a $0.5 million charge to reserve for
potential losses attributable to the Chapter 11 bankruptcy filings of two
Laboratory Services customers. Both customers remain as clients, and subsequent
to bankruptcy filings, are current on their obligations to the Company. The
Company does not anticipate that these charges will negatively impact revenues
or earnings in 2001.
The increase in the absolute dollar amount of selling, general and
administrative expenses also reflected the higher revenue level in 2000.
Research and development expenses
Research and development expenses increased by $0.3 million, or 35%, in
2000, principally due to higher research and development expenses associated
with new product development for on-site and other ancillary products in the
Product Sales segment.
Interest expense
Interest expense increased by $0.2 million, or 21%, in 2000, reflecting
higher debt levels and increasing interest rates (see Note 6 of Notes to
Consolidated Financial Statements).
Net(loss)income
In 2000, the Company recorded a net loss of $2.6 million compared to
net income of $1.4 million in 1999, reflecting higher overall operating costs
and a reduced gross margin in the Laboratory Services segment, partially offset
by higher revenues in both the Product Sales and Laboratory Services segments.
Laboratory Services reported a net loss of $3.4 million in 2000
compared to net income of $1.4 million in 1999. The decline was primarily due to
increased selling, general and administrative expenses associated with the
buildup of the Company's sales and marketing group, the reorganization of
laboratory operations and the Chapter 11 bankruptcy of two customers. Although
revenues increased 12%, this improvement was offset by a reduced gross margin,
which was impacted by a reduction in the average price per specimen and an
increase in the Company's employee health insurance costs.
Product Sales net income was $0.8 million in 2000 compared to a net
loss of $21,000 in 1999. This improvement was attributable to the growth in
sales and an improved gross margin, which was driven by an increased mix of
higher margin products and efficiencies gained at the production facility.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Revenues
Revenues increased 18% to $35.0 million in 1999 compared to $29.6
million in 1998. Revenues from Laboratory Services increased 15% to $31.0
million in 1999 primarily due to a 19% increase in laboratory tests for
employment drug testing services, partially offset by an 8% decrease in average
per unit prices. Revenues from Product Sales increased 59% to $4.0 million in
1999, reflecting significant growth in sales of the PROFILE(R)- II and
VERDICT(R)- II on-site testing kits. Revenues from Product Sales were also
favorably impacted by increased sales of agricultural diagnostic products and
contract manufacturing services, microbiological and associated products.
Gross profit
Gross margin improved to 35.0% in 1999 from 31.2% in 1998. This
improvement was driven by an increase in Laboratory Services gross margin of
2.8% and a 12.2% increase in Product Sales gross margin. Laboratory Services
gross margin improved primarily due to cost savings and improvements in the
efficiency of laboratory operations, which more than offset an 8% decrease in
average per unit prices. Gross margin from Product Sales was positively impacted
by the substantial increase in overall sales of products with a higher gross
margin, particularly the substance abuse testing products.
Selling, general and administrative expenses
Selling, general and administrative expenses were $9.3 million or 26.7%
of revenues in 1999, compared to $9.0 million or 30.3% of revenues in 1998. As a
percentage of total revenues, selling, general and administrative expenses
decreased primarily due to the Company's efforts to reduce and monitor operating
costs. This decrease was partially offset by higher sales and marketing expenses
within the Product Sales segment 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
Research and development expenses decreased $0.3 million, or 28%, in
1999. Laboratory Services research and development expenses declined $0.2
million or 40% primarily due to a reduction in the number of laboratory-based
assays being developed in 1999 compared to 1998. Product Sales research and
development expenses decreased $0.1 million or 18%, reflecting the completion of
a significant portion of the development costs associated with the Company's new
generation of on-site products.
Restructuring costs
The Company used $0.7 million of its restructuring reserve in 1999, which
reduced the remaining balance of this reserve to $0.5 million as of December 31,
1999. The reduction in the restructuring reserve was due to payments of $0.5
million and a decrease in the reserve by an additional $0.2 million, as a result
of the settlement of certain litigation brought against the Company for less
than the Company had previously accrued for in 1998. The $0.2 million adjustment
was recorded as a reduction in restructuring costs.
Interest expense
Interest expenses increased $0.1 million, or 21%, in 1999, principally
due to higher debt levels.
Net income (loss)
Net income was $1.4 million in 1999 compared to a net loss of $2.3
million in 1998. The Laboratory Services segment achieved net income of $1.4
million in 1999 compared to a net loss of $1.4 million in 1998. The Product
Sales segment recorded a net loss of $21,000 in 1999 compared to a net loss of
$0.9 million in 1998. The improvement in both segments resulted from increased
sales, improved gross margins and reduced operating costs.
Liquidity and Capital Resources
The working capital requirements of the Company have been funded
primarily by cash received from bank financing and the sale of equity
securities. Cash and cash equivalents at December 31, 2000 were $0.2 million,
compared to $0.6 million at December 31, 1999.
Net cash used in operating activities was $2.0 million in 2000 compared
to net cash provided by operating activities of $0.7 million in 1999. Net cash
used in operating activities was $0.2 million in 1998. The decrease of $2.7
million in 2000 was primarily due to a $2.6 million net loss, as well as higher
levels of accounts receivable and inventories, partially offset by increased
accrued expenses and an increase in the provision for doubtful accounts.
Accounts receivable before allowance for doubtful accounts increased $1.9
million, or 26% to $9.3 million at December 31, 2000, primarily due to a
significant increase in Product Sales revenues in the fourth quarter of 2000
over the corresponding quarter of 1999, as well as the impact of a slowing
economy in the Laboratory Services business. Inventories increased $1.3 million,
or 70%, to $3.1 million at December 31, 2000, principally to support the higher
production levels of substance abuse testing products related to the
year-over-year increase in sales within the Product Sales segment. The increased
inventory level also resulted from additional supplies (forms, labels, and
collection kits) shipped to new and existing collection sites to support a
projected increase in sales volume for 2001 within the Laboratory Services
segment. In 2000, the Company also revised its assumptions for calculating
off-site inventory located at collection sites throughout the United States. The
revised assumptions reduced the amount of expected scrap inventory and changed
the projected time that a collection site uses the collection kits from three
months to twelve months. Accrued expenses were $3.2 million at December 31,
2000, up $1.7 million from 1999, primarily related to the reorganization of the
laboratory operations and an increase in the Company's employee health insurance
costs. The increase of $0.9 million in the provision for doubtful accounts in
2000 was primarily related to a $0.5 million reserve established in connection
with the bankruptcy filings of two Laboratory Services customers.
Net cash used in investing activities was $3.4 million in 2000 compared
to $1.1 million and $0.9 million in 1999 and 1998, respectively. The Company's
investing activities consisted primarily of equipment and capital improvement
expenditures. The increased spending for equipment and capital improvement
expenditures in 2000 reflected purchases primarily for Laboratory Services to
improve efficiencies and reduce operating costs. The Company expects equipment
and capital improvement expenditures to be between $4.0 million and $5.0 million
in 2001. These expenditures are intended primarily to continue to improve
efficiencies and reduce operating costs within the Laboratory Services and
Product Sales businesses. Such expenditures are expected to be funded through
borrowings under the Company's credit facilities and profitable operations.
Net cash provided by financing activities was $5.0 million in 2000,
compared to $1.0 million and $1.1 million in 1999 and 1998, respectively. In
2000, the Company completed a private equity placement through the sale,
exclusively to accredited investors, of 550,000 units at an aggregate price of
$5.5 million, or $10.00 per unit, resulting in net proceeds of approximately
$4.9 million after deducting agents' commissions of $0.6 million and other
expenses. Each unit consisted of one share of common stock and one warrant to
purchase one additional share of common stock at an exercise price of $12.50.
In January 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
$3.185 million bearing interest at prime + 1.25%; (ii) an overadvance term loan
of $.7 million bearing interest at prime + 3%; (iii) a revolving line of credit,
payable on demand, of not more than $6.0 million or 85% of the Company's
eligible trade accounts receivable bearing interest at prime + 1%; and (iv) a
capex note of up to $2.45 million for the purchase of capital equipment bearing
interest at prime + 1.25%.
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, 2000, the Company was not in compliance with the
minimum debt service coverage and minimum quarterly net income level covenants
of the Wells Fargo Credit Agreement. Wells Fargo has waived the aforementioned
defaults of the Company.
The Company has received a total of $575,000 from private placements of
subordinated debt and warrants from 1998 through 1999. The notes require payment
of the principal amounts on December 31, 2001. Interest at 12% per annum is paid
semi-annually 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 equal to 25% of the face amount of the subordinated notes
divided by an exercise price of $3.25 per share. The Company has determined the
value of the warrants at the dates of the grants to be $56,000 based upon the
Black-Scholes option pricing model. 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 Company is relying on expected positive cash flow from operations
and its line of credit 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, 2000,
the Company had total borrowing capacity of $4.7 million on its line of credit,
of which $3.7 million was borrowed, leaving a net availability of $1.0 million
as of December 31, 2000.
