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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, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
Commission file number 1-11394
MEDTOX SCIENTIFIC, INC.
(Exact name of Registrant as specified in its charter)
Delaware 95-3863205
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
402 West County Road D, St. Paul, Minnesota 55112
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (651) 636-7466
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $.15 per share
(Title of Class)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-0K (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
$11,250,000, as of March 23, 1999, based upon a price of $3.875 which price is
equal to the closing price for the Common Stock on the American Stock Exchange.
The number of shares of Common Stock outstanding as of March 23, 1999, was
2,903,102.
This document contains 67 pages and the Exhibit Index appears at page 39 hereof.
MEDTOX SCIENTIFIC, INC.
FORM 10-K ANNUAL REPORT
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
Table of Contents
ITEM NO. PAGE
Part I
1. Business. . . . . . . . . . . . . . . . . . . . . 4
2. Properties. . . . . . . . . . . . . . . . . . . . 11
3. Legal Proceedings . . . . . . . . . . . . . . . . 12
4. Submission of Matters to a Vote of
Security Holders . . . . . . . . . . . . . . . . 12
Part II
5. Market for the Registrant's Common Equity
and Related Stockholder Matters. . . . . . . . . 13
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 . . . . . . . . . . . . . . . . . . . . . . . 24
9. Changes in and Disagreements With
Accountants on Accounting
and Financial Disclosure . . . . . . . . . . . . . . 24
Part III
10. Directors and Executive Officers
of the Registrant. . . . . . . . . . . . . . . . . . 26
11. Executive Compensation. . . . . . . . . . . . . . . . 27
12. Security Ownership of Certain Beneficial
Owners and Management. . . . . . . . . . . . . . 32
13. Certain Relationships and Related
Transactions . . . . . . . . . . . . . . . . . . . . . 33
Part IV
14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K. . . . . . . . . . . . . . 34
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . 40
PART I
Cautionary Statement Identifying Important Factors
That Could Cause the Company's Actual Results to Differ
From Those Projected in Forward Looking Statements
In connection with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, readers of this document and any
document incorporated by reference herein, are advised that this document and
documents incorporated by reference into this document contain both statements
of historical facts and forward looking statements. Forward looking statements
are subject to certain risks and uncertainties, which could cause actual results
to differ materially from those indicated by the forward looking statements.
Examples of forward looking statements include, but are not limited to (i)
projections of revenues, income or loss, earning or loss per share, capital
expenditures, dividends, capital structure and other financial items, (ii)
statements of the plans and objectives of the Company or its management or Board
of Directors, including the introduction of new products, or estimates or
predictions of actions by customers, suppliers, competitors or regulatory
authorities, (iii) statements of future economic performance, and (iv)
statements of assumptions underlying other statements and statements about the
Company or its business.
This document and any documents incorporated by reference herein also
identify important factors which could cause actual results to differ materially
from those indicated by the forward looking statements. These risks and
uncertainties include price competition, the decisions of customers, the actions
of competitors, the effects of government regulation, possible delays in the
introduction of new products, customer acceptance of products and services, and
other factors which are described herein and/or in documents incorporated by
reference herein.
The cautionary statements made pursuant to the Private Litigation
Securities Reform Act of 1995 above and elsewhere by the Company should not be
construed as exhaustive or as any admission regarding the adequacy of
disclosures made by the Company prior to the effective date of such Act. Forward
looking statements are beyond the ability of the Company to control and in many
cases the Company cannot predict what factors would cause results to differ
materially from those indicated by the forward looking statements.
ITEM 1. BUSINESS.
1. General.
MEDTOX Scientific, Inc. (formerly EDITEK, Inc.), a Delaware corporation,
was organized in September, 1986 to succeed the operations of a predecessor
California corporation. MEDTOX Scientific, Inc. and its subsidiaries, MEDTOX
Laboratories, Inc. and MEDTOX Diagnostics, Inc., are referred to herein as "the
Company". MEDTOX Laboratories, Inc. is a toxicology laboratory which provides
forensic toxicology, clinical toxicology, and heavy metals analyses. MEDTOX
Diagnostics, Inc. develops, manufactures and markets on-site diagnostic and
screening tests which are used to detect substances in humans, foodstuffs,
animals, feed and the environment. The company is continuing to transition these
operating units from being providers of high quality testing services and
devices into a broader service organization by supporting underlying laboratory
analysis and point-of-care devices with logistics management, data management
and overall program management services.
The Company entered the laboratory business on February 11,
1994 when it completed the acquisition of Princeton Diagnostic Laboratories of
America, Inc. ("PDLA"). On January 30, 1996, the Company acquired the assets and
certain liabilities of the predecessor of MEDTOX Laboratories, Inc. MEDTOX
Laboratories, Inc. is now a wholly owned subsidiary. For the fiscal year ended
December 31, 1998, sales from laboratory services accounted for 92% of the
Company's revenues. Revenue from the sale of the Company's on-site diagnostic
and screening tests and other products, including contract manufacturing
services, accounted for 8% of the total revenues of the Company for the year
ended December 31, 1998.
2. Principal Services, Products, and Markets.
General. The Company has two reportable segments: laboratory services and
products sales. Laboratory services include forensic toxicology, clinical
toxicology, and heavy metal analyses as well as logistics, data, and overall
program management services. Manufactured products include a variety of on-site
screening products.
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 abused substance testing include
public and private corporations. Among this customer base are Fortune 500
companies. In addition to public and private corporations, abused substance
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 MEDTOX
from clients across the country both by the Company's own couriers, contracted
delivery services and commercial overnight couriers.
C. Heavy metal, trace element, and solvent analyses. The
Company operates a laboratory in which blood and urine are tested for heavy
metals, trace elements, and solvents. The tests are performed using the
methodologies such as Flame and Flameless Atomic Absorption, Inductively Coupled
Plasma-Mass Spectrometry, and Gas Chromatography.
The Company's clients for this market are other laboratories,
occupational health clinics and companies which need to test patients or
employees monitored for excess exposure to hazardous materials.
D. Logistics, Data, and Program Management Services. The
Company also provides services in the areas of logistics management, data
management, and program management. These services support the Company's
underlying business of laboratory analysis and provide added value to its
clients. Value-added services include courier services for medical specimen
transportation, management programs for on-site drug testing, data collection
and reporting services, coordination of specimen collection sites, and medical
surveillance program management.
Product Sales
The Company's test products are easy to use, inexpensive,
point-of-care tests. The tests are capable of rapidly detecting the presence of
a number of substances in human urine or blood samples, foodstuffs, animals,
feed and the environment without the necessity of instruments or technical
personnel.
In 1998, the Company received FDA 510(k) clearance on the
first of its second-generation on- site test products, PROFILE(R)-II.
PROFILE(R)-II, is a five-drug lateral flow device for the detection of
drugs-of-abuse in human urine. This single-step, immunoassay device has been
combined with the company's Data Delivery System and laboratory confirmation
capability to produce the PROFILE(R)-II Test System. This integrated on-site
testing system is currently being marketed to occupational health clinics,
corporate clients, third party administrators, and drug abuse counseling and
treatment centers.
In addition to the PROFILE(R)-II, the Company's
second-generation products also include VERDICT(R)-II on-site screening devices.
VERDICT(R)-II products are manufactured in one, two and three drug
configurations. Target markets include criminal justice, temporary service
companies, the construction industry and drug rehabilitation facilities.
The Company continues to market the EZ-SCREEN(R) tests. These tests are
qualitative assays utilized in agricultural diagnostics to detect mycotoxins and
antibiotic residues. Mycotoxins are hazardous substances produced by fungal
growth and frequently contaminate corn, wheat, rye, barley, peanuts, tree nuts,
cottonseed, milk, rice, and livestock feeds. The EZ-SCREEN agridiagnostic tests
are marketed to regulatory authorities and producers of foodstuffs and feeds.
The Company distributes on-site tests for the detection of
alcohol with the EZ-SCREEN(R) Breath Alcohol Test. The test consists of a small
tube containing chemically treated crystals that change color in the presence of
alcohol. The Company purchases the Breath Alcohol Test through a distribution
agreement.
3. Marketing and Sales.
The Company believes that the combined operations of the
laboratory services and the on-site test kits manufactured by the Company have
created synergy in the marketing of comprehensive, on-site and laboratory
testing programs to a common customer base. The Company is in a position to
offer a full line of products and services for the substance abuse testing and
occupational medicine marketplace, including (1) on-site tests for the detection
of substance of abuse drugs (2) on-site qualitative and quantitative
determination of alcohol intoxication (both disposable and electronic instrument
detection devices); (3) SAMHSA certified laboratory testing (screening and
confirmation); (4) biological monitoring of occupational toxins; (5)
consultation; and (6) logistic, data management and program management services.
The Company currently markets these products and all laboratory services
through its dedicated sales force, through independent third party
administrators and through occupational health clinics.
Major Customers. The Company had no single customer whose
sales amounted to more than 10% of its total revenues during the year ended
December 31, 1998. One customer's sales amounted to approximately 7% of the
revenues of MEDTOX Laboratories, Inc. while sales to the United States
government and its agencies, primarily the United States Department of
Agriculture ("USDA"), amounted to approximately 4% of the revenues from MEDTOX
Diagnostics, Inc.
4. New Products, Research and Development.
Product Sales. Primary research and development efforts of the Company
during 1998 focused on the development of tests to extend the product offerings
in the single-step Profile(R)-II immunochromatographic assay product line
produced by the Company. These product line extensions include Verdict(R)-II
intended for the criminal justice market and Profile(R)-ER intended for the
emergency room market.
Verdict(R)-II consists of a line of simplified Profile(R)-II
devices designed to test for the drugs that the criminal justice system is
primarily concerned with today. MEDTOX has begun to market the Verdict(R)-II
tests, with good acceptance, to distributors in this market. Profile(R)-ER is an
expanded product which tests for additional drugs, compared to Profile(R)-II.
The added drugs are especially pertinent in the rule-out diagnosis of suspected
toxic drugs in emergency room settings. MEDTOX hopes to submit Profile(R)-ER for
FDA-clearance at the end of the second quarter 1999.
Laboratory Services. The research and development department of MEDTOX
Laboratories develops new assays for new drug entities, develops new assays for
existing metabolites of drugs and other toxins, and improves existing assays
with the goals of improving the assays' robustness, sensitivity, accuracy,
precision, specificity, and cost. Numerous new laboratory-based assays were
developed during 1998 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). During 1999 we plan to add gas
chromatography with tandem mass spectrometry (GC/MS/MS) as well. The many new
tests developed during 1998 expand our capabilities in the esoteric reference
clinical toxicology market (providing sophisticated testing for hospitals and
other reference laboratories), expand our capabilities and laboratory services
in biological monitoring of toxins in the workplace, expand our capabilities of
detecting drugs of abuse for clinical and workplace analysis, and also expand
our capabilities in pharmaceutical research analysis. During 1998, MEDTOX
developed a medical diagnostic laboratory to service multi-site clinical trials
for the pharmaceutical industry and also provide broader services to our
industrial toxicology and occupational medicine clients. Business generated by
these expanded laboratory services to industrial clients is already becoming
significant, while we have also received initial contracts for servicing
clinical trials. Significant developmental progress was also made during 1998
for our new line of nutritional assays which include analysis of vitamins, amino
acids, trace elements, measures of oxidative stress, and activities of free
radical scavenging enzymes. This work allows us to assess an individual's level
of oxidative stress, their ability to overcome that oxidative stress, any
nutritional deficiencies, and monitor supplementation to improve their ability
to overcome that stress. This area of testing is being shown to be important in
the detection of susceptibility to cancers, cardiac diseases, dementias, macular
degeneration, and is related to the development of serious adverse effects of
drugs.
5. Raw Materials.
Laboratory Services. The raw materials required by the
laboratory for urine drug testing consist primarily of two types: specimen
collection supplies and reagents for laboratory analysis. The collection
supplies include Drug Testing Custody and Control Forms that identify the
specimen and the client, as well as document the chain-of-custody. Collection
supplies also consist of specimen bottles and shipping boxes. Reagents for drug
testing are primarily immunoassay screening products and various chemicals used
for confirmation testing. The Company believes all of these materials are
available at competitive prices from other suppliers.
Product Sales. The primary raw materials required for the
immunoassay-based test kits produced by the Company consist of antibodies,
antigens and other reagents, plastic injection-molded devices, glass fiber,
nitrocellulose filter materials, and packaging materials. The Company maintains
an inventory of raw materials which, to date, has been acquired primarily from
third parties. Currently, most raw materials are available from several sources.
The Company possesses the technical capability to produce its own antibodies and
has initiated production of antibodies for certain tests. However, if the
Company were to change its source of supply for raw materials used in a specific
test, additional development, and the accompanying costs, may be required to
adapt the alternate material to the specific diagnostic test.
6. Patents, Trademarks, Licensing and Other Proprietary Information.
Product Sales. The Company has a patent pending on the system that it
developed which integrates on-site scientific analysis with state-of-the-art
data collection and delivery. The system is currently being utilized with the
Company's PROFILE(R)-II and Verdict(R)-II products.
The Company holds nine issued United States patents relating
to on-site testing technology. Eight of these patents generally form the basis
for the EZ-SCREEN and one-step technologies while the other patent relates to
methods of utilizing whole blood as a sample medium on its immunoassay devices.
Of the eight U.S. patents mentioned above which generally form
the basis for the EZ-SCREEN and one-step technologies, one expires in 2000, one
expires in 2004, five expire in 2007, and one expires in 2010. The patent which
relates to the methods of utilizing whole blood as a sample medium expires in
2012.
There can be no guarantee that there will not be a challenge
to the validity of the patents. In the event of such a challenge, the Company
might be required to spend significant funds to defend its patents, and there
can be no assurance that the Company would be successful in any such action.
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.
General. The Company holds approximately 15 registered trade names and/or
trademarks in reference to its products and corporate names. The trade names
and/or trademarks of the Company range in duration from 10 years to 20 years
with expiration dates ranging from 2001 to 2008. Applications have also been
made for additional trade names.
7. Seasonality.
Laboratory Services. The Company believes that the laboratory
testing business is subject to seasonal fluctuations in pre-employment
screening. These seasonal fluctuations include reduced volume in the summer
months, year-end holiday periods, and other major holidays. In addition,
inclement weather may have a negative impact on volume thereby reducing net
revenues and cash flow.
Product Sales. The Company does not believe that seasonality is a
significant factor in sales of its on-site immunoassay tests.
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 laboratory, the requirement to ship out
collection kits and forms, and the establishment of a collection site network.
At December 31, 1998, the Company did have several accounts which were in the
process of being set up where revenues are expected to be realized in 1999.
