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 September 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 November
9, 2001, was 4,254,543.
MEDTOX SCIENTIFIC, INC.
INDEX
Page
Part I Financial Information:
Item 1: Financial Statements (Unaudited)
Consolidated Statements of Operations - Three and
Nine Months Ended September 30, 2001 and 2000 ..... 3
Consolidated Balance Sheets - September 30, 2001
and December 31, 2000 .................................... 4
Consolidated Statements of Cash Flows - Nine
Months Ended September 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 ........ 12
Item 3:
Quantitative and Qualitative Disclosure
About Market Risk ........................................21
Part II Other Information .............................................. 22
Signatures ........................................... 23
Item 1: FINANCIAL STATEMENTS (UNAUDITED)
MEDTOX SCIENTIFIC, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
-------------- --------------- ----------- -----------
REVENUES:
Laboratory services $ 9,446 $ 9,206 $ 28,741 $ 26,951
Product sales 3,135 2,367 8,007 5,614
--------------- --------------- ----------- -----------
12,581 11,573 36,748 32,565
COST OF REVENUES:
Cost of services 6,711 6,164 19,681 17,798
Cost of sales 876 687 2,879 2,059
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7,587 6,851 22,560 19,857
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GROSS PROFIT 4,994 4,722 14,188 12,708
OPERATING EXPENSES:
Selling, general and administrative 3,587 3,735 10,178 9,882
Research and development 323 265 956 820
-------------- -------------- ----------- ------------
3,910 4,000 11,134 10,702
-------------- -------------- ----------- ------------
INCOME FROM OPERATIONS 1,084 722 3,054 2,006
OTHER INCOME (EXPENSE):
Interest expense, net (263) (245) (791) (751)
Other expense, net (31) - (75) -
-------------- -------------- ------------ -----------
(294) (245) (866) (751)
-------------- -------------- ------------ -----------
NET INCOME 790 477 2,188 1,255
============== ============== ============ ===========
BASIC EARNINGS PER COMMON
SHARE (1) $ 0.20 $ 0.13 $ 0.56 $ 0.38
============== ============== ============ ===========
DILUTED EARNINGS PER COMMON
SHARE (1) $ 0.18 $ 0.12 $ 0.53 $ 0.36
============== ============= ============ ===========
(1) Earnings per share amounts have been adjusted for the ten percent stock
dividend authorized by the Company's Board of Directors on September 26, 2001,
payable on November 9, 2001.
MEDTOX SCIENTIFIC, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
(Unaudited)
September 30, December 31,
2001 2000
---------------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ - $ 213
Accounts receivable:
Trade, less allowance for doubtful
accounts ($929 in 2001 and $1,131 in
2000) 10,256 7,873
Other 196 264
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Total accounts receivable 10,452 8,137
Inventories 3,431 3,052
Prepaid expenses and other 980 830
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Total current assets 14,863 12,232
EQUIPMENT AND IMPROVEMENTS, Net 11,931 5,211
GOODWILL, net of accumulated amortization of $4,928 in
2001 and $4,438 in 2000 11,674 12,291
OTHER ASSETS, net of accumulated amortization of $27 in
2001 and $7 in 2000 707 290
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TOTAL ASSETS $ 39,175 $ 30,024
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Checks written in excess of bank balances $ 57 $ -
Line of credit 3,165 3,724
Accounts payable 2,311 2,819
Accrued expenses 3,693 3,213
Accrued restructuring costs - 160
Current portion of long-term debt 2,241 1,579
Current portion of capital leases 191 221
------------ -------------
Total current liabilities 11,658 11,716
LONG-TERM DEBT 8,256 2,480
LONG-TERM PORTION OF CAPITAL LEASES 351 418
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value; authorized shares,
50,000; none issued and outstanding - -
Common stock, $0.15 par value; authorized shares,
14,400,000 in 2001 and 7,400,000 in 2000; issued
and outstanding shares, 3,955,238 in 2001 and 3,858,966
in 2000 539 526
Additional paid-in capital 66,771 65,422
Deferred stock-based compensation (522) (472)
Accumulated deficit (47,702) (49,890)
Treasury stock (176) (176)
------------- --------------
Total stockholders' equity 18,910 15,410
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 39,175 $ 30,024
============= ==============
MEDTOX SCIENTIFIC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended
September 30,
2001 2000
------------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,188 $ 1,255
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization 1,800 1,729
Provision for losses on accounts receivable 229 93
Gain on sale of equipment (35)
Deferred compensation 139 33
Changes in operating assets and liabilities:
Accounts receivable (2,544) (3,125)
Inventories (379) (1,287)
Prepaid expenses and other current assets (150) 224
Other assets (187) (52)
Accounts payable and accrued expenses (26) (1,383)
Accrued restructuring costs (160) (309)
------------- --------------
Net cash provided by (used in) operating
activities 910 (2,857)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (7,795) (3,100)
Proceeds from sale of equipment 35
Payment for acquisition of business (75)
------------- ---------------
