FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period to
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Commission file number 1-11394
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MEDTOX SCIENTIFIC, INC.
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(Exact name of registrant as specified in its charter)
Delaware 95-3863205
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(State or other jurisdiction of (I.R.S. Employer
incorporated or organization) Identification No.)
402 West County Road D, St.Paul, Minnesota 55112
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (651) 636-7466
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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
The number of shares of Common Stock, $.15 par value, outstanding as of May 4,
2001, was 3,528,121.
MEDTOX SCIENTIFIC, INC.
INDEX
Page
Part I Financial Information:
Item 1: Financial Statements (Unaudited)
Consolidated Statements of Operations - Three
Months Ended March 31, 2001 and 2000 .............. 3
Consolidated Balance Sheets - March 31, 2001
and December 31, 2000 .............................. 4
Consolidated Statements of Cash Flows - Three
Months Ended March 31, 2001 and 2000 .............. 5
Notes to Consolidated Financial Statements........... 6
Item 2:
Management's Discussion and Analysis of
Financial Condition and Results of Operations ........ 12
Item 3:
Quantitative and Qualitative Disclosure
About Market Risk ...................................... 18
Part II Other Information ................................................ 19
Signatures ............................................... 20
Item 1: FINANCIAL STATEMENTS (UNAUDITED)
MEDTOX SCIENTIFIC, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended
March 31, 2001 March 31, 2000
-------------- --------------
REVENUES:
Laboratory service revenues $ 9,304 $ 8,285
Product sales 2,302 1,391
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11,606 9,676
COST OF REVENUES:
Cost of services 6,395 5,541
Cost of sales 1,053 563
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7,448 6,104
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GROSS PROFIT 4,158 3,572
OPERATING EXPENSES:
Selling, general and administrative 3,140 2,798
Research and development 315 249
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3,455 3,047
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INCOME FROM OPERATIONS 703 525
OTHER INCOME (EXPENSE):
Interest expense (240) (228)
Other expense, net (25) -
--------- --------
(265) (228)
--------- --------
NET INCOME $ 438 $ 297
========= =========
BASIC EARNINGS PER COMMON SHARE $ 0.12 $ 0.10
========= =========
DILUTED EARNINGS PER COMMON SHARE $ 0.12 $ 0.10
========= =========
MEDTOX SCIENTIFIC, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
(Unaudited)
March 31, December 31,
2001 2000
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ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ - $ 213
Accounts receivable:
Trade, less allowance for doubtful
accounts ($968 in 2001 and $1,131
in 2000) 8,846 7,873
Other 340 264
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Total accounts receivable 9,186 8,137
Inventories 2,879 3,052
Prepaid expenses and other 1,239 830
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Total current assets 13,304 12,232
EQUIPMENT AND IMPROVEMENTS, NET 11,880 5,211
GOODWILL, net of accumulated amortization of
$4,645 in 2001 and $4,438 in 2000 12,084 12,291
OTHER ASSETS, net of accumulated amortization
of $12 in 2001 and $7 in 2000 285 290
--------- ---------
TOTAL ASSETS $ 37,553 $ 30,024
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Checks written in excess of bank balances $ 285 $ -
Line of credit 3,967 3,724
Accounts payable 2,558 2,819
Accrued expenses 3,194 3,213
Accrued restructuring costs 10 160
Current portion of long-term debt 2,190 1,579
Current portion of capital leases 221 221
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Total current liabilities 12,425 11,716
LONG-TERM DEBT 8,860 2,480
LONG-TERM PORTION OF CAPITAL LEASES 352 418
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value;
authorized shares, 50,000; none
issued and outstanding - -
Common stock, $0.15 par value;
authorized shares, 7,400,000;
issued and outstanding
shares, 3,537,152 in 2001 and 3,508,151
in 2000 531 526
Additional paid-in capital 65,439 65,422
Deferred stock-based compensation (426) (472)
Accumulated deficit (49,452) (49,890)
Treasury stock (176) (176)
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Total stockholders' equity 15,916 15,410
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 37,553 $ 30,024
========= =========
MEDTOX SCIENTIFIC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended
March 31, 2001 March 31, 2000
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 438 $ 297
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 620 558
Provision for losses on accounts receivable 46 36
Deferred compensation 45 -
Changes in operating assets and liabilities:
Accounts receivable (1,095) (1,322)
Inventories 173 (217)
Prepaid expenses and other current assets (409) (130)
Accounts payable and accrued expenses (280) 285
Accrued restructuring costs (150) (64)
