SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
Commission file number 1-11394
MEDTOX SCIENTIFIC, INC.
(Exact name of Registrant as specified in its charter)
Delaware 95-3863205
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
402 West County Road D, St. Paul, Minnesota 55112
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (612) 636-7466
Securities registered pursuant to Section 12(b) of
the Act:
Common Stock, par value $.15 per share
(Title of Class)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]
The aggregate market value of Common Stock of the Registrant, $.15 par value
("Common Stock"), held by non-affiliates of the Registrant is approximately
$18,001,000, as of March 23, 1998, based upon a price of $.3125 which price is
equal to the closing price for the Common Stock on the American Stock Exchange.
The number of shares of Common Stock outstanding as of March 23, 1998, was
57,603,772.
This document contains 108 pages and the Exhibit Index appears at page 41
hereof.
MEDTOX SCIENTIFIC, INC.
FORM 10-K ANNUAL REPORT
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
Table of Contents
ITEM NO. PAGE
Part I
1. Business. . . . . . . . . . . . . . . . 4
2. Properties. . . . . . . . . . . . . . . . 13
3. Legal Proceedings . . . . . . . . . . . . 14
4. Submission of Matters to a Vote of
Security Holders . . . . . . . . . . . . . . . 14
Part II
5. Market for the Registrant's Common Equity
and Related Stockholder Matters. . . . . . . 15
6. Selected Financial Data . . . . . . . . . 17
7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations. . . . . . . . . . . . . . 17
8. Financial Statements and Supplementary
Data . . . . . . . . . . . . . . . . . . 26
9. Changes in and Disagreements With
Accountants on Accounting
and Financial Disclosure . . . . . . . . 26
Part III
10. Directors and Executive Officers
of the Registrant. . . . . . . . . . . . . 26
11. Executive Compensation. . . . . . . . . . . 27
12. Security Ownership of Certain Beneficial
Owners and Management. . . . . . . . . . . ..... 34
13. Certain Relationships and Related
Transactions . . . . . . . . . . . . . . . . .. 35
Part IV
14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K. . . . . . . . . . . . .. 36
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . 42
PART I
CAUTIONARY STATEMENT IDENTIFYING IMPORTANT FACTORS
THAT COULD CAUSE THE COMPANY'S ACTUAL RESULTS TO DIFFER
FROM THOSE PROJECTED IN FORWARD LOOKING STATEMENTS
In connection with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, readers of this document and any
document incorporated by reference herein, are advised that this document and
documents incorporated by reference into this document contain both statements
of historical facts and forward looking statements. Forward looking statements
are subject to certain risks and uncertainties, which could cause actual results
to differ materially from those indicated by the forward looking statements.
Examples of forward looking statements include, but are not limited to (i)
projections of revenues, income or loss, earning or loss per share, capital
expenditures, dividends, capital structure and other financial items, (ii)
statements of the plans and objectives of the Company or its management or Board
of Directors, including the introduction of new products, or estimates or
predictions of actions by customers, suppliers, competitors or regulatory
authorities, (iii) statements of future economic performance, and (iv)
statements of assumptions underlying other statements and statements about the
Company or its business.
This document and any documents incorporated by reference herein also
identify important factors which could cause actual results to differ materially
from those indicated by the forward looking statements. These risks and
uncertainties include price competition, the decisions of customers, the actions
of competitors, the effects of government regulation, possible delays in the
introduction of new products, customer acceptance of products and services, and
other factors which are described herein and/or in documents incorporated by
reference herein.
The cautionary statements made pursuant to the Private Litigation
Securities Reform Act of 1995 above and elsewhere by the Company should not be
construed as exhaustive or as any admission regarding the adequacy of
disclosures made by the Company prior to the effective date of such Act. Forward
looking statements are beyond the ability of the Company to control and in many
cases the Company cannot predict what factors would cause results to differ
materially from those indicated by the forward looking statements.
ITEM 1. BUSINESS.
1. General.
MEDTOX Scientific, Inc. (formerly EDITEK, Inc.), a Delaware corporation,
was organized in September, 1986 to succeed the operations of a predecessor
California corporation. MEDTOX Scientific, Inc. and its subsidiaries, MEDTOX
Laboratories, Inc. and MEDTOX Diagnostics, Inc., are referred to herein as "the
Company". MEDTOX Laboratories, Inc. is a toxicology laboratory which provides
forensic toxicology, clinical toxicology, and heavy metals analyses. MEDTOX
Diagnostics, Inc. develops, manufactures and markets on-site diagnostic and
screening tests which are used to detect substances in humans, foodstuffs,
animals, feed and the environment.
The Company entered the laboratory business on February 11,
1994 when it completed the acquisition of Princeton Diagnostic Laboratories of
America, Inc. ("PDLA"). On January 30, 1996, the Company acquired the assets and
certain liabilities of the predecessor of MEDTOX Laboratories, Inc. MEDTOX
Laboratories, Inc. is now a wholly owned subsidiary. For the fiscal year ended
December 31, 1997, sales from laboratory services accounted for 91% of the
Company's revenues. Revenue from the sale of the Company's on-site diagnostic
and screening tests and other products, including contract manufacturing
services, accounted for 9% of the total revenues of the Company for the year
ended December 31, 1997.
2. Principal Services, Products, and Markets.
General. The Company's principal sources of revenues come from
the sale of laboratory testing services in forensic toxicology, clinical
toxicology, and heavy metal analyses as well as from manufactured products
including a variety of on-site screening products.
