FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
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 No X
The number of shares of Common Stock, $.15 par value, outstanding as of May 3,
2002, was 4,356,105.
MEDTOX SCIENTIFIC, INC.
INDEX
Page
Part I Financial Information:
Item 1: Financial Statements (Unaudited)
Consolidated Statements of Operations - Three
Months Ended March 31, 2002 and 2001 ............... 3
Consolidated Balance Sheets - March 31, 2002
and December 31, 2001 .............................. 4
Consolidated Statements of Cash Flows - Three
Months Ended March 31, 2002 and 2001 ............... 5
Notes to Consolidated Financial Statements.......... 6
Item 2:
Management's Discussion and Analysis of
Financial Condition and Results of Operations ....... 10
Item 3:
Quantitative and Qualitative Disclosure
About Market Risk ................................... 18
Part II Other Information ............................................ 19
Signatures .......................................... 20
Item 1: FINANCIAL STATEMENTS (UNAUDITED)
MEDTOX SCIENTIFIC, INC
CONSOLIDATED STATEMENT OF OPERATIONS
(Dollars in thousands except per share amounts)
(Unaudited)
Three Months Ended
March 31, 2002 March 31, 2001
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REVENUES:
Laboratory service revenues $ 9,337 $ 9,304
Product sales 3,014 2,302
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12,351 11,606
COST OF REVENUES:
Cost of services 6,356 6,395
Cost of sales 1,089 1,053
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7,445 7,448
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GROSS PROFIT 4,906 4,158
OPERATING EXPENSES:
Selling, general and administrative 3,778 3,140
Research and development 274 315
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4,052 3,455
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INCOME FROM OPERATIONS 854 703
OTHER INCOME (EXPENSE):
Interest expense, net (353) (240)
Other expense, net (16) (25)
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(369) (265)
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NET INCOME $ 485 $ 438
==================== ===================
BASIC EARNINGS PER COMMON SHARE (1) $ 0.11 $ 0.11
==================== ===================
DILUTED EARNINGS PER COMMON SHARE (1) $ 0.11 $ 0.11
==================== ===================
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING:
Basic (1) 4,349,096 3,875,559
Diluted (1) 4,582,289 4,037,780
(1) Share and per share amounts for the three months ended March 31, 2001 have
been restated for the ten percent stock dividend paid on November 9, 2001.
MEDTOX SCIENTIFIC, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
(Unaudited)
March 31, December 31,
2002 2001
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ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ - $ 67
Accounts receivable:
Trade, less allowance for doubtful accounts ($1,297 in
2002 and $1,069 in 2001) 9,394 8,439
Other 113 181
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Total accounts receivable 9,507 8,620
Inventories 4,017 3,897
Prepaid expenses and other 1,648 1,617
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Total current assets 15,172 14,201
BUILDING, EQUIPMENT AND IMPROVEMENTS, net 12,428 12,200
GOODWILL, net of accumulated amortization of $5,133 in 2002 and 2001 15,197 15,197
OTHER INTANGIBLE ASSETS, net of accumulated amortization of $321 in 2002 and $187 in 2001 2,079 2,213
OTHER ASSETS 370 345
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TOTAL ASSETS $ 45,246 $ 44,156
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Checks written in excess of bank balances $ 328 $ -
Line of credit 4,099 2,914
Accounts payable 3,225 2,914
Accrued expenses 2,265 3,450
Current portion of long-term debt 2,163 2,120
Current portion of capital leases 196 223
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Total current liabilities 12,276 11,621
LONG-TERM DEBT, net of current portion 9,604 9,749
LONG-TERM PORTION OF CAPITAL LEASES, net of current portion 241 266
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; issued and outstanding
shares, 4,353,939 in 2002 and 4,315,211 in 2001 653 647
Additional paid-in capital 75,609 75,199
Deferred stock-based compensation (759) (463)
Accumulated deficit (52,099) (52,584)
Note receivable from related party (103) (103)
Treasury stock (176) (176)
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Total stockholders' equity 23,125 22,520
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 45,246 $ 44,156
=============== ===============
MEDTOX SCIENTIFIC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended
March 31, 2002 March 31, 2001
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 485 $ 438
Adjustments to reconcile net income to net cash used in operating
activities:
Depreciation and amortization 614 620
Provision for losses on accounts receivable 75 46
Deferred compensation 90 45
Changes in operating assets and liabilities:
Accounts receivable (962) (1,095)
Inventories (120) 173
Prepaid expenses and other current assets (31) (409)
Other assets (25)