Net cash used in investing activities (7,795) (3,140)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in checks written in excess of bank balances 57 368
Net proceeds from sale of common stock 294 4,949
Net proceeds from legal settlement 628
Net payments on revolving credit facility (559) (1,068)
Proceeds from long-term debt 7,400 3,653
Principal payments on long-term debt (976) (2,288)
Principal payments on capital leases (172) (193)
------------ ----------------
Net cash provided by financing activities 6,672 5,421
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DECREASE IN CASH AND CASH EQUIVALENTS (213) (576)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 213 576
------------- ----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ - $ -
============= ================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Non cash activities:
Additions to capital leases $ 75 $ 301
Acquisitions:
Fair value of assets acquired 252
Cash paid (75)
Common stock issued (177)
----------------
$ -
================
Cash paid for:
Interest 824 694
MEDTOX SCIENTIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 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 nine-month period ended September 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. 142, "Goodwill and
Other Intangible Assets." This statement applies to intangibles and goodwill
acquired after June 30, 2001, as well as goodwill and intangibles previously
acquired. Under this statement, goodwill as well as other intangibles determined
to have an infinite life will no longer be amortized; however, these assets will
be reviewed for impairment on a periodic basis. SFAS No. 142 also includes
provisions for the reclassification of certain existing recognized intangibles
as goodwill, reclassification of certain intangibles out of previously reported
goodwill and the identification of reporting units for purposes of assessing
potential future impairments of goodwill. SFAS No. 142 is effective for the
Company on January 1, 2002. The Company is currently assessing but has not yet
determined the impact of SFAS No. 142 on its financial position and results of
operations. As of September 30, 2001 the Company had net goodwill and other
intangible assets of approximately $11.7 million and $0.5 million, respectively.
Amortization expense recorded during the three and nine months ended September
30, 2001 and September 30, 2000 was approximately $0.2 million, $0.7 million,
$0.2 million, and $0.7 million, respectively.
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 Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
------------- ---------- ----------- ----------
Laboratory Services:
Revenues $ 9,446 $ 9,206 $ 28,741 $ 26,951
Interest expense, net 252 226 755 694
Depreciation and amortization 558 566 1,703 1,671
Segment income (loss) 288 (56) 1,135 648
Segment assets 34,660 27,937 34,660 27,937
Expenditures for segment assets 118 1,045 7,541 2,780
Product Sales:
Revenues 3,135 2,367 8,007 5,614
Interest expense, net 11 19 36 57
Depreciation and amortization 35 22 97 58
Segment income 502 533 1,053 607
Segment assets 4,515 3,830 4,515 3,830
Expenditures for segment assets 93 13 254 320
Total:
Revenues 12,581 11,573 36,748 32,565
Interest expense, net 263 245 791 751
Depreciation and amortization 593 588 1,800 1,729
Segment income 790 477 2,188 1,255
Segment assets 39,175 31,767 39,175 31,767
Expenditures for segment assets 211 1,058 7,795 3,100
NOTE D - INVENTORIES
Inventories consisted of the following:
(In thousands)
September 30, December 31,
2001 2000
-------------- --------------
Raw materials $ 1,112 $ 910
Work in process 507 322
Finished goods 349 373
Supplies 1,463 1,447
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$ 3,431 $ 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 Nine Months Ended
September 30, 2001 September 30, 2001
------------------- ------------------
Gross rental income $ 407 $ 877
Operating and administrative expenses (270) (566)
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Net rental income before intercompany
elimination 137 311
Elimination of intercompany rental
income (166) (388)
------------ ------------
Net rental loss $ (29) $ (77)
============ ============
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 Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
----------- ------------- ------------ ------------
Net income (A) $ 790 $ 477 $ 2,188 $ 1,255
============= ============= ============ ============
Weighted average number of basic
common shares outstanding (B) 3,937,868 3,560,894 3,899,810 3,321,873
Dilutive effect of stock options and
warrants computed based on the
treasury stock method using average
market price 351,800 256,801 231,169 211,499
------------- ------------- ------------ ------------
Weighted average number of diluted
common shares outstanding (C) 4,289,668 3,817,695 4,130,979 3,533,372
============= ============= ============ ============
Basic earnings per common share (A/B) $ 0.20 $ 0.13 $ 0.56 $ 0.38
============= ============= ============ ============
Diluted earnings per common share (A/C) $ 0.18 $ 0.12 $ 0.53 $ 0.36
============= ============= ============ ============
Options and warrants to purchase 14,795, 766,739, 679,754, and 679,754 shares of
common stock were outstanding during the three and nine months ended September
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.
