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 June 30, 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 July 20,
2001, was 3,578,135.
MEDTOX SCIENTIFIC, INC.
INDEX
Page
Part I Financial Information:
Item 1: Financial Statements (Unaudited)
Consolidated Statements of Operations - Three and
Six Months Ended June 30, 2001 and 2000 ....... 3
Consolidated Balance Sheets - June 30, 2001
and December 31, 2000 ................................... 4
Consolidated Statements of Cash Flows - Six
Months Ended June 30, 2001 and 2000 ............ 5
Notes to Consolidated Financial Statements........ 6
Item 2:
Management's Discussion and Analysis of
Financial Condition and Results of Operations ..... 11
Item 3:
Quantitative and Qualitative Disclosure
About Market Risk .......................................20
Part II Other Information ............................................ 21
Signatures ............................................ 22
Item 1: FINANCIAL STATEMENTS (UNAUDITED)
MEDTOX SCIENTIFIC, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
June 30, 2001 June 30, 2000 June 30, 2001 June 30, 2000
------------------- ------------------ ----------------- -----------------
REVENUES:
Laboratory services $9,991 $9,460 $19,295 $17,745
Product sales
2,570 1,856 4,872 3,247
------------------- ------------------ ----------------- -----------------
12,561 11,316 24,167 20,992
COST OF REVENUES:
Cost of services 6,575 6,093 12,970 11,634
Cost of sales 950 809 2,003 1,372
------------------- ------------------ ----------------- -----------------
7,525 6,902 14,973 13,006
------------------- ------------------ ----------------- -----------------
GROSS PROFIT
5,036 4,414 9,194 7,986
OPERATING EXPENSES:
Selling, general and administrative 3,451 3,349 6,591 6,147
Research and development 318 306 633 555
------------------- ------------------ ----------------- -----------------
3,769 3,655 7,224 6,702
------------------- ------------------ ----------------- -----------------
INCOME FROM OPERATIONS 1,267 759 1,970 1,284
OTHER INCOME (EXPENSE):
Interest expense (288) (278) (528) (506)
Other expense, net (19) - (44) -
------------------- ------------------ ----------------- -----------------
(307) (278) (572) (506)
------------------- ------------------ ----------------- -----------------
NET INCOME 960 481 1,398 778
=================== ================== ================= =================
BASIC EARNINGS PER COMMON
SHARE $0.27 $ 0.17 $ 0.40 $ 0.27
=================== ================== ================= =================
DILUTED EARNINGS PER COMMON
SHARE $0.26 $ 0.16 $ 0.37 $ 0.26
=================== ================== ================= =================
MEDTOX SCIENTIFIC, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
(Unaudited)
June 30, December 31,
2001 2000
--------------- ---------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 48 $ 213
Accounts receivable:
Trade, less allowance for doubtful accounts
($850 in 2001 and $1,131 in 2000) 10,307 7,873
Other 361 264
--------------- ---------------
Total accounts receivable 10,668 8,137
Inventories 2,816 3,052
Prepaid expenses and other 818 830
--------------- ---------------
Total current assets 14,350 12,232
EQUIPMENT AND IMPROVEMENTS, NET 12,020 5,211
GOODWILL, net of accumulated amortization of $4,723 in 2001 and $4,438 in 2000 11,879 12,291
OTHER ASSETS, net of accumulated amortization of $17 in 2001 and $7 in 2000 280 290
--------------- ---------------
TOTAL ASSETS $ 38,529 $ 30,024
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ 4,549 $ 3,724
Accounts payable 2,104 2,819
Accrued expenses 3,574 3,213
Accrued restructuring costs - 160
Current portion of long-term debt 2,235 1,579
Current portion of capital leases 191 221
--------------- ---------------
Total current liabilities 12,653 11,716
LONG-TERM DEBT 8,610 2,480
LONG-TERM PORTION OF CAPITAL LEASES 327 418
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, 3,531,044 in 2001 and 3,508,151 in 2000 530 526
Additional paid-in capital 65,695 65,422
Deferred stock-based compensation (618) (472)
Accumulated deficit (48,492) (49,890)
Treasury stock (176) (176)
--------------- ---------------
Total stockholders' equity 16,939 15,410
--------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 38,529 $ 30,024
=============== ===============
MEDTOX SCIENTIFIC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended
June 30, 2001 June 30, 2000
------------------- --------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,398 $ 778
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization 1,207 1,141
Provision for losses on accounts receivable 93 83
Deferred compensation 75 -
Changes in operating assets and liabilities:
Accounts receivable (2,624) (2,270)
Inventories 236 (420)
Prepaid expenses and other current assets 12 38
Accounts payable and accrued expenses (354) (357)
Accrued restructuring costs (160) (234)
------------------- --------------------
Net cash used in operating activities (117) (1,241)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (7,584) (2,042)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in checks written in excess of bank balances - 352