Accounts payable and accrued expenses (874) (280)
Accrued restructuring costs (150)
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Net cash used in operating activities (748) (612)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (622) (7,076)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in checks written in excess of bank balances 328 285
Net proceeds from sale of common stock 30 22
Net proceeds on revolving credit facility 1,185 243
Proceeds from long-term debt 360 7,278
Principal payments on long-term debt (548) (287)
Principal payments on capital leases (52) (66)
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Net cash provided by financing activities 1,303 7,475
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DECREASE IN CASH AND CASH EQUIVALENTS (67) (213)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 67 213
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ - $ -
================= ===================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest $ 316 $ 218
MEDTOX SCIENTIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of MEDTOX
Scientific, Inc. (the "Company") have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and notes required by generally accepted
accounting principles. In the opinion of management, all adjustments (consisting
only of normal recurring adjustments) considered necessary for a fair
presentation of financial condition and results of operations have been
included. Operating results for the three-month period ended March 31, 2002 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, 2001.
Reclassifications: Certain reclassifications have been made to the 2001
financial statements to conform with the 2002 presentations.
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Accounting Financial Standards No. 142 (SFAS 142), "Goodwill and Other
Intangible Assets." This statement requires that goodwill and intangible assets
deemed to have an indefinite life not be amortized. Instead of amortizing
goodwill and intangible assets deemed to have an indefinite life, the statement
requires a test for impairment to be performed annually, or immediately if
conditions indicate that such an impairment could exist. The Company adopted the
provisions of SFAS 142 effective January 1, 2002, and as a result, will no
longer record goodwill amortization of approximately $0.8 million per year. The
Company is currently in the process of completing the first step of the initial
goodwill impairment test required by SFAS 142 and will complete this assessment
in the second quarter of 2002.
The following table provides the comparable effects of the adoption of
SFAS No. 142 for the quarters ended March 31, 2002 and March 31, 2001.
(In thousands, except per share data) Three months ended
March 31, 2002 March 31, 2001
Reported net income $ 485 $ 438
Add back goodwill amortization - 207
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Adjusted net income $ 485 $ 645
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Reported earnings per share - basic $ 0.11 $ 0.11
Goodwill amortization - 0.05
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Adjusted net earnings per share - basic $ 0.11 $ 0.16
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Reported earnings per share - diluted $ 0.11 $ 0.11
Goodwill amortization - 0.05
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Adjusted net earnings per share - diluted $ 0.11 $ 0.16
========== ==========
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of long-lived assets and the
associated asset retirement costs. SFAS No. 143 is effective for the Company on
January 1, 2003. The Company is currently in the process of evaluating the
impact of the adoption of SFAS No. 143.
On January 1, 2002, the Company adopted SFAS No. 144, "Accounting for Impairment
or Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" and addresses the financial accounting and reporting for the
impairment or disposal of long-lived assets. The adoption of SFAS No. 144 did
not have a material effect on the Company's financial position or results of
operations.
NOTE B - SEGMENTS
The Company has two reportable segments: Laboratory Services and Product Sales.
The Laboratory Services segment consists of MEDTOX Laboratories, Inc. Services
provided include forensic toxicology, clinical toxicology, clinical testing for
the pharmaceutical industry, pediatric lead testing, heavy metals analyses,
courier delivery, and medical surveillance. Providing revenues from external
customers for each group of services within the Laboratory Services segment is
impracticable. The Product Sales segment consists of MEDTOX Diagnostics, Inc.
Products manufactured include easy to use, inexpensive, on-site drug tests such
as PROFILE(R)-II, EZ-SCREEN(R), and VERDICT(R)-II.
The Company's reportable segments are strategic business units that offer
different products and services. They are managed separately as each business
requires different products, services and marketing strategies.
In evaluating financial performance, management focuses on net income as a
segment's measure of profit or loss.