Share and per share amounts for all periods presented above have been adjusted
for the ten percent stock dividend authorized by the Company's Board of
Directors on September 26, 2001, payable on November 9, 2001.
NOTE G - CONTINGENCIES
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 alleged 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 had 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 paid $75,000 with a
full release of all claims and a dismissal order entered in October 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.
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 79,750 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. Pursuant to the Escrow Agreement, Morgan Capital paid the
Company $715,000 in cash to satisfy the judgment. On November 1, 2001, Morgan
Capital filed a petition for a writ of certiorari to the United States Supreme
Court, seeking review of the judgment against it. The Company is unable to
predict whether the Supreme Court will grant such review.
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 and Mr. McCoy
disputed the effect of the termination of his employment with the Company. In
September 2001, the Company entered into an agreement with Mr. McCoy resolving
these issues. The parties agreed to a mutual release of claims. McCoy resigned
his position on the Board of Directors and agreed to serve as an ongoing
consultant to the Company. In exchange, the Company agreed to provide McCoy with
a lump sum payment of $250,000, and an additional amount of $250,000 in
restricted common stock. In exchange for McCoy's ongoing consulting
relationship, he will receive $35,000 annually over the next five years. The
Company also advanced McCoy $102,500 in cash, subject to a five-year promissory
note, representing the amount necessary for McCoy to exercise his previously
held options to 44,000 shares of the Company's common stock.
NOTE H - SUBSEQUENT EVENTS
On September 26, 2001, the Company's Board of Directors authorized a ten percent
stock dividend on the Company's common stock, which will be paid on November 9,
2001 to stockholders of record on October 26, 2001.
In October and November 2001, the Company received approximately $1.05 million
from private placement of subordinated debt. The notes require payment of the
principal amounts on September 30, 2004. Interest at 10% per annum is paid
semi-annually on June 30 and December 31. In connection with the issuance of the
subordinated notes, the Company issued warrants to purchase a number of shares
of common stock equal to 50% of the face amount of the subordinated notes
divided by an exercise price of $9.675 per share.
On October 24, 2001, the Company completed the acquisition of Leadtech
Corporation, (Leadtech), a private company operating as an independent clinical
laboratory devoted primarily to the examination of blood lead concentrations in
pediatric patients. For the year ended December 31, 2000, Leadtech had unaudited
net revenue of approximately $1.8 million and unaudited earnings before
interest, taxes, depreciation and amortization, adjusted for certain shareholder
distributions, of $1.0 million. Operations at the Leadtech facility in New
Jersey will cease within 90 days from the acquisition date, and all testing will
be performed in the MEDTOX laboratory facility in St. Paul, Minnesota. The
purchase price of $6.2 million consisted of $2.5 million in cash, the issuance
of $2.5 million of the Company's common stock and $1.2 million of seller
financing payable over 24 months. The initial cash payment of $2.5 million was
funded primarily from proceeds received from private placement of subordinated
debt in October 2001, net proceeds from the legal settlement with Morgan Capital
LLC, and operating cash flows.
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 technological, 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 o
perations
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 inability 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 nine months ended September 30,
2001, Laboratory Services revenue accounted for 75% and 78%, respectively, of
the Company's revenues, compared with 80% and 83% for the same periods in 2000.
Revenue from Product Sales accounted for 25% and 22% of the total revenues of
the Company for the three and nine months ended September 30, 2001,
respectively, compared with 20% and 17% for the same periods in 2000.