Product Sales. At December 31, 1998, 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 its
business.
9. Competition.
Laboratory Services. Competition in the area of drugs of abuse testing is
intense. Competitors and potential competitors include forensic testing units of
large clinical laboratories, such as Laboratory Corporation of America Holdings,
Quest Diagnostics, Inc. and SmithKline Laboratories, Inc. and other independent
laboratories, specialized laboratories, and in-house testing facilities
maintained by hospitals.
Competitive factors include reliability and accuracy of tests,
price structure, service, transportation and collection networks and the ability
to establish relationships with hospitals, physicians, and users of drug abuse
testing programs. It should be recognized, however, that many of the competitors
and potential competitors have substantially greater financial and other
resources than the Company.
The industry in which the Company competes is characterized by
service issues including, turn-around time of reporting results, price, the
quality and reliability of results, and an absence of patent or other
proprietary protection. In addition, since tests performed by the Company are
not protected by patents or other proprietary rights, any of these tests could
be performed by competitors. However, there are proprietary assay protocols for
the more specialized testing that are unique to the Company.
The Company's ability to successfully compete in the future
and maintain it margins will be based on its ability to maintain its quality and
customer service strength while maintaining efficiencies and low cost
operations. There can be no assurance that price competitiveness will not
increase in importance as a competitive factor in the laboratory testing
business.
Product Sales. The diagnostics market has become highly
competitive with respect to the price, quality and ease of use of various tests
and is characterized by rapid technological and regulatory changes. The Company
has designed its on-site tests as inexpensive, on-site tests for use by
unskilled personnel, and has not endeavored to compete with laboratory-based
systems. Numerous large companies with greater research and development,
marketing, financial, and other capabilities, as well as government-funded
institutions and smaller research firms, are engaged in research, development
and marketing of diagnostic assays for application in the areas for which the
Company produces its products.
The Company has experienced increased competition with respect
to its immunoassay tests from systems and products developed by others, many of
whom compete solely on price. As the number of firms marketing diagnostic tests
has grown, the Company has experienced increased price competition. A further
increase in competition may have a material adverse effect on the business and
future financial prospects of the Company.
10. Government Regulations.
The products and services of the Company are subject to the regulations of
a number of governmental agencies as listed below. It is believed that the
Company is currently in compliance with all regulatory authorities. The Company
cannot predict whether future changes in governmental regulations might
significantly increase compliance costs or adversely affect the time or cost
required to develop and introduce new products.
1. Substance Abuse and Mental Health Services Administration (SAMHSA).
MEDTOX Laboratories, Inc. has been certified by SAMHSA since 1988. SAMHSA
certifies laboratories meeting strict standards under Subpart C of Mandatory
Guidelines for Federal Workplace Drug Testing Programs. Continued certification
is accomplished through periodic inspection by SAMHSA to assure compliance with
applicable regulations.
2. United States Food and Drug Administration (FDA). Certain tests for
human diagnostic purposes must be cleared by the FDA prior to their marketing
for in vitro diagnostic use in the United States. The FDA regulated products
produced by the Company are in vitro diagnostic products subject to FDA
clearance through the 510(k) process which requires the submission of
information and data to the FDA that demonstrates that the device to be marketed
is substantially equivalent to a currently marketed device. This data is
generated by performing clinical studies comparing the results obtained using
the Company's device to those obtained using an existing test product. Although
no maximum statutory response time has been set for review of a 510(k)
submission, as a matter of policy the FDA has attempted to complete review of
510(k) submissions within 90 days. To date, the Company has received 510(k)
clearance for 12 different products and the average time for clearance was 72
days with a maximum of 141 days and a minimum of 20 days. Products subject to
510(k) regulations may not be marketed for in vitro diagnostic use until the FDA
issues a letter stating that a finding of substantial equivalence has been made.
As a registered manufacturer of FDA regulated products, the Company is
subject to a variety of FDA regulations including the Good Manufacturing
Practices (GMP) regulations which define the conditions under which FDA
regulated products are to be produced. These regulations are enforced by FDA and
failure to comply with GMP or other FDA regulations can result in the delay of
premarket product reviews, fines, civil penalties, recall, seizures, injunctions
and criminal prosecution.
3. Health Care Financing Administration (HCFA). The Clinical Laboratory
Improvement Act (CLIA) introduced in 1992 requires that all in vitro diagnostic
products be categorized as to level of complexity. A request for CLIA
categorization of any new clinical laboratory test system must be made
simultaneously with FDA 510(k) submission. The EZ-SCREEN and VERDICT drugs of
abuse tests currently marketed by MEDTOX Diagnostics, Inc. have been categorized
as moderately complex. The complexity category to which a clinical laboratory
test system is assigned may limit the number of laboratories qualified to use
the test system thus impacting product sales. MEDTOX Laboratories, Inc. is a
CLIA licensed laboratory.
4. Drug Enforcement Administration (DEA). The primary business of the
Company involves either testing for drugs of abuse or developing test kits for
the detection of drugs/drug metabolites in urine. MEDTOX Laboratories, Inc. is
registered with the DEA to conduct chemical analyses with controlled substances.
The MEDTOX Diagnostics, Inc. facility in Burlington, N.C. is registered by the
DEA to manufacture and distribute controlled substances and to conduct research
with controlled substances. Maintenance of these registrations requires that the
Company comply with applicable DEA regulations.
5. Additional Laboratory Regulations. The laboratories of MEDTOX
Laboratories, Inc. and certain of its laboratory personnel are licensed or
otherwise regulated by certain federal agencies, states, and localities in which
it conducts business. Federal, state and local laws and regulations require
MEDTOX Laboratories, Inc. among other things, to meet standards governing the
qualifications of laboratory owners and personnel, as well as the maintenance of
proper records, facilities, equipment, test materials, and quality control
programs. In addition, the laboratories are subject to a number of other
federal, state, and local requirements which provide for inspection of
laboratory facilities and participation in proficiency testing, as well as
govern the transportation, packaging, and labeling of specimens tested by either
laboratory. The laboratories are also subject to laws and regulations
prohibiting the unlawful rebate of fees and limiting the manner in which
business may be solicited.
The laboratory receives and uses small quantities of hazardous chemicals
and radioactive materials in their operations and are licensed to handle and
dispose of such chemicals and materials. Any business handling or disposing of
hazardous and radioactive waste is subject to potential liabilities under
certain of these laws.
11. Product and Professional Liability.
Laboratory Services. The Company's laboratory testing services
are primarily diagnostic and expose the Company to the risk of liability claims.
The Company's laboratories have maintained continuous Professional and General
Liability insurance since 1984. The insurance policy covers those amounts the
Company is legally obligated to pay from damages resulting from a Medical
Incident, which arises out of a Failure to Render Professional Services. To
date, the Company has not had any substantial product liability and no material
professional service claims are currently pending.
Product Sales. Manufacturing and marketing of products by the
Company entail a risk of product liability claims. In August, 1993, the Company
procured insurance coverage against the risk of product liability arising out of
events after such date, but such insurance does not cover claims made after that
date based on events that occurred prior to that date. The insurance policy
covers damages that the Company is legally obligated to pay as a result from
bodily injury and property damage. Consequently, for uncovered claims, the
Company could be required to pay any and all costs associated with any product
liability claims brought against it, the cost of defense whatever the outcome of
the action, and possible settlement or damages if a court rendered a judgment in
favor of any plaintiff asserting such a claim against the Company. Damages may
include punitive damages, which may substantially exceed actual damages. The
obligation to pay such damages could have a material adverse effect on the
Company and exceed its ability to pay such damages. No product liability claims
are pending.
12. Employees.
As of December 31, 1998, the Company had a total of
approximately 315 full time employee equivalents as compared to approximately
305 full time employee equivalents at December 31, 1997. Of the approximate 315
employees, 285 work at and for MEDTOX Laboratories, while the remaining 30 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
and the Company considers its relations with its employees to be good.
ITEM 2. PROPERTIES.
The administrative offices and laboratory operations of MEDTOX
Laboratories, Inc. are located in a 45,207 square foot facility in St. Paul,
Minnesota. The facility is rented under a lease which expires in March 2002. The
current annual rent, excluding operating costs, for the facility is $396,000 per
year.
The Company leases approximately 33,000 square feet in
Burlington, North Carolina, where it maintains the offices, research and
development laboratories, production operations, and warehouse of MEDTOX
Diagnostics, Inc. The total rent paid by the Company for this site during the
fiscal year ended December 31, 1998 was approximately $122,000. These facilities
are currently leased from Dr. Samuel C. Powell, a member of the Board of
Directors of the Company. The Company is currently leasing the space on a
month-to-month basis and intends to negotiate a new lease with Dr. Powell in the
near future. The Company believes it is renting these facilities on terms as
favorable as those available from third parties for equivalent premises. In the
opinion of management, comparable alternative facilities could be obtained
without disruption of the business if a new lease with Dr. Powell is not
negotiated. See "Item 13 - Certain Relationships and Related Transactions."
The Company leases administrative offices and laboratory
facilities in an approximately 22,000 square foot facility in South Plainfield,
New Jersey. The rent payment, excluding operating costs, is $170,345 per year.
The lease runs through April, 2000. The facility is currently idle and the
Company is aggressively seeking a tenant to sub-lease the facility. The costs of
the facility have been considered in the Company's restructuring charge in 1996.
See Note 8 to the Notes of the Consolidated Financial Statements contained
herein.
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.
The Company has entered a settlement agreement with United
States Drug Testing Laboratories who asserted a claim of patent infringement
against the Company on August 20, 1996. It was alleged that the Company
infringes two patents allegedly owned by United States Drug Testing Laboratories
relating to forensically acceptable determinations of gestational fetal exposure
to drugs and other chemical agents. The Company while denying any infringement
has reached a settlement agreement with United States Drug Testing Laboratories
whereby the Company will pay United States Drug Testing Laboratories $17,500 and
issue United States Drug Testing Laboratories 2,500 shares of common stock.
On January 31, 1997, the Company filed suit in Federal
District Court in Minnesota against Morgan Capital LLC, David Bistricer and Alex
Bistricer alleging violation in 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 granted Defendants' motion to dismiss the
Company's complaint, ruling that the Defendants' conduct did not constitute a
violation of Section 16(b). On October 29, 1997, the Company filed an appeal of
that decision to the United States Court of Appeals for the Eighth Circuit. On
July 21, 1998, the Eighth Circuit reversed the District Court dismissal and
remanded the case to the District Court. Cross motions to dismiss and for
partial summary judgment are pending.
The Company is a defendant in a lawsuit brought by a previous landlord and
pending in the Circuit Court of Cook County, Illinois. The landlord alleges that
the Company breached the terms of a lease the Company attempted to issue in
connection with an asset acquisition. Discovery is continuing in the case. In
December 1998, the Court granted summary judgment against the Company on the
issue of liability and the matter is set for trial in June 1999 on the issue of
damages.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.
The Annual Meeting (the "1997 Annual Meeting") of the
stockholders of the Company was held on September 11, 1998. The following
individuals were elected to serve on the Board of Directors of the Company for
the ensuing year and until their respective successors are duly elected and
qualified: Harry G. McCoy, Pharm.D., Samuel C. Powell, Ph.D., Richard A. Braun,
Miles E. Efron and James W. Hansen. Also by a vote of 2,187,765 shares in favor
and 261,334 shares against, at the 1997 Annual Meeting, the stockholders of the
Company approved an amendment to Article FOURTH of the Company's Certificate of
Incorporation to increase its number of authorized common stock from 3,000,000
shares to 3,750,000 shares. During the year ended December 31, 1998, no other
matters were submitted to a vote of securities holders.
The Company held a special meeting of stockholders on February 22, 1999
to adopt and approve an amendment of the Company's Certificate of Incorporation
providing for a one for twenty reverse stock split of outstanding Common Stock
of the Company. The amendment was approved by a vote of 2,309,935 in favor and
162,644 against. The reverse split was effective on February 23, 1999 and the
stock began trading on the new basis February 24, 1999. All shares and per share
amounts presented in the annual report on Form 10-K have been adjusted to
reflect the reverse split.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Common Stock
Since September 27, 1993, the Common Stock has been listed on
the American Stock Exchange currently trading under the symbol "TOX". From
September 16, 1992 to September 26, 1993 the Common Stock was traded in and
quoted in the Emerging Company Marketplace of the American Stock Exchange
("ECM") under the trading symbol "EDI.EC". As of March 23, 1999, the number of
holders of record of the Common Stock was 2,843. 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.
1999: (through March 23, 1999) High Low
---- ---- ----
First Quarter............................. 4 5/8 2 1/8
1998: High Low
---- ---- ----
First Quarter........................... 7 1/2 5
Second Quarter........................ 8 3/4 5
Third Quarter........................... 8 3/4 5
Fourth Quarter......................... 7 1/2 3 3/4
1997:
First Quarter........................... 12 1/2 7 1/2
Second Quarter........................ 10 7 1/2
Third Quarter........................... 10 6 1/4
Fourth Quarter......................... 7 1/2 5
On March 23, 1999, the closing price of the Common Stock as
reported by the American Stock Exchange was $3 7/8.
No dividends have been declared or paid by the Company since its
inception and management of the Company has no plans to pay dividend in the
foreseeable future. The Company's financial covenants under its debt instrument
may effectively preclude the Company from paying dividends.
Series A Preferred Stock
To help finance the acquisition of the predecessor to MEDTOX
Laboratories, Inc. and provide working capital, the Company issued 407 shares of
Series A Preferred Stock in January 1996. There are currently no remaining
shares of Series A Preferred Stock outstanding.
The Series A Preferred Stock was convertible into shares of
Common Stock, at any time from March 30, 1996, the 60th day after the shares of
Series A Preferred Stock were first issued by the Company (the "Initial
Conversion Date"), until January 30, 1998, the second anniversary of the Initial
Preferred Issuance Date, at which time all conversion rights terminated. The
Series A Preferred Stock had no voting power and had certain liquidation
preference and dividend rights. The number of shares of Common Stock issuable
upon conversion of a share of Series A Preferred Stock equaled the number
derived by dividing (i) the purchase price of the Series A Preferred Stock
($50,000 per share) by the lesser of (i) $2.775 (based on pre-reverse split
market price) or (ii) 75% of the Market Price of the Common Stock on the day the
shares of Series A Preferred Stock were converted into Common Stock. "Market
Price" is defined for this purpose as the daily average of the closing bid
prices quoted on the American Stock Exchange or other exchange on which the
Common Stock is traded for the five trading days immediately preceding the date
the shares are converted.