Segment Information
(In thousands)
Three months ended
March 31, 2002 March 31, 2001
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Laboratory Services:
Revenues $ 9,337 $ 9,304
Interest expense 340 227
Depreciation and amortization 572 590
Segment net income 14 293
Segment assets 40,223 34,046
Expenditures for segment assets 462 6,980
Three months ended
March 31, 2002 March 31, 2001
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Product Sales:
Revenues 3,014 2,302
Interest expense 13 13
Depreciation and amortization 42 30
Segment net income 471 145
Segment assets 5,023 3,507
Expenditures for segment assets 160 96
Company:
Revenues 12,351 11,606
Interest expense 353 240
Depreciation and amortization 614 620
Net income 485 438
Total assets 45,246 37,553
Expenditures for total assets 622 7,076
The following is a summary of revenues from external customers for each group of
products and services provided within the Product Sales segment:
(In thousands)
Three months ended
March 31, 2002 March 31, 2001
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Substance abuse testing products $ 2,583 $ 1,890
Contract manufacturing services 350 266
Agricultural diagnostic products 81 146
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$ 3,014 $ 2,302
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NOTE C - INVENTORIES
Inventories consisted of the following:
(In thousands)
March 31, December 31,
2002 2001
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Raw materials $ 1,607 $ 1,570
Work in process 495 414
Finished goods 417 460
Supplies, including off-site inventory 1,498 1,453
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$ 4,017 $ 3,897
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NOTE D - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
common share: (Dollars in thousands, except per share amounts)
Three months ended
March 31, 2002 March 31, 2001
Net income (A) $ 485 $ 438
============= ============
Weighted average number of basic common
shares outstanding (B) 4,349,096 3,875,559
Dilutive effect of stock options and warrants
computed based on the treasury stock method
using average market price 233,193 162,221
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Weighted average number of diluted
common shares outstanding (C) 4,582,289 4,037,780
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Basic earnings per common share (A/B) $ 0.11 $ 0.11
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Diluted earnings per common share (A/C) $ 0.11 $ 0.11
============= ============
Options and warrants to purchase 764,571 and 979,897 shares of common stock were
outstanding during the first three months of 2002 and 2001, 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 E - 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.
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Cautionary Statement Identifying Important Factors
That Could Cause the Company's Actual Results to Differ
From Those Projected in Forward Looking Statements
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, readers of this document and any document
incorporated by reference herein, are advised that this document and documents
incorporated by reference into this document contain both statements of
historical facts and forward looking statements. Forward looking statements are
subject to certain risks and uncertainties, which could cause actual results to
differ materially from those indicated by the forward looking statements.
Examples of forward looking statements include, but are not limited to (i)
projections of revenues, income or loss, earnings or loss per share, capital
expenditures, dividends, capital structure and other financial items, (ii)
statements of the plans and objectives of the Company or its management or Board
of Directors, including the introduction of new products, or estimates or
predictions of actions by customers, suppliers, competitors or regulatory
authorities, (iii) statements of future economic performance, and (iv)
statements of assumptions underlying other statements and statements about the
Company or its business.
This document and any documents incorporated by reference herein also identify
important factors which could cause actual results to differ materially from
those indicated by the forward looking statements. These risks and uncertainties
include price competition, the decisions of customers, the actions of
competitors, the effects of government regulation, possible delays in the
introduction of new products, customer acceptance of products and services, and
other factors which are described herein and/or in documents incorporated by
reference herein.
The cautionary statements made pursuant to the Private Litigation Securities
Reform Act of 1995 above and elsewhere by the Company should not be construed as
exhaustive or as any admission regarding the adequacy of disclosures made by the
Company prior to the effective date of such Act. Forward looking statements are
beyond the ability of the Company to control and in many cases the Company
cannot predict what factors would cause results to differ materially from those
indicated by the forward looking statements.
General
MEDTOX Scientific, Inc. (formerly EDITEK, Inc.), a Delaware corporation, was
organized in September 1986 to succeed the operations of a predecessor
California corporation. MEDTOX Scientific, Inc. and its wholly-owned
subsidiaries, MEDTOX Laboratories, Inc., MEDTOX Diagnostics, Inc., and New
Brighton Business Center LLC are referred to herein as "the Company". The
Company is engaged primarily in two distinct, but very much related, businesses.