In the short term, the Company believes that the aforementioned capital
will be sufficient to fund the Company's planned operations through 2001. While
there can be no assurance that the available capital will be sufficient to fund
the future operations of the Company beyond 2001, the Company believes that
future profitable operations, as well as access to additional capital through
debt or equity financings, will be the primary means for funding the operations
of the Company for the long term.
The Company continues to follow a plan which includes (i) aggressively
monitoring and controlling costs, (ii) increasing revenue from sales of the
Company's existing products and services (iii) developing new products and
services, as well as (iv) continuing to selectively pursue synergistic
acquisitions to increase the Company's critical mass. However, 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 Inflation and Changing Prices
The impact of inflation and changing prices on the Company has been
primarily limited to salary, laboratory and operating supplies and rent
increases and has not been material to date to the Company's operations. In the
future, the Company may not be able to increase the prices of laboratory testing
by an amount sufficient to cover the cost of inflation, although the Company is
responding to these concerns by refocusing the laboratory operations towards
higher margin testing (including clinical and pharmaceutical trials) as well as
emphasizing the marketing, sales and operations of the Product Sales business.
Seasonality
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.
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
2000, 1999 and 1998, 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 of subordinated notes outstanding as of
December 31, 2000 and 1999, 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 $7.0 million and $6.6 million outstanding
on its line of credit and long-term debt issued under the Wells Fargo Credit
Agreement as of December 31, 2000 and 1999. 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, 2000 and 1999, 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.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
Initial
Name Age Position with the Company Effective Date
Harry G. McCoy 49 Former President and Chairman 1996
of the Board of Directors;
Director
Richard J. Braun 56 Chairman of the Board of Directors, 1996
President, Chief Executive Officer
Samuel C. Powell, Ph.D. 48 Director 1987
James W. Hansen 45 Director 1996
Miles E. Efron 74 Director 1997
Brian P. Johnson 51 Director 2000
James B. Lockhart 50 Chief Financial Officer and 2000
Vice President of Finance
and Administration
Kevin J. Wiersma 39 Vice President and Chief 1998
Operating Officer of Medtox
Laboratories, Inc.
James A. Schoonover 44 Vice President and Chief 2000
Marketing Officer
B. Mitchell Owens 44 Vice President and Chief Operating 2000
Officer of Medtox Diagnostics, Inc.
Harry G. McCoy, Pharm.D., Dr. McCoy served as Chairman of the Board of
Directors and President from July 1996 until October 26, 2000. Dr. McCoy founded
MEDTOX in 1984, and served as both Clinical Director and member of the MEDTOX
Board of Directors until its acquisition by the Company in January 1996. He
continued as President of MEDTOX following its acquisition by the Company. Dr.
McCoy also has academic appointments with the University of Minnesota and the
University of North Dakota, and is Chairman and CEO of the Nova Jazz
Corporation, a Minnesota non-profit company.
Richard J. Braun, MBA, JD, CPA, was named Chairman of the Board of
Directors and President on October 26, 2000. Mr. Braun was named a Director and
elected as Chief Executive Officer in July 1996. From 1994 until joining the
Company, Mr. Braun acted as a private investor and provided management
consulting services to the health care and technology industries. From 1992
until 1994, he served as Chief Operating Officer and as a Director of EBP, Inc.,
a NYSE company engaged in managed care. From 1989 through 1991, Mr. Braun served
as Executive Vice President, Chief Operating Officer and Director of Reich and
Tang L.P., a NYSE investment advisory and broker dealer firm.
Samuel C. Powell, Ph.D., served as Chairman of the Board of Directors
from November 1987 to June 1994 and has served as a Director of the Company
since September 1986. Dr. Powell served as Chairman of the Board and Chief
Executive Officer of Granite Technological Enterprises, from January 1984 until
its acquisition by the Company in June 1986. Since 1987, he has been President
of Powell Enterprises, Burlington, North Carolina, offering financial and
management services to a variety of businesses and real estate ventures.
Additionally, Dr. Powell has been involved in local politics since 1985 as
Councilman for the City of Burlington, N.C. Dr. Powell has also been appointed
to serve on the North Carolina Board of Science and Technology from 1989 to
1995, and as a Board Member and Chairman of the N.C. State Alcoholism Research
Authority.
James W. Hansen was named as a Director in September 1996. Mr. Hansen has,
since November, 1996, been Chairman, CEO and Treasurer of Videolabs, Inc., a
NASDAQ traded, technology company and is CEO of Prevention First, a development
stage medical services provider. From 1986 to 1992, Mr. Hansen was Senior Vice
President and General Manager of the Pension Division of Washington Square
Capital, a Reliastar company, which is a NYSE traded financial services company.
Since 1992, Mr. Hansen has served as an Investor, Director, President or Vice
President of several private companies in medical services and technology. He
also serves as a Director of UBIQ, Inc., Videolabs, Inc. and Prevention First
and has taught in the MBA program at the University of St. Thomas since 1984.
Miles E. Efron was named as a Director in January, 1997. From 1988 to 1993,
Mr. Efron served as Chief Executive Officer of North Star Universal, a holding
company with interests in health care, food products and computer connectivity
and networking. Since 1993, Mr. Efron has served as Chairman of North Star
Universal. Mr. Efron currently serves on the Board of Directors of several
companies, none of which are related to the Company.
Brian P. Johnson, MBA, was named as a Director on June 5, 2000. Mr. Johnson
is a general partner of Touchstone Venture Partners. Mr. Johnson holds a
bachelor's degree from the University of South Dakota and a master's degree in
business administration in marketing from the University of St. Thomas. He has
also served on a number of civic boards in addition to business boards.
James B. Lockhart was named Chief Financial Officer on February 29,
2000. Prior to joining the Company, Mr. Lockhart practiced in the area of
corporate, tax, and business planning for nearly 25 years. He has acted as an
outside adviser to boards of directors of public companies on numerous issues
including both operational matters and matters involving mergers and
acquisition. Mr. Lockhart has also personally served as a board member of a NYSE
listed public company, where he sat on the audit committee and chaired the
investment committee.
Kevin J. Wiersma was named Chief Operating Officer of MEDTOX Laboratories,
Inc. on July 17, 2000. Mr. Wiersma was named Secretary, Vice President and
Controller on July 20, 1998. Mr. Wiersma joined MEDTOX Laboratories in 1982 and
continued with the MEDTOX following its acquisition by the Company. Mr. Wiersma
has served in various positions with the Company relating to finance and
operations management.
James A. Schoonover was named Vice President and Chief Marketing
Officer on July 17, 2000. Mr. Schoonover joined the Company in 1997 as Vice
President of Business Development. Prior to joining the Company, Mr. Schoonover
was a divisional Vice President for a subsidiary of Olsten Corporation and Vice
President of Sales for a national collection site management company.
B. Mitchell Owens, MBA, CPIM, was named Vice President and Chief Operating
Officer of MEDTOX Diagnostics, Inc. on July 17, 2000. Mr. Owens joined the
Company in 1988 and has served in various positions including Director of
Operations and General Manager. Prior to joining the Company, Mr. Owens was
employed by GTE Technical Products Division and Kayser-Roth Corporation in
related operations management positions.
ITEM 11. EXECUTIVE COMPENSATION
The following table discloses the compensation earned by the Company's
Chief Executive Officer and Former Chairman of the Board and President and the
four other most highly compensated executive officers whose total annual salary
exceeded $100,000 for the fiscal year ended December 31, 2000.
SUMMARY COMPENSATION TABLE
Long Term Compensation
Annual Compensation Awards Payouts
Other
Annual Restricted Options/ LTIP All Other
Name and Principal Compen- Stock Awards SAR's Payouts Compen-
Position Year Salary Bonus sation(3) ($)(4) (5) (#) (6) sation
- -------------------------- ------- --------- ---------- ---------- ------------- --------- --------- -------------
Harry G. McCoy 2000 $225,000 -- -- $43,313 -- -- --
Former President and 1999 $200,000 -- -- -- 40,000 -- --
Chairman of the Board 1998 $200,000 $9,615 -- -- 50,000 -- --
of Directors; Director(1)
Richard J. Braun 2000 $250,000 -- -- 15,000 -- $15,060 (7)
Chairman of the Board of 1999 $200,000 -- -- $133,781 80,000 -- $11,910 (7)
Directors, President, 1998 $200,000 $9,615 -- -- 50,000 -- $ 9,060 (7)
Chief Executive Officer(2)
James B. Lockhart 2000 $121,731 $43,000(12) -- $60,984 32,500 -- --
Chief Financial Officer
and Vice President
Finance and
Administration (8)
Kevin J. Wiersma 2000 $131,346 -- -- $76,734 10,000 -- --
Vice President and Chief 1999 $115,000 -- -- -- 17,500 -- --
Operating Officer of 1998 $ 92,144 $11,700 -- -- 5,000 -- --
Medtox Laboratories,
Inc. (9)
James A. Schoonover 2000 $131,346 -- -- $68,859 7,500 -- --
Vice President and Chief
Marketing Officer (10)
B. Mitchell Owens 2000 $131,346 -- -- $68,859 10,000 -- --
Vice President and Chief
Operating Officer of
Medtox Diagnostics,
Inc. (11)
(1) Dr. McCoy was replaced as Chairman and President of the Company on
October 26, 2000. Pursuant to the terms of the Employment Agreement
dated January 1, 2000, between Dr. McCoy and the Company, Dr. McCoy is
to continue to receive payments based on his combined salary and bonus
for the balance of his term of employment. See Employment Contracts for
further information.