No dividends on the Series A Preferred Stock were declared or
paid prior to their conversion to Common Stock.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data are derived from
financial statements of the Company and should be read in conjunction with the
financial statements, related notes, and other financial information included
herein.
In evaluating financial performance, management focuses on net income as a
segment's measure of profit or loss. The accounting policies of the segments are
the same as those described in the summary of significant accounting policies
(Note 1).
SEGMENT INFORMATION
(IN THOUSANDS)
1998 LAB SERVICES PRODUCT SALES TOTAL
NET SALES FROM
EXTERNAL CUSTOMERS 27,070 2,505 29,575
SEGMENT PROFIT (LOSS)
-OPERATING INCOME (1,391) (906) (2,297)
EARNINGS PER SHARE (0.79)
SEGMENT ASSETS 13,981 10,619 24,600
1997
NET SALES FROM
EXTERNAL CUSTOMERS 25,899 2,695 28,594
SEGMENT PROFIT (LOSS)
-OPERATING INCOME 430 (405) 25
EARNINGS PER SHARE 0.01
SEGMENT ASSETS 14,269 10,612 24,881
1996
NET SALES FROM
EXTERNAL CUSTOMERS 23,541 3,047 26,588
SEGMENT PROFIT (LOSS)
-OPERATING INCOME (9,155) (3,653) (12,808)
DEEMED DIVIDEND ON PREF STOCK (6,783)
EARNINGS PER SHARE (0.59)
SEGMENT ASSETS 6,643 17,437 24,080
1995
NET SALES FROM
EXTERNAL CUSTOMERS 4,612 2,914 7,526
SEGMENT PROFIT (LOSS)
-OPERATING INCOME (2,614) (7,283) (9,897)
EARNINGS PER SHARE (0.77)
SEGMENT ASSETS 1,751 2,187 3,938
1994
NET SALES FROM
EXTERNAL CUSTOMERS 3,775 2,818 6,593
SEGMENT PROFIT (LOSS)
-OPERATING INCOME (34) (3,512) (3,546)
EARNINGS PER SHARE (0.49)
SEGMENT ASSETS 4,573 2,805 7,378
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
General
The Company commenced operations in June 1983 and until 1986
was a development stage company. The Company became engaged in the manufacture
and sale of products as a result of its acquisition of Granite Technological
Enterprises, Inc. in June 1986. The Company began the manufacture and sale of
its EZ-SCREEN diagnostic tests in 1985 and introduced its patented one-step
assay, VERDICT and RECON, in 1993. In February 1994, the Company completed the
acquisition of PDLA. In January 1996, the Company completed the acquisition of
the predecessor of MEDTOX Laboratories, Inc. The results of operations for the
year ended December 31, 1996 include the results of operations of MEDTOX
Laboratories, Inc. for the period January 30, 1996 through December 31, 1996.
Since inception, the Company has financed its working capital requirements
primarily from the sale of equity securities and more recently debt financing.
Year ended December 31, 1998 Compared to Year ended December 31, 1997
Laboratory Services
Revenues from Laboratory Services for the year ended December
31, 1998 were $27,070,000 as compared to $25,899,000 for the year ended December
31, 1997. The increase of 4.5% was primarily attributable to increase of 16.5%
in laboratory samples for employment drug testing services. This increase was
due to increased sales from current clients as well as new clients. Revenue from
increase in sample volume was partially offset by an 11.3% decrease in average
per unit prices.
The gross margin from the revenues generated from the
laboratory services was 31% for the year ended December 31, 1998 as compared to
a gross margin of 37.5% for the same period in 1997. The decline in gross margin
was primarily due to increased costs related to implementation of new tests and
a decrease in the average selling price per laboratory sample. The decrease in
average realized selling price was partially offset by savings realized from
cost savings and improvements in the efficiency of laboratory operations.
Selling, general and administration expenses for the year
ended December 31, 1998 were $7,929,000, compared to $7,780,000 for the year
ended December 31, 1997. The increase of $149,000 or 2% in 1998 was the result
of increased costs in several areas including; $379,000 in increased
depreciation expense, $133,000 in increased group insurance costs, a $123,000
increase in computer information systems expense, and severance expenses
totaling $167,000 related to staff resizing. These increases were partially
offset by savings of $564,000 realized from reduced sales and marketing expenses
due to a restructuring of the sales and marketing group and an overall effort to
reduce and monitor costs.
Research and development expenses incurred during the year
ended December 31, 1998 were $522,000 as compared to $502,000 for the same
period in 1997. This increase of $20,000 was primarily the result of increased
in personnel costs due to scheduled salary increases.
The Company periodically undertakes a review of the value of
the remaining goodwill associated with the acquisition of MEDTOX Laboratories,
Inc., to determine if the value is supported by the projected future
undiscounted cash flows. Utilizing an undiscounted cash flow analysis, the
Company determined that the carrying value of the remaining goodwill associated
with the MEDTOX Laboratories, Inc. acquisition is supported by the projected
cash flows at December 31, 1998.
The Laboratory Services segment for the year ended December
31, 1998, incurred interest and financing costs of $615,000, compared to costs
of $609,000 incurred during the year ended December 31, 1997.
The Company's restructuring reserve increased by $712,000 for the
year ended December 31, 1998 as compared to the period ended December 31, 1997.
The increase in the reserve was due to an increase in the projected litigation
and settlement expenses relating to a lawsuit brought by a previous landlord and
pending in the Circuit Court of Cook County, Illinois. The landlord alleges that
the Company breached the terms of a lease the Company attempted to issue in
connection with an asset acquisition. Discovery is continuing in the case. In
December 1998, the Court granted summary judgment against the Company on the
issue of liability and the matter is set for trial in June 1999 on the issue of
damages.
As a result of the above, the net loss for the Laboratory
Services segment of the Company for the year ended December 31, 1998 was
($1,391,000), compared to the net income of $430,000 for the year ended December
31, 1997.
Product sales
Revenues from Product Sales for the year ended December 31,
1998 decreased 7.1% to $2,505,000 as compared to $2,695,000 for the year ended
December 31, 1997. The decrease was primarily attributable to decreased sales in
substance abuse testing products and agricultural diagnostic products.
Product sales include the sales generated from substance abuse
testing products, which incorporates the EZ-SCREEN PROFILE and VERDICT on-site
test kits and other ancillary products for the detection of abused substances.
Sales from these products decreased 15.0% to $1,297,000 for the year ended
December 31, 1998 compared to sales of $1,525,000 in 1997. The Company believes
that the decrease in product sales is primarily due to increased competition
from products perceived as more user friendly than the Company's traditional
products. The Company also believes that the introduction of its new generation
of on-site test kits along with its patent pending "test system" has placed the
Company in strong position to compete successfully in the on-site drug screening
market. The first of these next generation test kits, PROFILE(R)- II, received
pre-market 510(k) clearance from the U.S. Food & Drug Administration in the
fourth quarter.
Product sales also include sales of agricultural diagnostic
products. Sales of these products decreased 37.8% to $458,000 for the year ended
December 31 1998, compared to $736,000 in 1997. The primary reason for the
decrease of $278,000 was the result of decreased purchases by the USDA for the
Company's products. The USDA's needs for the company's products vary from year
to year and sales to the USDA are expected fluctuate accordingly.
Sales of contract manufacturing services, microbiological and
associated products increased 72.8% to $750,000 for the year ended December 31,
1998 compared to $434,000 in 1997. This increase was due to increased revenues
from both historical customers and new customers added in late 1997.
Gross margins from Product Sales for the year ended December
31, 1998 were 33.3% compared to 37% for the year ended December 31, 1997. The
decrease in gross margin from product sales was due to lower overall sales of
products and increased manufacturing costs related to new product development.
Revenues from interest and other income for the year ended December 31,
1998 were $1,000 compared to $6,000 for the year ended December 31, 1997.
Selling, general and administration expenses for products
sales during the year ended December 31, 1998 were $1,045,000, compared to
$946,000 for the year ended December 31, 1997. The increase of $99,000 or 10%
was primarily the result of implementation costs associated with the
introduction of the Company's new generation on-site products.
Research and development expenses incurred during the year
ended December 31, 1998 were $631,000 as compared to $463,000 for the same
period in 1997. The increase of $169,000 or 36.5% was primarily the result of
costs associated with the development of the Company's new generation on-site
products.
For the year ended December 31, 1998, the Product Sales
segment incurred interest and financing costs of $59,000. There were no interest
charges incurred by this segment during the year ended December 31, 1997. The
interest and finance costs were the result of the funds borrowed by the Company
to fund asset purchases and working capital requirements.
As a result of the above, the product sales segment net loss for the year
ended December 31, 1998 was ($906,000), compared to the net loss of ($405,000)
for the year ended December 31, 1997.
Year ended December 31, 1997 Compared to Year ended December 31, 1996
Laboratory Services
Laboratory service revenues were $25,899,000 for the year
ended December 31, 1997 as compared to $23,541,000 for the year ended December
31, 1996. This increase of 10% was primarily the result of the timing of the
acquisition of MEDTOX whereby the Company realized revenues from MEDTOX for
approximately eleven months during the year ended December 31, 1996, as compared
to the complete year ended December 31, 1997. Had the acquisition of MEDTOX been
effective January 1, 1996, the Company would have had revenues of $24,741,000
from laboratory services during the year ended December 31, 1996, as compared to
the $25,899,000 realized from the sale of laboratory services during the year
ended December 31, 1997, this would represent a pro forma increase of $1,158,000
or 5%. The 5% increase was the result of increased sales from new and existing
customers.
The gross margin from the revenues generated from the
laboratory services was 37.5% for the year ended December 31, 1997 as compared
to a gross margin of 34.8% in 1996. During the year ended December 31, 1997, the
Company was able to offset declining average selling prices by reducing costs
through the consolidation of laboratory operations in 1996 as well as continued
improvements in efficiency of laboratory operations.
Selling, general and administration expenses for laboratory
services for the year ended December 31, 1997 were $7,780,000, compared to
$8,584,000 for the year ended December 31, 1996. The $804,000 reduction in these
expenses in 1997 was primarily the result of the consolidation of certain
administrative functions into the MEDTOX facility, decreased amortization
expense, and an overall effort to monitor and control costs.
Research and development expenses incurred in the laboratory
services segment during the year ended December 31, 1997 were $502,000 as
compared to $398,000 for the same period in 1996. This increase of $104,000 was
primarily the result of increased new assay development for new drug entities,
new assays for existing metabolites of drugs and other toxins, and improvement
in existing assays with the goals of increasing the assay's robustness,
sensitivity, accuracy, precision, specificity, and cost.
For the year ended December 31, 1997, the segment had interest and
financing costs of $609,000, compared to costs of $469,000 incurred during the
year ended December 31, 1996. This increase was the result of the funds borrowed
by the Company to complete the financing for the acquisition of MEDTOX.
During the year ended December 31, 1996, the Company
determined that it would be beneficial to consolidate the laboratory operations
of PDLA into the laboratory operations at MEDTOX as well as to down size certain
administrative positions at both PDLA and MEDTOX in order to eliminate
duplicative functions. As a result of these restructuring steps, the Company
recorded charges of $2,424,000 during the year ended December 31, 1996,
including a $101,000 write down of the goodwill associated with the PDLA
acquisition, to cover certain costs of the restructuring. The Company had no
such charge during the year ended December 31, 1997.
During 1996 the laboratory testing industry was undergoing a
period of intense competition, and MEDTOX began to experience, a declining
average selling price. This trend to continued through the end of 1998. In
addition, during 1996 the Company expected that alternative testing methods,
including available on-site testing, or on-site testing that may become
available in future years, may make the current forms of laboratory testing less
competitive. While the Company expects to continue to develop and/or evaluate
new testing technologies, it was believed that the current form of laboratory
testing at MEDTOX could not support the carrying value of the goodwill from the
sale of that laboratory to the Company.
Utilizing an undiscounted cash flow analysis, the Company determined that
the carrying value of the remaining goodwill associated with the MEDTOX
acquisition exceeded the estimated future cash flows to be generated by that
business. Accordingly, the Company recorded a write-off of $6,016,000 at
December 31, 1996. The noncash write-off of the goodwill has reduced the future
amortization expense of the Company by $317,000 per year.
As a result of the above, the net income for the year ended December 31,
1997 for the laboratory services segment was $430,000, compared to the net loss
of ($9,156,000) for the year ended December 31, 1996.
Product Sales
Revenues for product sales for the year ended December 31,
1997 decreased 8.9% to $2,695,000 as compared to $2,957,000 for the year ended
December 31, 1996. The decrease is primarily attributable to decreased sales of
the Company's agricultural diagnostic products.
Product sales include the sales generated from substance abuse
testing products, which incorporates the EZ-SCREEN and VERDICT on-site test kits
and other ancillary products for the detection of abused substances. Sales from
these products increased 3.7% to $1,525,000 for the year ended December 31, 1997
compared to $1,471,000 in 1996.
Product sales also include sales of agricultural diagnostic
products. Sales of these products decreased 33.7% to $736,000 for the year ended
December 31 1997, compared to sales of $1,110,000 in 1996. For the year ended
December 31, 1996, the Company had sales of $361,000 which were generated
through the former operations of Bioman. Excluding these revenues, sales of
agricultural diagnostic products were $749,000 for the year ended December 31,
1996. As such, the sales of these products on a pro forma basis declined 1.7%
for the year ended December 31, 1997 as compared to the same period in 1996. The
primary reason for the increase was due to increased purchases by the USDA for
the Company's products.
Sales of contract manufacturing services, microbiological and
associated product sales were $434,000 for the year ended December 31, 1997
compared to $301,000 for the same period in 1996. This increase was due to
increased revenues from contract manufacturing services.
Revenues generated from the shipment of products to the U.S.
Department of Defense were $75,000 for the year ended December 31, 1996. The
Company had no such sales during the year ended December 31, 1997 and 1998.
For the year ended December 31, 1997, the Company had no
revenues from royalties and fees, compared to $90,000 for the year ended
December 31, 1996. This decrease was primarily due to the absence of royalties
from American Medical Laboratories, Inc. ("AML") as the agreement with AML
expired in 1996.
Revenues from interest and other income for the year ended December 31,
1997 were $6,000 compared to $138,000 for the year ended December 31, 1996.
Gross margins from the sales of both manufactured products and
products purchased for resale for the year ended December 31, 1997 were 37%
compared to 27% of sales of these products during the year ended December 31,
1996. This increase in gross margin from product sales is primarily the result
of the increased sales of the EZ-SCREEN PROFILE product and contract
manufacturing services, as well as reduced costs as a result of certain
restructuring steps taken in 1996.