The business of manufacturing and distribution of diagnostic devices is carried
on by MEDTOX Diagnostics, Inc. from its facility in Burlington, North Carolina
and the business of forensic and clinical laboratory services is conducted by
MEDTOX Laboratories, Inc. at its facility in St. Paul, Minnesota.
The Company has two reportable segments: "Laboratory Services" conducted by the
Company's wholly owned subsidiary, MEDTOX Laboratories, Inc. and "Products
Sales" conducted by the Company's wholly owned subsidiary MEDTOX Diagnostics,
Inc. Laboratory Services include forensic toxicology, clinical toxicology,
clinical testing for the pharmaceutical industry and heavy metal analyses as
well as logistics, data, and overall program management services. Product Sales
include sales of a variety of point-of-collection (POC) screening devices for
therapeutic drugs and drugs of abuse. For the quarter ended March 31, 2002 and
2001, Laboratory Services revenue accounted for 76% and 80% of the Company's
revenues, respectively. Revenue from Product Sales accounted for 24% and 20% of
the total revenues of the Company for the quarter ended March 31, 2002 and 2001,
respectively.
Critical Accounting Policies
The Company has identified the policies outlined below as critical to its
business operations and an understanding of results of operations. The listing
is not intended to be a comprehensive list of all accounting policies. In many
cases, the accounting treatment of a particular transaction is specifically
dictated by accounting principles generally accepted in the United States, with
no need for management's judgment in their application. The impact and any
associated risks related to these policies on the Company's business operations
is discussed throughout Management's Discussion and Analysis of Financial
Condition and Results of Operations where such policies affect reported and
expected financial results. For a detailed discussion on the application of
these and other accounting policies, see Note 1 in the Notes to the Consolidated
Financial Statements in Item 14 on Form 10-K for the year ended December 31,
2001. Note that the preparation of this Form 10-Q requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities, disclosure of contingent assets and liabilities at the date of our
financial statements, and the reported amounts of revenue and expenses during
the reporting period. There can be no assurance that actual results will not
differ from those estimates.
The Company's critical accounting policies are as follows:
Accounts Receivable:
The Company performs ongoing credit evaluations of its customers and adjusts
credit limits based upon payment history and the customers' current credit
worthiness, as determined by management's review of their current credit
information. The Company continuously monitors collections and payments from its
customers and maintains a provision for estimated credit losses based upon the
Company's historical experience and any specific customer collection issues that
have been identified. While such credit losses have historically been within the
Company's general expectations and the provisions established, the Company
cannot guarantee that it will continue to experience the same credit loss rates
that have occurred in the past. The Company's consolidated trade accounts
receivable balance as of March 31, 2002 was $9.4 million, net of allowance for
doubtful accounts of $1.3 million.
Off-Site Supplies Inventory:
Off-site supplies represents collection kits and forms located at collections
sites throughout the United States used by Laboratory Services' customers to
submit specimens for testing services. At March 31, 2002, off-site inventory was
$0.8 million. The process for estimating off-site inventory involves significant
assumptions and judgments. The estimate is based on the historical average time
that a collection site uses the inventory, as well as the amount of inventory
expected to be scrapped.
Goodwill:
The Company continually evaluates whether events and changes in circumstances
warrant revised estimates of useful lives or recognition of an impairment loss
of unamortized goodwill. The conditions that would trigger an impairment
assessment of unamortized goodwill include a significant, sustained negative
trend in operating results or cash flows, a decrease in demand for the Company's
products or services, a change in the competitive environment, and other
industry and economic factors. Until January 1, 2002, the Company measured
impairment of unamortized goodwill utilizing the undiscounted cash flow method.
The estimated cash flows were then compared to recorded goodwill amounts; if the
unamortized balance of the goodwill exceeded the estimated cash flows, the
excess of the unamortized balance would have been written off.