A. Employment Drug Testing Laboratory Services. The primary
source of revenues of the Company is the provision of laboratory testing
services for the identification of drugs of abuse. These tests are conducted
using methodologies such as various immunoassays, gas liquid chromatography, and
gas chromatography/mass spectrometry. The Company has pioneered security and
chain of custody procedures, including sample bar coding as well as
stereospecific confirmation methods, to help maintain the integrity of the
specimens and the confidentiality of the test results.
The Company's customers for abused substance testing include
public and private corporations. Among this customer base are Fortune 500
companies. In addition to public and private corporations, abused substance
testing is also conducted on behalf of service firms such as drug treatment
counseling centers, occupational health clinics, third party administrators and
hospitals.
B. Clinical Toxicology. The Company has a fully certified
clinical toxicology reference laboratory specializing in esoteric therapeutic
drug monitoring and emergency toxicology. The tests performed in the clinical
laboratory are conducted using methodologies such as various immunoassays, gas
liquid chromatography, high performance liquid chromatography and gas
chromatography/mass spectrometry. The Company performs the analyses on many
classes of drugs including: analgesic, antianxiety, anticholinergic,
anticoagulant, anticonvulsant, antidepressant, antidiabetic, antiemetic,
antihistamine, antiinflammatory, antimicrobial, antipsychotic, bronchodilotar,
cardiovascular, stimulant, decongestant, immunosuppressant, local anesthetic,
muscle relaxant, narcotic analgesic, and sedative medications.
The Company's clients for this market consist of hospitals,
clinics and other laboratories. Laboratory specimens are delivered to MEDTOX
from clients across the country both by the Company's own couriers, contracted
delivery services and commercial overnight couriers.
C. Heavy metal, trace element, and solvent analyses. The
Company also operates a laboratory in which blood and urine are tested for heavy
metals, trace elements, and solvents. The tests are performed using the
methodologies such as Flame and Flameless Atomic Absorption, Inductively Coupled
Plasma-Mass Spectrometry, and Gas Chromatography.
The Company's clients for this market are other laboratories,
occupational health clinics and companies which need to test patients or
employees monitored for excess exposure to hazardous materials.
D. Products. The Company's test products, which were adapted
from assay technologies previously developed in the 1970's for human medical
diagnostics, are easy to use, inexpensive, on-site tests. The tests are capable
of rapidly detecting the presence of a number of substances in human urine or
blood samples, foodstuffs, animals, feed and the environment without the
necessity of instruments or technical personnel. The Company's diagnostic tests
and the disposable devices used in connection therewith are marketed under the
names EZ-SCREEN(R), QUIK-CARD(R), VERDICT(R), PROFILE(R), and EZ-QUANT(R), which
are registered trademarks of the Company. A QUIK-CARD together with the
necessary reagents, comprise an EZ-SCREEN test. EZ-SCREEN and VERDICT tests are
utilized in agricultural diagnostics (which includes mycotoxin detection, drug
residue surveillance, feed analysis, and regulatory compliance) and clinical
diagnostics (which includes drugs of abuse testing). VERDICT is a
"self-performing", one-step test marketed to the drugs of abuse testing market.
The EZ-QUANT tests are microtiter, ELISA-based, quantitative assays utilized in
agricultural diagnostics.
The EZ-SCREEN tests are used in clinical diagnostics to detect
the presence of certain drugs of abuse in humans. The Company has received
clearance from the Food and Drug Administration ("FDA") for EZ-SCREEN tests for
six of the most commonly abused substances: cannabinoids, cocaine, opiates,
barbiturates, amphetamines, and phencyclidine (PCP). The Company markets this
product line, both domestically and internationally, to law enforcement
agencies, industrial companies for pre-employment screening, physicians'
offices, hospitals, clinics and drug abuse counseling and treatment centers.
VERDICT tests are used to detect the presence of certain drugs
of abuse in humans. The Company is now marketing the one-step VERDICT tests for
cocaine, THC, opiates, barbiturates and PCP, all of which have received 510(k)
premarket clearance from the FDA.
The Company distributes on-site tests for the detection of
alcohol with the EZ-SCREEN Breath Alcohol Test. The test consists of a small
tube containing chemically treated crystals that change color in the presence of
alcohol. The Company purchases these products through a distribution agreement.
The EZ-SCREEN and EZ-QUANT tests are used in agricultural
diagnostics to detect, among other things, mycotoxins, which are hazardous
substances produced by fungal growth. Mycotoxins frequently contaminate corn,
wheat, rye, barley, peanuts, tree nuts, cottonseed, milk, rice, and livestock
feeds. The EZ-SCREEN agridiagnostic tests are marketed to regulatory authorities
and producers of foodstuffs and feeds.
3. Marketing and Sales.
The Company believes that the combined operations of the
laboratory operations and the on-site test kits manufactured by the Company have
created synergy in the marketing of comprehensive, on-site and laboratory
testing programs to a common customer base. The Company is in a position to
offer a full line of products and services for the substance abuse testing
marketplace, including (1) on-site tests for the detection of substance of abuse
drugs (EZ-SCREEN and VERDICT); (2) on-site qualitative and quantitative
determination of alcohol intoxication (both disposable and electronic instrument
detection devices); (3) SAMHSA certified laboratory testing (screening and
confirmation); (4) accessory items (gloves, specimen containers, permanent
recording temperature strips); (5) consultation; and (6) coordination of
collection site services.
The Company currently markets these products and services
through its dedicated sales force, through independent third party
administrators and through occupational health clinics.
Major Customers. The Company had no single customer whose
sales amounted to more than 10% of its total revenues during the year ended
December 31, 1997. One customer's sales amounted to approximately 7% of the
revenues of MEDTOX Laboratories, Inc. while sales to the United States
government and its agencies, primarily the United States Department of
Agriculture ("USDA"), amounted to approximately 13% of the revenues from MEDTOX
Diagnostics, Inc.