(2) Mr. Braun was elected Chairman of the Board of Directors and President
on October 26, 2000.
(3) Other Annual Compensation for executive officers is not reported as
it is less than the required reporting threshold of the Securities
and Exchange Commission.
(4) 2000 restricted stock awards were made pursuant to the Restated Equity
Compensation Plan adopted by the Board of Directors effective May 10,
2000. The value of each award shown is based upon the closing market
price of the Company's common stock on the date of grant ($7.88 per
share on May 1, 2000 and $12.06 per share on November 1, 2000). Awards
granted under the Restated Equity Compensation Plan vest over a three
year period. A total of 45,500 shares of restricted stock were granted
to the executives named in the table in the respective numbers
indicated: Harry G. McCoy, 5,500; Richard J. Braun, 13,000 shares;
James B. Lockhart, 5,750 shares; Kevin J. Wiersma, 7,750 shares; James
A. Schoonover, 6,750 shares; and B. Mitchell Owens, 6,750 shares. Any
dividends declared on the Company's common stock will be paid on all
shares of restricted stock granted under the Restated Equity
Compensation Plan.
(5) As of December 31, 2000, the number and fair market value, based on the
closing market price of the Company's common stock of $6.3125 on
December 29, 2000, of the aggregate restricted stock holdings granted
to the named executive officers were: Harry G. McCoy, 5,500 shares and
$34,719; Richard J. Braun, 13,000 shares and $82,063; James B.
Lockhart, 5,750 shares and $36,297; Kevin J. Wiersma, 7,750 shares and
$48,922; James A. Schoonover, 6,750 shares and $42,609; and B. Mitchell
Owens, 6,750 shares and $42,609.
(6) Not applicable. No compensation of this type received.
(7) Includes $15,060, $11,910 and $9,060 of premiums paid for by the
Company for a life and disability insurance policy on Mr. Braun in
2000, 1999 and 1998, respectively.
(8) Mr. Lockhart was appointed Chief Financial Officer on February 29,
2000.
(9) Mr. Wiersma was appointed Vice President and Chief Operating Officer
of MEDTOX Laboratories, Inc. on July 17, 2000.
(10) Mr. Schoonover was appointed Vice President and Chief Marketing Officer
on July 17, 2000.
(11) Mr. Owens was appointed Vice President and Chief Operating Officer of
MEDTOX Diagnostics, Inc. on July 17, 2000.
(12) Mr. Lockhart received a guaranteed bonus payment in 2000 as part of
his compensation in the initial year of employment with the Company.
Stock Options Granted During Fiscal Year
The following table sets forth information about the stock options
granted to the named executive officers of the Company during 2000.
OPTION GRANTS IN LAST FISCAL YEAR
Potential Realized
Value at Assumed
Annual Rates of
Stock Price
Appreciation for
Individual Grants Option Term
% of Total
Options
Number Granted to
of Employees Exercise
Options in Fiscal Price Expiration 5% ($) 10%( $)
Name Granted Year ($/Sh) Date (1) (1)
- -------------------------------------------------------------------------------------------------------------------
Richard J. 15,000 14% $ 12.0625 11/01/10 $294,728 $469,305
Braun
James B. 25,000 24% $ 8.6875 01/03/10 $353,776 $563,328
Lockhart 7,500 7% $ 12.0625 11/01/10 $147,364 $234,653
Kevin J. 10,000 10% $ 12.0625 11/01/10 $196,485 $312,870
Wiersma
James A. 7,500 7% $ 12.0625 11/01/10 $147,364 $234,653
Schoonover
B. Mitchell 10,000 10% $ 12.0625 11/01/10 $196,485 $312,870
Owens
(1) The potential realizable value of the options reported above was
calculated by assuming 5% and 10% annual rates of appreciation of the
common stock of the Company from the date of grant of the options until
the expiration of the options. These assumed annual rates of
appreciation were used in compliance with the rules of the Securities
and Exchange Commission and are not intended to forecast future price
appreciation of the common stock of the Company. The Company chose not
to report the present value of the options, which is an alternative
under Securities and Exchange Commission rules, because the Company
does not believe any formula will determine with reasonable accuracy a
present value based on unknown or volatile factors. The actual value
realized from the options could be substantially higher or lower than
the values reported above, depending upon the future appreciation or
depreciation of the common stock during the option period and the
timing of exercise of the options.
Stock Options Exercised During Fiscal Year and Year-End Values of Unexercised
Options
The following table sets forth information about the stock options held
by the named executive officers of the Company at December 31, 2000.
Number of
Shares Number of Unexercised Value of Unexercised In-the
Acquired Value Options at FY-End Money Options at FY-End
Name on Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable (1)
- ------------------------------------------------------------------------------------------------------------------------------
Harry G. McCoy - - 76,667/13,333 $100,001/$ 49,999
Richard J. Braun - - 104,126/40,874 $199,838/$100,163
James B. Lockhart - - 8,705/23,795 - / -
Kevin J. Wiersma - - 16,200/16,300 $29,679/$14,852
James A. Schoonover - - 21,249/11,251 $29,679/$14,852
B. Mitchell Owens - - 19,200/16,300 $29,679/$14,852
(1) The closing price of the Common Stock of the Company at
December 31, 2000 was $6.3125 per share.
Long-Term Incentive Plans and Pension Plans
The Company does not contribute to any Long-Term Incentive Plan or
Pension Plan for its executive officers as those terms are defined in the rules
of the Securities and Exchange Commission. The Company relies on its stock
option and restricted stock plans to provide long-term incentives for executive
officers. The Company has three stock option plans: a 1983 Stock Option Plan for
employees which expired on June 23, 1993; the Restated Equity Compensation Plan
which was originally adopted by the shareholders of the annual meeting in 1993
to replace the 1983 Incentive Stock Option Plan and was restated and adopted by
the Board of Directors on May 10, 2000; and a 1991 Non-Employee Director's Plan
for members of the Board of Directors who are not employees of the Company. In
addition, the Company has granted separately to various existing and former
executive employees, including Mr. Braun and Dr. McCoy, non-qualified options to
purchase shares of the Company's Common Stock.
Compensation of Directors
All directors who are not employees of the Company receive $500 per
month for their service as a director. All directors are also reimbursed for
expenses incurred in attending board of directors' meetings and participating in
other activities.
Employment Contracts
Harry G. McCoy, former Chairman of the Board of Directors and former
President of the Company, has an employment agreement with the Company dated
January 1, 2000. The initial term of the agreement is through December 31, 2002,
and thereafter is renewed automatically for one-year terms unless otherwise
terminated in accordance with the terms of the agreement. The agreement provides
for an annual base salary of $225,000 and additional bonuses, fringe benefits
and grants of restricted stock which, except for the fringe benefits, are
performance based. The agreement also provides for a Severance Award equal to
base salary, health insurance and bonus plan payments for the greater of twelve
(12) months or the then remaining term of employment under the agreement. The
Severance Award is payable following termination by the Company other than for
cause, or if the employee voluntarily terminates following (i) a change in
control; (ii) any relocation of greater than fifty (50) miles; or (iii) any
material reduction in the level of the employee's responsibility, position,
authorities or duties; or (iv) the Company breaches any of its obligations under
the Agreement.
The employment agreement contains a covenant not to compete whereby for
a period of twelve (12) months after the termination of employment with the
Company, the employee agrees that they will not, directly or indirectly, either
(a) have any interest in (b) enter the employment of, (c) act as agent, broker,
or distributor for or advisor or consultant to, or (d) provide information
useful in conducting the business of the Company to solicit customers or
employees on behalf of the Company to any person, firm, corporation or business
entity which is engaged, or which employee reasonably knows is undertaking to
become engaged, in the United States in the business of the Company.
Richard J. Braun, Chairman of the Board of Directors, President, and
Chief Executive Officer, has an employment agreement with the Company dated
January 1, 2000. The initial term of the agreement is through December 31, 2002,
and thereafter is renewed automatically for one-year terms unless otherwise
terminated in accordance with the terms of the agreement. The agreement provides
for an annual base salary of $250,000 and additional bonuses, fringe benefits
and grants of restricted stock which, except for the fringe benefits, are
performance based. The agreement also provides for a Severance Award equal to
base salary, health insurance and bonus plan payments for the greater of twelve
(12) months or the then remaining term of employment under the agreement. The
Severance Award is payable following termination by the Company other than for
cause, or if the employee voluntarily terminates following (i) a change in
control; (ii) any relocation of greater than fifty (50) miles; or (iii) any
material reduction in the level of the employee's responsibility, position,
authorities or duties; or (iv) the Company breaches any of its obligations under
the Agreement.