Results of Operations
The Company achieved record revenues and net income for the three and nine-month
periods ended September 30, 2001. Revenues for the third quarter of 2001
increased 9% over the third quarter of 2000, driven by sales of the
PROFILE(R)-II Test System and the expanding VERDICT(R)-II product line. Selling,
general, and administrative expenses in the third quarter of 2001 decreased as a
percentage of sales to 28.5% from 32.3% in the same quarter in 2000, reflecting
continued efforts taken to 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 Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
- -------------------------------------------------------------------------------------------------------------
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 60.3 59.2 61.4 61.0
Operating expenses:
Selling, general, and administrative 28.5 32.3 27.7 30.3
Research and development 2.6 2.3 2.6 2.5
---------- ----------- ---------- ----------
31.1 34.6 30.3 32.8
Other expense 2.3 2.1 2.3 2.3
---------- ----------- ---------- ----------
Net income 6.3% 4.1% 6.0% 3.9%
========== =========== ========== ==========
Three Months Ended September 30, 2001 Compared to Three Months Ended
September 30, 2000
Revenues
Revenues increased 9% to $12.6 million for the three months ended September 30,
2001, driven by a $0.8 million, or 32% increase in Product Sales revenues and a
$0.2 million, or 3% 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 $0.8
million to $2.8 million in the third 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. In September 2001, the Company entered into new agreements with four
additional states for the sale of its VERDICT(R)-II devices, with shipping of
the product beginning in October 2001. The Company continues to develop new
products for the detection of abused substances, 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 signed an agreement
with a leading supplier of medical, surgical and laboratory supplies to
distribute the PROFILE(R)-ER product line into the hospital market. The Company
is also in discussions with other major buying groups and distributors that have
expressed interest in the PROFILE(R)-ER device. In addition to the recent
development of the PROFILE(R)-ER device, the Company currently anticipates the
introduction of a significant enhancement to the existing PROFILE(R)-II device
in the fourth quarter of 2001.
Product sales from agricultural diagnostic products decreased 59% to $34,000
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 5% to
$324,000 due to decreased revenues from both historical customers and new
customers.
The slight growth in Laboratory Services revenues was primarily due to a 2%
increase in the number of laboratory tests performed. Sample volume from the
Company's occupational health, wellness and esoteric testing clients increased
34% compared to the third 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 impact of the tragic events occurring on September 11,
2001 caused testing volume from existing occupational health and corporate
clients to be below expectations. However, this impact has been largely
mitigated by the Company's continued success in acquiring new client
relationships. The Company believes that the current lower testing volume from
existing clients will continue to be offset by successful sales efforts to new
clients.
Gross profit
Consolidated gross margin was 39.7% for the three months ended September 30,
2001 compared to 40.8% for the same period in 2000, reflecting a decline in
Laboratory Services gross margin, partially offset by a slight improvement in
Product Sales gross margin.
Laboratory Services gross margin was 29.0% for the three months ended September
30, 2001, down from 33.0% for the three months ended September 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 of 72.0% for the three months ended September
30, 2001 was up slightly from gross margin of 71.0% for the same period of 2000.
Selling, general and administrative expenses
Selling, general and administrative expenses were $3.6 million, or 28.5% of
revenues for the three months ended September 30, 2001, compared to $3.7 million
or 32.3% of revenues in the same period of 2000. The decrease in the percentage
of revenues and in absolute dollars primarily reflects the continued efforts
taken to reduce overall operating costs.
Selling, general and administrative expenses were also positively impacted by
the settlement in September 2001 of the dispute with Mr. McCoy regarding the
effect of the termination of his employment with the Company. At the time of
settlement, the Company had an accrual of approximately $450,000 for future
payments of compensation pursuant to Mr. McCoy's employment contract. As a
result of the agreement between the Company and Mr. McCoy (as discussed in Note
G of Notes to Consolidated Financial Statements), the Company agreed to provide
Mr. McCoy with a lump sum payment of $250,000. The remaining accrual of
approximately $200,000 was reversed.
Other expense
Other expense consisted primarily of interest expense, which remained relatively
stable. Other expense in the three months ended September 30, 2001 also included
a loss of $29,000 from the Company's rental activities.