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible
Assets" (SFAS 142). The Company adopted SFAS No. 142 on January 1, 2002. With
the adoption of SFAS No. 142, the Company will assess the impact based on a
two-step approach to assess goodwill based on applicable reporting units and
will reassess any intangible assets, including goodwill, recorded in connection
with previous acquisitions. The Company recorded approximately $0.2 million of
goodwill amortization during the first three months of 2001 and would have
recorded approximately $0.2 million of goodwill amortization during the same
period of 2002. In lieu of amortization, the Company will be required to perform
an initial impairment review of goodwill by June 30, 2002 and at least annually
thereafter. The Company is currently assessing, but has not yet determined, the
impact the adoption of SFAS No. 142 will have on its consolidated financial
statements. As of March 31, 2001, the Company had unamortized goodwill of $15.2
million.
Accounting for Income Taxes:
As part of the process of preparing the consolidated financial statements, the
Company is required to estimate income taxes in each of the jurisdictions in
which it operates. This process involves estimating actual current tax exposure
together with assessing temporary differences resulting from differing treatment
of items for tax and accounting purposes. These differences result in deferred
tax assets and liabilities. The Company must then assess the likelihood that
deferred tax assets will be recovered from future taxable income and, to the
extent management believes that recovery is not likely, the Company must
establish a valuation allowance. To the extent the Company increases or
decreases the valuation allowance in a period, the Company must include an
expense or benefit within the tax provision in the consolidated statement of
operations.
Significant management judgment is required in determining the provision for
income taxes, deferred tax assets and liabilities, and any valuation allowance
recorded against net deferred tax assets. As of December 31, 2001, the Company
has recorded a full valuation allowance of $13.9 million due to uncertainties
related to the Company's ability to utilize the deferred tax assets, primarily
consisting of certain net operating losses (NOL) carried forward, before they
expire. The valuation allowance is based on management's estimate of taxable
income (primarily determined from four-year cumulative historical results) and
the period over which deferred tax assets will be recoverable. It is possible
that the Company could be profitable in the future at levels which cause
management to conclude that it is more likely than not that the Company will
realize all or a portion of the NOL carryforward. Upon reaching such a
conclusion, the Company would immediately record the estimated net realizable
value of the deferred tax asset at that time and would then provide for income
taxes at a rate equal to the Company's combined federal and state effective
rates, which would approximate 38% under current tax rates. Subsequent revisions
to the estimated net realizable value of the deferred tax asset could cause the
provision for income taxes to vary significantly from period to period, although
the Company's cash payments would remain unaffected until the benefit of the NOL
is completely utilized.
Results of Operations
The Company achieved record revenues and net income for the first quarter ended
March 31, 2002. Revenues for the first quarter of 2002 increased 6% over the
first quarter of 2001, driven by sales of the PROFILE(R) Test Systems and the
expanding VERDICT(R)-II product line. Gross margin improved over the first
quarter of 2001 due to the Company's continued focus on higher margin products
and testing. These positive trends were partially offset by higher selling,
general, and administrative expenses in the first quarter of 2002 over the same
quarter in 2001, reflecting increased sales and marketing efforts. The following
table sets forth the percentages of total revenues represented by certain items
reflected in the Company's Consolidated Statements of Operations:
Three months ended,
March 31, 2002 March 31, 2001
- -------------------------------------------------------------------------------
Revenues 100.0% 100.0%
Cost of revenues 60.3 64.2
--------- ----------
Gross margin 39.7 35.8
Operating expenses:
Selling, general, and administrative 30.6 27.1
Research and development 2.2 2.7
---------- ----------
32.8 29.8
Other expense, primarily interest 3.0 2.2
---------- ----------
Net income 3.9% 3.8%
========== ==========
Three Months Ended March 31, 2002 Compared to Three Months Ended March 31, 2001
Revenues
Revenues increased 6% to $12.4 million for the three months ended March 31,
2002, driven by a $0.7 million, or 31% increase in Product Sales revenues, while
Laboratory Services revenues were essentially flat quarter over quarter.