The employment agreement contains a covenant not to compete whereby for
a period of twelve (12) months after the termination of employment with the
Company, the employee agrees that they will not, directly or indirectly, either
(a) have any interest in (b) enter the employment of, (c) act as agent, broker,
or distributor for or advisor or consultant to, or (d) provide information
useful in conducting the business of the Company to solicit customers or
employees on behalf of the Company to any person, firm, corporation or business
entity which is engaged, or which employee reasonably knows is undertaking to
become engaged, in the United States in the business of the Company..
The Company has entered into severance agreements with James B.
Lockhart, Kevin J. Wiersma, James A. Schoonover and B. Mitchell Owens, at
various times in 2000 as each individual was appointed to the position of Vice
President. The initial term of the severance agreement is one year and each
shall automatically be extended for one additional year unless, not later than
July 1 of the preceding year, either the Company or the individual provides
written notice to the other party or unless the agreement is otherwise
terminated due to death, permanent disability, or for "cause." If during the
term of the severance agreement, the Company terminates the employment of the
individual other than for "cause," the individual shall be entitled to a
severance award. The severance award consists of payment of an amount equal to
the individual's then current base salary plus certain health benefits over the
course of the twelve month period following the date of the individual's
termination.
The severance agreements for Mr. Lockhart, Mr. Wiersma, Mr. Schoonover and
Mr. Owens agreement contain a covenant not to compete whereby the individual
agrees that during the twelve (12) month period following the Date of
Termination during which the individual receives severance payments, the
individual will not directly or indirectly own, manage, operate, control, be
employed by, participate in or be connected in any manner with the ownership,
management, operation or control of any business providing or delivering
products or services which compete with the business, products or services of
the Company or its affiliates, in the geographic markets in which the Company
operates.
Compensation Committee and Decision Making
The compensation of executive officers of the Company for 2000 was
determined by the Compensation Committee which is currently comprised of James
W. Hansen, Miles E. Efron, and Samuel C. Powell. Stock options are awarded under
the Company's Restated Equity Compensation Plan and Non-Employee Director Plan
by the Compensation Committee. All non-employee directors were eligible to
receive stock options under the Company's 1991 Non-Employee Director Plan.
Report of the Compensation Committee on Executive Compensation
In General
The Committee has three primary goals for executive compensation at the
Company.
o Retaining good performers,
o Rewarding executives appropriately for performance, and
o Aligning executives' interests with those of stockholders.
Currently, executive pay consists of three elements that are designed
to meet those objectives:
o Base salary is paid based primarily on job responsibilities and industry
job comparison. The Committee believes that base salaries at approximately
industry averages are essential to retaining good performers.
o Stock options, which allow executives to benefit when the market price of the
Company's stock increases.
o Bonuses to be paid upon the attainment of certain
financial objectives and individual circumstances when warranted.
Following is additional information regarding each of the above elements.
Base Salary
Base salary increases for executive officers have been modest and
consistent with job performance and increases in responsibility.
Bonus
James B. Lockhart received a guaranteed bonus payment in 2000 as part
of his compensation in the initial year of employment with the Company.
Stock Options
In 2000, certain executive officers received incentive stock options to
purchase a total of 75,000 shares. The number of options granted to the
executive officers represented 72% of the total options granted in 2000 to all
employees.
Restricted Stock
In 2000, certain executive officers received restricted stock awards
for a total of 45,500 shares. The number of restricted stock awards granted to
the executive officers represented 82% of the total restricted stock awards
granted in 2000 to all employees.
Summary
Currently, the Company's executive compensation program rewards the
following elements of performance.
o Individual performance is rewarded through continued employment with the
Company.
o Stock price performance is rewarded through increases in the value of
stock options.
o Financial performance of the Company is rewarded through payments of bonuses
upon the attainment of certain financial goals
The Committee believes that the current program has been effective in
rewarding executives appropriately for performance, retaining good performers,
and aligning executives' interests with those of stockholders. While the
Committee is satisfied with the current compensation system, it reserves the
right to make changes to the program as are necessary to continue to meet its
stated goals in future years.
Benefits also are offered to officers that are not based on
performance. Such benefits provide a safety net of protection in the event of
illness, disability, death, retirement, etc. Such a safety net is provided to
all full time employees of the Company.
Chief Executive Officer Pay
Amounts earned during 2000 by the Chief Executive Officer, Richard J.
Braun, are shown in the Summary Compensation Table. Achievements by the Company
which were deemed material to the Chief Executive Officer's compensation include
record increases in total revenue, record growth of the Diagnostic segment of
the Company and new product development. For the year ended December 31, 2000,
the Compensation Committee used, in its deliberations on executive compensation,
these criteria and other accomplishments.
Submitted by the Compensation Committee of the Company's Board of Directors
James W. Hansen
Miles E. Efron
Samuel C. Powell
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information available to the Company as
of March 20, 2001 regarding the beneficial ownership of the common stock by (i)
each person known by the Company to beneficially own more than five percent (5%)
of the outstanding common stock, (ii) each of the Directors, (iii) the Chief
Executive Officer and all executive officers whose compensation was $100,000 or
greater during 2000, and (iv) all executive officers and Directors of the
Company as a group:
Number of Shares Percent of Common
Name Beneficially Owned Stock Outstanding
Harry G. McCoy, Pharm. D. 245,593 (1) 6.36 %
Former President and Chairman of the Board of
Directors; Director
Richard J. Braun 139,127 (2) 3.61 %
Chairman of the Board of Directors, President,
Chief Executive Officer
Samuel C. Powell, Ph.D., Director 105,519 (3) 2.73 %
James W. Hansen, Director 15,796 (4) *
Miles E. Efron, Director 9,580 (5) *
Brian P. Johnson, Director 13,060 (6) *
James B. Lockhart 25,350 (7) *
Chief Financial Officer and Vice President Finance
and Administration
Kevin J. Wiersma 27,641 (8) *
Vice President and Chief Operating Officer
of Medtox Laboratories, Inc.
James A. Schoonover 41,833 (9) 1.08 %
Vice President and Chief Marketing Officer
B. Mitchell Owens 29,859 (10) *
Vice President and Chief Operating Officer
of Medtox Diagnostics, Inc.
All Directors and Executive Officers
as a Group (10 in number) 653,358 (11) 16.93 %
Perkins Capital Management, Inc. 528,300 13.69 %
Pyramid Trading Limited Partnership 348,300 9.03 %
- ----------
* Less than one percent (1%)
1. Includes 81,745 shares of common stock issuable under options which are
or which will become exercisable within the next 60 days. Also includes
5,500 shares of restricted stock which will not become vested until
5/1/03.
2. Includes 116,177 shares of common stock issuable under options which
are or which will become exercisable within the next 60 days. Also
includes 5,500 shares of restricted stock which will not become vested
until 5/1/03 and 7,500 shares which will not become vested until
11/1/03.
3. Includes 8,080 shares of common stock issuable under stock options and
7,692 shares of common stock issuable under common stock purchase
warrants which are or will become exercisable within the next 60 days.
4. Includes 10,796 shares of common stock issuable under stock options
which are or will become exercisable within the next 60 days.
5. Includes 7,080 shares of common stock issuable under stock options
which are or will become exercisable within the next 60 days.
6. Includes 1,714 shares of common stock issuable under stock options and
3,846 shares of Common Stock issuable under common stock purchase
warrants and which are or will become exercisable within the next 60
days.
7. Includes 12,831 shares of common stock issuable under stock options and
5,769 shares of common stock issuable under common stock purchase
warrants and which are or will become exercisable within the next 60
days. Also includes 2,000 shares of restricted stock which will not
become vested until 5/1/03 and 3,750 shares which will not become
vested until 11/1/03.
8. Includes 19,691 shares of common stock issuable under stock options
which are or will become exercisable within the next 60 days. Also
includes 4,000 shares of restricted stock which will not become vested
until 5/1/03 and 3,750 shares which will not become vested until
11/1/03.
9. Includes 23,787 shares of common stock issuable under options which are
or will become exercisable within the next 60 days. Also includes 3,000
shares of restricted stock which will not become vested until 5/1/03
and 3,750 shares which will not become vested until 11/1/03.
10. Includes 22,691 shares of common stock issuable under options which are
or will become exercisable within the next 60 days. Also includes 3,000
shares of restricted stock which will not become vested until 5/1/03
and 3,750 shares which will not become vested until 11/1/03.