4. New Products.
The research and development department of MEDTOX
Laboratories, Inc. develops new assays for new drug entities, develops new
assays for existing metabolites of drugs and other toxins, and improving
existing assays with the goals of improving the assay's robustness, sensitivity,
accuracy, precision, specificity, and cost. In 1997, MEDTOX developed
approximately 100 new assays for drugs, occupational toxins, and their
metabolites. Liquid chromatography, gas chromatography, gas chromatography with
mass spectrometry and inductively coupled plasma mass spectrometry were the
principal techniques used for these new assays. Also during 1997, liquid
chromatography with tandem mass spectrometry (LC/MS/MS) instrumentation was
added as a new technique for the development and performance of assays for
drugs, toxins and metabolites. In 1998, MEDTOX will attempt to continue this
rapid development of new assays with increasing reliance on tandem mass
spectrometry. This new technology should allow MEDTOX to compete more
successfully in its markets due to decreased assay development time, reduced
cost, enhanced sensitivity, and enhanced specificity. The Company believes that
these technologies will improve its laboratory services in clinical toxicology,
forensic toxicology, workplace toxicology, and pharmaceutical research contract
analysis.
The primary research and development effort in 1997 at MEDTOX
Diagnostics, Inc. was devoted to the development of a new generation of on-site
test kits for the detection of drugs of abuse. This unique assay format will
enable the end-user to screen for five to ten different drugs simultaneously
within a ten minute period. A proprietary lateral flow immunochromatographic
device employing colloidal gold technology was developed by the MEDTOX
Diagnostics, Inc. research and development team. This innovative device is
covered by U.S. Patent 5,202,268. Test kits employing this device are user
friendly and offer customers reliable and timely drug screen test results. The
Company believes that this patented state-of-the-art technology will position
MEDTOX Diagnostics, Inc. to compete successfully in the on-site drug screening
market and offer comprehensive drug testing kits and services beginning in
mid-1998. This patented technology also provides the opportunity to develop
assays and products in other niche markets through company-funded projects,
joint ventures or contracted development.
5. Research and Development.
The markets for laboratory testing and clinical diagnostic
products are highly competitive, and innovations and technological changes occur
frequently. For these reasons, the Company has devoted substantial funds to
research and development of its products and services. During the fiscal years
ended December 31, 1997, 1996 and 1995, the Company incurred expenses of
$965,000, $1,280,000, and $920,000 respectively, for research and development.
As of December 31, 1997, the Company employed 17 people in research and
development, 4 of whom hold Ph.D.'s. The Company also has six other people who
hold Ph.D.'s.
6. Raw Materials.
The raw materials required by the laboratory for urine drug
testing consist primarily of two types: specimen collection supplies and
reagents for laboratory analysis. The collection supplies include Drug Testing
Custody and Control Forms that identify the specimen and the client, as well as
document the chain-of-custody. Collection supplies also consist of specimen
bottles and shipping boxes. Reagents for drug testing are primarily immunoassay
screening products and various chemicals used for confirmation testing. The
Company believes all of these materials are available at competitive prices from
other suppliers.
The primary raw materials required for the immunoassay-based
test kits produced by the Company consist of antibodies, antigens and other
reagents, plastic injection-molded devices, glass fiber, nitrocellulose filter
materials, and packaging materials. The Company maintains an inventory of raw
materials which, to date, has been acquired primarily from third parties.
Currently, most raw materials are available from several sources. The Company
possesses the technical capability to produce its own antibodies and has
initiated production of antibodies for certain tests. However, if the Company
were to change its source of supply for raw materials used in a specific test,
additional development, and the accompanying costs, may be required to adapt the
alternate material to the specific diagnostic test.
7. Patents, Trademarks, Licensing and Other Proprietary Information.
The Company holds nine issued United States patents, eight of
which generally form the basis for the EZ-SCREEN and one-step technologies.
Additionally, the Company has one patent which relates to methods of utilizing
whole blood as a sample medium on its immunoassay devices. The Company also
holds various patents in several foreign countries. The Company also holds two
United States patents which it acquired in the acquisition of Granite
Technological Enterprises, Inc. in 1986.
Of the eight U.S. patents mentioned above which generally form
the basis for the EZ-SCREEN and one-step technologies, one expires in 2000, one
expires in 2004, five expire in 2007, and one expires in 2010. The patent which
relates to the methods of utilizing whole blood as a sample medium expires in
2012.
There can be no guarantee that there will not be a challenge
to the validity of the patents. In the event of such a challenge, the Company
might be required to spend significant funds to defend its patents, and there
can be no assurance that the Company would be successful in any such action.
The Company believes that the basic technologies requisite to
the production of antibodies are in the public domain and are not patentable.
The Company intends to rely upon trade secret protection of certain proprietary
information, rather than patents, where it believes disclosure could cause the
Company to be vulnerable to competitors who could successfully replicate the
Company's production and manufacturing techniques and processes.
The Company holds approximately 15 registered trade names
and/or trademarks in reference to its products and corporate names. The trade
names and/or trademarks of the Company range in duration from 10 years to 20
years with expiration dates ranging from 2001 to 2008. Applications have also
been made for additional trade names.
8. Seasonality.
The Company believes that the laboratory testing business is
subject to seasonal fluctuations in pre-employment screening which has low
points in July and December annually. The Company does not believe that
seasonality is a significant factor in sales of its on-site immunoassay tests.