---------- ----------
Net cash used in operating activities (612) (557)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (7,076) (775)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in checks written in excess of bank balances 285 -
Net proceeds from sale of common stock 22 2
Net borrowings on line of credit 243 906
Proceeds from long-term debt 7,278 3,526
Principal payments on long-term debt (287) (2,088)
Principal payments on capital leases (66) (60)
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Net cash provided by financing activities 7,475 2,286
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(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (213) 954
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 213 576
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ - $ 1,530
========= ==========
SUPPLEMENTAL NONCASH ACTIVITIES:
Additions to capital leases $ - $ 44
MEDTOX SCIENTIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2001
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of MEDTOX
Scientific, Inc. (the "Company") have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and notes required by generally accepted
accounting principles. In the opinion of management, all adjustments (consisting
only of normal recurring adjustments) considered necessary for a fair
presentation of financial condition and results of operations have been
included. Operating results for the three-month period ended March 31, 2001 are
not necessarily indicative of the results that may be attained for the entire
year. These consolidated financial statements should be read in conjunction with
the consolidated financial statements and the notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2000.
Reclassifications: Certain reclassifications have been made to the 2000
financial statements to conform with the 2001 presentations.
Comprehensive Income: Comprehensive income is a measure of all nonowner changes
in stockholders' equity and includes such items as net income, certain foreign
currency translation items, minimum pension liability adjustments, and changes
in the value of available-for-sales securities. For the three months ended March
31, 2001 and 2000, comprehensive income for the Company was equivalent to net
income as reported.
Derivative Instruments and Hedging Activities: On January 1, 2001, the Company
adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended by SFAS No. 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities. SFAS No. 133 establishes accounting
and reporting standards for derivative instruments and for hedging activities.
It requires that all derivatives, including those embedded in other contracts,
be recognized as either assets or liabilities and that those financial
instruments be measured at fair value. The accounting for changes in the fair
value of derivatives depends on their intended use and designation. Management
has reviewed the requirements of SFAS No. 133 and has determined that they have
no free-standing or embedded derivatives. All contracts that contain provisions
meeting the definition of a derivative also meet the requirements of, and have
been designated as, normal purchases or sales. The Company's policy is to not
use free-standing derivatives and to not enter into contracts with terms that
cannot be designated as normal purchases or sales.
NOTE B - DEBT
In January 1998, the Company entered into a Credit Security Agreement (the Wells
Fargo Credit Agreement) with Wells Fargo Business Credit (Wells Fargo). The
Wells Fargo Credit Agreement, as amended as of March 31, 2001, consists of (i) a
term loan of $3.185 million bearing interest at prime + 1.25%; (ii) a revolving
line of credit, payable on demand, of not more than $6.0 million or 85% of the
Company's eligible trade accounts receivable bearing interest at prime + 1%; and
(iii) a capex note of up to $3.5 million for the purchase of capital equipment
bearing interest at prime + 1.25% and (iv) availability of letters of credit in
amounts not to exceed the lesser of $300,000 (less outstanding letters of
credit) or the unborrowed portion of the revolving line of credit (less
outstanding letters of credit).
Effective March 31, 2001 the Company and Wells Fargo Business Credit amended the
Credit Agreement. The amended Wells Fargo Credit Agreement provided the Company
i) an increase in the capex note from $2.45 million to $3.5 million, and ii) the
ability to use letters of credit issued under the revolving credit facility.
NOTE C - SEGMENTS
The Company has two reportable segments: Lab Services and Product Sales. The Lab
Services segment consists of MEDTOX Laboratories, Inc. Services provided include
forensic toxicology, clinical toxicology, heavy metals analyses, courier
delivery, and medical surveillance. The Product Sales segment consists of MEDTOX
Diagnostics, Inc. Products manufactured include easy to use, inexpensive,
on-site drug tests such as PROFILE(R)-II, EZ-SCREEN(R), and VERDICT(R)-II. The
Company's reportable segments are strategic business units that offer different
products and services. They are managed separately as each business requires
different products, services and marketing strategies.