11. Includes 321,899 shares of common stock issuable under options or
warrants which are or will become exercisable within the next 60 days
and 45,500 shares of restricted stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Lease Agreement with Dr. Samuel C. Powell
In July 1986, the Company executed a lease agreement with Dr. Powell
providing for a lease to the Company of approximately 16,743 square feet of
space at 1238 Anthony Road, Burlington, North Carolina. Since 1986, the Company
has expanded the space rented under the lease to approximately 33,000 square
feet. For the last several years, the Company has leased this same approximately
33,000 square feet on a month-to-month basis at an annual base rent, excluding
operating cost, of approximately $121,000. Effective March 28, 2001, the Company
entered into a 10-year lease of the entire building (approximately 39,500 square
feet) at the same location for an annual base rent of $197,000, exclusive of
certain operating expenses. In addition, under the lease the Company will have
available to it, up to $600,000 to spend on tenant improvements of the building,
which will then be amortized over the 10-year life of the lease as additional
rent at an assumed annual interest rate of 9.5%. The Company believes it is
renting this facility in Burlington on terms as favorable as those available
from third parties for equivalent premises.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.
a. (i) Financial Statements Page
--------------------
Independent Auditors' Report ............ 43
Consolidated Balance Sheets at December
31, 2000 and 1999...................... 44
Consolidated Statements of Operations
for the Years Ended December 31,
2000, 1999 and 1998.................... 45
Consolidated Statements of Stockholders'
Equity for the Years
Ended December 31, 2000,
1999 and 1998.......................... 46
Consolidated Statements of Cash
Flows for the Years Ended
December 31, 2000, 1999 and 1998....... 47
Notes to Consolidated Financial
Statements............................. 48
(ii) Consolidated Financial Statement Schedules
Schedule II - Valuation and
Qualifying Accounts ................... 64
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
(incorporated by reference to Appendix A filed with the
Registrant's Proxy Statement on September 29, 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
(incorporated by reference to Exhibit 3.5 filed with
the Registrant's Report on Form 10-K for the fiscal
year ended December 31, 1998).
3.6 Certificate of Amendment of Certificate of
Incorporation of MEDTOX Scientific, Inc. filed with
Delaware Secretary of State on November 19, 1999
(incorporated by reference to Exhibit 3.6 filed with
the Registrant's Report on Form 10-K for the fiscal
year ended December 31, 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 (incorporated by
reference to Exhibit 4.1 filed with the Registrant's
Report on Form 10-K for the fiscal year ended December
31, 1999).
4.2 Form of Warrant accompanying the 12% Subordinated
Notes issued through the first quarter of 1999
(incorporated by reference to Exhibit 4.2 filed with
the Registrant's Report on Form 10-K for the fiscal
year ended December 31, 1999).
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 and 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.)
10.44 Employment Agreement dated January 1, 2000 between the
Registrant and Richard J. Braun. (Incorporated by
reference to Exhibit 10.44 filed with the Registrant's
Report on form 10-K for the fiscal year ended December
31, 1999.)
10.45 Employment Agreement dated January 1, 2000 between the
Registrant and Harry G. McCoy. (Incorporated by
reference to Exhibit 10.45 filed with the Registrant's
Report on form 10-K for the fiscal year ended December
31, 1999.)
b. Reports on Form 8-K
On December 5, 2000, the Company announced that it would take
a $500,000 charge against earnings in the quarter ended December 31, 2000. The
reserve is for potential losses attributable to the Chapter 11 bankruptcy
filings reported earlier in 2000 by both Safety-Kleen Corp and Southern Medical
Arts Companies.
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
MEDTOX SCIENTIFIC, INC.
Report on Form 10-K
For year ended December 31, 2000
INDEX TO EXHIBITS FILED SEPARATELY WITH FORM 10-K
EXHIBIT # DESCRIPTION OF EXHIBIT
4.3 Form of Warrant accompanying the Stock Purchase Agreement dated
July 31, 2000.
10.46 Registrant's Restated Equity Compensation Plan dated May 10,
2000.
10.47 Form of Severance Agreement between the Registrant and James B.
Lockhart, James A. Schoonover, B. Mitchell Owens, and Kevin
J. Wiersma.
10.48 Purchase and Sale Agreement dated July 27, 2000 by and between
the Registrant and NMRO, Inc.
10.50 Registration Rights Agreement dated July 31, 2000 among the
Registrant, certain investors, and Miller, Johnson, & Kuehn,
Inc. ("MJK").
10.51 Stock Purchase Agreement dated July 31, 2000 between the
Registrant and certain investors.
10.52 Purchase and Sale Agreement dated December 29, 2000 by and
between MEDTOX Laboratories, Inc. and PHL-OPCO, LP.
10.53 Mortgage and Security Agreement dated March 16, 2001 by and
between New Brighton Business Center LLC and Principal Life
Insurance Company.
10.54 Secured Promissory Note dated March 16, 2001 by and between New
Brighton Business Center LLC and Principal Life Insurance
Company.
23 Consent of Deloitte & Touche LLP
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 2001.
MEDTOX Scientific, Inc.
Registrant
By:/s/ Richard J. Braun
Richard J. Braun
President, Chief Executive Officer and
Chairman of the Board of Directors
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/ Richard J. Braun President, Chief Executive Officer, March 28, 2001
Richard J. Braun and Chairman of the Board of
Directors (Principal Executive
Officer)
/s/ James B. Lockhart Chief Financial Officer and Vice March 28, 2001
James B. Lockhart President of Finance and
Administration (Principal Financial
Officer)
/s/ Kari L. Golembeck Controller March 28, 2001
Kari L. Golembeck (Principal Accounting Officer)
/s/ Samuel C. Powell Director March 28, 2001
Samuel C. Powell, Ph.D.
/s/ Miles E. Efron Director March 28, 2001
Miles E. Efron
/s/ James W. Hansen Director March 28, 2001
James W. Hansen
/s/ Brian P. Johnson Director March 28, 2001
Brian P. Johnson
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, 2000 and 1999 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 2000. 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, 2000 and 1999 and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2000, 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 23, 2001
(March 16, 2001 as to Note 15)
MEDTOX SCIENTIFIC, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
(In thousands, except share and per share data)
- -------------------------------------------------------------------------------------------------------------------
2000 1999
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 213 $ 576
Accounts receivable:
Trade, less allowance for doubtful accounts ($1,131 in 2000 and $274 in 1999) 7,873 6,982
Other 264 125
--------- ---------
Total accounts receivable 8,137 7,107
Inventories 3,052 1,796
Prepaid expenses and other 830 815
--------- ---------
Total current assets 12,232 10,294
EQUIPMENT AND IMPROVEMENTS, NET 5,211 2,816
GOODWILL, net of accumulated amortization of $4,438 in 2000 and $3,568 in 1999 12,291 13,161
OTHER ASSETS, net of accumulated amortization of $7 in 2000 290 -
--------- ---------
TOTAL ASSETS $ 30,024 $ 26,271
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ 3,724 $ 4,208
Accounts payable 2,819 3,682
Accrued expenses 3,213 1,554
Current portion of restructuring accrual 160 384
Current portion of long-term debt 1,579 1,236
Current portion of capital leases 221 186
--------- ---------
Total current liabilities 11,716 11,250
LONG-TERM PORTION OF RESTRUCTURING ACCRUAL - 85
LONG-TERM DEBT 2,480 1,737
LONG-TERM PORTION OF CAPITAL LEASES 418 409
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value; authorized shares, 50,000; none issued and
outstanding - -
Common stock, $0.15 par value; authorized shares, 7,400,000; issued and
outstanding shares, 3,508,151 in 2000 and 2,904,410 in 1999 526 436
Additional paid-in capital 65,422 59,859
Deferred stock-based compensation (472) -
Accumulated deficit (49,890) (47,329)
Treasury stock (176) (176)
--------- ---------
Total stockholders' equity 15,410 12,790
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 30,024 $ 26,271
========= =========
See notes to consolidated financial statements.
MEDTOX SCIENTIFIC, INC.
CONSOLIDATED STATEMENTS OF operations
YEARS ENDED december 31, 2000, 1999, AND 1998
(In thousands, except share and per share data)
- -------------------------------------------------------------------------------------------------------------------
2000 1999 1998
REVENUES:
Laboratory service revenues $ 34,797 $ 31,012 $ 27,070
Product sales 8,083 3,991 2,505
------------ ------------ ------------
42,880 35,003 29,575
COST OF REVENUES:
Cost of services 24,713 20,572 18,689
Cost of sales 3,134 2,177 1,671
------------ ------------ ------------
27,847 22,749 20,360
------------ ------------ ------------
GROSS PROFIT 15,033 12,254 9,215
OPERATING EXPENSES:
Selling, general, and administrative 15,480 9,348 8,974
Research and development 1,123 834 1,153
Restructuring costs - (164) 712
------------ ------------- ------------
16,603 10,018 10,839
------------ ------------ ------------
(LOSS) INCOME FROM OPERATIONS (1,570) 2,236 (1,624)
OTHER INCOME (EXPENSE):
Interest and other income - - 1
Interest expense (991) (817) (674)
------------- ------------- -------------
(991) (817) (673)
------------- ------------- -------------
NET (LOSS) INCOME $ (2,561) $ 1,419 $ (2,297)
============= ============ =============
BASIC (LOSS) EARNINGS PER COMMON SHARE $ (0.81) $ 0.49 $ (0.79)
============ ============ =============
WEIGHTED AVERAGE NUMBER OF BASIC COMMON
SHARES OUTSTANDING 3,142,588 2,902,087 2,893,399
=========== =========== ===========
DILUTED (LOSS) EARNINGS PER COMMON SHARE $ (0.81) $ 0.48 $ (0.79)
============ ============ ============
WEIGHTED AVERAGE NUMBER OF DILUTED
COMMON SHARES OUTSTANDING 3,142,588 2,985,107 2,893,399
============ ============ ============
See notes to consolidated financial statements.