9. Backlog.
There exists a delay in recognition of revenues when setting
up new accounts for laboratory services. From the time an account becomes a
client of the Company to the time the laboratory starts receiving specimens, it
may take up to four months. The delay in receiving samples is primarily due to
the necessity of establishing communication capabilities between the client and
the laboratory, the requirement to ship out collection kits and forms, and the
establishment of a collection site network. At December 31, 1997, the Company
did have several accounts which were in the process of being set up where
revenues are expected to be realized in 1998.
At December 31, 1997, MEDTOX Diagnostics, Inc. did not have
any significant backlog and normally does not have any significant backlog. The
Company does not believe that recorded sales backlog is a significant factor in
its business.
10. Competition.
Laboratory Services. Competition in the area of drugs of abuse testing is
intense. Competitors and potential competitors include forensic testing units of
large clinical laboratories, such as Laboratory Corporation of America Holdings,
Quest Diagnostics, Inc. and SmithKline Laboratories, Inc. and other independent
laboratories, other specialized laboratories, and in-house testing facilities
maintained by hospitals.
Competitive factors include reliability and accuracy of tests,
price structure, service, transportation collection networks and the ability to
establish relationships with hospitals, physicians, and users of drug abuse
testing programs. It should be recognized, however, that many of the competitors
and potential competitors have substantially greater financial and other
resources than the Company.
The industry in which the Company competes is characterized by
service issues including, turn-around time of reporting results, price, the
quality and reliability of results, and an absence of patent or other
proprietary protection. In addition, since tests performed by the Company are
not protected by patents or other proprietary rights, any of these tests could
be performed by competitors. However, there are proprietary assay protocols for
the more specialized testing that are unique to the Company.
Some specific segments of the laboratory testing business are
price competitive with low margins. Other segments, which place a premium on
quality, constitute a large part of the business of MEDTOX Laboratories, Inc.
where, to date, quality service has been a more important competitive factor
than price. This has allowed MEDTOX Laboratories, Inc. to generate positive
gross margins. The Company's ability to successfully compete in the future and
maintain it margins will be based on its ability to maintain its quality and
customer service strength while maintaining efficiencies and low cost
operations. There can be no assurance that price competitiveness will not
increase in importance as a competitive factor in the laboratory testing
business.
Immunoassay Tests. The diagnostics market has become highly
competitive with respect to the price, quality and ease of use of various tests
and is characterized by rapid technological and regulatory changes. The Company
has designed its on-site tests as inexpensive, on-site tests for use by
unskilled personnel, and has not endeavored to compete with laboratory-based
systems. Numerous large companies with greater research and development,
marketing, financial, and other capabilities, as well as government-funded
institutions and smaller research firms, are engaged in research, development
and marketing of diagnostic assays for application in the areas for which the
Company produces its products.
The Company has experienced increased competition with respect
to its immunoassay tests from systems and products developed by others, many of
whom compete solely on price. As the number of firms marketing diagnostic tests
has grown, the Company has experienced increased price competition. A further
increase in competition may have a material adverse effect on the business and
future financial prospects of the Company.
11. Government Regulations.
The products and services of the Company are subject to the
regulations of a number of governmental agencies as listed below. It
is believed that the Company is currently in compliance with all
regulatory authorities. The Company cannot predict whether future
changes in governmental regulations might significantly increase
compliance costs or adversely affect the time or cost required to
develop and introduce new products. In addition, products of the
Company are or may become subject to foreign regulations.
1. Substance Abuse and Mental Health Services Administration (SAMHSA).
MEDTOX Laboratories, Inc. has been certified by SAMHSA since
1988. SAMHSA certifies laboratories meeting strict standards under Subpart C of
Mandatory Guidelines for Federal Workplace Drug Testing Programs. Continued
certification is accomplished through periodic inspection by SAMHSA to assure
compliance with applicable regulations.
2. United States Food and Drug Administration (FDA). Certain tests for
human diagnostic purposes must be cleared by the FDA prior to their marketing
for in vitro diagnostic use in the United States. The FDA regulated products
produced by the Company are in vitro diagnostic products subject to FDA
clearance through the 510(k) process which requires the submission of
information and data to the FDA that demonstrates that the device to be marketed
is substantially equivalent to a currently marketed device. This data is
generated by performing clinical studies comparing the results obtained using
the Company's device to those obtained using an existing test product. Although
no maximum statutory response time has been set for review of a 510(k)
submission, as a matter of policy the FDA has attempted to complete review of
510(k) submissions within 90 days. To date, the Company has received 510(k)
clearance for 11 different products and the average time for clearance was 72
days with a maximum of 141 days and a minimum of 20 days. Products subject to
510(k) regulations may not be marketed for in vitro diagnostic use until the FDA
issues a letter stating that a finding of substantial equivalence has been made.
As a registered manufacturer of FDA regulated products, the Company is
subject to a variety of FDA regulations including the Good Manufacturing
Practices (GMP) regulations which define the conditions under which FDA
regulated products are to be produced. These regulations are enforced by FDA and
failure to comply with GMP or other FDA regulations can result in the delay of
premarket product reviews, fines, civil penalties, recall, seizures, injunctions
and criminal prosecution.
3. Health Care Financing Administration (HCFA). The Clinical Laboratory
Improvement Act (CLIA) introduced in 1992 requires that all in vitro diagnostic
products be categorized as to level of complexity. A request for CLIA
categorization of any new clinical laboratory test system must be made
simultaneously with FDA 510(k) submission. The EZ-SCREEN and VERDICT drugs of
abuse tests currently marketed by MEDTOX Diagnostics, Inc. have been categorized
as moderately complex. The complexity category to which a clinical laboratory
test system is assigned may limit the number of laboratories qualified to use
the test system thus impacting product sales. MEDTOX Laboratories, Inc. is a
CLIA licensed laboratory.