In evaluating financial performance, management focuses on net income as a
segment's measure of profit or loss.
Segment Information
(In thousands)
Three months ended
March 31, 2001 March 31, 2000
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Laboratory Services:
Revenues $ 9,304 $ 8,285
Interest expense 227 209
Depreciation and amortization 590 544
Segment income 293 285
Segment assets 34,046 26,430
Expenditures for segment assets 6,980 772
Product Sales:
Revenues 2,302 1,391
Interest expense 13 19
Depreciation and amortization 30 14
Segment income 145 12
Segment assets 3,507 2,692
Expenditures for segment assets 96 3
Three months ended
March 31, 2001 March 31, 2000
-------------- --------------
Total:
Revenues 11,606 9,676
Interest expense 240 228
Depreciation and amortization 620 558
Segment income 438 297
Segment assets 37,553 29,122
Expenditures for segment assets 7,076 775
NOTE D - INVENTORIES
Inventories consisted of the following:
(In thousands)
March 31, December 31,
2001 2000
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Raw materials $ 828 $ 910
Work in process 371 322
Finished goods 314 373
Supplies 1,366 1,447
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$ 2,879 $ 3,052
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NOTE E - PURCHASE OF BUILDING
The administrative offices and laboratory operations for the Laboratory Services
segment of the Company's business are located primarily in a 53,576 square foot
facility in St. Paul, Minnesota. On March 16, 2001 the Company purchased the
entire three building complex with a total of 129,039 square feet, which
included the 53,576 square feet formerly leased by the Company's Laboratory
Services segment. The purchasing entity was New Brighton Business Center LLC, a
wholly owned limited liability company, established by the Company for the sole
purpose of purchasing the entire three building complex. The selling entity was
PHL-OPCO, LP a Delaware limited partnership, which was an unrelated third party
who had operated the facility as its landlord until the sale of the property to
the Company. The purchase price, exclusive of expenses and closing costs, was
$6.35 million and was financed by a mortgage loan from Principal Life Insurance
Company of Des Moines, Iowa in the amount of $6.2 million. The mortgage loan has
a term of ten years and is being repaid based on a 20-year amortization schedule
with a balloon payment at the end of the ten year term. The interest rate is
fixed at an annual rate of 7.23% for the first five years at which time the rate
will be renegotiated by the parties. The facility includes other commercial
tenants who have individual leases that range from 4 years to less then 1 year
in duration. The current annual rent paid by such third party tenants, excluding
their pro-rata share of operating expenses, is approximately $431,000 per year.
The following components of the Company's rental activities were reported net in
other income (expense) in the Consolidated Statement of Operations:
(In thousands)
Three months ended
March 31, 2001
Gross rental income $ 58
Operating and administrative expenses (42)
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Net rental income before intercompany elimination 16
Elimination of intercompany rental income (41)
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Net rental loss $ (25)
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NOTE F - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
common share: (Dollars in thousands, except per share amounts)
Three months ended
March 31, 2001 March 31, 2000
Net income (A) $ 438 $ 297
============ ===========
Weighted average number of basic common
shares outstanding (B) 3,523,235 2,904,478
Dilutive effect of stock options and warrants
computed based on the treasury stock method
using average market price 147,474 139,621
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Weighted average number of diluted
common shares outstanding (C) 3,670,709 3,044,099
============ ===========
Basic earnings per common share (A/B) $ 0.12 $ 0.10
============ ===========
Diluted earnings per common share (A/C) $ 0.12 $ 0.10
============ ===========
Options and warrants to purchase 890,815 and 125,512 shares of common stock were
outstanding during the first three months of 2001 and 2000, respectively, but
were not included in the computation of diluted earnings per share as their
exercise prices were greater than the average market price of the common shares.