MEDTOX SCIENTIFIC, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
- -------------------------------------------------------------------------------------------------------------------
Preferred Stock Common Stock Additional Deferred
Par Par Paid-in Stock-Based Accumulated Treasury
Shares Value Shares Value Capital Compensation Deficit Stock Total
BALANCE AT DECEMBER 31, 1997 4 $ - 2,841,409 $426 $ 59,772 $ - $ (46,451) $(176) $ 13,571
Issuance of common stock under
employee stock plans 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
Issuance of common stock under
employee stock plans 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
Issuance of common stock under
employee stock plans 37,660 5 47 52
Private placement of common
stock(net of offering costs
of $0.6 million) 550,000 83 4,795 4,878
Stock issued in connection with
acquisition 15,152 2 175 177
Exercise of stock options 929 5 5
Deferred stock-based compensation 541 (541)
Amortization of deferred
compensation 69 69
Net loss (2,561) (2,561)
----- ------- ---------- ----- ------- ------------ -------- ------ --------
BALANCE AT DECEMBER 31, 2000 - $ - 3,508,151 $ 526 $ 65,422 $ (472) $ (49,890) $(176) $ 15,410
====== ======= ========= ===== ======== ========= ========= ====== =========
See notes to consolidated financial statements.
MEDTOX SCIENTIFIC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
(In thousands)
2000 1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (2,561) $ 1,419 $ (2,297)
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Depreciation and amortization 2,420 2,124 2,094
Provision for losses on accounts receivable 879 229 42
Gain on sale of equipment (35) - (4)
Deferred compensation 69 - -
Changes in operating assets and liabilities:
Accounts receivable (1,909) (1,348) (476)
Inventories (1,256) (689) 35
Prepaid expenses and other current assets (15) (291) (109)
Other assets (54) - -
Accounts payable and accrued expenses 796 (19) 161
Restructuring accruals (309) (687) 369
-------- --------- ---------
Net cash (used in) provided by operating activities (1,975) 738 (185)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment and improvements (3,353) (1,119) (949)
Proceeds from sale of equipment 35 - 4
Payment for acquisition of business (75) - -
--------- -------- ---------
Net cash used in investing activities (3,393) (1,119) (945)
CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease) increase in checks in excess of bank balances - (142) 142
Net proceeds from sale of common stock 4,935 6 25
Net (payments) proceeds on revolving credit facility (483) 1,113 (477)
Proceeds from long-term debt 4,479 1,521 4,294
Principal payments on long-term debt (3,669) (1,472) (2,794)
Principal payments on capital leases (257) (107) (118)
Other - 38 -
-------- -------- ---------
Net cash provided by financing activities 5,005 957 1,072
-------- -------- ---------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (363) 576 (58)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 576 - 58
---------- -------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 213 $ 576 $ -
========= ======== =========
SUPPLEMENTAL NONCASH ACTIVITIES:
Additions to capital leases $ 557 $ 101 $ 414
Acquisitions:
Fair value of assets acquired 252
Cash paid (75)
Common stock issued (177)
---------
$ -
========
See notes to consolidated financial statements.
MEDTOX SCIENTIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
include 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.
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.
Cash and 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.
Intangible Assets - Goodwill and customer lists are amortized on a
straight-line basis over the expected periods to be benefited, generally
20 years. The carrying value of intangible assets is reviewed if the
facts and circumstances suggest that it may be impaired. If this review
indicates that an asset will not be recoverable, as determined based on
the undiscounted cash flows to be generated by the asset over the
remaining amortization period, the Company's carrying value of the asset
is reduced by the estimated shortfall of cash flows. Based on the
Company's analysis of future cash flows, the carrying value of goodwill
and customer lists appeared recoverable as of December 31, 2000 and
1999.
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.
Revenue Recognition - Revenues from Laboratory Services are recognized
when services are provided. Revenues from Product Sales are recognized
when the products are shipped.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial
Statements. SAB No. 101 summarizes the SEC staff's views in applying
generally accepted accounting principles to recognition, presentation, and
disclosure of revenue in financial statements. During the fourth quarter of
2000, the Company performed a review of its revenue recognition policies
and determined that it is in compliance with the guidance provided in SAB
No. 101.
Freight charges to customers are included in product sales and freight
costs are included in cost of sales, in accordance with EITF No. 00-10,
Accounting for Shipping and Handling Fees and Costs.
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 Common Share - Basic earnings (loss) per common
share equals net earnings (loss) divided by the weighted average common
shares outstanding during the period. Diluted earnings (loss) per common
share equals net earnings (loss) divided by the sum of weighted average
common shares outstanding during the period plus common stock
equivalents. Common stock equivalents are shares assumed to be issued if
outstanding stock options or warrants were exercised. Common stock
equivalents that are anti-dilutive are excluded from net earnings per
common share. Common stock equivalents are not considered in periods
with a loss as the effect would be anti-dilutive.
Fair Value of Financial Instruments - The carrying amounts of cash and
cash equivalents, accounts receivable and accounts payable are
considered to be representative of their respective fair values due to
their short-term nature. The carrying amounts of the line of credit and
long-term debt are considered to be representative of their respective
fair values as their interest rates are based on market rates.
Concentrations of Credit Risk - Concentrations of credit risk with
respect to accounts receivable are limited due to the diversity of the
Company's clients as well as their dispersion across many different
geographic regions. The Company had no customers that accounted for more
than 10% of consolidated revenues in 2000, 1999, or 1998.
Stock-Based Compensation - Statement of Financial Accounting Standards
(SFAS) No. 123, Accounting for Stock-Based Compensation, requires
companies to measure employee stock compensation plans and non-employee
stock-based compensation based on the fair value method of accounting.
However, for stock compensation granted to employees, SFAS No. 123 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 (Loss) - Comprehensive earnings (loss) is a
measure of all nonowner changes in shareholders' equity and includes
such items as net earnings (loss), certain foreign currency translation
items, minimum pension liability adjustments, and changes in the value
of available-for-sale securities. In 2000, 1999 and 1998, comprehensive
earnings (loss) for the Company were equivalent to net earnings (loss)
as reported.
Derivative Instruments and Hedging Activities - On January 1, 2001, the
Company adopted SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, as amended by SFAS No. 138, Accounting for Certain
Derivative Instruments and Certain Hedging Activities. SFAS No. 133
establishes accounting and reporting standards for derivative
instruments and for hedging activities. It requires that all
derivatives, including those embedded in other contracts, be recognized
as either assets or liabilities and that those financial instruments be
measured at fair value. The accounting for changes in the fair value of
derivatives depends on their intended use and designation. Management
has reviewed the requirements of SFAS No. 133 and has determined that
they have no free-standing or embedded derivatives. All contracts that
contain provisions meeting the definition of a derivative also meet the
requirements of, and have been designated as, normal purchases or sales.
The Company's policy is to not use free-standing derivatives and to not
enter into contracts with terms that cannot be designated as normal
purchases or sales.
Reclassifications - Certain reclassifications have been made to the 1999
and 1998 consolidated financial statements to conform with the 2000
presentation. These reclassifications had no effect on net earnings
(loss) or total stockholders' equity as previously reported.
2. ACQUISITION
In August 2000, the Company purchased customer lists and certain other
assets of National Medical Review Offices, Inc. (NMRO), a Minnesota-based
company specializing in specimen collection services. The purchase price
of approximately $252,000 included an initial payment of $75,000 in cash
plus the issuance of 15,152 shares of the Company's common stock at
$11.69 per share. The Company accounted for its acquisition of NMRO using
the purchase method of accounting. The following table summarizes the
fair value of the NMRO assets acquired:
(In thousands)
Equipment $ 9
Non-compete agreement 21
Customer lists 222
-------
$ 252
The Company intends to depreciate the equipment, non-compete agreement,
and customer lists on a straight-line basis over periods of five, three,
and twenty years, respectively. Pro forma results are not material to the
financial condition or results of operations of the Company.
3. 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 consists of MEDTOX Diagnostics. Products manufactured include
easy to use, inexpensive, on-site drug tests such as PROFILE(R)-II,
EZ-SCREEN and VERDICT(R)-II.
The Company's reportable segments are strategic business units that
offer different products and services. They are managed separately as
each business requires different products, services and marketing
strategies.
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
2000:
Revenues $ 34,797 $ 8,083 $ 42,880
Interest expense 917 74 991
Depreciation and amortization 2,329 91 2,420
Segment (loss) income (3,374) 813 (2,561)
Segment assets 26,498 3,526 30,024
Expenditures for segment assets 2,892 461 3,353
Lab Services Product Sales Total
1999:
Revenues 31,012 3,991 35,003
Interest expense 752 65 817
Depreciation and amortization 2,042 82 2,124
Segment income (loss) 1,440 (21) 1,419
Segment assets 24,269 2,002 26,271
Expenditures for segment assets 1,025 94 1,119
1998:
Revenues 27,070 2,505 29,575
Interest expense 615 59 674
Depreciation and amortization 1,980 114 2,094
Segment loss (1,391) (906) (2,297)
Segment assets 23,289 1,311 24,600
Expenditures for segment assets 830 119 949
4. INVENTORIES
Inventories consisted of the following at December 31:
(In thousands)
2000 1999
Raw materials $ 910 $ 462
Work in process 322 230
Finished goods 373 126
Supplies 1,447 978
-------- --------
$ 3,052 $ 1,796
======== ========
5. EQUIPMENT AND IMPROVEMENTS
Equipment and improvements consisted of the following at December 31:
(In thousands)
2000 1999
Furniture and equipment $ 12,222 $ 12,820
Leasehold improvements 1,566 1,354
--------- ---------
13,788 14,174
Less accumulated depreciation (8,577) (11,358)
--------- ---------
$ 5,211 $ 2,816
=========== ===========
Depreciation expense was $1.5 million, $1.3 million and $1.4 million for
the years ended December 31, 2000, 1999 and 1998, respectively.