The Product Sales segment achieved higher sales due to increased sales of
substance abuse testing products and contract manufacturing services, partially
offset by decreased sales of agricultural diagnostic products. Product sales
from substance abuse testing products, which incorporates the EZ-SCREEN(R),
PROFILE(R)-II, PROFILE(R)-ER, PROFILE-IIA(R) and VERDICT(R)-II on-site test kits
and other ancillary products for the detection of abused substances, increased
$0.7 million to $2.6 million in the first quarter of 2002. This growth reflected
strong sales in the PROFILE-ER(R), PROFILE-IIA(R) and VERDICT-II(R) product
lines resulting in a total of 562,000 disposable point of collection devices
sold in the first quarter of 2002 compared to 376,000 devices sold in the same
period of 2001. The PROFILE(R)-ER device is an on-site, nine drugs-of-abuse
panel, targeted at hospital laboratories for emergency response screening in
drugs-of-abuse overdose situations. The PROFILE-IIA(R) device, introduced in
October 2001, screens for five drugs of abuse and uses a unique lateral flow
test strip to screen for the five most common adulterants. The VERDICT(R)-II was
developed for the prison, probation, parole and rehabilitation markets. The
VERDICT(R)-II product line now consists of 16 different configurations to detect
from one to seven drugs of abuse. In the first quarter of 2002, the Company
captured significant new business in California for its VERDICT(R)-II product
line related to the implementation of California Proposition 36, "The Substance
Abuse and Crime Prevention Act of 2000." An integral part of implementing
Proposition 36 involves frequent drug testing of individuals subject to its
mandates.
Sales of contract manufacturing services, microbiological and associated
products increased 32% to $0.4 million, reflecting increased revenues from both
historical customers and new customers. Product sales from agricultural
diagnostic products decreased 45% to $0.1 million primarily as a result of
decreased purchases by the U.S. Department of Agriculture (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.
Laboratory Services revenues were essentially flat quarter over quarter.
Revenues from the Company's specialty laboratory services increased 22% due to
the expansion of clinical testing for the pharmaceutical industry and the
October 2001 acquisition of Leadtech Corporation (Leadtech), a pediatric
lead-testing laboratory. This positive trend was offset by a 9% drop in specimen
volume from the Company's occupational health and corporate clients, reflecting
the impact of the slowing economy and lower levels of employment hiring.
However, this impact has been partially mitigated by the Company's continued
success in acquiring new client relationships and gaining market share.
Gross profit
Consolidated gross margin improved to 39.7% for the three months ended March 31,
2002 compared to 35.8% for the three months ended March 31, 2001, reflecting
improvement in both Product Sales and Laboratory Services gross margins, as well
as the continuing shift in the Company's business mix toward Product Sales at
significantly higher margins.
Laboratory Services gross margin was 31.9% for the three months ended March 31,
2002, up from 31.3% for the same period in 2001. This improvement was primarily
attributable to the Company's continued focus on higher margin specialty
laboratory testing services. Gross margin from Product Sales improved to 63.9%
for the three months ended March 31, 2002 from 54.3% in the comparable period of
2001, driven by an increased mix of higher margin products and manufacturing
efficiencies gained at the production facility.
Selling, general and administrative expenses
Selling, general and administrative expenses were $3.8 million, or 30.6% of
revenues in the first quarter of 2002, compared to $3.1 million or 27.1% of
revenues in the first quarter of 2001. The increase was primarily due to
increased sales and marketing expenses related to acquiring new business. The
increase in the absolute dollar amount of selling, general and administrative
expenses was also attributable to the higher revenue level in the first quarter
of 2002.
Research and development expenses
Research and development expenses decreased 13% in the first quarter of 2002,
principally due to a reduction in research and development expenses associated
with new product development for on-site and other ancillary products in the
Product Sales segment.
Other expense
Other expense, consisting primarily of interest expense, increased 39% in the
first quarter of 2002, reflecting higher average debt levels, partially offset
by lower interest rates.
Net income
In the first quarter of 2002, the Company recorded net income of $0.5 million
compared to $0.4 million in the first quarter of 2001. This slight improvement
was driven by a 6% increase in consolidated revenues and an improving gross
margin, partially offset by increased selling, general, and administrative
expenses and higher interest expense.
Laboratory Services net income was $14,000 in the first quarter of 2002 compared
to $0.3 million in the first quarter of 2001. The decline in net income was
primarily attributable to increased sales and marketing expenses as well as
higher interest expense.
Product Sales net income was $0.5 million in the first quarter of 2002 compared
to $0.1 million in the first quarter of 2001. This improvement was driven by the
growth in sales and an increased gross margin, partially offset by higher
selling, general and administrative expenses.