NOTE G - CONTINGENCIES
In February 1999, the Company settled a claim of patent infringement brought
against the Company by United States Drug Testing Laboratories on August
20,1996. The Company, while denying any infringement, has settled the case by
paying United States Drug Testing Laboratories $17,500 and issuing United States
Drug Testing Laboratories 2,500 shares of common stock. The Company had
previously accrued for this contingency. Accordingly, the settlement of this
matter did not affect results of operations for the year ending December 31,
1999. Under the MEDTOX Laboratories acquisition agreement, pursuant to which the
Company originally acquired MEDTOX Laboratories, Inc., the sellers of MEDTOX
Laboratories, Inc. agreed to remain liable for any and all damages for any
patent infringement which was alleged to have occurred prior to the closing of
the Company's purchase of MEDTOX Laboratories, Inc. The acquisition agreement
also provided for the sellers to indemnify and hold the Company harmless from
and against any damages, loss, liability or expense, including reasonable
attorneys' fees and court costs in connection with any infringement which was
alleged to have occurred before the closing date. It is the Company's opinion
that it is entitled to recover $79,000 in damages from the sellers in accordance
with the above referenced provisions of the acquisition agreement. The parties
have agreed that the matter may be arbitrated in Minneapolis, Minnesota rather
than in Chicago as required by the original acquisition agreement. Management
expects this matter will be resolved prior to the end of calendar year 2001.
In January 1997, the Company filed suit in Federal District Court in Minnesota
against Morgan Capital LLC, David Bistricer and Alex Bistricer alleging
violation of Section 16b of the Securities and Exchange Act of 1934 and seeking
recovery of more than $500,000 in short-swing profits. Messrs. David and Alex
Bistricer are former directors of the Company. On August 4, 1997, the U.S.
District Court dismissed the Company's complaint and on October 29, 1997, the
Company filed an appeal of that decision to the United States Court of Appeals
for the Eighth Circuit. On July 21, 1998, the Eighth Circuit reversed the
District Court dismissal and remanded the case to the District Court. On June 3,
1999 the U.S. District Court found that Morgan Capital had violated Section
16(b) and ordered Morgan Capital to pay the Company damages of $551,000 plus
interest. On or about September 30, 2000 the parties entered into a Stipulation
and Mutual Release dismissing with prejudice all claims and counterclaims
between the parties regarding the transaction other then the Company's Section
16(b) claim against the former stockholder, Morgan Capital. The parties entered
into this Stipulation along with an Escrow Agreement requiring Morgan Capital to
deposit into escrow 72,500 shares of publicly registered common stock of the
Company as collateral to secure payment by Morgan Capital of the judgment to be
entered in favor of the Company in the amount of $675,000 plus any post-judgment
interest. The Federal District Court entered such judgment in favor of the
Company on October 17, 2000. Morgan Capital subsequently appealed the Federal
District Court's decision to the Eighth Circuit Court of Appeals. The parties
have completed and filed their respective appeal briefs with the Eighth Circuit
Court of Appeals. The parties are now awaiting the scheduling of oral arguments
which should occur sometime in 2001. The Company has not recorded a receivable
for this amount due to the uncertainty of this matter.
In March 2000, the Company was served with a copy of a complaint filed against
the Company in the Circuit Court of Cook County, Illinois, by the Plaintiff, The
Methodist Medical Center of Illinois. The Plaintiff is alleging that the Company
interfered with various contractual relationships of the Plaintiff in connection
with the referral of certain customers to the Company by other defendants
previously sued by the Plaintiff in the same action. The Company has filed a
cross claim against the other defendants in the litigation based on such
defendants' contractually obligation to indemnify the Company against any
damages, costs or expense (including attorney fees) incurred by the Company,
arising out of any claim of contractual interference by the Company in
connection with the referral of the customers to the Company by such defendants.
The parties are now engaged in pretrial discovery while at the same time
settlement negotiations are underway between the parties. While it is too early
to be confident as to the ultimate resolution of this matter, in light of the
nature of plaintiff's claims, the nature of the discovery to date, the
co-defendants indemnification obligation and the relative positions of the
parties during the settlement discussion, management does not expect the
ultimate resolution of this matter to have a material impact on the Company's
financial condition or results of operations.
In January 2001, the Company was contacted by counsel for one of the Company's
shareholders who had purchased stock in the Company's private placement in
August 2000. The shareholder's counsel expressed the view that the decline in
the Company's stock in December was directly attributable to the Company's
announcement of a charge to earnings in the fourth quarter due to the bankruptcy
filings of two of its customers. Counsel asserted that since the bankruptcy
filing by one of the customers had occurred prior to the closing of the private
placement, the Company should have disclosed the fact of that filing in
connection with the private placement. The Company is unable to ascertain
whether the shareholder will pursue the matter through litigation.