6. DEBT
Long-term debt consisted of the following at December 31:
(In thousands)
2000 1999
Term loan, due March 2003, 10.75% at December 31, 2000 $ 2,412 $ 1,358
Overadvance term loan, paid June 2000 350
Capex note, due March 2003, 10.75% at December 31, 2000 841 649
Subordinated notes, due December 2001, 12% at December 31, 2000 556 537
Various vehicle loans, due from October 2002 through
December 2005, 2.90% to 10.34% 250 79
--------- ---------
4,059 2,973
Less current portion (1,579) (1,236)
------- ----------
$ 2,480 $ 1,737
========= =========
Long-term debt maturities at December 31, 2000 were as follows:
2001 $ 1,579
2002 1,032
2003 1,419
2004 14
2005 15
---------
$ 4,059
=========
Wells Fargo Credit Agreement - In January 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 $3.185 million
bearing interest at prime + 1.25%; (ii) an overadvance term loan of $0.7
million bearing interest at prime + 3%; (iii) a revolving line of
credit, payable on demand, of not more than $6.0 million or 85% of the
Company's eligible trade accounts receivable bearing interest at prime +
1%; and (iv) a capex note of up to $2.45 million for the purchase of
capital equipment bearing interest at prime + 1.25%.
At December 31, 2000, $3.7 million was outstanding under the revolving
line of credit, and $1.0 million 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 weighted average interest
rate on borrowings outstanding under the revolving line of credit was
9.5% and 8.5% for the years ended December 31, 2000 and 1999,
respectively.
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, 2000, the Company
was not in compliance with the minimum debt service coverage and minimum
quarterly net income level covenants of the Wells Fargo Credit
Agreement. Wells Fargo has waived the aforementioned defaults of the
Company.
Subordinated Debt - The Company has received a total of $575,000 from
private placements of subordinated debt and warrants from 1998 through
1999. The notes require payment of the principal amounts on December 31,
2001. Interest at 12% per annum is paid semi-annually 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 equal to 25% of the face amount of the subordinated notes divided
by an exercise price of $3.25 per share. The Company has determined the
value of the warrants at the dates of the grants to be $56,000 based upon
the Black-Scholes option pricing model. 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.
Interest paid for all outstanding debt was $0.9 million, $0.8 million
and $0.6 million for the years ended December 31, 2000, 1999 and 1998,
respectively.
7. STOCKHOLDERS' EQUITY
The Board of Directors declared a one-for-twenty reverse stock split
effective February 24, 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.
In July and August 2000, the Company completed a private equity placement
through the sale, exclusively to accredited investors, of 550,000 units
at an aggregate price of $5.5 million, or $10.00 per unit, resulting in
net proceeds of approximately $4.9 million after deducting agents'
commissions of $0.6 million and other expenses. Each unit consisted of
one share of common stock and one warrant to purchase one additional
share of common stock at an exercise price of $12.50. In connection with
the private placement, the Company also issued warrants to the placement
agent to purchase 55,000 shares of common stock at an exercise price of
$12.50 per share. The warrants are currently exercisable and expire five
years from the date of issuance.
At December 31, 2000, 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 44,230
December 31, 2001
Private equity placement $ 12.50 July 31, 2000 to 495,000
July 30, 2005
Private equity placement $ 12.50 August 31, 2000 to 110,000
August 30, 2005
In addition, at December 31, 2000, 167,842 shares of common stock were
reserved for future issuances under the stock option plans discussed in
Note 8.
In September 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.
8. 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) of stock options 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. Restricted stock
awards are awarded with a fixed restriction period.
The following table summarizes information about stock options
outstanding at December 31, 2000:
Plan Options Outstanding
-------------------------------------------
1993 Non- Weighted
Equity employee Average
1983 ISO Compensation Director Exercise
Plan Plan Plan Price
Balance at December 31, 1997 7,710 11,068 11,750 $49.80
Granted 97,248 10.01
Canceled (2,274) (35,307) (2,583) 55.63
-------- ------- --------
Balance at December 31, 1998 5,436 73,009 9,167 14.43
Granted 218,528 1,472 3.39
Canceled (508) (17,146) 3.42
-------- -------- -------
Balance at December 31, 1999 4,928 273,391 10,639 7.12
Granted 120,000 10.71
Exercised (929) 5.43
Canceled (225) (667) 72.98
-------- ----------- ---------
Balance at December 31, 2000 4,703 393,462 9,972 $ 8.03
========= =========== ===========
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 - $12.06 399,571 $ 6.39 8 202,605 $ 5.32
$30.00 - $59.99 1,276 53.26 3 1,276 53.26
$60.00 - $89.99 4,894 71.44 2 4,894 71.44
$90.00 - $119.99 625 102.24 2 625 102.24
$120.00 - $149.99 1,271 130.77 2 1,271 130.77
$153.80 500 153.80 2 500 153.80
--------- -------
408,137 8.03 211,171 8.54
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 - $153.80 4,703 $ 98.46 4,703 $ 98.46
1993 Equity Compensation Plan $2.56 - $137.60 393,462 6.90 197,059 6.30
Nonemployee Director Plan $8.75 - $ 92.60 9,972 9.94 9,409 10.38
--------- -------
408,137 8.03 211,171 8.54
Nonqualified Stock Options - At December 31, 2000, 1999 and 1998, the
Company had 99,999, 102,054 and 102,054, 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 $8.75, $10.42 and $10.42, at December 31, 2000,
1999, and 1998, respectively. The shares of common stock covered by
nonqualified options are restricted as to transfer under applicable
securities laws.
Restricted Stock Awards- Restricted stock awards are made to certain key
employees as an incentive for the performance of future services that
will contribute materially to the successful operation of the Company.
In 2000, the Company awarded 55,250 restricted shares to certain key
employees with a restriction period of three years. The awards had a
market value of $541,000 on the date of the grants, which was recorded
as deferred stock-based compensation and additional paid-in capital.
Compensation is charged to operations on a straight-line basis over the
restriction periods and amounted to $69,000 in 2000.
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. Shares issued under the Purchase Plan were 7,703, 2,416 and 4,891
during the years ended December 31, 2000, 1999, and 1998, respectively.
As of December 31, 2000, 119,422 shares of common stock were available
for issuance under the Purchase 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 the Company determined compensation expense based on the fair value
at the grant date for its stock options under SFAS No. 123, Accounting
for Stock-Based Compensation, the Company's net income (loss) and
earnings (loss) per share would have been changed to the pro forma
amounts indicated below:
(In thousands, except per share data)
2000 1999 1998
Net income (loss) .............. As reported $ (2,561) $ 1,419 $ (2,297)
Pro forma (2,976) 987 (2,746)
Basic earnings (loss) per share..... As reported $ (0.81) $ 0.49 $ (0.79)
Pro forma (0.94) 0.34 (0.95)
Diluted earnings (loss) per share ... As reported $ (0.81) $ 0.48 $ (0.79)
Pro forma (0.94) 0.33 (0.95)
The fair value of the options at the grant date was estimated using the
Black-Scholes model with the following assumptions:
2000 1999 1998
Expected life (years) 5 5 5
Interest rate 5.75% 5.875% 4.25%
Volatility 61.4% 61.9% 90.5%
Dividend yield 0% 0% 0%
The weighted average fair value of options granted in 2000, 1999, and
1998 was $6.17, 1.97 and $5.22 per share, respectively.
9. EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted
earnings (loss) per common share: (Dollars in thousands, except per
share amounts)
2000 1999 1998
Net (loss) income (A) $ (2,561) $ 1,419 $ (2,297)
=============== ============= ===============
Weighted average number of basic common
shares outstanding (B) 3,142,588 2,902,087 2,893,399
Dilutive effect of stock options and warrants
computed based on the treasury stock method
using average market price 83,020
-------------- ------------- --------------
Weighted average number of diluted
common shares outstanding (C) 3,142,588 2,985,107 2,893,399
============== ============= ==============
Basic (loss) earnings per common share (A/B) $ (0.81) $ 0.49 $ (0.79)
============= ============= =============
Diluted (loss) earnings per common share (A/C) $ (0.81) $ 0.48 $ (0.79)
============= ============= =============
Options and warrants to purchase 253,743 shares of common stock were
outstanding during 1999 but were not included in the computation of
diluted earnings per share as their exercise prices were greater than
the average market price of the common shares. Options and warrants to
purchase an aggregate 1,157,366 and 197,227 shares of common stock were
outstanding during 2000 and 1998 and were excluded from the computation
of dilutive earnings per share as their inclusion would have been
anti-dilutive due to net losses in those years.