Selling, general and administration expenses for the year
ended December 31, 1997 were $946,000, compared to $3,559,000 for the year ended
December 31, 1996. The $2,613,000 reduction in these expenses in 1997 was
primarily the result of the consolidation of certain administrative functions
into the MEDTOX facility, decreased amortization expense, and an overall effort
to monitor and control costs.
Research and development expenses incurred during the year
ended December 31, 1997 were $463,000 as compared to $882,000 for the same
period in 1996. The reduction of $419,000 in research and development expenses
is primarily the result of a reduction of personnel and a refocus of efforts in
the research and development function associated with the Company's on-site
products.
During the year ended December 31, 1996, the Company
determined that to improve the operating results of the Company, it would be
necessary to sell the former operations of Bioman, close its farm facility and
reduce its work force at its Burlington, North Carolina location. As a result of
these restructuring steps, the Company recorded charges of $25,000 during the
year ended December 31, 1996 to cover certain costs of the restructurings. The
Company had no such charge during the year ended December 31, 1997.
As a result of the above, the net loss for the year ended December 31,
1997 for the product sales segment was $405,000, compared to the net loss of
$3,653,000 for the year ended December 31, 1996.
In March 1997, the Securities and Exchange Commission Staff
(the "Staff") announced its position on accounting for preferred stock which is
convertible into common stock at a discount from the market rate at the date of
issuance. To comply with this position, the Company recorded a deemed dividend
of $6,783,000 related to the January 1996 sales of the Series A Preferred Stock.
This resulted in a reported net loss applicable to common stockholders of
$19,592,000 for the year ended December 31, 1996.
Material Changes in Financial Condition
Laboratory Services
At December 31, 1998, net accounts and notes receivable for
laboratory services were $5,570,000. This $415,000 increase as compared to
$5,155,000 at December 31, 1997 was a result of a decrease in the allowance for
bad debts and an increase in gross billings prior to pass through costs, in the
fourth quarter of 1998 as compared to the same quarter in 1997.
Inventories were $432,000 at December 31, 1998 compared to
$457,000 at December 31, 1997.
Prepaid expenses and other assets were $503,000 at December
31, 1998 as compared to $351,000 at December 31, 1997. The increase of $152,000
is primarily the result of the renewal of insurance policies, annual maintenance
contracts, licenses and fees, and an increase in prepaid supplies.
The balance of equipment and improvements at December 31, 1998
was $10,275,000 as compared to a balance of $9,030,000 at December 31, 1997. The
increase of $1,245,000 was the result of purchases of equipment and capital
improvements for the laboratory operation to improve efficiencies and reduce
operating costs.
As of December 31, 1998, accounts payable totaled $3,345,000
compared to $3,659,000 at December 31, 1997. The decrease of $314,000, or 8.6%,
is primarily the result of more timely payment of vendors.
Accrued expenses were $1,586,000 at December 31, 1998, as
compared to $1,162,000 at December 31, 1997. The increase of $424,000, or 36.5%,
was the result of the laboratory supplies received but not invoiced, accruals
for severance expenses, and an accrual for the United States Drug Testing
Laboratories litigation settlement.
At December 31, 1998, the laboratory services segment had a
total balance of leases payable of $702,000, compared to a balance of $414,000
at December 31, 1997. The increase in the balance of the leases payable was the
result of the leases of certain equipment to improve operating efficiencies in
the laboratory.
At December 31, 1998, laboratory services had a total balance
of restructuring accruals of $1,155,000 compared to a balance of $786,000 at
December 31, 1997. The increase in the balance of the restructuring accruals of
$369,000, or 47%, was the result of an increase of $712,000 in reserves for
pending litigation expenses less $343,000 in restructuring expense payments made
during 1998.
At December 31, 1998, the Company had a total loan balance
owed to its financial lender of $5,268,000, compared to a total balance of
$5,016,000 owed at December 31, 1997. The net increase of $252,000, or 5%, was
primarily the result of increased borrowings by the Company from its line of
credit to pay operating expenses as well as fund the purchases of certain assets
to improve operating efficiencies.
Product Sales
At December 31, 1998, net accounts receivable for product sales were
$417,000. This $39,000 decrease as compared to $456,000 at December 31, 1997 was
primarily due an improvement in days sales outstanding (DSO).
Prepaid expenses and other assets were $21,000 at December 31,
1998 as compared to $64,000 at December 31, 1997. The decrease of $43,000 is
primarily the result of the timing of the renewal of annual maintenance
contracts, annual licenses and fees.
The balance of equipment and improvements at December 31, 1998
was $2,787,000 as compared to a balance of $2,882,000 at December 31, 1997. The
decrease of $95,000 was the result of obsolete equipment disposed of during the
year.
As of December 31, 1998, accounts payable totaled $186,000
compared to $109,000 at December 31, 1997. The increase of $77,000, or 70%, is
primarily the result of increased purchases of supplies relating to development
and production of the Company's new generation on-site products, as well as
certain capital expenditures.
Accrued expenses were $138,000 at December 31, 1998, as
compared to $164,000 at December 31, 1997.
At December 31, 1998, and December 31, 1997, the product sales
segment had no leases payable.
At December 31, 1998, the product services had a total loan
balance owed to its financial lender of $752,000, compared to a total balance of
$0 owed at December 31, 1997. The net increase of $752,000, or 100%, was the
result of allocation of the portion of the Company's debt secured by the product
sales segment being allocated to the segment. Funds were used for working
capital as well as purchases of certain assets to improve operating
efficiencies.
Liquidity and Capital Resources
The working capital requirements of the Company have been
funded primarily by cash received from debt financing. At December 31, 1998, the
Company had checks written in excess of bank balances in the amount of $142,000.
Cash and cash equivalents at December 31, 1998 of $0, compared to $58,000 as of
December 31, 1997.
The Company is relying on expected positive cash flow from
operations, its line of credit, in addition to funds received from private
placements of subordinate debt (see discussion below) to fund its future working
capital and asset purchases. The amount of credit on the revolving line of
credit is based primarily on the receivables of the Company and, as such, varies
with the accounts receivable, and to a lesser degree the inventory of the
Company. As of December 31, 1998, the Company had total availability of $367,000
on the line of credit of which $115,000 was borrowed, leaving a net availability
of $252,000 as of December 31, 1998.
On January 14, 1998, the Company entered into a Credit
Security Agreement (the "Wells Fargo Credit Agreement" f/k/a "Norwest Credit
Agreement") with Wells Fargo Business Credit (Wells Fargo), f/k/a Norwest
Business Credit. The Wells Fargo Credit Agreement consists of (i) a term loan of
$2,125,000 which matures on January 15, 1999, (ii) a term loan of $700,000 which
matures on January 15, 1999, (iii) a revolving line of credit based upon the
balance of the Company's trade accounts receivable, and (iv) a note of up to
$1,200,000 for the purchase of capital equipment for 1998. The term loan of
$2,125,000 carries an interest rate equal to 1.25% above the publicly announced
rate of interest by Wells Fargo Bank Minnesota, N.A. (the "Base Rate"). The
$700,000 term loan has an interest rate equal to 3.00% above the Base Rate as
does the line of credit. The note for the capital expenditures carries an
interest rate equal to 1.25% above the Base Rate. The Company utilized $4.5
million of the proceeds received from Wells Fargo to pay off the outstanding
loan balance owed to its former lender.
On November 24, 1998 the Company and Wells Fargo Business
Credit amended the Credit Agreement. The amended Wells Fargo Credit Agreement
consists of (i) an increase in the remaining balance on the term loan to the
original amount of $2,125,000 and extension of the maturity to November 25,
2001, (ii) an increase in the remaining balance on the $700,000 term loan to
$417,000 and an extension of its maturity to June 1, 1999, and (iii) a note of
up to $1,000,000 for the purchase of capital equipment for 1999.
As of December 31, 1998, the Company was not in compliance
with the provisions of the minimum debt service coverage ratio, minimum net
income, and minimum book net worth covenants of the Norwest Credit Agreement.
However, on April 12, 1999, the Company amended the Wells Fargo Credit Agreement
(the Third Amendment). The Third Amendment waived the Company's noncompliance
with these covenants at December 31, 1998 and also modified the terms of the
financial covenants for 1999. Management is of the opinion the Company can
achieve the modified financial covenants throughout the course of 1999.
At December 31, 1998, the Company received $175,000 from
private placements of subordinated debt, with a maturity date of December 31,
2001. The debt carries an interest rate of 12% and has accompanying warrants to
purchase a number of shares of common stock equal in exercise price to 25% of
the notes purchased. As of March 23, 1999, the Company had received an
additional $400,000 from this debt offering. The Company is continuing to sell
these securities and may sell up to $1,500,000 in the private placement.
The funds received from the amendment to the Norwest Business
Credit Agreement and the private placements of subordinated debt were used to
fund the working capital needs of the company.
In the short term, the Company believes that the
aforementioned capital along with additional funds received from the
subordinated debt offering will be sufficient to fund the Company's planned
operations through 1999. While there can be no assurance that the available
capital will be sufficient to fund the future operations of the Company beyond
1999, the Company believes that consistent profitable earnings, as well as
access to capital, will be the primary basis for funding the operations of the
Company for the long term.
The Company continues to follow a plan which includes (i)
continuing to aggressively monitor and control costs, (ii) increasing revenue
from sales of the Company's products, services, and research and development
contracts, as well as (iii) continue to selectively pursue synergistic
acquisitions to increase the Company's critical mass. There can be no assurance
that costs can be controlled, revenues can be increased, financing may be
obtained, acquisitions successfully consummated, or that the Company will be
profitable.
Impact of Year 2000
The "Year 2000" issue arises from the fact that many computer
systems rely on a two-digit date code to identify the year (e.g. 98 to represent
1998) and thus may not be able to differentiate between the year 2000 and the
year 1900. If not corrected, systems processing date-dependent information may
fail or create erroneous results, causing disruptions of operations, including,
but not limited to, a temporary inability to process transactions, report
results, send invoices, or engage in similar normal business activity.
The Company has completed its assessment of its internal
computer systems and has determined that modification to some portion of its
software is required so that its computer systems function properly with respect
to dates in the year 2000 and beyond. The Company presently believes that with
modification to existing software and conversion to new software, the Year 2000
issue will not pose significant operational problems for its computer systems.
The Company has initiated formal communication with all of its
significant suppliers to determine the extent to which the company is vulnerable
to those third parties ability to resolve their own Year 2000 issues. There can
be no guarantee that the systems of other companies on which the Company relies
will be timely converted or that a failure to convert or a conversion that is
incompatible with the Company's system would not have an adverse effect on the
Company's systems. Supplier response is not yet complete and the Company is
continuing to work to conclude this area of its Year 2000 assessment.
The Company anticipates completing the Year 2000 project prior
to any adverse impact on its computer operating system, however, if such
modifications and conversions are not made, or completed timely, the Year 2000
issue could have a material impact on the operations of the Company. The Company
continues to assess its readiness relative to Year 2000 issues and will develop
a contingency plan for all items not resolved at the end of the first quarter.
The cost of the Year 2000 project is not expected to be
material. Changes required to internally supported software are minor compared
to the modifications performed in the normal course of business and the Company
plans to use internal resources and delay other projects to complete these Year
2000 modifications. Updates to externally supported software are covered under
existing service contracts or are not anticipated to have costs material in
nature.
The assessment of the impact, cost, and completion of the Year
2000 project is based on management's best estimates. Actual results could
differ materially from those anticipated by factors including, but not limited
to, the continued availability of certain resources, third party modification
plans, and the ability to locate and correct all relevant computer codes.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Reference is made to the financial statements, financial
statement schedule and notes thereto included later in this report under Item
14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Effective May 27, 1998, the Registrant terminated Ernst & Young
LLP as its independent accounting firm. The termination of Ernst & Young LLP was
approved by the Audit Committee of the Board of Directors of the Registrant.
There were no disagreements with Ernst & Young LLP during the last two fiscal
years ending December 31, 1997. Accordingly, Ernst & Young LLP has not advised
the Registrant of (i) the absence of the internal controls necessary for the
Registrant to develop reliable financial statements, (ii) any information which
would cause Ernst & Young LLP to no longer rely on management's representations,
or that Ernst & Young LLP was unwilling to be associated with the financial
statements prepared by management, (iii) any need to expand significantly the
scope of its audit, or any information that if further investigated may (a)
materially impact the fairness or reliability of either a previously issued
audit report or the underlying financial statements or any financial statements
for any fiscal period subsequent to the date of the most recent financial
statements covered by an audit report or (b) cause it to be unwilling to rely on
management's representations or be associated with the Registrant's financial
statements, or (iv) any information that has come to the attention of Ernst &
Young LLP that it concluded materially impacts the fairness or reliability of
either (a) a previously issued audit report or the underlying financial
statements or (b) any financial statements issued or to be issued covering any
fiscal period subsequent to the date of the most recent financial statements
covered by an audit report.
Effective June 3, 1998, the Registrant engaged Deloitte & Touche
LLP as its independent accounting firm. Neither the Registrant or any of its
subsidiaries has had any prior relationships with Deloitte & Touche LLP.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
Initial
Name Age Position with the Company Effective Date
Harry G. McCoy 47 Chairman of the Board of Directors, 1996
President and Director
Richard J. Braun 54 Chief Executive Officer and Director 1996
Samuel C. Powell, Ph.D. 46 Director 1987
James W. Hansen 43 Director 1996
Miles E. Efron 72 Director 1997
Kevin J. Wiersma 37 Vice President, Controller 1998
and Secretary
Harry G. McCoy, Pharm.D., was elected Chairman of the Board of Directors
and President in July 1996 and has served as a Director since January, 1996. 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. Dr. McCoy 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 as 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, Mr. Braun
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. Mr. Braun currently is a
Director of Enstar, Inc., a public company with investments in health care, and
computer connectivity and networking.
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.
Kevin J. Wiersma was named as 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.
ITEM 11. EXECUTIVE COMPENSATION
The following table and the narrative text discuss the compensation
paid during 1998 and the two prior fiscal years to the Company's President and
Chief Executive Officer and to the other executive officers whose annual salary
and bonuses exceeded $100,000 during 1998.