Net proceeds from sale of common stock 55 30
Net borrowings on line of credit 825 621
Proceeds from long-term debt 7,400 3,648
Principal payments on long-term debt (623) (1,809)
Principal payments on capital leases (121) (135)
------------------- --------------------
Net cash provided by financing activities 7,536 2,707
------------------- --------------------
DECREASE IN CASH AND CASH EQUIVALENTS (165) (576)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 213 576
------------------- --------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 48 $ -
=================== ====================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Non cash activities:
Additions to capital leases $ - $ 298
Cash paid for:
Interest 538 461
MEDTOX SCIENTIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 six-month period ended June 30, 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.
New Accounting Standard: In July 2001, the Financial Accounting Standards Board
issued Statement on Financial Accounting Standards (SFAS) No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS
No. 141 eliminates the pooling-of-interests method of accounting for business
combinations after June 30, 2001. SFAS No. 142 establishes new standards for
accounting for goodwill and intangible assets and will be adopted by the Company
on January 1, 2002. Management has not completed its assessment of the impact
the adoption of SFAS No. 141 and 142 will have on the Company's financial
position and results of operations.
NOTE B - DEBT
In January 1998, the Company entered into a Credit Security Agreement (the Wells
Fargo Credit Agreement) with Wells Fargo Business Credit, Inc. 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).
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 Six Months Ended
June 30, 2001 June 30, 2000 June 30, 2001 June 30, 2000
------------- ------------- ------------- -------------
Laboratory Services:
Revenues $ 9,991 $ 9,460 $ 19,295 $ 17,745
Interest expense 276 259 503 468
Depreciation and amortization 555 561 1,145 1,105
Segment income 554 419 847 704
Segment assets 34,515 26,488 34,515 26,488
Expenditures for segment assets 443 963 7,423 1,735
Product Sales:
Revenues 2,570 1,856 4,872 3,247
Interest expense 12 19 25 38
Depreciation and amortization 32 22 62 36
Segment income 406 62 551 74
Segment assets 4,014 2,975 4,014 2,975
Expenditures for segment assets 65 304 161 307
Total:
Revenues 12,561 11,316 24,167 20,992
Interest expense 288 278 528 506
Depreciation and amortization 587 583 1,207 1,141
Segment income 960 481 1,398 778
Segment assets 38,529 29,463 38,529 29,463
Expenditures for segment assets 508 1,267 7,584 2,042
NOTE D - INVENTORIES
Inventories consisted of the following:
(In thousands)
June 30, December 31,
2001 2000
-------------- ------------------
Raw materials $ 823 $ 910
Work in process 390 322
Finished goods 303 373
Supplies 1,300 1,447
--------------- ------------------
$ 2,816 $ 3,052
================ ==================
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 Six Months Ended
June 30, 2001 June 30, 2001
-------------------- ----------------
Gross rental income $ 412 $ 470
Operating and administrative expenses (254) (296)
------------ ------------
Net rental income before intercompany
elimination 158 174
Elimination of intercompany rental income (181) (222)
------------ ------------
Net rental loss $ (23) $ (48)
============ ============
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 Six Months Ended
June 30, 2001 June 30, 2000 June 30, 2001 June 30, 2000
------------- ------------- ------------- -------------
Net income (A) $ 960 $ 481 $ 1,398 $ 778
============= ============= ============== ===============
Weighted average number of basic
common shares outstanding (B) 3,532,109 2,915,610 3,527,697 2,910,044
Dilutive effect of stock options and
warrants computed based on the
treasury stock method using average
market price 224,032 134,484 202,078 137,105
------------- ------------- -------------- --------------
Weighted average number of diluted
common shares outstanding (C) 3,756,141 3,050,094 3,729,775 3,047,149
============= ============= ============== ==============
Basic earnings per common share (A/B) $ 0.27 $ 0.17 $ 0.40 $ 0.27
============= ============= ============== ==============
Diluted earnings per common share (A/C) $ 0.26 $ 0.16 $ 0.37 $ 0.26
============= ============= ============== ==============
Options and warrants to purchase 647,564, 846,314, 190,459, and 135,958 shares
of common stock were outstanding during the three and six months ended June 30,
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 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 16(b) 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. On August 3,
2001 the Eighth Circuit Court of Appeals ruled in favor of the Company,
affirming the District Court decision awarding the Company $675,000 plus post
judgment interest. Morgan Capital has notified the Company, pursuant to the
Escrow Agreement, that it will pay the Company cash to satisfy the judgment,
which the Company believes will total at least $708,000.