10. 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, $121,000, and $122,000 for the years ended
December 31, 2000, 1999 and 1998, respectively.
The Company leases other offices and facilities and office equipment
under certain operating leases, which expire on various dates through
August 2007. 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 11 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, 2000, the Company is obligated for future minimum
lease payments (excluding payments under the leases vacated as part of
the 1997 restructuring discussed in Note 11) without regard for sublease
payments under noncancelable leases as follows:
(In thousands)
Capital Operating
Leases Leases
2001 $ 274 $ 675
2002 246 495
2003 87 487
2004 72 433
2005 65 351
2006 and thereafter 7 1,286
-------- --------
751 $ 3,727
========
Amount representing interest 112
--------
Present value of net minimum 639
lease payments
Less current portion 221
--------
Long-term capital lease
obligations $ 418
========
Rent expense (including amounts for the facilities leased from the
director) amounted to $1.2 million, $0.8 million and $0.8 million for
the years ended December 31, 2000, 1999 and 1998, respectively.
11. 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 1998, restructuring reserves increased by $0.4 million to $1.2
million at December 31, 1998. An increase in the estimate of the
required reserve of $0.7 million resulted from preliminary unfavorable
court rulings relative to certain lease contingencies originally accrued
for in 1996. In addition, the reserve decreased by $0.3 million as a
result of payments made pursuant to the lease obligations with both
facilities.
In 1999, restructuring reserves decreased by $0.7 million to $0.5
million, due to payments of $0.5 million pursuant to the lease
obligations with both facilities and a decrease in the reserve of $0.2
million due to a more favorable settlement of certain lease
contingencies originally accrued for in 1998.
In 2000, restructuring reserves decreased by $0.3 million to $0.2
million at December 31, 2000 due to payments of $0.1 million pursuant to
the lease obligations with both facilities. The final payment for the
Illinois facility is due July 1, 2001. All payments have been made for
the New Jersey facility.
12. 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)
2000 1999
Deferred tax liability -
Equipment and improvements $ (205) $ (163)
Deferred tax assets:
Goodwill 971 1,196
Medical expense accrual 112 11
Bad debt reserve 430
Accrued severance 249
Net operating loss carryforwards 13,393 13,379
Research and experimental credit carryforwards 173 134
Restructuring costs 61 178
Legal reserve 3
Other 286 233
----------- ----------
Total net deferred tax assets 15,470 14,971
Valuation allowance for deferred tax assets (15,470) (14,971)
----------- ----------
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:
2000 1999 1998
Computed expected federal income tax
expense (benefit) $ (871) $ 482 $ (781)
State tax, net of federal effect (98) 40 (134)
Permanent differences 23 10 12
Change in valuation allowance 499 (739) (671)
Adjustment to prior year provision 10 1,574
Expired net operating loss carryforwards 454 249
Other (17) (42)
--------- ---------- ---------
$ - $ - $ -
========= ========= =========
At December 31, 2000, the Company had net operating loss carryforwards
(NOL) of approximately $35.2 million, 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.
13. 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,
2000, 1999 and 1998 was $0.2 million, $0.1 million and $0.1 million,
respectively.
14. COMMITMENTS AND CONTINGENCIES
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 parties
have agreed that the matter may be arbitrated in Minneapolis, Minnesota
rather then in Chicago as required by the original acquisition agreement.
Management expects this matter will be finally resolved prior to the end
of calendar year 2001.
In January 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. On or about September 30, 2000 the parties entered into a
Stipulation and Mutual Release dismissing with prejudice all claims and
counterclaims between the parties regarding the transaction other then
the Company's Section 16(b) claim against the former stockholder, Morgan
Capital. The parties entered into this Stipulation along with an Escrow
Agreement requiring Morgan Capital to deposit into escrow 72,500 shares
of publicly registered common stock of the Company as collateral to
secure payment by Morgan Capital of the judgment to be entered in favor
of the Company in the amount of $675,000 plus any post-judgment interest.
The Federal District Court entered such judgment in favor of the Company
on October 17, 2000. Morgan Capital subsequently appealed the Federal
District Court's decision to the Eighth Circuit Court of Appeals. The
parties have completed and filed their respective appeal briefs with the
Eighth Circuit Court of Appeals. The parties are now awaiting the
scheduling of oral arguments which should occur sometime in 2001. The
Company has not recorded a receivable for this amount due to the
uncertainty of this matter.
In March 2000, the Company was served with a copy of a complaint filed
against the Company in the Circuit Court of Cook County, Illinois, by the
Plaintiff, The Methodist Medical Center of Illinois. The Plaintiff is
alleging that the Company interfered with various contractual
relationships of the Plaintiff in connection with the referral of certain
customers to the Company by other defendants previously sued by the
Plaintiff in the same action. The Company has filed a cross claim against
the other defendants in the litigation based on such defendants'
contractually obligation to indemnify the Company against any damages,
costs or expense (including attorney fees) incurred by the Company,
arising out of any claim of contractual interference by the Company in
connection with the referral of the customers to the Company by such
defendants. The parties are now engaged in pretrial discovery while at
the same time settlement negotiations are underway between the parties.
While it is too early to be confident as to the ultimate resolution of
this matter, in light of the nature of plaintiff's claims, the nature of
the discovery to date, the co-defendants indemnification obligation and
the relative positions of the parties during the settlement discussion,
management does not expect the ultimate resolution of this matter to have
a material impact on the Company's financial condition or results of
operations.
In January 2001, the Company was contacted by counsel for one of the
Company's shareholders who had purchased stock in the Company's private
placement in August 2000. The shareholder's counsel expressed the view
that the decline in the Company's stock in December was directly
attributable to the Company's announcement of a charge to earnings in the
fourth quarter due to the bankruptcy filings of two of its customers.
Counsel asserted that since the bankruptcy filing by one of the customers
had occurred prior to the closing of the private placement, the Company
should have disclosed the fact of that filing in connection with the
private placement. The Company is unable to ascertain whether the
shareholder will actually pursue the matter through litigation.
15. SUBSEQUENT EVENT
On March 16, 2001 the Company purchased the entire three building complex
with a total of 129,039 square feet, which included the 53,576 square feet
formerly leased by the Company's Laboratory Services segment. The
purchasing entity was New Brighton Business Center LLC, a wholly owned
limited liability company, established by the Company for the sole purpose
of purchasing the entire three building complex. The selling entity was
PHL-OPCO, LP, a Delaware limited partnership, which was an unrelated third
party who had operated the facility as its landlord until the sale to the
Company. The purchase price, exclusive of expenses and closing costs, was
$6,350,000 and was financed by a mortgage loan from Principal Life
Insurance Company of Des Moines, Iowa in the amount of $6,200,000. The
mortgage loan has a term of ten years and is being repaid based on a 20
year amortization schedule with a balloon payment at the end of the ten
year term. The interest rate is fixed at an annual rate of 7.23% for the
first five years at which time the rate will be renegotiated by the
parties. The facility includes other commercial tenants who have individual
leases that range from 4 years to less then 1 year in duration. The current
annual rent paid by such third party tenants, excluding their pro-rata
share of operating expenses, is $431,000 per year.
16. QUARTERLY INFORMATION (UNAUDITED)
(In thousands, except per share amounts)
First Second Third Fourth
2000 Quarter Quarter Quarter Quarter
---------------------------------------------------------------------------------------------------
Revenues $ 9,676 $ 11,316 $ 11,573 $ 10,315
Gross profit 3,572 4,414 4,722 2,325
Net income (loss) (1) 297 481 477 (3,816)
Basic earnings (loss) per share 0.10 0.17 0.15 (1.09)
Diluted earnings (loss) per share 0.10 0.16 0.14 (1.09)
First Second Third Fourth
1999 Quarter Quarter Quarter Quarter
---------------------------------------------------------------------------------------------------
Revenues $ 7,835 $ 9,152 $ 9,074 $ 8,942
Gross profit 2,589 3,217 3,168 3,280
Net income 160 741 349 169
Basic earnings per share 0.06 0.26 0.12 0.06
Diluted earnings per share 0.06 0.25 0.12 0.06
(1) During the fourth quarter of 2000, the Company reported a net loss of
$3.8 million due to decreased sample volume from existing
drugs-of-abuse clients as a result of adverse weather conditions and
the slowing economy. The Company also experienced higher than expected
expenses during the quarter relating to the reorganization of
laboratory operations and the Chapter 11 bankruptcy filings of two
customers.
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, 2000
Deducted from Asset Accounts
Allowance for Doubtful Accounts $ 274,000 $ 879,000 $ 22,000(1) $ 1,131,000
Restructuring Accrual $ 469,000 $ - $ 309,000(3) $ 160,000
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)(4) $ - $ 521,000(3) $ 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(2) $ - $ 342,000(2) $ 1,155,000
(1) Uncollectible accounts written off, net of recoveries.
(2) Represents payments of lease obligations and an increase of estimate on
future lease payments.
(3) Represents payments of lease obligations.
(4) Represents a decrease in reserves due to a more favorable settlement of
certain lease Contingencies originally accrued for in 1998.