Net income
In the three months ended September 30, 2001, the Company recorded net income of
$0.8 million compared to $0.5 million in the same period of 2000. This
improvement was driven by a 9% increase in consolidated revenues and a reduction
in selling, general, and administrative expenses.
Laboratory Services net income was $0.3 million for the three months ended
September 30, 2001 compared to a loss of $56,000 during the same period of 2000.
This improvement was primarily driven by the reduction in selling, general, and
administrative expenses, reflecting efforts taken to reduce operating costs as
well as the $200,000 accrual reversal related to the settlement with Mr. McCoy.
Product Sales net income of $0.5 million for the three months ended September
30, 2001 remained consistent with net income in the same period of 2000.
Nine Months Ended September 30, 2001 Compared to Nine Months Ended
September 30, 2000
Revenues
Revenues increased 13% to $36.7 million for the nine months ended September 30,
2001, driven by a $2.4 million, or 43% increase in Product Sales revenues and a
$1.8 million, or 7% 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 $2.7
million to $6.9 million in the first nine 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. In September 2001, the Company entered into new agreements with four
additional states for the sale of its VERDICT(R)-II devices, with shipping of
the product beginning in October 2001. The Company continues to develop new
products for the detection of abused substances, 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 signed an agreement
with a leading supplier of medical, surgical and laboratory supplies to
distribute the PROFILE(R)-ER product line into the hospital market. The Company
is also in discussions with other major buying groups and distributors that have
expressed interest in the PROFILE(R)-ER device. In addition to the recent
development of the PROFILE(R)-ER device, the Company currently anticipates the
introduction of a significant enhancement to the existing PROFILE(R)-II device
in the fourth quarter of 2001.
Product sales from agricultural diagnostic products decreased 27% to $0.3
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 16% to $0.8 million due to decreased revenues from both historical
customers and new customers.
The slight growth in Laboratory Services revenues was primarily due to a 10%
increase in the number of laboratory tests performed. Sample volume from the
Company's occupational health, wellness and esoteric testing clients increased
38% compared to the first nine 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 impact of the tragic events occurring on September 11,
2001 caused testing volume from existing occupational health and corporate
clients to be below expectations. However, this impact has been largely
mitigated by the Company's continued success in acquiring new client
relationships. The Company believes that the current lower testing volume from
existing clients will continue to be offset by successful sales efforts to new
clients.
Gross profit
Consolidated gross margin was 38.6% for the nine months ended September 30, 2001
compared to 39.0% for the same period in 2000, reflecting a decline in
Laboratory Services gross margin, partially offset by a slight improvement in
Product Sales gross margin.
Laboratory Services gross margin was 31.5% for the nine months ended September
30, 2001, down from 34.0% for the same period in 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 of 64.0% for the nine months ended September 30,
2001 was up slightly from gross margin of 63.3% for the same period of 2000.
Selling, general and administrative expenses
Selling, general and administrative expenses were $10.2 million, or 27.7% of
revenues for the first nine months of 2001, compared to $9.9 million or 30.3% of
revenues in the same period of 2000. The decrease in the percentage of revenues
primarily reflects efforts taken to reorganize the laboratory operations and
reduce overall operating costs.
Selling, general and administrative expenses were also positively impacted by
the settlement in September 2001 of the dispute with Mr. McCoy regarding the
effect of the termination of his employment with the Company. At the time of
settlement, the Company had an accrual of approximately $450,000 for future
payments of compensation pursuant to Mr. McCoy's employment contract. As a
result of the agreement between the Company and Mr. McCoy (as discussed in Note
G of Notes to Consolidated Financial Statements), the Company agreed to provide
Mr. McCoy with a lump sum payment of $250,000. The remaining accrual of
approximately $200,000 was reversed.
The increase in the absolute dollar amount of selling, general and
administrative expenses was attributable to the higher revenue level in the
first nine months of 2001.
Other expense
Other expense consisted primarily of interest expense, which remained relatively
stable. Other expense in the nine months ended September 30, 2001 also included
a loss of $77,000 from the Company's rental activities.
Net income
In the nine months ended September 30, 2001, the Company recorded net income of
$2.2 million compared to $1.3 million in the same period of 2000. This
improvement was driven by a 13% increase in consolidated revenues and a
reduction in selling, general, and administrative expenses as a percentage of
revenues.