4. Drug Enforcement Administration (DEA). The primary business of the
Company involves either testing for drugs of abuse or developing test kits for
the detection of drugs/drug metabolites in urine. MEDTOX Laboratories, Inc. is
registered with the DEA to conduct chemical analyses with controlled substances.
The MEDTOX Diagnostics, Inc. facility in Burlington, N.C. is registered by the
DEA to manufacture and distribute controlled substances and to conduct research
with controlled substances. Maintenance of these registrations requires that the
Company comply with applicable DEA regulations.
5. United States Department of Defense (DOD). As a result of the Company's
contract with the DOD being classified as SECRET, it has been necessary to
establish the appropriate security procedures and facilities, including
designation of a Facility Security Officer who is responsible for overseeing the
security system, including conduct of periodic security audits by appropriate
defense agencies. Additionally, the Company is now subject to periodic audits of
its accounting systems and records by the Defense Audit Agency.
6. Additional Laboratory Regulations. The laboratories of MEDTOX
Laboratories, Inc. and certain of its laboratory personnel are licensed or
otherwise regulated by certain federal agencies, states, and localities in which
it conducts business. Federal, state and local laws and regulations require
MEDTOX Laboratories, Inc. among other things, to meet standards governing the
qualifications of laboratory owners and personnel, as well as the maintenance of
proper records, facilities, equipment, test materials, and quality control
programs. In addition, the laboratories are subject to a number of other
federal, state, and local requirements which provide for inspection of
laboratory facilities and participation in proficiency testing, as well as
govern the transportation, packaging, and labeling of specimens tested by either
laboratory. The laboratories are also subject to laws and regulations
prohibiting the unlawful rebate of fees and limiting the manner in which
business may be solicited.
The laboratory receives and uses small quantities of hazardous chemicals
and radioactive materials in their operations and are licensed to handle and
dispose of such chemicals and materials. Any business handling or disposing of
hazardous and radioactive waste is subject to potential liabilities under
certain of these laws.
12. Product and Professional Liability.
Manufacturing and marketing of products by the Company entail
a risk of product liability claims. In August, 1993, the Company procured
insurance coverage against the risk of product liability arising out of events
after such date, but such insurance does not cover claims made after that date
based on events that occurred prior to that date. The insurance policy covers
damages that the Company is legally obligated to pay as a result from bodily
injury and property damage. Consequently, for uncovered claims, the Company
could be required to pay any and all costs associated with any product liability
claims brought against it, the cost of defense whatever the outcome of the
action, and possible settlement or damages if a court rendered a judgment in
favor of any plaintiff asserting such a claim against the Company. Damages may
include punitive damages, which may substantially exceed actual damages. The
obligation to pay such damages could have a material adverse effect on the
Company and exceed its ability to pay such damages. No product liability claims
are pending.
The Company's laboratory testing services are primarily
diagnostic and expose the Company to the risk of liability claims. The Company's
laboratories have maintained continuous Professional and General Liability
insurance since 1984. The insurance policy covers those amounts the Company is
legally obligated to pay from damages resulting from a Medical Incident, which
arises out of a Failure to Render Professional Services. To date, the Company
has not had any substantial product liability and no material professional
service claims are currently pending.
13. Employees.
As of December 31, 1997, the Company had a total of
approximately 280 full time employees as compared to approximately 320 full time
employees at December 31, 1996. Of the approximate 280 employees, 250 work at
and for MEDTOX Laboratories, while the remaining 30 work at MEDTOX Diagnostics,
Inc.
The Company's employees are not covered by any collective
bargaining agreements, and the Company has not experienced any work stoppages
and the Company considers its relations with its employees to be good.
ITEM 2. PROPERTIES.
The Company leases approximately 33,000 square feet in
Burlington, North Carolina, where it maintains the offices, research and
development laboratories, production operations, and warehouse of MEDTOX
Diagnostics, Inc. The total rent paid by the Company for this site during the
fiscal year ended December 31, 1997 was approximately $121,000. These facilities
are currently leased from Dr. Samuel C. Powell, a member of the Board of
Directors of the Company. The Company is currently leasing the space on a
month-to-month basis. The Company intends to negotiate a new lease with Dr.
Powell in the future. The Company believes it is renting these facilities on
terms as favorable as those available from third parties for equivalent
premises. In the opinion of management, comparable alternative facilities could
be obtained without disruption of its business if a new lease with Dr. Powell is
not negotiated. See "Item 13 - Certain Relationships and Related Transactions."
The administrative offices and laboratory operations of MEDTOX
Laboratories, Inc. are located in a 41,017 square foot facility in St. Paul,
Minnesota. The facility is rented under a lease which expires in March 1999. The
current annual rent, excluding operating costs, for the facility is $330,000 per
year.
The Company leases administrative offices and laboratory
facilities in an approximate 22,000 square foot facility in South Plainfield,
New Jersey. The rent payment, excluding operating costs, is $170,345 per year.
The lease runs through April, 2000. The facility is currently idle and the
Company is aggressively seeking a tenant to sub-lease the facility. The costs of
the facility have been considered in the Company's restructuring charge in 1996.
See Note 8 to the Notes of the Consolidated Financial Statements contained
herein.
The Company believes that its existing facilities are adequate
for the purposes being used to accommodate its product development, and
manufacturing and laboratory testing requirements.
ITEM 3. LEGAL PROCEEDINGS.
The Company is a defendant to claims of patent infringement
asserted on August 20, 1996 by United States Drug Testing Laboratories, Inc. It
is alleged that the Company infringes two patents allegedly owned by United
States Drug Testing Laboratories relating to forensically acceptable
determinations of gestational fetal exposure to drugs and other chemical agents.