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Cautionary Statement Identifying Important Factors
That Could Cause the Company's Actual Results to Differ
From Those Projected in Forward Looking Statements
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, readers of this document and any document
incorporated by reference herein, are advised that this document and documents
incorporated by reference into this document contain both statements of
historical facts and forward looking statements. Forward looking statements are
subject to certain risks and uncertainties, which could cause actual results to
differ materially from those indicated by the forward looking statements.
Examples of forward looking statements include, but are not limited to (i)
projections of revenues, income or loss, earnings or loss per share, capital
expenditures, dividends, capital structure and other financial items, (ii)
statements of the plans and objectives of the Company or its management or Board
of Directors, including the introduction of new products, or estimates or
predictions of actions by customers, suppliers, competitors or regulatory
authorities, (iii) statements of future economic performance, and (iv)
statements of assumptions underlying other statements and statements about the
Company or its business.
This document and any documents incorporated by reference herein also identify
important factors which could cause actual results to differ materially from
those indicated by the forward looking statements. These risks and uncertainties
include price competition, the decisions of customers, the actions of
competitors, the effects of government regulation, possible delays in the
introduction of new products, customer acceptance of products and services, and
other factors which are described herein and/or in documents incorporated by
reference herein.
The cautionary statements made pursuant to the Private Litigation Securities
Reform Act of 1995 above and elsewhere by the Company should not be construed as
exhaustive or as any admission regarding the adequacy of disclosures made by the
Company prior to the effective date of such Act. Forward looking statements are
beyond the ability of the Company to control and in many cases the Company
cannot predict what factors would cause results to differ materially from those
indicated by the forward looking statements.
General
MEDTOX Scientific, Inc. (formerly EDITEK, Inc.), a Delaware corporation, was
organized in September 1986 to succeed the operations of a predecessor
California corporation. MEDTOX Scientific, Inc. and its wholly-owned
subsidiaries, MEDTOX Laboratories, Inc., MEDTOX Diagnostics, Inc., and New
Brighton Business Center LLC are referred to herein as "the Company". The
Company is engaged primarily in two distinct, but very much related businesses.
The business of manufacturing and distribution of diagnostic devices is carried
on by MEDTOX Diagnostics, Inc. from its facility in Burlington, North Carolina
and the business of forensic and clinical laboratory services is conducted by
MEDTOX Laboratories, Inc. at its facility in St. Paul, Minnesota.
The Company has two reportable segments: "Laboratory Services" conducted by the
Company's wholly owned subsidiary, MEDTOX Laboratories, Inc. and "Products
Sales" conducted by the Company's wholly owned subsidiary MEDTOX Diagnostics,
Inc. Laboratory Services include forensic toxicology, clinical toxicology, and
heavy metal analyses as well as logistics, data, and overall program management
services. Product Sales include sales of a variety of on-site screening products
and contract manufacturing. For the quarter ended March 31, 2001 and 2000,
Laboratory Services revenue accounted for 80% and 86% of the Company's revenues,
respectively. Revenue from Product Sales accounted for 20% and 14% of the total
revenues of the Company for the quarter ended March 31, 2001 and 2000,
respectively.
Results of Operations
The Company achieved record revenues and net income for the first quarter ended
March 31, 2001. Revenues for the first quarter of 2001 increased 20% over the
first quarter of 2000, driven by sales of the PROFILE(R)-II Test System and the
expanding VERDICT(R)-II product line, as well as increased sample volume from
the Company's occupational health, wellness and esoteric testing clients.