Laboratory Services net income was $1.1 million for the nine months ended
September 30, 2001 compared to $0.6 million during the same period of 2000. This
improvement was primarily driven by the reduction in selling, general, and
administrative expenses, reflecting efforts taken to reduce operating costs as
well as the $200,000 accrual reversal related to the settlement with Mr. McCoy.
Product Sales net income of $1.1 million in the first nine months of 2001
compared to $0.6 million 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 provided by operating activities was $0.9 million for the nine months
ended September 30, 2001 compared to net cash used in operating activities of
$2.9 million in the same period of 2000. The increase in cash used of $3.8
million was primarily due to an improvement in net income of $0.9 million and a
reduction in inventory and accounts receivable trends. Inventory levels
increased $0.4 million from December 31, 2000 to September 30, 2001 compared to
an increase of $1.3 million from December 31, 1999 to September 30, 2000. The
increase in inventory levels in the prior year period was attributable to an
increase in forecasted sales for the fourth quarter of 2000. Accounts receivable
increased $2.5 million from December 31, 2000 to September 30, 2001 compared to
an increase of $3.1 million from December 31, 1999 to September 30, 2000,
reflecting increased collection efforts in the current year in response to the
slowing economy. The change in cash provided by operations was also affected by
a reduction in accounts payable in the prior year period.
Net cash used in investing activities, consisting of capital expenditures, was
$7.8 million for the nine months ended September 30, 2001, up from $3.1 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 $6.7 million in the first nine
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. In addition, in September 2001, the Company
received net proceeds of $0.6 million as settlement in the Company's lawsuit
against Morgan Capital LLC under Section 16(b) of the Securities Exchange Act of
1934. Net cash provided by financing activities of $5.4 million in the first
nine months of 2000 primarily represented net proceeds of approximately $4.9
million from the Company's private equity placement during the third 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, the
revolving line of credit, and the 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
September 30, 2001, the Company had total borrowing capacity of $6.0 million on
its line of credit, of which $3.2 million was borrowed, leaving a net
availability of $2.8 million as of September 30, 2001.
In addition to the Company's present financing sources, in October and November
2001, the Company received approximately $1.05 million from private placement of
subordinated debt. The notes require payment of the principal amounts on
September 30, 2004. Interest at 10% per annum is paid semi-annually on June 30
and December 31. In connection with the issuance of the subordinated notes, the
Company issued warrants to purchase a number of shares of common stock equal to
50% of the face amount of the subordinated notes divided by an exercise price of
$9.675 per share.
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 September 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 September 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
September 30, 2001, the Company had a $6.1 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 $6.6 million and $7.0 million outstanding on its
line of credit and long-term debt issued under the Wells Fargo Credit Agreement
as of September 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 September 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.
The Annual Meeting of the stockholders of the Company was held on September 26,
2001. The following items were approved by a vote of the stockholders.
1. The following individuals were elected to serve on the Board of
Directors of the Company for three year terms or until their successors are duly
elected and qualified: James W. Hansen and Brian P. Johnson.
2. By a vote of 2,942,987 in favor and 290,214 against, the stockholders of
the Company approved the amendment to Article FOURTH of the Company's
Certificate of Incorporation to increase its number of authorized shares of
Common Stock from 7,400,000 to 14,400,000 shares. 57,097 shares were abstained
or did not vote.
During the quarter ended September 30, 2001, no other matters were submitted to
a vote of securities holders.
ITEM 5 OTHER INFORMATION. Inapplicable
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K.
a. Exhibits:
4.4 Form of 10% Subordinated Notes issued by the Registrant in
October and November 2001 to raise an aggregate amount of $1.5 million
in subordinate debt, all with a maturity of September 30, 2001.
4.5 Form of Warrant accompanying the 10% Subordinated Notes
issued in October and November 2001.
b. Reports on Form 8-K:
On August 14, 2001, the Company announced that on August 3, 2001, the
United States Court of Appeals for the Eighth Circuit ruled in favor
of MEDTOX in the Company's lawsuit against Morgan Capital LLC under
Section 16 (b) of the Securities Exchange Act of 1934.
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, November 14, 2001
- --------------------- Chairman of the Board of Directors
Richard J. Braun (Principal Executive Officer)
/s/ Kari L. Golembeck Controller (Principal Accounting November 14, 2001
- --------------------- Officer)
Kari L. Golembeck