In March 2000, the Company was served with a copy of a complaint filed against
the Company in the Circuit Court of Cook County, Illinois, by the Plaintiff, The
Methodist Medical Center of Illinois. The Plaintiff is alleging that the Company
interfered with various contractual relationships of the Plaintiff in connection
with the referral of certain customers to the Company by other defendants
previously sued by the Plaintiff in the same action. The Company has filed a
cross claim against the other defendants in the litigation based on such
defendants' contractual obligation to indemnify the Company against any damages,
costs or expenses (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 have
reached an agreement to settle the case, whereby the Company will pay $75,000
with a full release of all claims and a dismissal order expected to be entered
in August of 2001. The Company will voluntarily dismiss its indemnity claims
against the co-defendants for reimbursement of the $75,000 paid, with the right
of refiling the indemnification claim existing for one year. The Company will
continue to pursue its right of indemnification for the $75,000 during the next
year.
On October 26, 2000, Harry McCoy was replaced as Chairman and President of the
Company but continued to receive payments as an employee under an employment
agreement with the Company. In May 2001, Mr. McCoy commenced employment at
Hamilton Thorne Biosciences, Inc. as its President. The Company has informed Mr.
McCoy that it views such employment as a termination of his employment agreement
with the Company. Mr. McCoy has disputed this assertion and has threatened
litigation against the Company. The Company is unable to ascertain whether Mr.
McCoy will pursue such 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. The factors that could affect
our actual results include the following:
o increased competition, including price competition
o general economic and business conditions, both nationally and
internationally
o changes in business strategy or development plans
o techonological, evolving industry standards, or other problems that
could delay the sale of our products
o our inability to obtain appropriate licenses from third parties,
protect our trade secrets, operate without infringing upon the
proprietary rights of others, or prevent others from infringing on our
proprietary rights
o our inability to obtain sufficient financing to continue to expand
operations
o changes in demand for products and services by our customers
o our failure to obtain and retain new customers and alliance partners,
or a reduction in tests ordered or specimens submitted by existing
customers
o adverse results in litigation matters
o our ability to attract and retain experienced and qualified personnel
o failure to maintain our days sales outstanding levels
o losses due to bad debt
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 three and six months ended June 30, 2001,
Laboratory Services revenue accounted for 80% of the Company's revenues,
compared with 84% and 85% for the same periods in 2000. Revenue from Product
Sales accounted for 20% of the total revenues of the Company for the three and
six months ended June 30, 2001, compared with 16% and 15% for the same periods
in 2000.
Results of Operations
The Company achieved record revenues and net income for the three and six month
periods ended June 30, 2001. Revenues for the second quarter of 2001 increased
11% over the second 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 second quarter of
2001 decreased as a percentage of sales to 27.5% from 29.6% 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 Six Months Ended
June 30, 2001 June 30, 2000 June 30, 2001 June 30, 2000
- ----------------------------------------------------------------------------------------------------------------------------
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 59.9 61.0 62.0 62.0
Operating expenses:
Selling, general, and administrative 27.5 29.6 27.3 29.3
Research and development 2.5 2.7 2.6 2.6
---------- ----------- ---------- ----------
30.0 32.3 29.9 31.9
Other expense 2.5 2.5 2.3 2.4
---------- ----------- ---------- ----------
Net income 7.6% 4.2% 5.8% 3.7%
======== ========= ======== =========
Three Months Ended June 30, 2001 Compared to Three Months Ended June 30, 2000
Revenues
Revenues increased 11% to $12.6 million for the three months ended June 30,
2001, driven by a $0.7 million, or 38% increase in Product Sales revenues and a
$0.5 million, or 6% increase in Laboratory Services revenues.