Summary Compensation Table
Long Term Compensation
--------------------------------------------------
Annual Compensation Awards Payouts
Other
Annual Restricted Options/ LTIP All Other
Name and Principal Compensation Stock SAR's Payouts Compensation
Position Year Salary Bonus (1) Awards (2) (#) (2)
- -------------------------- ------- --------- ------------ ---------- ----------- --------- --------- -------------
Harry G. McCoy 1998 $209,615 -- -- -- 50,000 -- --
Chairman of the Board 1997 $199,489 -- -- -- -- -- --
and President (3) 1996 $166,648 -- -- -- -- -- --
Richard J. Braun 1998 $209,615 -- -- -- 50,000 -- $9,060(5)
Chief Executive 1997 $193,479 -- -- -- -- -- $3,195(5)
Officer(4) 1996 $ 72,696 -- -- -- -- -- --
Kevin J. Wiersma 1998 $ 92,144 $11,700 -- -- 5,000 -- --
Vice President,
Controller and
Secretary (6)
Peter J. Heath 1998 $ 91,868 -- -- -- 12,500 -- $46,154
Vice President of Finance 1997 $119,235 -- -- -- -- -- $ 3,000
and Chief Financial 1996 $113,677 $30,000 -- -- 3,750 -- $ 1,400
Officer(7)
(1) Other Annual Compensation for executive officers is not reported as it is
less than the required reporting threshold of the Securities and Exchange
Commission.
(2) Not applicable. No compensation of this type received.
(3) Dr. McCoy was appointed Chairman of the Board and President on July 3, 1996.
(4) Mr. Braun was appointed Chief Executive Officer on July 25, 1996.
(5) Includes $9,060 of premiums paid for by the Company for a disability
insurance policy on Mr. Braun for 1998 and $3,195 for 1997.
(6) Mr. Wiersma was appointed Vice President and Secretary on July 20, 1998.
(7) Mr. Heath resigned as Vice President of Finance and CFO on July 31, 1998. As
part of Mr. Heath's separation agreement, he is to receive $90,000 payable over
nine months. During 1998, Mr. Heath received $46,154 pursuant to the separation
agreement.
Stock Options Granted During Fiscal Year
The following table sets forth information about the stock options
granted to the named executive officers of the Company during 1998.
Option Grants In Last Fiscal Year
Potential Realized
Value at Assumed
Annual Rates of
Stock Price
Appreciation for
Individual Grants Option Term
% of Total
Options
Number Granted to
of Employees Exercise
Options in Fiscal Price Expiration 5% ($) 10%( $)
Name Granted Year ($/Sh) Date (2) (2)
- ------------------------------------------------------------------------------------------------------------------
Harry G.
McCoy 50,000 25% $8.75 03/01/08 $275,141 $697,262
Richard J.
Braun 50,000 25% $8.75 03/01/08 $275,141 $697,262
Kevin J
Wiersma 5,000 2% $8.75 03/01/08 $ 27,514 $ 69,726
Peter J.
Heath (1) 10,000 5% $8.75 03/01/08 $ 55,028 $139,452
2,500 1% $8.75 07/31/03 $ 7,440 $ 37,659
(1) Mr. Heath resigned as Vice President of Finance and Chief Financial
Officer on 7/31/98. 10,000 options to acquire shares were canceled
effective 7/31/98. The remaining 2,500 options to acquire shares were
fully vested at 12/31/98.
(2) 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, 1998.
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 - - 31,894/18,105 $0/$0
Richard J. Braun - - 31,894/18,105 $0/$0
Peter J. Heath - - 2,500/ - $0/$0
Kevin J. Wiersma - - 1,521/3,478 $0/$0
- ----------------------------
(1) The closing price of the Common Stock of the Company at December 31, 1998 as
$5.00 per share. (Share price adjusted to reflect reverse split.)
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 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 Equity Compensation Plan which was adopted by the
shareholders of the annual meeting in 1993 to replace the 1983 Incentive Stock
Option Plan, and a 1991 Non-Employee Director's Plan for members of the Board of
Directors who are not employees of the Company.
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, Chairman of the Board of Directors and President of the
Company, has an employment agreement with the Company covering the period ending
December 31, 1999, which by its term is extended thereafter in one-year
increments unless Dr. McCoy provides written notice of termination to the
Company at least sixty (60) days prior to the date of termination. The agreement
may also be terminated by mutual consent or due to death or for "cause," or as
described below. The employment agreement provides for an annual salary of at
least $199,650 and certain fringe benefits. If Dr. McCoy's employment is
terminated by the Company other than for cause, or if Dr. McCoy chooses to
terminate the agreement voluntarily, following (i) a change in control; (ii) any
relocation to which Dr. McCoy has not agreed to of greater than fifty (50)
miles; or (iii) any material reduction in the level of Dr. McCoy's
responsibility, position, authorities or duties; or (iv) the Company breaches
any of its obligations under the Agreement, Dr. McCoy will be entitled to a
Severance Award. The Severance Award consists of Dr. McCoy's 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 employment agreement contains a Covenant Not to Compete whereby for
a period of twelve (12) months after the termination of employment with the
Company, Dr. McCoy agrees that he 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 Dr. McCoy reasonably knows is undertaking to become
engaged, in the United States in the business of the Company.
Richard J. Braun, Chief Executive Officer, has an employment agreement
with the Company with the same terms as Dr. McCoy.
Kevin Wiersma, Vice President and Controller has a severance agreement
with the Company covering the period December 31, 1999, which by its term is
extended thereafter in one-year increments unless either the Company or Mr.
Wiersma provides written notice to the other party at least six (6) months prior
to the end of the original term or each renewal period or unless the agreement
is otherwise terminated due to death, permanent disability, or for "cause." The
employment agreement provides for an annual salary of at least $95,000 and
certain fringe benefits. If Mr. Wiersma's employment with the Company terminates
during the term of the agreement involuntarily, other than an involuntary
termination on account of misconduct, he will be entitled to a Severance Award.
The Severance Award consists of payment of an amount equal to Mr. Wiersma's then
current annual salary plus certain health benefits over the course of the twelve
(12) month period following Mr. Wieresma's termination.
Three other key employees of the Company have severance agreements
similar to Mr. Wiersma's agreement.
Compensation Committee and Decision Making
The compensation of executive officers of the Company for 1998 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 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, which is a
formula plan in accordance with the requirements of Rule 16b-3 under the
Securities Act of 1934, as amended.
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
Kevin Wiersma received a bonus in 1998 as part of incentive
compensation for meeting certain performance-related goals.
Stock Options
In 1998, certain executive officers received incentive stock options to
purchase a total of 117,500 shares. The number of options granted to the
executive officers represented 59% of the total options granted in 1998 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 1998 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
the attainment of profitability for 1997 for the first time in the Company's
history. For the year ended December 31, 1997, 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 22, 1998 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 1998, and (iv) all executive officers and Directors of the
Company as a group:
Number of Shares Percent of Common
Name Beneficially Owned Stock Outstanding
Executive Officers and Directors:
Harry G. McCoy, Pharm. D.
Chairman and President 187,920 (1) 6.32%
Richard J. Braun
Chief Executive Officer
and Director 35,822 (2) 1.20%
Samuel C. Powell, Ph.D., Director 72,274 (3) 2.43%
Louis Perlman, Director 51,500 (4) 1.73%
James W. Hansen, Director 4,722 (5) *
Miles E. Efron, Director 4,444 (6) *
Kevin J. Wiersma
Vice President, Controller
and Secretary 2,045 (7) *
Peter J. Heath
Vice President-Finance, CFO and
Secretary 3,060 (8) *
All Directors and Executive Officers
As a Group (8 in number) 361,787 (9) 12.16%
- ----------
* Less than one percent (1%)
(1) Includes 29,572 shares of Common Stock issuable under options which are or
which will become exercisable within the next 60 days.
(2) Includes 29,572 shares of Common Stock issuable under options which are or
which will become exercisable within the next 60 days.
(3) Includes 4,027 shares of Common Stock issuable under stock options which are
or will become exercisable within the next 60 days.
(4) Mr. Perlman did not stand for reelection to the Board of Directors at the
Company's Annual Meeting of Stockholders held on September 11, 1998. 51,500
shares was the latest information provided to the Company at September 11, 1998.
(5) Includes 2,222 shares of Common Stock issuable under options which are or
which will become exercisable within the next 60 days.
(6) Includes 1,944 shares of Common Stock issuable under options which are or
which will become exercisable within the next 60 days.
(7) Includes 1,845 shares of Common Stock issuable under options which are or
which will become exercisable within the next 60 days.
(8) Includes 2,500 shares of Common Stock issuable under options which are or
which will become exercisable within the next 60 days.
(9) Includes 71,682 shares of Common Stock issuable under options which are or
will become exercisable within the next 60 days.
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. Upon the expiration of the original lease, the Company entered into a new
lease with Dr. Powell for the same space and at the same base rental rate for a
term of one year ending on May 31, 1990. Effective June 1, 1990, the Company has
been leasing the space on a month-to-month basis. The Company is currently
leasing space at a rate of approximately $10,000 per month. The Company intends
to negotiate a new lease with Dr. Powell in the near future. The Company holds
certain rights of first refusal to lease additional space in the building if it
becomes available (the building contains a total of 42,900 square feet). The
total rent paid by the Company to Dr. Powell during the fiscal year ended
December 31, 1998 was approximately $122,000. The Company believes the rent
amount paid to Dr. Powell is consistent with market rates.
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, REPORTS ON FORM 8-K.
a. (i) Financial Statements Page
Report of Independent Auditors................... 42
Consolidated Balance Sheets at December
31, 1998 and 1997.............................. 44
Consolidated Statements of Operations
for the years ended December 31,
1998, 1997 and 1996............................ 45
Consolidated Statements of Stockholders'
Equity for the years
ended December 31, 1998,
1997 and 1996.................................. 46
Consolidated Statements of Cash
Flows for the years ended
December 31, 1998, 1997 and 1996........... 47
Notes to Consolidated Financial
Statements...................................... 48
(ii) Consolidated Financial Statement Schedules
Schedule II - Valuation and
Qualifying Accounts ............................ 61
All other financial statement schedules normally required under Regulation S-X
are omitted as the required information is inapplicable.
(iii) Exhibits
3.1 Bylaws of the Registrant (incorporated by reference to
Exhibit 4.2 filed with the Registrant's Report on Form
10-Q for the quarter ended December 31, 1986).
3.2 Restated Certificate of Incorporation of the Registrant
filed with the Delaware Secretary of State on July 29,
1994 (incorporated by reference to Exhibit 3.8 filed
with the Registrant's Form 10-K for fiscal year ended
December 31, 1994).
3.3 Certificate of Amendment of Certificate of
Incorporation of the Registrant, filed with the
Delaware Secretary of State on November 27, 1995.
3.4 Amended Certificate of Designations of Preferred Stock
(Series A Convertible Preferred Stock) of the
Registrant, filed with the Delaware Secretary of State
on January 29, 1996 (incorporated by reference to
Exhibit 3.1 filed with the Registrant's report on Form
8-K dated January 30, 1996.)
10.2 Registrant's Stock Option Plan (as amended and
restated) (incorporated by reference to Exhibit 10.2
filed with the Registrant's Report on Form 10-K for the
fiscal year ended December 30, 1990).
10.3 Second Amendment dated December 31, 1986 to Exclusive
License Agreement amending and restating exclusive
license granted by the Registrant to Disease Detection
International, Inc. (incorporated by reference to
Exhibit 10.25 filed with the Registration Statement on
Form S-1 dated August 26, 1987, Commission File No.
33-15543).
10.5 Non-Qualified Stock Option Agreement between the
Registrant and James D. Skinner dated as of July 1,
1987 (incorporated by reference to Exhibit 10.26 filed
with the Registrant's Registration Statement on Form
S-1 dated August 26, 1987, Commission File No.
33-15543).
10.6 Non-Qualified Stock Option Agreement between the
Registrant and James D. Skinner (incorporated by
reference to Exhibit 10.17 filed with the Registrant's
Form 10-K for the fiscal year ended December 31, 1988).
10.7 Non-Qualified Stock Option Agreement between the
Registrant and James D. Skinner dated as of August 10,
1988 (incorporated by reference to Exhibit 10.18 filed
with the Registrant's Form 10-K for the fiscal year
ended December 31, 1987).
10.8 Lease Agreement, dated as of June 1, 1989 between
Samuel C. Powell, as lessor, and EDITEK, as lessee
relating to premises located at 1238 Anthony Road,
Burlington, North Carolina (incorporated by reference
as filed with the Registrant's report on Form 10-Q for
the quarter ended June 30, 1989).
10.12 Stock Option Agreement dated May 4, 1990 between the
Registrant and Samuel C. Powell amending and restating
the Non-Qualified Stock Option Agreement between the
Registrant and Samuel C. Powell dated as of May 23,
1988. (Incorporated by reference to Exhibit 10.34 filed
with the Registrant's Form 10-K for the fiscal year
ended December 31, 1990).
10.13 Loan Modification Agreement dated May 3, 1990 between
the Registrant and James D. Skinner regarding the
Promissory Note dated as of September 10, 1988 by James
D. Skinner to the Registrant. (Incorporated by
reference to Exhibit 10.36 filed with the Registrant's
Form 10-K for the fiscal year ended December 31, 1990).
10.14 Stock Purchase Agreements dated as of July 19, 1991
between the Registrant and Walter O. Fredericks, Peter
J. Heath, Samuel C. Powell, and James D. Skinner.
(Incorporated by reference to Exhibit (a) filed with
the Registrant's Form 10-Q for the quarter ended June
30, 1991).
10.15 Form of Stock Purchase Agreement dated as of September
3, 1992 between the Registrant and Purchasers of
EDITEK's common stock in a private placement on
September 3, 1992. (Incorporated by reference in
Exhibit 10.46 filed with the Registrant's Form 10-K for
the fiscal year ended December 31, 1992).
10.16 Agreement and Plan of Merger between the Registrant,
PDLA Acquisition Corporation, and Princeton Diagnostic
Laboratories of America, Inc. dated October 12, 1993.
(Incorporated by reference to Exhibit (a) filed with
the Registrant's Form 10-Q for the quarter ended
December 31, 1993.)
10.17 Registrant's Amended and Restated Stock Option Plan for
non-employee directors (incorporated by reference to
Exhibit 4 filed with the Registrant's Registration
Statement on Form S-8 dated February 21, 1995,
Commission File No. 33-89646).
10.18 Registrant's Equity Compensation Plan (incorporated by
reference to Exhibit 4 filed with the Registrant's
Registration Statement on Form S-8 dated November 11,
1993, Commission File No. 33-71490).
10.19 Registrant's Amended and Restated Qualified Employee
Stock Purchase Plan (incorporated by reference to
Exhibit 4 filed with the Registrant's Registration
Statement on Form S-8 dated November 11, 1993,
Commission File No. 33-71596).
10.20 Non-Qualified Stock Option Agreement between the
Registrant an Mark D. Dibner dated January 14, 1993
(incorporated by reference to Exhibit 4.2 filed with
the Registrant's Registration Statement on Form S-8
dated February 21, 1995, Commission File No. 33-89646).