The Company has answered the complaint denying any infringement and has
counterclaimed for a declaratory judgment that the patents are invalid,
unenforceable, and not infringed. It also has counterclaimed for unfair
competition under federal and state law, requesting money damages as well as
injunction relief. The Company, while not abandoning its legal recourse, has
recently entered into settlement discussions with United States Drug Testing
Laboratories, Inc.
On January 31, 1997, the Company filed suit in Federal
District Court in Minnesota against Morgan Capital LLC, David Bistricer and Alex
Bistricer alleging violation in Section 16b of the Securities and Exchange Act
of 1934 and seeking recovery of more than $500,000 in short-swing profits.
Messrs. David and Alex Bistricer are former directors of the Company. On August
4, 1997, the U.S. District Court granted Defendants' motion to dismiss the
Company's complaint, ruling that the Defendants' conduct did not constitute a
violation of Section 16(b). On October 29, 1997, the Company filed an appeal of
that decision to the United States Court of Appeals for the Eighth Circuit. That
appeal is currently pending.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.
The Annual Meeting (the "1996 Annual Meeting") of the
stockholders of the Company was held on May 8, 1997. The following individuals
were elected to serve on the Board of Directors of the Company for the ensuing
year and until their respective successors are duly elected and qualified: Harry
G. McCoy, Pharm.D., Samuel C. Powell, Ph.D., Richard A. Braun, Louis Perlman and
James W. Hansen. Also by a vote of 36,573,377 shares in favor and 5,522,857
shares against, at the 1996 Annual Meeting, the stockholders of the Company
approved the adoption of an amendment to the Certificate of the Corporation to
change the name of the Company to MEDTOX Scientific, Inc. During the year ended
December 31, 1996, no other matters were submitted to a vote of securities
holders.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Common Stock
Since September 27, 1993, the Common Stock has been listed on
the American Stock Exchange currently trading under the symbol "TOX". From
September 16, 1992 to September 26, 1993 the Common Stock was traded in and
quoted in the Emerging Company Marketplace of the American Stock Exchange
("ECM") under the trading symbol "EDI.EC". As of March 23, 1998, the number of
holders of record of the Common Stock was 3,033. The following tables set forth,
for the calendar quarters indicated, the high and low closing price per share
for the Common Stock, as reported by the American Stock Exchange. The quotations
shown represent inter dealer prices without adjustment for retail markups,
markdowns or commissions, and do not necessarily reflect actual transactions:
1998: (through March 23, 1998) High Low
First Quarter................... 3/8 1/4
1997:
First Quarter......................... 5/8 3/8
Second Quarter........................ 1/2 3/8
Third Quarter......................... 1/2 5/16
Fourth Quarter......................... 3/8 1/4
1996:
First Quarter.......................... 3-11/16 2-7/8
Second Quarter.............. 2-3/8 5/8
Third Quarter................. 1-3/8 13/16
Fourth Quarter............... 1-3/8 7/16
On March 23, 1998, the closing price of the Common Stock as
reported by the American Stock Exchange was $.3125.
No dividends have been declared or paid by the Company since its inception.
Series A Preferred Stock
To help finance the acquisition of the predecessor to MEDTOX
Laboratories, Inc. and provide working capital, the Company issued 407 shares of
Series A Preferred Stock in January 1996. There are currently no remaining
shares of Series A Preferred Stock outstanding.
The Series A Preferred Stock was convertible into shares of
Common Stock, at any time from March 30, 1996, the 60th day after the shares of
Series A Preferred Stock were first issued by the Company (the "Initial
Conversion Date"), until January 30, 1998, the second anniversary of the Initial
Preferred Issuance Date, at which time all conversion rights terminated. The
Series A Preferred Stock had no voting power and had certain liquidation
preference and dividend rights. The number of shares of Common Stock issuable
upon conversion of a share of Series A Preferred Stock equaled the number
derived by dividing (i) the purchase price of the Series A Preferred Stock
($50,000 per share) by the lesser of (i) $2.775 or (ii) 75% of the Market Price
of the Common Stock on the day the shares of Series A Preferred Stock were
converted into Common Stock. "Market Price" is defined for this purpose as the
daily average of the closing bid prices quoted on the American Stock Exchange or
other exchange on which the Common Stock is traded for the five trading days
immediately preceding the date the shares are converted.
No dividends on the Series A Preferred Stock were declared or
paid prior to their conversion to Common Stock.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data are derived from
financial statements of the Company and should be read in conjunction with the
financial statements, related notes, and other financial information included
herein.
Years Ended December 31
1997 1996 1995 1994 1993
----- ------ -------- ----- ------
(in thousands, except per share amounts)
Net revenues $28,600 $26,726 $7,526 $6,593 $2,633
Net income (loss) 25 (12,809) (7,285) (3,546) (3,066)
Preferred stock
deemed dividend -0- 6,783 -0- -0- -0-
Net income (loss)
applicable to
common stockholders 25 (19,592) (7,285) (3,546) (3,066)
Net loss per share
applicable to common
stockholders (0.00) (0.59) (0 .77) (0.49) (0.56)
Total assets 24,881 24,079 3,938 7,378 4,005
Long term debt -0- -0- -0- 63 -0-
Cash dividends -0- -0- -0- -0- -0-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
General
The Company commenced operations in June 1983 and until 1986
was a development stage company. The Company became engaged in the manufacture
and sale of products as a result of its acquisition of Granite Technological
Enterprises, Inc. in June 1986. The Company began the manufacture and sale of
its EZ-SCREEN diagnostic tests in 1985 and introduced its patented one-step
assay, VERDICT and RECON, in 1993. In February 1994, the Company completed the
acquisition of PDLA. In January 1996, the Company completed the acquisition of
the predecessor of MEDTOX Laboratories, Inc. The results of operations for the
year ended December 31, 1996 include the results of operations of MEDTOX
Laboratories, Inc. for the period January 30, 1996 through December 31, 1996.