Liquidity and Capital Resources
The working capital requirements of the Company have been funded primarily by
cash received from bank and debt financing and the sale of equity securities.
Net cash used in operating activities was $0.7 million in the first quarter of
2002 up slightly from $0.6 million in the first quarter of 2001.
Net cash used in investing activities, consisting of capital expenditures, was
$0.6 million in the first quarter of 2002 compared to $7.1 million in the first
quarter of 2001. In the first quarter of 2001, the Company purchased the three
building, 129,039 square foot complex in St. Paul, Minnesota, where the
Company's laboratory segment formerly leased 53,576 square feet. The purchase
price, exclusive of expenses and closing costs, was $6.35 million and was
financed by a mortgage loan from Principal Life Insurance Company of Des Moines,
Iowa in the amount of $6.2 million
Net cash provided by financing activities of $1.3 million in the first quarter
of 2002 primarily represented net proceeds from the revolving credit facility
which were used to fund the Company's operations during the quarter. Net cash
provided by financing activities of $7.5 million in the first quarter of 2001
was principally associated with proceeds received under the mortgage loan
discussed above and the Company's credit agreement for the purchase of capital
equipment.
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 Wells Fargo Credit Agreement requires the Company to comply with certain
covenants and maintain certain quarterly financial ratios as to minimum debt
service coverage and maximum debt to book net worth. It also sets minimum
quarterly net income and book net worth levels, which restrict the payment of
dividends. As of March 31, 2002, the Company was in compliance with the
financial covenants of the Wells Fargo Credit Agreement.
The Company is relying on expected positive cash flow from operations, its line
of credit and capex note to fund its future working capital and asset purchases.
The amount of credit on the revolving line of credit is based primarily on the
receivables of the Company and, as such, varies with the accounts receivable,
and to a lesser degree, the inventory of the Company. As of March 31, 2002, the
Company had total borrowing capacity of $5.7 million on its line of credit, of
which $4.1 million was borrowed, leaving a net availability of $1.6 million as
of March 31, 2002.
In the short term, the Company believes that the aforementioned capital will be
sufficient to fund the Company's planned operations through 2002. While there
can be no assurance that the available capital will be sufficient to fund the
future operations of the Company beyond 2002, 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
historically not been material 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.
Impact of New Accounting Standards
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of long-lived assets and the
associated asset retirement costs. SFAS No. 143 is effective for the Company on
January 1, 2003. The Company is currently in the process of evaluating the
impact of the adoption of SFAS No. 143.
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 2001 and
through March 31, 2002, 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.
As of March 31, 2002 and December 31, 2001, the Company had $1.05 million and
$100,000 of subordinated notes outstanding at fixed interest rates of 10% and
8.5%, respectively. In addition, at March 31, 2002 and December 31, 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. The Company also had capital
leases at various fixed rates. These financial instruments are subject to
interest rate risk and will increase or decrease in value if market interest
rates change.
The Company had approximately $7.7 million and $6.6 million outstanding on its
line of credit and long-term debt issued under the Wells Fargo Credit Agreement
as of March 31, 2002 and December 31, 2001, respectively. The debt under the
Wells Fargo Credit Agreement is held at variable interest rates. The Company has
cash flow exposure on its committed and uncommitted line of credit and long-term
debt due to its variable prime rate pricing. At March 31, 2002 and December 31,
2001, 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 E
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: None
b. Reports on Form 8-K:
On May 7, 2002, the Company filed an amendment on Form 8-K/A
to the Form 8-K originally filed on November 8, 2001 regarding
the Company's acquisition of Leadtech Corporation (Leadtech).
The amended Form 8-K/A contains the audited financial
statements of Leadtech for the period ended September 30, 2001
and certain pro forma information.
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, May 8, 2002
- ------------------------- and Chairman of the Board of Directors
Richard J. Braun (Principal Executive Officer)
/s/ Kevin J. Wiersma Vice President and Chief Operating May 8, 2002
- ------------------------- Officer (Principal Financial Officer)
Kevin J. Wiersma
/s/ Kari L. Golembeck Controller (Principal Accounting May 8, 2002
- ------------------------- Officer)
Kari L. Golembeck