10.22 Asset Purchase Agreement dated as of July 1, 1995
between the Registrant and MEDTOX Laboratories, Inc.
(incorporated by reference to Exhibit 10.1 filed with
the Registrant's Report on Form 8-K dated January 30,
1996).
10.23 Amendment Agreement dated as of January 2, 1996 between
the Registrant and MEDTOX Laboratories, Inc.
(incorporated by reference to Exhibit 10.2 filed with
the Registrant's Report on Form 8-K dated January 30,
1996).
10.24 Assignment Agreement dated as of January 10, 1996
between and among the Registrant, MEDTOX Laboratories,
Inc. and Psychiatric Diagnostic Laboratories of
America, Inc. (incorporated by reference to Exhibit
10.3 filed with the Registrant's Report on Form 8-K
dated January 30, 1996).
10.25 Amendment Agreement dated as of January 30, 1996 among
the Registrant, MEDTOX Laboratories, Inc. and
Psychiatric Diagnostic Laboratories of America, Inc.
(incorporated by reference to Exhibit 10.25 filed with
the Registrant's Report on Form 10-K for the fiscal
year ended December 31, 1996.)
10.26 Loan and Security Agreement (together with the Exhibits
and Schedules thereto) by and between the Registrant,
Psychiatric Diagnostic Laboratories of America, Inc.,
diAGnostix, inc. and Heller Financial, Inc. dated
January 30, 1996 (incorporated by reference to Exhibit
10.4 filed with the Registrant's Report on form 8-K
dated January 30, 1996).
10.27 Term Note A executed by the Registrant, Psychiatric
Diagnostic Laboratories of America, Inc. and diAGnostix
in favor of Heller Financial, Inc. dated January 30,
1996 (incorporated by reference to Exhibit 10.5 filed
with the Registrant's Report on Form 8-K dated January
30, 1996).
10.28 Term Note B executed by the Registrant, Psychiatric
Diagnostic Laboratories of America, Inc. and diAGnostix
in favor of Heller Financial, Inc., dated January 30,
1996 (incorporated by reference to Exhibit 10.6 filed
with the Registrant's Report on Form 8-K dated January
30, 1996).
10.29 Assignment for Security (Patents) executed by the
Registrant in favor of Heller Financial, Inc., dated
January 30, 1996 (incorporated by reference to Exhibit
10.7 filed with the Registrant's Report on Form 8-K
dated January 30, 1996).
10.30 Assignment for Security - EDITEK (Trademarks) executed
by the Registrant in favor of Heller Financial, Inc.,
dated January 30, 1996 (incorporated by reference to
Exhibit 10.8 filed with the Registrant's Report on Form
8-K dated January 30, 1996).
10.31 Assignment for Security - Princeton (Trademarks)
executed by Princeton Diagnostic Laboratories of
America, Inc. in favor of Heller Financial, Inc., dated
January 30, 1996 (incorporated by reference to Exhibit
10.9 filed with the Registrant's Report on Form 8-K
dated January 30, 1996).
10.32 Lease Agreement between MEDTOX Laboratories, Inc. and
Phoenix Home Life Mutual Ins. Co. dated April 1, 1992,
and amendments thereto (incorporated by reference to
Exhibit 10.10 filed with the Registrant's Report on
Form 8-K dated January 30, 1996).
10.33 Employment Agreement between the Registrant and Harry
G. McCoy dated January 30, 1996. (Incorporated by
reference to Exhibit 10.33 filed with the Registrant's
Report on Form 10-K for the fiscal year ended December
31, 1995.)
10.34 Registrant's Amended and Restated Equity Compensation
Plan (increasing shares to 3,000,000). (Incorporated by
reference to Exhibit 10.34 filed with the Registrant's
Report on Form 10-K for the fiscal year ended December
31, 1995.)
10.35 Asset Purchase Agreement dated as of May 31, 1995
between the Registrant, Bioman Products, Inc. and
NOVAMANN International, Inc. (Incorporated by reference
to Exhibit 10.35 filed with the Registrant's Report on
Form 10-K for the fiscal year ended December 31, 1995.)
10.36 Securities Purchase Agreement dated January 31, 1996
between the Registrant and Harry G. McCoy.
(Incorporated by reference to Exhibit 10.36 filed with
the Registrant's Report on Form 10-K for the fiscal
year ended December 31, 1995.)
10.37 Registration Rights Agreement dated February 1, 1996
between the Registrant and Harry G. McCoy.
(Incorporated by reference to Exhibit 10.37 filed with
the Registrant's Report on Form 10-K for the fiscal
year ended December 31, 1995.)
10.38 Agreement regarding rights to "MEDTOX" name dated as of
January 30, 1996 between the Registrant and Harry G.
McCoy. (Incorporated by reference to Exhibit 10.38
filed with the Registrant's Report on Form 10-K for the
fiscal year ended December 31, 1995.)
10.39 Warrant Agreement dated as of December 18, 1995 between
Samuel C. Powell and the Registrant. (Incorporated by
reference to Exhibit 10.39 filed with the Registrant's
Report on Form 10-K for the fiscal year ended December
31, 1995.)
10.40 Termination and Settlement Agreement dated as of July
3, 1996 between the Registrant and James D. Skinner.
(Incorporated by reference to Exhibit 10.40 filed with
the Registrant's Report on Form 10-K for the fiscal
year ended December 31, 1996.)
10.41 Agreement dated as of March 17, 1997 between the
Registrant and Harry G. McCoy whereby Dr. McCoy assigns
his rights to the name "MEDTOX" to the Registrant.
(Incorporated by reference to Exhibit 10.41 filed with
the Registrant's Report on Form 10-K for the fiscal
year ended December 31, 1996.)
10.42 Employment Agreement dated January 1, 1997 between the
Registrant and Harry G. McCoy. (Incorporated by
reference to Exhibit 10.42 filed with the Registrant's
Report on form 10-K for the fiscal year ended December
31, 1997.)
10.43 Employment Agreement dated January 1, 1997 between the
Registrant and Richard J. Braun. (Incorporated by
reference to Exhibit 10.43 filed with the Registrant's
Report on form 10-K for the fiscal year ended December
31, 1997.)
b. Reports on Form 8-K
On June 3, 1998, the Company reported a change in its independent
accountants. The Company terminated its relationship with Ernst & Young LLP and
appointed Deloitte & Touche LLP as its independent auditors.
On September 18, 1998, the Company declared a dividend distribution of
one Preferred Share Purchase Right on each outstanding share of the Registrant's
common stock, payable to stockholder of record on September 30, 1998. The Rights
are distributed pursuant to a Rights Agreement, dated September 18, 1998,
between the Registrant and American Stock Transfer & Trust Company.
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
MEDTOX SCIENTIFIC, INC.
Report on Form 10-K
For year ended December 31, 1998
INDEX TO EXHIBITS FILED SEPARATELY WITH FORM 10-K
EXHIBIT # DESCRIPTION OF EXHIBIT
3.5 Certificate of Amendment of Certificate of Incorporation
of MEDTOX Scientific, Inc.
21 List of Subsidiaries
24.1 Consent of Deloitte & Touche LLP
24.2 Consent of Ernst & Young 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 14th
day of April 1999.
MEDTOX Scientific, Inc.
Registrant
By:/s/ Harry G. McCoy, Pharm.D.
Harry G. McCoy, Pharm.D.
President and
Chairman of the Board
Pursuant to the requirements of the Securities Act of 1934,
this Registration Statement has been signed below by the following persons on
behalf of the Registrant in the capacities and on the dates indicated.
Signature Title Date
/s/ Harry G. McCoy, Pharm.D. President, April 14, 1999
Harry G. McCoy and Chairman of the Board
/s/ Richard J. Braun Chief Executive Officer April 14, 1999
Richard J. Braun Director
/s/ Kevin J. Wiersma Vice President, April 14, 1999
Kevin J. Wiersma Controller and
Secretary
/s/ Samuel C. Powell Director April 14, 1999
Samuel C. Powell, Ph.D.
/s/ James W. Hansen Director April 14, 1999
James W. Hansen
/s/ Miles E. Efron Director April 14, 1999
Miles E. Efron
MEDTOX SCIENTIFIC, INC.
Consolidated Financial Statements for the
Years Ended December 31, 1998, 1997, and 1996 and
Independent Auditors' Report
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Directors
Medtox Scientific, Inc.
We have audited the accompanying consolidated balance sheet of Medtox
Scientific, Inc. (formerly EDITEK, Inc.) and Subsidiaries (the Company) as of
December 31, 1998 and the related consolidated statements of operations,
stockholders' equity, and cash flows for the year then ended. Our audit also
included the financial statement schedule listed in the index as Item 14.a.2.
These 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the 1998 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 audit provides 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. and
Subsidiaries as of December 31, 1998 and the results of their operations and
their cash flows for the year then ended, in conformity with generally accepted
accounting principles. 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
March 26, 1999
(April 12, 1999 as to the sixth paragraph of Note 5)
Report of Independent Auditors
Board of Directors and Shareholders
Medtox Scientific, Inc. (formerly EDITEK, Inc.)
We have audited the accompanying consolidated balance sheets of Medtox
Scientific, Inc. (formerly EDITEK, Inc.) as of December 31, 1997, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the two years in the period ended December 31, 1997. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a). These consolidated financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Medtox Scientific,
Inc. (formerly EDITEK, Inc.) at December 31, 1997, and the consolidated results
of its operations and its cash flows for each of the two years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
February 6, 1998
MEDTOX SCIENTIFIC, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
(In thousands, except for number of shares)
1998 1997
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 58
Accounts receivable:
Trade, less allowance for doubtful accounts ($245 in 1998 and $514 in 1997) $ 5,957 5,443
Other 30 110
--------- ---------
5,987 5,553
INVENTORIES:
Raw materials 444 414
Work in process 151 134
Finished goods 80 137
Supplies 432 457
--------- ---------
1,107 1,142
Prepaid expenses and other 524 415
--------- ---------
Total current assets 7,618 7,168
EQUIPMENT AND IMPROVEMENTS:
Furniture and equipment 11,779 10,669
Leasehold improvements 1,283 1,243
--------- ---------
13,062 11,912
Less accumulated depreciation and amortization (10,087) (8,946)
--------- ---------
2,975 2,966
GOODWILL, net of accumulated amortization of $3,086 in 1998 and $2,245 in 1997 14,007 14,747
--------- ---------
$ 24,600 $ 24,881
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Checks written in excess of bank balances $ 142
Line of credit 3,095 $ 3,572
Accounts payable 3,531 3,768
Accrued expenses 1,724 1,326
Current portion of restructuring accrual 1,079 521
Current portion of long-term debt 1,140 1,444
Current portion of capital leases 186 119
--------- ---------
Total current liabilities 10,897 10,750
LONG-TERM PORTION OF RESTRUCTURING ACCRUAL 76 265
LONG-TERM DEBT 1,785
LONG-TERM PORTION OF CAPITAL LEASES 516 295
COMMITMENTS AND CONTINGENCIES (Notes 8 and 12)
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value; authorized shares, 1,000,000; issued and
outstanding shares, none in 1998 and 4 in 1997
Common stock, $0.15 par value; authorized shares, 3,750,000; issued
and outstanding shares, 2,899,669 in 1998 and 2,841,409 in 1997 435 426
Additional paid-in capital 59,815 59,772
Accumulated deficit (48,748) (46,451)
Treasury Stock (176) (176)
--------- ---------
Total stockholders' equity 11,326 13,571
--------- ---------
$ 24,600 $ 24,881
========= =========
See notes to consolidated financial statements.
MEDTOX SCIENTIFIC, INC.
CONSOLIDATED STATEMENTS OF operations
YEARS ENDED december 31, 1998, 1997, AND 1996
(In thousands, except share and per share data)
1998 1997 1996
REVENUES:
Laboratory service revenues $ 27,070 $ 25,899 $ 23,541
Product sales 2,505 2,695 2,957
Royalties and fees 90
Interest and other income 1 6 138
----------- ---------- -----------
29,576 28,600 26,726
COSTS AND EXPENSES:
Cost of services 18,689 16,191 15,344
Cost of sales 1,671 1,697 2,151
Selling, general, and administrative 8,974 9,510 11,725
Research and development 1,153 965 1,280
Interest and financing costs 674 609 469
Restructuring costs 712 (397) 2,449
Goodwill write-off 6,117
----------- ---------- -----------
31,873 28,575 39,535
----------- ---------- -----------
NET (LOSS) INCOME (2,297) 25 (12,809)
LESS PREFERRED STOCK DEEMED DIVIDEND (6,783)
----------- ---------- -----------
NET (LOSS) INCOME APPLICABLE TO COMMON
STOCKHOLDERS $ (2,297) $ 25 $ (19,592)
=========== ========== ===========
(LOSS) INCOME PER SHARE APPLICABLE TO COMMON
STOCKHOLDERS - BASIC AND DILUTED $ (0.79) $ 0.01 $ (11.71)
=========== ========== ==========
WEIGHTED AVERAGE NUMBER OF SHARES OF
COMMON STOCK OUTSTANDING 2,893,399 2,566,966 1,672,793
=========== ========= ===========
See notes to consolidated financial statements.
MEDTOX SCIENTIFIC, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except for number of shares)
Note
Additional Receivable
Preferred Stock Common Stock Paid-in Accumulated from Treasury
Shares Par Value Shares Par Value Capital Deficit Stockholder Stock Total
BALANCE AT DECEMBER 31, 1995 521,989 $ 78 $ 35,461 $(33,667) $ (100) $(76) $ 1,696
Exercise of stock options
and warrants 5,021 1 45 46
Stock issued for MEDTOX Laboratories,
Inc. acquisition 125,865 19 4,806 4,825
Sale of preferred stock 407 19,126 19,126
Cancellation of note receivable from
officer in exchange for common stock 100 (100)
Sale of common stock 3,824 1 63 64
Conversion of preferred stock to common
stock (169) 609,326 91 (91)
Private placement of common stock 11,765 2 598 600
Net loss (12,809) (12,809)
------ ------ -------- ------ ------- -------- ------ ------ -------
BALANCE AT DECEMBER 31, 1996 238 1,277,790 192 60,008 (46,476) (176) 13,548
Stock issued for MEDTOX Laboratories,
Inc. acquisition 417,292 62 (62)
Sale of common stock 10,524 2 73 75
Conversion of preferred stock to common
stock (234) 1,135,803 170 (247) (77)
Net income 25 25
------ ------ --------- ----- -------- -------- ------- ------ -------
BALANCE AT DECEMBER 31, 1997 4 2,841,409 426 59,772 (46,451) (176) 13,571
Sale of common stock 4,927 1 24 25
Conversion of preferred stock to common
stock (4) 53,333 8 (8)
Value of warrants issued 27 27
Net loss (2,297) (2,297)
------ ----- --------- ------ -------- -------- ------ ------ ------
BALANCE AT DECEMBER 31, 1998 - $ - 2,899,669 $ 435 $ 59,815 $(48,748) $ $(176) $11,326
====== ===== ========= ======= ======== ========= ====== ====== ========
See notes to consolidated financial statements.