Selling, general, and administrative expenses in the first quarter of 2001
decreased as a percentage of sales to 27% from 29% in the same quarter in 2000,
reflecting efforts taken to reorganize the laboratory operations and reduce
operating costs. The following table sets forth the percentages of total
revenues represented by certain items reflected in the Company's Consolidated
Statements of Operations:
Three months ended,
March 31, 2001 March 31, 2000
- -----------------------------------------------------------------------------
Revenues 100.0% 100.0%
Cost of revenues 64.2 63.1
Operating expenses:
Selling, general, and administrative 27.1 28.9
Research and development 2.7 2.6
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29.8 31.5
Other expense 2.2 2.3
---------- ----------
Net income 3.8% 3.1%
========== ==========
Three Months Ended March 31, 2001 Compared to Three Months Ended March 31, 2000
Revenues
Revenues increased 20% to $11.6 million for the three months ended March 31,
2001, driven by a $1.0 million, or 12% increase in Laboratory Services revenues
and a $0.9 million, or 66% increase in Product Sales revenues.
The growth in Laboratory Services revenues was primarily due to a 22% increase
in the number of laboratory tests performed. Sample volume from the Company's
occupational health, wellness and esoteric testing clients increased 40%
compared to the first quarter of 2000. The Company's research and development
group continues to improve and add to the over 900 proprietary bio-analytical
assays that have been developed. In the past, these tests have largely been
marketed to hospitals, clinics and other laboratories. However, more recently,
the Company has increased its efforts to apply the assay development skills to
the bio-analytical needs of the pharmaceutical market. Despite the overall
favorable sales trend within the Laboratory operations, the average price per
testing specimen declined 9%. The erosion in the average price per testing
specimen stemmed from competitive market conditions, which restricted the
average price that the Company could charge new customers. In addition, the
slowing economy and the Company's planned emphasis on the PROFILE(R)-II Test
System for on-site drugs-of-abuse (DAU) screening slowed the growth of
laboratory DAU sample volume.
The Product Sales segment achieved higher revenues due to increased sales of
substance abuse testing products and agricultural diagnostic products, partially
offset by a slight reduction in sales of contract manufacturing services.
Product sales from substance abuse testing products, which incorporates the
EZ-SCREEN(R), PROFILE(R)-II and VERDICT(R)-II on-site test kits and other
ancillary products for the detection of abused substances, increased $0.9
million to $1.9 million in the first quarter of 2001. This growth reflected the
sales and marketing efforts for the Company's second-generation test kits,
PROFILE(R)-II and VERDICT(R)-II. The VERDICT(R)-II was developed for the prison,
probation, parole and rehabilitation markets. The VERDICT(R)-II product line now
consists of 18 different configurations to detect from one to five drugs of
abuse. The Company continues to develop new products in this area, including the
PROFILE(R)-ER device. The PROFILE(R)-ER device is an on-site, nine
drugs-of-abuse panel, targeted at hospital laboratories for emergency response
screening in drugs-of-abuse overdose situations. The Company received FDA
approval for its PROFILE(R)-ER device and for 10 configurations of its
VERDICT(R)-II product in January 2001. A small amount of the PROFILE(R)-ER
product was shipped in the first quarter of 2001.
Product sales from agricultural diagnostic products increased 30% to $146,000
primarily as a result of increased purchases by the USDA for the Company's
products. The USDA's needs for the Company's products vary from year-to-year and
sales to the USDA are expected to fluctuate accordingly. Sales of contract
manufacturing services, microbiological and associated products decreased 10% to
$265,000 due to decreased revenues from both historical customers and new
customers.
Gross profit
Consolidated gross margin was 35.8% for the three months ended March 31, 2001
compared to 36.9% for the three months ended March 31, 2000, reflecting a
decline in both Laboratory Services gross margin and Product Sales gross margin.
Laboratory Services gross margin was 31.3% for the three months ended March 31,
2001, down from 33.1% for the three months ended March 31, 2000. The erosion of
the gross margin was primarily attributable to a 9% decline in the average price
per testing specimen. The drop in the average price per testing specimen stemmed
from competitive market conditions, which restricted the average price that the
Company could charge new customers.
Gross margin from Product Sales declined to 54.3% for the three months ended
March 31, 2001 from 59.5% for the three months ended March 31, 2000, reflecting
increased material and labor costs due to new product introduction and
manufacturing scale up of the newly released PROFILE(R)-ER, as well as new
products within the PROFILE(R)-II and VERDICT(R)-II product lines.