The Product Sales segment achieved higher revenues due to increased sales of
substance abuse testing products, partially offset by a slight reduction in
sales of contract manufacturing services and agricultural diagnostic products.
Product sales from substance abuse testing products, which incorporates the
EZ-SCREEN(R), PROFILE(R)-II and VERDICT(R)-II on-site test kits and other
ancillary products for the detection of abused substances, increased $0.9
million to $2.2 million in the second 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 currently sells the
PROFILE(R)-ER device through its direct sales force and has recently signed an
agreement with a leading supplier of medical, surgical and laboratory supplies
to distribute the device. The Company is also in discussions with other major
buying groups and distributors that have expressed interest in the PROFILE(R)-ER
device.
Product sales from agricultural diagnostic products decreased 51% to $73,000
primarily as a result of decreased purchases by the USDA for the Company's
products. The USDA's needs for the Company's products vary from year-to-year and
sales to the USDA are expected to fluctuate accordingly. Sales of contract
manufacturing services, microbiological and associated products decreased 32% to
$257,000 due to decreased revenues from both historical customers and new
customers.
The growth in Laboratory Services revenues was primarily due to a 7% increase in
the number of laboratory tests performed. Sample volume from the Company's
occupational health, wellness and esoteric testing clients increased 41%
compared to the second 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 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.
Gross profit
Consolidated gross margin was 40.1% for the three months ended June 30, 2001
compared to 39.0% for the same period in 2000, reflecting improvement in Product
Sales gross margin, offset by a decline in Laboratory Services gross margin.
Laboratory Services gross margin was 34.2% for the three months ended June 30,
2001, down from 35.6% for the three months ended June 30, 2000. The decline in
the gross margin was primarily attributable to higher specimen collection costs
and increased employee health insurance costs.
Gross margin from Product Sales improved to 63.0% for the three months ended
June 30, 2001 from 56.4% for the three months ended June 30, 2000, driven by an
increased mix of higher margin products and efficiencies gained at the
production facility.
Selling, general and administrative expenses
Selling, general and administrative expenses were $3.5 million, or 27.5% of
revenues for the three months ended June 30, 2001, compared to $3.3 million or
29.6% of revenues in the same period 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 second quarter of 2001.
Other expense
Other expense consisted primarily of interest expense, which remained relatively
stable. Other expense in the three months ended June 30, 2001 also included a
loss of $23,000 from the Company's rental activities.
Net income
In the three months ended June 30, 2001, the Company recorded net income of $1.0
million compared to $0.5 million in the same period of 2000. This improvement
was driven by an 11% increase in consolidated revenues and a reduction in
selling, general, and administrative expenses as a percentage of revenues.
Laboratory Services net income was $0.6 million for the three months ended June
30, 2001 up from $0.4 million during the same period of 2000. This improvement
was primarily driven by the reduction in selling, general, and administrative
expenses.
Product Sales net income was $0.4 million for the three months ended June 30,
2001 compared to $62,000 in the same period of 2000. This improvement was
primarily attributable to the growth in sales and an improved gross margin.
Six Months Ended June 30, 2001 Compared to Six Months Ended June 30, 2000
Revenues
Revenues increased 15% to $24.2 million for the six months ended June 30, 2001,
driven by a $1.6 million, or 9% increase in Laboratory Services revenues and a
$1.6 million, or 50% increase in Product Sales revenues.
The growth in Laboratory Services revenues was primarily due to a 12% 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 six months 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 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, partially offset by a slight reduction in
sales of contract manufacturing services and agricultural diagnostic products.