MEDTOX SCIENTIFIC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
(In thousands)
1998 1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (2,297) $ 25 $ (12,809)
Adjustments to reconcile net (loss) income to net cash (used in)
provided by operating activities:
Depreciation and amortization 2,094 2,083 2,265
Goodwill write-off 6,117
PDLA write-off 284
Provision for losses on accounts receivable 42 156 128
Gain on sale of equipment (4) (42)
Changes in operating assets and liabilities, net of acquisition:
Accounts receivable (476) (1,156) (749)
Inventories 35 148 10
Prepaid expenses and other (109) (275) 365
Accounts payable and accrued expenses 161 627 1,025
Deferred revenues (97)
Restructuring accruals 369 (1,017) 1,072
---------- -------- ----------
Net cash (used in) provided by operating activities (185) 591 (2,431)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment and improvements (949) (1,315) (1,118)
Proceeds from sale of equipment 4 45
Acquisitions, net of cash acquired (19,630)
---------- -------- ----------
Net cash used in investing activities (945) (1,315) (20,703)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in checks in excess of bank balances 142
Net proceeds from sale of preferred stock 19,126
Net proceeds from sale of common stock 25 (2) 710
Proceeds from line of credit and long-term debt 36,669 2,135 5,437
Principal payments on capital leases (118) (87)
Principal payments on line of credit and long-term debt (35,646) (1,346) (2,315)
---------- -------- ----------
Net cash provided by financing activities 1,072 700 22,958
---------- -------- ----------
DECREASE IN CASH AND CASH EQUIVALENTS (58) (24) (176)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 58 82 258
---------- -------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ - $ 58 $ 82
========== ======== ==========
SUPPLEMENTAL NONCASH ACTIVITIES:
During 1998 and 1997, the Company entered into capital lease agreements totaling
$414,000 and $468,000, respectively.
During 1996, the Company canceled the note receivable from an officer of
$100,000 in exchange for 667 shares of common stock.
In January 1996, the Company acquired MEDTOX Laboratories, Inc. The purchase
price was $24 million, which included $19 million cash and the issuance of
$5,000,000 in common stock (125,865 shares).
See notes to consolidated financial statements.
MEDTOX SCIENTIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
1. Summary of significant accounting policies
The Company - In May 1997, the Company changed its corporate name from
EDITEK, Inc. to MEDTOX Scientific, Inc. (MEDTOX). The consolidated
financial statements include the accounts of MEDTOX and its wholly owned
subsidiaries, MEDTOX Laboratories, Inc. (MEDTOX Laboratories) and MEDTOX
Diagnostics, Inc. (MEDTOX Diagnostics) (collectively referred to as the
Company).
MEDTOX Laboratories provides laboratory analyses, logistics management,
data management, and program management services. Laboratory analyses
including clinical testing services for the detection of substances of
abuse and other toxins in biological fluids and tissues. Logistics, data
and program management services include courier services for medical
specimen transportation, management programs for on-site drug testing, data
collection and reporting services, coordination of specimen collection
sites, and medical surveillance program management.
MEDTOX Diagnostics is engaged in the research, development, and sale of
products based upon enzyme immunoassay technology for the detection of
antibiotic residues, mycotoxins, drugs of abuse and other hazardous
substances as well as distribution of agridiagnostic and food safety
testing products.
All significant intercompany transactions and balances have been
eliminated.
Cash and Cash Equivalents - Cash and cash equivalents include cash and
highly liquid investment maturing within three months when purchased.
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 at December 31, 1998 and 1997.
Equipment and Improvements - Equipment and improvements are stated at cost.
Provisions for depreciation have been computed using the straight-line
method to amortize the cost of depreciable assets over their estimated
useful lives. Leasehold improvements are amortized over the lesser of the
lease term or the economic useful lives of the improvements.
Revenue Recognition - Sales are recognized in the statement of operations
when products are shipped or services are rendered.
Research and Development - Research and development expenditures are
charged to expense as incurred.
Income Taxes - The Company uses the liability method of accounting for
income taxes. Under this method, deferred tax assets and liabilities are
determined based on differences between the financial reporting and tax
bases of assets and liabilities and are measured using the enacted tax
rates and laws that will be in effect when the differences are expected to
reverse.
Income (Loss) per Share of Common Stock - Income (loss) per share of common
stock amounts are based on the weighted average number of shares of common
stock outstanding, as well as shares of common stock that would have been
issued and outstanding in certain transactions had the Company had the
necessary number of authorized shares of common stock. All other common
stock equivalents were anti-dilutive and therefore were not included in the
computation of income (loss) per share for all periods presented.
Goodwill - Goodwill is amortized on a straight-line basis over 20 years.
The carrying value of goodwill is reviewed if the facts and circumstances
suggest that it may be impaired. If this review indicates that goodwill
will not be recoverable, as determined based on the undiscounted cash flows
of the entity acquired over the remaining amortization period, the
Company's carrying value of the goodwill is reduced by the estimated
shortfall of cash flows. In 1996, the Company recorded goodwill write-offs
totaling $6,117,000 (see Note 4).
Impairment of Long-Lived Assets - The Company periodically evaluates the
carrying value of long-lived assets and long-lived assets to be disposed of
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. Losses on long-lived
assets to be disposed of are determined in a similar manner, except that
the fair market values are reduced for the costs to sell.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Reclassifications - Certain reclassifications have been made to the 1997
and 1996 consolidated financial statements to conform with the 1998
presentation. These reclassifications had no effect on net income (loss) or
total stockholders' equity as previously reported.
Stock-Based Compensation - SFAS No. 123, Accounting for Stock-Based
Compensation, requires companies to measure employee stock compensation
plans based on the fair value method of accounting. However, the statement
allows the alternative of continued use of Accounting Principles Board
Opinion (APBO) No. 25, Accounting for Stock Issued to Employees, with pro
forma disclosure of net income and earnings per share determined as if the
fair value method had been applied in measuring compensation cost. The
Company elected the continued use of APBO No. 25.
Comprehensive Earnings - Comprehensive earnings is a measure of all
nonowner changes in shareholders' equity and includes such items as net
earnings, certain foreign currency translation items, minimum pension
liability adjustments, and changes in the value of available-for-sale
securities. In 1998, 1997, and 1996, comprehensive earnings for the Company
were equivalent to net earnings as reported.
Derivative Instruments and Hedging Activities - SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities, was issued in June 1998
and establishes accounting and reporting standards for derivative
instruments. The statement requires recognition of all derivatives as
either assets or liabilities in the statement of financial position
measured at fair value and will be effective in fiscal year 2000. The
Company has not yet completed its analysis of the impact SFAS No. 133 will
have on its consolidated financial statements.
2. SEGMENTS
The Company adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, in 1998, which changes the way the
Company reports information about its operating segments. The information
for 1997 and 1996 has been restated to conform to the 1998 presentation.
The Company has two reportable segments: Product Sales and Lab Services.
The Product Sales segment is made up entirely of MEDTOX Diagnostics.
Products manufactured include easy to use, inexpensive, on-site drug tests
such as PROFILE II, EX-SCREEN, EX-QUANT, and VERDICT. The Lab Services
segment includes MEDTOX Laboratories and CMS. Services provided include
forensic toxicology, clinical toxicology, heavy metals analyses, courier
delivery, and medical surveillance.
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
1998:
Net Sales $ 27,070 $ 2,505 $ 29,575
Segment Loss (1,391) (906) (2,297)
Segment Assets 13,981 10,619 24,600
1997:
Net Sales 25,899 2,695 28,594
Segment Profit (Loss) 430 (405) 25
Segment Assets 14,269 10,612 24,881
1996:
Net Sales 23,541 3,047 26,588
Segment Loss (15,939) (3,653) (19,592)
Segment Assets 6,643 17,436 24,079
3. ACQUISITIONS
In January 1996, the Company acquired MEDTOX Laboratories, a toxicology
laboratory located in Saint Paul, Minnesota. The purchase price was $24
million, which included $19 million cash and the issuance of 125,865 shares
of common stock. The acquisition was accounted for under the purchase
method of accounting under which the Company recorded approximately $22
million of goodwill. The goodwill is being amortized over a period of 20
years (see Note 4).
The Company financed the acquisition by issuing $19 million of convertible
preferred stock and borrowing $4 million under two $2 million term loans.
In connection with the acquisition, the Company entered into a revolving
line of credit of up to $7 million for working capital purposes.
4. GOODWILL WRITE-OFF
In 1996, the Company reviewed the value of the goodwill associated with the
acquisition of MEDTOX Laboratories. The purpose of the review was to
determine if the value of the goodwill, generated as a result of the price
paid by the Company for MEDTOX Laboratories, was in fact supported by the
projected future benefit to the Company as measured by projected cash
flows.
Given the highly competitive nature of the testing marketplace, the
industry and MEDTOX Laboratories had begun to experience a declining
average selling price. In addition the Company believed that alternative
testing methods, including on-site testing, would become available in
future years that may make the then existing forms of laboratory testing
less competitive. While the Company expected to continue to develop and/or
evaluate new testing technologies, the then existing form of laboratory
testing at MEDTOX Laboratories was unable to support the carrying value of
the goodwill generated from the sale of that laboratory to the Company.
Utilizing an undiscounted cash flow analysis, the Company concluded that
the carrying value of the remaining goodwill associated with the MEDTOX
Laboratories acquisition exceeded the estimated future cash flows.
Accordingly, the Company recorded a write-off of $6,016,000 in December
1996.
In September 1996, upon the sale of Bioman, the Company recorded a $101,000
write-off of the goodwill associated with the original acquisition of
Bioman.
5. DEBT
Long-term debt consisted of the following at December 31:
1998 1997
Term loan, due November 2001, 9% at December 31, 1998 $ 2,066
Overadvance term loan, due June 1999, 10.75% at December 31, 1998 358
Capex note, due November 2001, 9% at December 31, 1998 347
Subordinated notes, due December 2001, 12% at December 31, 1998 148
Note payable to bank, due September 2000, 10% at December 31, 1998 6
Term loan, paid in 1998 $ 1,444
--------
2,925 1,444
Less current portion 1,140 1,444
--------- ---------
$ 1,785 $ -
==========================
Long-term debt maturities at December 31, 1998 were as follows:
1999 $ 1,140
2000 784
2001 1,001
---------
$ 2,925
On January 14, 1998, the Company entered into a Credit Security Agreement
(the Norwest Credit Agreement) with Norwest Business Credit (Norwest). The
Company utilized $4.5 million of the proceeds from the Norwest Credit
Agreement to repay the outstanding second term loan owed to its former
lender, Heller Financial, Inc. (Heller).
The Norwest Credit Agreement consists of (i) a term loan of $2,125,000
bearing interest at prime + 1.25% due January 15, 2001; (ii) an overadvance
term loan of $700,000 bearing interest at prime + 3% due January 15, 1999;
(iii) a revolving line of credit of not more than $6,000,000 or 80% of the
Company's eligible trade accounts receivable bearing interest at prime + 1%
due January 15, 2001; and (iv) a capex note of up to $1,200,000 for the
purchase of capital equipment for 1998 bearing interest at prime + 1.25%
due January 15, 2001. At December 31, 1998, $3,095,000 was outstanding
under the revolving line of credit, and $252,000 was available to be
advanced under the borrowing base formula. The Norwest 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. The Norwest
Credit Agreement is secured by virtually all of the Company's assets,
including equipment, general intangibles, inventories, and receivables.
On May 22, 1998, the Company and Norwest amended the Norwest Credit
Agreement (the First Amendment). The First Amendment waived the Company's
noncompliance with the minimum book net worth covenant for the first
quarter of 1998. It also set new minimum book net worth requirements for
each fiscal quarter through January 31, 1999.
On November 24, 1998, the Company and Norwest again amended the Credit
Agreement (the Second Amendment). The Second Amendment consisted of (i)
additional borrowings of up to the original $2,125,000 term loan and
extension of the due date to November 25, 2001; (ii) an additional $300,000
borrowing under the original overadvance term loan of $700,000 and an
extension of the due date to June 1, 1999; (iii) a capex note of up to
$1,000,000 for the purchase of capital equipment for 1999 and extension of
the due date to November 25, 2001; (iv) the quarterly financial ratios as
to minimum debt service coverage and maximum debt to book net worth ratios
were modified; (v) the quarterly minimum net income and book net worth
levels were adjusted; (vi) a waiver permitting the creation of CMS; (vii) a
waiver permitting the mergers of Precision Drug Testing Laboratories of
America, Inc., Princeton Drug Testing Laboratories of America, Inc., and
MEDTOX Diagnostics into the Company; (viii) a waiver of the Company's
noncompliance with the minimum net income and minimum book net worth
requirements for the quarter ended June 30, 1998; and (ix) a waiver of the
Company's noncompliance with the minimum net income, minimum book net
worth, and minimum debt service coverage ratio requirements for the quarter
ended September 30, 1998.
As of December 31, 1998, the Company was not in compliance with the
provisions of the minimum debt service coverage ratio, minimum net income,
and minimum book net worth covenants of the Norwest Credit Agreement.
However, on April 12, 1999, the Company amended the Norwest Credit
Agreement effective April 1, 1999 (the Third Amendment). The Third
Amendment waived the Company's noncompliance with these covenants at
December 31, 1998 and also modified the terms of the financial covenants
for 1999. Management is of the opinion the Company can achieve the modified
financial covenants throughout the course of 1999. Accordingly, long-term
debt under the Norwest Credit Agreement has not been reclassified as
current.
On December 31, 1998, the Company received $175,000 from private placements
of subordinated debt. The notes require payment of the principal amount on
December 31, 2001. Interest at 12% per annum is paid semiannually on June
30 and December 31. In connection with the issuance of the subordinated
notes, the Company issued warrants to purchase 8,750 shares of common
stock, exercisable from December 15, 1999 to December 31, 2001, at an
exercise price of $5.00 per share. The Company has determined the value of
the warrants at the date of grant to be $27,000. The value of the warrants
has been accounted for as additional paid-in capital and deducted from the
principal of the subordinated notes as discount on debt issued.