Selling, general and administrative expenses
Selling, general and administrative expenses were $3.1 million, or 27.1% of
revenues in the first quarter of 2001, compared to $2.8 million or 28.9% of
revenues in the first quarter of 2000. The decrease in the percentage of
revenues reflects efforts taken to reorganize the laboratory operations and
reduce overall operating costs. The increase in the absolute dollar amount of
selling, general and administrative expenses was attributable to the higher
revenue level in the first quarter of 2001.
Research and development expenses
Research and development expenses increased by 27% in the first quarter of 2001,
principally due to higher expenses associated with new product development for
on-site and other ancillary products in the Product Sales segment.
Other expense
Other expense consisted primarily of interest expense, which remained relatively
stable from the first quarter of 2000 to the first quarter of 2001. Other
expense in the first quarter of 2001 also included a loss of $25,000 from the
Company's rental activities.
Net income
In the first quarter of 2001, the Company recorded net income of $0.4 million
compared to $0.3 million in the first quarter of 2000. This improvement was
driven by a 20% increase in consolidated revenues and a reduction in selling,
general, and administrative expenses as a percentage of revenues.
Laboratory Services net income of $0.3 million in the first quarter of 2001
remained consistent with the first quarter of 2000. Although revenues increased
12%, this improvement was offset by a reduced gross margin, which was impacted
by a reduction in the average price per specimen.
Product Sales net income was $145,000 in the first quarter of 2001 compared to
$12,000 in the first quarter of 2000. This improvement was primarily
attributable to the growth in sales.
Liquidity and Capital Resources
The working capital requirements of the Company have been funded primarily by
cash received from bank financing and the sale of equity securities.
Net cash used in operating activities was $0.6 million in both the first quarter
of 2001 and 2000.
Net cash used in investing activities, consisting of capital expenditures, was
$7.1 million in the first quarter of 2001, up from $0.8 million in the first
quarter of 2000. In the first quarter of 2001, the Company purchased the three
building, 129,039 square foot complex in St. Paul, Minnesota, where the
Company's laboratory segment formerly leased 53,576 square feet. The purchase
price, exclusive of expenses and closing costs, was $6.35 million and was
financed by a mortgage loan from Principal Life Insurance Company of Des Moines,
Iowa in the amount of $6.2 million. The mortgage loan has a term of ten years
and is being repaid based on a 20-year amortization schedule with a balloon
payment at the end of the ten-year term. The interest rate is fixed at an annual
rate of 7.23% for the first five years at which time the rate will be
renegotiated by the parties. The facility includes other commercial tenants who
have individual leases that range from 4 years to less then 1 year in duration.
The current annual rent paid by such third party tenants, excluding their
pro-rata share of operating expenses, is approximately $431,000 per year. See
Note E of Notes to Consolidated Financial Statements.
Net cash provided by financing activities of $7.5 million in the first quarter
of 2001 was principally associated with proceeds received under the mortgage
loan discussed above and the Company's credit agreement for the purchase of
capital equipment. Net cash provided by financing activities of $2.3 million in
the first quarter of 2000 primarily represented proceeds from the renegotiation
of the Company's term debt which were used to fund the Company's operations
during the first quarter of 2000 and pay down the line of credit, which occurred
in the second quarter of 2000.
In January 1998, the Company entered into a Credit Security Agreement (the Wells
Fargo Credit Agreement) with Wells Fargo Business Credit (Wells Fargo). The
Wells Fargo Credit Agreement, as amended, consists of (i) a term loan of $3.185
million bearing interest at prime + 1.25%; (ii) a revolving line of credit,
payable on demand, of not more than $6.0 million or 85% of the Company's
eligible trade accounts receivable bearing interest at prime + 1%; and (iii) a
capex note of up to $3.5 million for the purchase of capital equipment bearing
interest at prime + 1.25% and (iv) availability of letters of credit in amounts
not to exceed the lesser of $300,000 (less outstanding letters of credit) or the
unborrowed portion of the revolving line of credit (less outstanding letters of
credit).
The Company is relying on expected positive cash flow from operations, its line
of credit, and capex note 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
March 31, 2001, the Company had total borrowing capacity of $5.3 million on its
line of credit, of which $4.0 million was borrowed, leaving a net availability
of $1.3 million as of March 31, 2001.