Product sales from substance abuse testing products, which incorporates the
EZ-SCREEN(R), PROFILE(R)-II and VERDICT(R)-II on-site test kits and other
ancillary products for the detection of abused substances, increased $1.8
million to $4.2 million for the first six months 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 currently sells the
PROFILE(R)-ER device through its direct sales force and has recently signed an
agreement with a leading supplier of medical, surgical and laboratory supplies
to distribute the device. The Company is also in discussions with other major
buying groups and distributors that have expressed interest in the PROFILE(R)-ER
device.
Product sales from agricultural diagnostic products decreased 16% to $0.2
million primarily as a result of decreased purchases by the USDA for the
Company's products. The USDA's needs for the Company's products vary from
year-to-year and sales to the USDA are expected to fluctuate accordingly. Sales
of contract manufacturing services, microbiological and associated products
decreased 22% to $0.5 million due to decreased revenues from both historical
customers and new customers.
Gross profit
Consolidated gross margin of 38.0% for the six months ended June 30, 2001
remained flat compared to the same period of 2000, reflecting improvement in
Product Sales gross margin, offset by a decline in Laboratory Services gross
margin.
Laboratory Services gross margin was 32.8% for the six months ended June 30,
2001, down from 34.4% for the six months ended June 30, 2000. The decline in the
gross margin was primarily attributable to higher specimen collection costs and
increased employee health insurance costs.
Gross margin from Product Sales improved to 58.9% for the six months ended June
30, 2001 from 57.7% for the six months ended June 30, 2000, driven by an
increased mix of higher margin products and efficiencies gained at the
production facility.
Selling, general and administrative expenses
Selling, general and administrative expenses were $6.6 million, or 27.3% of
revenues for first six months of 2001, compared to $6.1 million or 29.3% of
revenues for the first six months 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 six months of 2001.
Research and development expenses
Research and development expenses increased by 14% in the first six months 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 six months of 2000 to the first six months 2001. Other
expense in the six months ended June 30, 2001 also included a loss of $48,000
from the Company's rental activities.
Net income
In the six months ended June 30, 2001, the Company recorded net income of $1.4
million compared to $0.8 million in the same period of 2000. This improvement
was driven by a 15% increase in consolidated revenues and a reduction in
selling, general, and administrative expenses as a percentage of revenues.
Laboratory Services net income was $0.8 million for the six months ended June
30, 2001 compared to $0.7 million during the same period of 2000. This
improvement was primarily driven by the reduction in selling, general, and
administrative expenses as a percentage of revenues.
Product Sales net income was $0.6 million in the first six months of 2001
compared to $74,000 in the same period of 2000. This improvement was primarily
attributable to the growth in sales and an improved gross margin.
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 $117,000 for the six months ended June
30, 2001 compared to $1.2 million in the same period of 2000. The decrease in
cash used of $1.1 million was primarily due to an improvement in net income of
$0.6 million and a reduction in inventory levels, partially offset by an
increase in accounts receivable. Inventory levels decreased $0.2 million from
December 31, 2000 to June 30, 2001 compared to an increase of $0.4 million from
December 31, 1999 to June 30, 2000. The increase in inventory levels in the
prior year period was attributable to an increase in forecasted sales for the
third quarter of 2000. Accounts receivable increased $2.6 million from December
31, 2000 to June 30, 2001, reflecting the impact of the slowing economy.
Net cash used in investing activities, consisting of capital expenditures, was
$7.6 million for the six months ended June 30, 2001, up from $2.0 million in the
same period of 2000. In March 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 six
months 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 $2.7
million in the first six months 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, Inc. 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
June 30, 2001, the Company had total borrowing capacity of $6.0 million on its
line of credit, of which $4.6 million was borrowed, leaving a net availability
of $1.4 million as of June 30, 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 June 30, 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 June 30, 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 June 30, 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 $8.3 million and $7.0 million outstanding on its
line of credit and long-term debt issued under the Wells Fargo Credit Agreement
as of June 30, 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 June 30, 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: Inapplicable
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
/s/Richard J. Braun President, Chief Executive Officer, August 14, 2001
- --------------------- and Chairman of the Board of Directors
Richard J. Braun (Principal Executive Officer)
/s/ Kari L. Golembeck Controller (Principal Accounting Officer) August 14, 2001
- -----------------------
Kari L. Golembeck