During the first quarter of 1999, the Company received an additional
$400,000 from private placements of subordinated debt under the same terms
as the December 1998 debt issuances. In connection with the issuance of the
subordinated notes, the Company issued warrants to purchase 20,000 shares
of common stock at an exercise price of $5.00 per share.
Interest paid for all outstanding debt was $599,000, $576,000, and $424,000
for the years ended December 31, 1998, 1997, and 1996, respectively.
6. STOCKHOLDERS' EQUITY
The Board of Directors declared a one-for-twenty reverse stock split
effective February 20, 1999. Accordingly, all stock option, warrant, share,
and per share data included in this report have been restated to reflect
the reverse split.
The Company has sold its common stock in various private transactions as
follows:
Number Price
of Per Net
Shares Share Proceeds
1996 11,765 $51.00 $ 600,000
In January 1996, the Company sold 407 shares of Series A Preferred Stock at
a price of $50,000 per share. Each share of Series A Preferred Stock was
convertible into shares of common stock. The amount of common shares to be
issued upon the exercise of the conversion right is derived by dividing (i)
the purchase price of one share of Series A Preferred Stock, $50,000 by
(ii) the lower of (x) $2.775 or (y) 75% of the market price of the common
stock on the date the conversion right is exercised. The market price is
defined as the daily average of the closing bid prices quoted on the
American Stock Exchange for the five trading days immediately preceding the
date the conversion right is exercised. At December 31, 1998, all 407
shares of Series A Preferred Stock had been converted into 1,798,462 shares
of common stock.
The market price of the Company's common stock was $70.00 on the date of
issuance of the Series A Preferred Stock. The reduction in the conversion
price of the Series A Preferred Stock from $70.00 to $52.50 per share was
valued at $6,783,333 and recorded as a preferred stock dividend to arrive
at the 1996 net loss available to holders of common stock in the
calculation of net loss per share in 1996.
As part of the purchase price paid by the Company for the acquisition of
MEDTOX Laboratories, the Company issued 125,865 shares of common stock.
In connection with the issuance of the common shares, the Company agreed
that if, after the closing date of the MEDTOX Laboratories acquisition, the
market value of the Company's common stock declined below approximately
$39.60 per share, the Company would issue additional shares of common stock
(Additional Shares) to shareholders of MEDTOX Laboratories who retain their
shares of common stock at specified dates through November 19, 1997 (the
Repricing Dates). The following is a summary of the price resets, the
market price per share used for purposes of calculating the reset quantity
of shares, and the quantity of additional shares that were issued in 1997:
Market Price Related Shares
Repricing Date to Repricing Date Issued
May 23, 1996 $31.20 55,953
November 22, 1996 $19.00 64,673
March 27, 1997 $8.25 257,898
November 19, 1997 $7.50 38,768
-----------
417,292
At December 31, 1998, 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
Series N $ 59.20 Expired March 17, 1999 1,634
Series O 55.40 Expired January 30, 1999 29,333
Subordinated notes 12% 5.00 December 15, 1999 to
December 31, 2001 8,750
-----------
39,717
In addition, at December 31, 1998, 416,770 shares of common stock were
reserved for future issuances under the stock option plans discussed in
Note 7.
On September 18, 1998, the Company's Board of Directors authorized and
declared a dividend of one preferred share purchase right for each common
share then outstanding. Subsequent to that date the Company maintains a
plan in which one preferred share purchase right (Right) exists for each
common share of the Company. Each Right entitles its holder to purchase one
one-hundredth of a share of a new series of junior participating preferred
stock at an exercise price of $29.80, subject to adjustment. The Rights are
exercisable only if a person or group acquires beneficial ownership of 20
percent or more of the Company's outstanding common stock.
7. STOCK OPTION AND PURCHASE PLANS
The Company has stock option plans to provide incentives to eligible
employees, officers, and directors in the form of incentive stock options,
nonqualified stock options, stock appreciation rights, restricted and
unrestricted stock awards, performance shares, and other stock-based
awards. The Compensation Committee of the Board of Directors determines the
exercise price (not to be less than the fair market value of the underlying
stock) at the date of grant. Options generally become exercisable in
installments over a period of one to five years and expire ten years from
the date of grant.
The following table summarizes information about stock options outstanding
at December 31, 1998:
Plan Options Outstanding Weighted
Non- Average
Shares employee Exercise
Available 1983 ISO 1993 Director Price
for Grant Plan Plan Plan Share
Balance at December 31, 1995 167,297 22,470 36,052 2,393 $66.80
Additional shares reserved for issuance 45,047
Granted (11,915) 11,250 665 56.60
Canceled 24,231 (7,699) (21,984) (2,247) 64.80
Exercised (4,460) (561) 9.20
-------- ------- -------- -------
Balance at December 31, 1996 224,660 10,311 25,318 250 69.40
Additional shares reserved for issuance 93,817
Granted (11,500) 11,500 8.75
Canceled 14,250 (2,601) (14,250) 63.80
Exercised
-------- ------- -------- -------
Balance at December 31, 1997 321,227 7,710 11,068 11,750 49.80
Additional shares reserved for issuance 3,496
Granted (145,750) 145,750 10.01
Canceled 38,690 (2,274) (35,307) (3,333) 55.63
Exercised
-------- ------- -------- -------
Balance at December 31, 1998 217,613 5,436 121,511 8,417 $14.43
======== ======= ======== =======
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
$8.75 125,348 $ 8.75 9 59,758 $ 8.75
$30.00 - $59.99 1,376 53.53 3 1,376 53.99
$60.00 - $89.99 5,786 71.92 6 5,780 71.92
$90.00 - $119.99 625 102.24 5 625 102.24
$120.00 - $149.99 1,729 130.88 2 1,729 130.88
$153.80 500 153.80 3 500 153.80
--------- -------
135,364 $ 14.43 69,768 $ 19.77
Options Outstanding Options Exercisable
Weighted Weighted
Range of Average Average
Exercise Number Exercise Number Exercise
Option Plan Prices Outstanding Price Exercisable Price
1983 Incentive Stock Option Plan $48.80 - $143.80 5,436 $99.70 5,430 $ 99.73
1993 Equity Compensation Plan $8.75 - $153.80 121,511 10.48 57,185 12.41
Nonemployee Director Plan $8.75 - $ 92.60 8,417 16.49 7,153 17.86
--------- -------
135,364 $14.43 69,768 $ 19.77
Nonqualified Stock Options - The shares of common stock covered by
nonqualified options are restricted as to transfer under applicable
securities laws.
Qualified Employee Stock Purchase Plan - The Company has a Qualified
Employee Stock Purchase Plan (the Purchase Plan) under which all employees
meeting certain criteria may subscribe to and purchase shares of common
stock. The number of shares of common stock authorized to be issued under
the Purchase Plan is 25,000. The subscription price of the shares is 85% of
the fair market value of the common stock on the day the executed
subscription form is received by the Company. The purchase price for the
shares is the lesser of the subscription price or 85% of the fair market
value of the shares on the day the right to purchase is exercised. Payment
for common stock is made through a payroll deduction plan.
The Company applies Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations, in accounting
for its stock-based compensation plan. Accordingly, no compensation expense
has been recognized for its stock option awards, because the exercise price
of all options equals the market price of the stock on the grant date. Had
compensation expense for the Company's stock option awards been determined
based upon their grant date fair value consistent with the methodology
prescribed under Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation, the Company's net loss applicable
to common stockholders and basic and diluted loss per share applicable to
common stockholders would have been $2,746,000 and ($0.95 per share),
$87,000 and ($.03 per share), and $20,027,000 and ($11.97 per share) for
1998, 1997, and 1996, respectively. The fair value of the options at the
grant date was estimated using the Black-Scholes model with the following
weighted average assumptions:
1998 1997 1996
Expected life (years) 5 5 5
Interest rate 4.25% 6.0% 6.0%
Volatility 90.5% 103.0% 119.5%
Dividend yield 0% 0% 0%
The weighted average fair value of options granted in 1998 was $5.22 per
share.
8. 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 $122,000, $121,000, and $122,000 for the years ended December
31, 1998, 1997, and 1996, respectively.
The Company leases other offices and facilities and office equipment under
certain operating leases which expire on various dates through March 2002.
Under the terms of the facility leases, a pro rata share of operating
expenses and real estate taxes are charged as additional rent. See also
Note 9 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, 1998, the Company is obligated for future minimum lease
payments (excluding payments under the leases vacated as part of the 1996
restructuring discussed in Note 9) without regard for sublease payments
under noncancelable leases as follows (in thousands):
Capital Operating
Leases Leases
1999 $257 $ 804
2000 221 633
2001 143 556
2002 91 139
2003 and thereafter 122
----- ------
834 $2,132
Amount representing interest 132
-----
Present value of net minimum lease payments 702
Less current portion 186
-----
Long-term capital lease obligations $ 516
=====
Rent expense (including amounts for the facilities leased from the
director) amounted to $751,000, $582,000, and $638,000 for the years ended
December 31, 1998, 1997, and 1996, respectively.
9. RESTRUCTURING COSTS
During 1996, the Company recorded restructuring costs of $2,449,000 as a
result of the consolidation of the laboratory operations of PDLA into the
laboratory operations at Medtox Laboratories, the sale of the former
operations of Bioman, and the reduction of its work force at certain of its
facilities. In fiscal 1996, payments of $646,000 were made against the
restructuring reserves.
In fiscal 1997, restructuring reserves decreased by $1,017,000 to $786,000
at December 31, 1997, due to payments of $620,000 and a decrease in the
estimate of the required reserve of $397,000 in December 1997.
In fiscal 1998, restructuring reserves increased by $369,000 to $1,155,000
at December 31, 1998, due to payments of $342,000 and an increase in the
estimate of the required reserve of $711,000 in the fourth quarter of 1998
resulting from preliminary unfavorable court rulings relative to certain
contingencies originally accrued for in 1996.
10. 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):
1998 1997
Deferred tax liability -
Excess fixed asset basis $ (194)
Deferred tax assets:
Excess fixed asset basis $ 169
Excess goodwill basis 1,421 1,897
Medical reserve 104 -
Net operating loss carryforwards 13,523 13,487
Research and experimental credit carryforwards 65 41
Restructuring costs 439 298
Legal reserve 68 76
Other 284 413
------------ -----------
Total net deferred tax assets 15,710 16,381
Valuation allowance for deferred tax assets (15,710) (16,381)
------------ -----------
Net deferred tax asset $ - $ -
============ ===========
At December 31, 1998, the Company had net operating loss carryforwards
(NOLs) of approximately $35,600,000 which are available to offset taxable
income through 2013 and begin 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.
11. BENEFIT PLANS
The Company has a defined contribution benefit plan that cover
substantially all employees who meet certain age and length of service
requirements. Contributions to the plans are at the discretion of the Board
of Directors. The 401(k) expense for the years ended December 31, 1998,
1997, and 1996 was $98,000, $152,000, and $80,000, respectively.
12. COMMITMENTS AND CONTINGENCIES
The Company is a defendant in a suit in Circuit Court of Cook County,
Illinois to a claim of unpaid rent obligations associated with an idle
facility in Illinois. The Company answered the complaint denying
responsibility for the obligation. In December 1998, the Court granted
summary judgment against the Company on certain issues relative to this
matter. While the Company intends to vigorously defend this action, in
December 1998, following the summary judgment, an additional accrual, as
discussed in Note 9, was established.
The Company has entered a settlement agreement with United States Drug
Testing Laboratories who asserted a claim of patent infringement against
the Company on August 20, 1996. It was alleged that the Company infringes
two patents allegedly owned by United States Drug Testing Laboratories
relating to forensically acceptable determinations of gestational fetal
exposure to drugs and other chemical agents. The Company while denying any
infringement has reached a settlement agreement with United States Drug
Testing Laboratories whereby the Company will pay United States Drug
Testing Laboratories $17,500 and issue United States Drug Testing
Laboratories 2,500 shares of common stock.
The Company believes that the probable outcome of the above contingencies
will not materially affect the financial position or results of operations
of the Company.
On January 31, 1997, the Company filed suit in Federal District Court in
Minnesota against a majority shareholder and two former outside directors
of the Company alleging violation of Section 16b of the Securities Exchange
Act of 1934 and seeking recovery of more than $500,000 in short-swing
profits. On August 4, 1997, the U.S. District Court granted the defendants'
Motion to Dismiss the Company's complaint, ruling that the defendants'
conduct did not constitute a violation of Section 16(b). On October 29,
1997, the Company filed an appeal of that decision to the United States
Court of Appeals for the Eighth Circuit (Court of Appeals). On July 21,
1998, the Court of Appeals reversed the U.S. District Court's dismissal and
remanded the case back to the U.S. District Court.
Under the MEDTOX Laboratories acquisition agreements, the Company may be
contingently liable for certain tax liabilities incurred by the former
MEDTOX Laboratories shareholders. At the present time, the possible
liability under this agreement is not reasonably ascertainable because the
agreement, as written, is ambiguous and its intent is not clear. Under the
agreement, the obligation, if any, on the part of the Company can be
deferred under certain circumstances and at the present time the Company
believes this deferral will be available to the Company for the foreseeable
future.
SCHEDULE II - VALUATION & QUALIFYING ACCOUNTS
Balance at Charged to Costs Charged to Other Deductions Balance at
Beginning of and Expenses Accounts the End of
Period Period
Year Ended December 31, 1998:
Deducted from Asset Accounts:
Allowance for Doubtful Accounts $ 515,000 $ 22,000 $ 292,000(3) $ 245,000
Restructuring Accrual $ 786,000 $ 711,111(5) $ - $ 341,000(5) $ 1,155,000
Year Ended December 31, 1997:
Deducted from Asset Accounts:
Allowance for Doubtful Accounts $ 358,000 $ 157,000 $ - $ - $ 515,000
Restructuring Accrual $1,803,000 $ - $ - $ 1,017,000(4) $ 786,000
Year Ended December 31, 1996:
Deducted from Asset Accounts:
Allowance for Doubtful Accounts $ 130,000 $ 241,000 $ 100,000(2) $ 113,000(3) $ 358,000
Restructuring Accrual $ - $ 2,449,000 $ 646,000(1) $ 1,803,000
(1) Represents severance payments and payments on lease obligations.
(2) $100,000 charged to Other Accounts represents the amount acquired through
MEDTOX acquisition.
(3) Uncollectible accounts written off, net of recoveries
(4) Includes reduction of $397,000 of Lease Liability deemed to no longer be an
obligation of the Company.
The remainder is due in payments toward the liability.
(5) Represents payments of lease obligations and an increase of estimate on
future lease payments.