Since inception, the Company has financed its working capital requirements
primarily from the sale of equity securities.
Year ended December 31, 1997 Compared to Year ended December 31, 1996
Total revenues for the year ended December 31, 1997 were
$28,600,000 as compared to $26,726,000 for the year ended December 31, 1996. The
increase was attributable to the increase in revenues from laboratory services.
Laboratory service revenues were $25,899,000 for the year ended December 31,
1997 as compared to $23,541,000 for the year ended December 31, 1996. This
increase of 10% was primarily the result of the timing of the acquisition of
MEDTOX Laboratories, Inc. whereby the Company realized revenues from MEDTOX
Laboratories, Inc. for approximately eleven months during the year ended
December 31, 1996, as compared to the complete year ended December 31, 1997. Had
the acquisition of MEDTOX Laboratories, Inc. been effective January 1, 1996, the
Company would have had revenues of $24,741,000 from laboratory services during
the year ended December 31, 1996, as compared to the $25,899,000 realized from
the sale of laboratory services during the year ended December 31, 1997. This
would represent a pro forma increase of $1,158,000 or 5%. The increase in sales
of laboratory services was the result of a pro forma increase of 11% in total
samples received by the laboratory in 1997 as compared to 1996.
Product sales include the sales generated from substance abuse
testing products, which incorporates the EZ-SCREEN and VERDICT on-site test kits
and other ancillary products for the detection of abused substances. Sales from
these products were $1,525,000 for the year ended December 31, 1997 compared to
sales of $1,471,000 recorded for the same period in 1996.
Product sales also include sales of agricultural diagnostic
products. Sales of these products were $736,000 for the year ended December 31
1997, compared to sales of $1,110,000 for the year ended December 31, 1996. For
the year ended December 31, 1996, the Company had sales of $367,000 which were
generated through the former operations of Bioman. Excluding these revenues,
sales of agricultural diagnostic products were $603,000 for the year ended
December 31, 1996. As such, the sales of these products for the year ended
December 31, 1997 were, on a pro forma basis, 22% higher than during the
comparable period in 1996. The primary reason for the increase was due to
increased purchases by the USDA for the Company's products.
Sales of contract manufacturing services, microbiological and
associated product sales were $434,000 for the year ended December 31, 1997
compared to $301,000 for the same period in 1996. This increase was due to
increased revenues from contract manufacturing services.
Revenues generated from the shipment of products to the U.S.
Department of Defense were $75,000 for the year ended December 31, 1996. The
Company had no such sales during the year ended December 31, 1997. The contract
the Company had with the Department of Defense has expired. At this time, the
Company does not know if the U.S. Department of Defense intends to purchase any
more of the kits the Company has developed.
For the year ended December 31, 1997, the Company had no
revenues from royalties and fees, compared to $90,000 for the year ended
December 31, 1996. This decrease was primarily due to the absence of royalties
from American Medical Laboratories, Inc. ("AML") as the agreement with AML has
expired.
Revenues from interest and other income for the year ended December 31,
1997 were $6,000 compared to $138,000 for the year ended December 31, 1996.
The gross margin from the revenues generated from the
laboratory services was 37% for the year ended December 31, 1997 as compared to
a gross margin of 35% for the same period in 1996. During the year ended
December 31, 1997, the Company was able to offset declining average selling
prices by reducing costs through the consolidation of laboratory operations in
1996 as well as continued improvements in efficiency of laboratory operations.
Gross margins from the sales of both manufactured products and
products purchased for resale for the year ended December 31, 1997 were 37%
compared to 27% of sales of these products during the year ended December 31,
1996. This increase in gross margin from product sales is primarily the result
of the increased sales of the EZ-SCREEN PROFILE product and contract
manufacturing services, as well as reduced costs as a result of certain
restructuring steps taken in 1996.
Selling, general and administration expenses for the year
ended December 31, 1997 were $9,113,000, compared to $11,725,000 for the year
ended December 31, 1996. The $2,612,000 reduction in these expenses in 1997 was
primarily the result of the consolidation of certain administrative functions
into the MEDTOX Laboratories, Inc. facility, decreased amortization expense, and
an overall effort to monitor and control costs.
Research and development expenses incurred during the year
ended December 31, 1997 were $965,000 as compared to $1,280,000 for the same
period in 1996. The reduction of $315,000 in research and development expenses
is primarily the result of a reduction of personnel and a refocus of efforts in
the research and development function associated with the Company's on-site
products.
For the year ended December 31, 1997, the Company incurred
interest and financing costs of $609,000, compared to costs of $469,000 incurred
during the year ended December 31, 1996. This increase was the result of the
funds borrowed by the Company to fund asset purchases and working capital
requirements.
During the year ended December 31, 1996, the Company
determined that it would be beneficial to consolidate the laboratory operations
of PDLA into the laboratory operations at MEDTOX Laboratories, Inc. as well as
to down size certain administrative positions at both PDLA and MEDTOX
Laboratories, Inc. in order to eliminate duplicative functions. The Company also
determined that to improve the operating results of the Company, it would be
necessary to sell the former operations of Bioman, close its farm facility and
reduce its work force at its Burlington, North Carolina location. As a result of
these restructuring steps, the Company recorded charges of $2,449,000 during the
year ended December 31, 1996 to cover certain costs of the restructurings,
including $907,000 related to certain severance payments (see Note 8 of the
Financial Statements). The Company had no such charge during the year ended
December 31, 1997.