In the short term, the Company believes that the aforementioned capital will be
sufficient to fund the Company's planned operations through 2001. While there
can be no assurance that the available capital will be sufficient to fund the
future operations of the Company beyond 2001, the Company believes that future
profitable operations, as well as access to additional capital through debt or
equity financings, will be the primary means for funding the operations of the
Company for the long term.
The Company continues to follow a plan which includes (i) aggressively
monitoring and controlling costs, (ii) increasing revenue from sales of the
Company's existing products and services (iii) developing new products and
services, as well as (iv) continuing to selectively pursue synergistic
acquisitions to increase the Company's critical mass. However, there can be no
assurance that costs can be controlled, revenues can be increased, financing may
be obtained, acquisitions successfully consummated, or that the Company will be
profitable.
Impact of Inflation and Changing Prices
The impact of inflation and changing prices on the Company has been primarily
limited to salary, laboratory and operating supplies and rent increases and has
not been material to date to the Company's operations. In the future, the
Company may not be able to increase the prices of laboratory testing by an
amount sufficient to cover the cost of inflation, although the Company is
responding to these concerns by refocusing the laboratory operations towards
higher margin testing (including clinical and pharmaceutical trials) as well as
emphasizing the marketing, sales and operations of the Product Sales business.
Seasonality
The Company believes that the laboratory testing business is subject to seasonal
fluctuations in pre-employment screening. These seasonal fluctuations include
reduced volume in the summer months, year-end holiday periods, and other major
holidays. In addition, inclement weather may have a negative impact on volume
thereby reducing net revenues and cash flow.
Item 3 QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
MARKET RISK.
Market risk is the risk that the Company will incur losses due to adverse
changes in interest rates or currency exchange rates and prices. The Company's
primary market risk exposures are to changes in interest rates. During 2000 and
through March 31, 2001, the Company did not have sales denominated in foreign
currencies nor did it have any subsidiaries located in foreign countries. As
such, the Company is not exposed to market risk associated with currency
exchange rates and prices.
The Company had $575,000 of subordinated notes outstanding as of March 31, 2001
and December 31, 2000, at a fixed interest rate of 12% per annum. The Company
also had capital leases at various fixed rates. In addition, at March 31, 2001,
the Company had a $6.2 million mortgage loan payable to Principal Life Insurance
Company at a fixed annual rate of 7.23% for the first five years at which time
the rate will be renegotiated by the parties. These financial instruments are
subject to interest rate risk and will increase or decrease in value if market
interest rates change
The Company had approximately $8.0 million and $7.0 million outstanding on its
line of credit and long-term debt issued under the Wells Fargo Credit Agreement
as of March 31, 2001 and December 31, 2000, respectively. The debt under the
Wells Fargo Credit Agreement is held at variable interest rates. The Company has
cash flow exposure on its committed and uncommitted line of credit and long-term
debt due to its variable prime rate pricing. At March 31, 2001 and December 31,
2000, a 1% change in the prime rate would not materially increase or decrease
interest expense or cash flows.
PART II OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS. See Part I, Note G
ITEM 2 CHANGES IN SECURITIES. Inapplicable
ITEM 3 DEFAULTS ON SENIOR SECURITIES. Inapplicable
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
Inapplicable
ITEM 5 OTHER INFORMATION. Inapplicable
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K.
a. Exhibits:
10.55 Nova Building Lease dated March 28, 2001 by and between
Samuel C. Powell and Karen G. Powell and MEDTOX Diagnostics,
Inc.
10.56 Amendment No.1 to Nova Building Lease dated April 1, 2001
by and between Samuel C. Powell and Karen G. Powell and
MEDTOX Diagnostics, Inc.
10.57 Amended and Restated Credit and Security Agreement dated
March 31, 2001 by and among MEDTOX Scientific, Inc.,
MEDTOX Laboratories, Inc., MEDTOX Diagnostics, Inc.,
Consolidated Medical Services, Inc. and Wells Fargo Business
Credit, Inc.
b. Reports on Form 8-K: Inapplicable
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Signature Title Date
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/s/ Richard J. Braun President, Chief Executive Officer, and May 11, 2001
- --------------------- Chairman of the Board of Directors
Richard J. Braun (Principal Executive Officer)
/s/ Kari L. Golembeck Controller (Principal Accounting Officer) May 11, 2001
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Kari L. Golembeck