The Company periodically undertakes a review of the value of
the goodwill associated with the acquisition of MEDTOX Laboratories, Inc. The
purpose of the reviews is to determine if the value of the goodwill, generated
as a result of the price paid by the Company for MEDTOX Laboratories, Inc., was
in fact supported by the projected future benefit to the Company as measured by
generated cash flow.
Given the highly competitive nature of the testing
marketplace, the industry is undergoing, and MEDTOX Laboratories, Inc. began to
experience, a declining average selling price. The Company expects this trend to
continue. In addition, the Company expects that alternative testing methods,
including on-site testing, are available or may become available in future years
that may make the current forms of laboratory testing less competitive. While
the Company expects to continue to develop and/or evaluate new testing
technologies, the current form of laboratory testing at MEDTOX Laboratories,
Inc. could not support the carrying value of the goodwill from the sale of that
laboratory to the Company.
Utilizing an undiscounted cash flow analysis, the Company
determined that the carrying value of the remaining goodwill associated with the
MEDTOX Laboratories, Inc. acquisition exceeded the estimated cash flows.
Accordingly, the Company recorded a write-off of $6,016,000 at December 31,
1996. The noncash write-off of the goodwill has reduced the future amortization
expense of the Company by $317,000 per year. The Company determined that no such
write-off was required in 1997.
As a result of the above, the net income for the year ended
December 31, 1997 was $25,000, compared to the net loss of $12,809,000 for the
year ended December 31, 1996.
In March 1997, the Securities and Exchange Commission Staff
(the "Staff") announced its position on accounting for preferred stock which is
convertible into common stock at a discount from the market rate at the date of
issuance. To comply with this position, the Company restated its loss for the
year ended December 31, 1996 applicable to common stockholders to reflect a
deemed dividend of $6,783,000 related to the January 1996 sales of the Series A
Preferred Stock. The dividend resulted in an increase in the previously reported
net loss applicable to common stockholders from $12,809,000 to $19,592,000 for
the year ended December 31, 1996. The Company had no such charge for the year
ended December 31, 1997.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Total revenues for the year ended December 31, 1996 were
$26,726,000 as compared to $7,526,000 for the year ended December 31, 1995. The
increase was attributable to the increase in revenues from products and
services. These revenues totaled $26,498,000 for the year ended December 31,
1996 as compared to $7,037,000 for the prior year.
Laboratory service revenues were $23,541,000 for the year
ended December 31, 1996, compared to $4,312,000 for the year ended December 31,
1995. This increase was due to the revenues contributed by the MEDTOX
Laboratories, Inc. customer base. The revenues generated by MEDTOX Laboratories,
Inc. for the period February 1, 1995 through December 31, 1995 were $18,791,000
providing for pro forma comparable laboratory service revenues for the year
ended December 31, 1995 of $23,103,000 as compared to the $23,541,000 of
revenues realized from the sales of laboratory services for the year ended
December 31, 1996.
Included in product sales are the sales generated from
substance abuse testing products, which incorporates the EZ-SCREEN and VERDICT
on-site test kits and other ancillary products for the detection of abused
substances. Sales from these products were $1,471,000 for the year ended
December 31, 1996 compared to $1,180,000 recorded for the year ended December
31, 1995. This increase of 25% was primarily the result of sales of the
EZ-SCREEN PROFILE test kits which were introduced in May of 1996, as well as
increased sales of the VERDICT test kits.
Product sales also include sales of diagnostic products for
the agricultural market. Sales of these products were $1,110,000 for the year
ended December 31, 1996 as compared to $1,090,000 for the year ended December
31, 1995.
Sales of other products, including contract manufacturing
services were $301,000 for the year ended December 31, 1996. Sales of these
products and services were $393,000 for the year ended December 31, 1995. The
decrease of 23% was primarily the result of the Company's decision not to market
these products. Accordingly, the Company closed down the operations of its farm
facility during 1996. While the closure will decrease the amount of revenues
generated from these sales, the elimination of the costs of the farm facility
are expected to improve the overall gross margin. The Company does, however,
intend to pursue additional contract manufacturing contracts.
Revenues generated from the shipments of products to the U.S.
Department of Defense were $75,000 for the year ended December 31, 1996 as
compared to $62,000 for the year ended December 31, 1995.
Revenues from royalties and fees during the year ended
December 31, 1996 were $90,000, compared to $300,000 for the year ended December
31, 1995. This decrease was primarily due to lower royalties from American
Medical Laboratories, Inc. ("AML"), as AML lost accounts that required payment
of royalties to the Company.
Revenues from interest and other income for the year ended
December 31, 1996 were $138,000 compared to $189,000 for the year ended December
31, 1995. The $189,000 in 1995 included the recovery of debts owed by a customer
of laboratory services which had been written off, as well as a payment made to
the Company by the landlord of the facility in New Jersey for renewing the lease
for that facility. During 1996, there was no such payment or recovery of such
debts.
The gross margin from the revenues generated from the
laboratory services was 35% for the year ended December 31, 1996 an increase
compared to 1995, when the gross margin was 9%. The improvement in the gross
margin was primarily due to the operations of MEDTOX Laboratories, Inc. and the
consolidation of the laboratory operations of PDLA into the laboratory
operations of MEDTOX Laboratories, Inc.
Gross margins from the sales of both manufactured products and
products purchased for resale for the year ended December 31, 1996 were 27%
compared to 18% of sales of these products during the year ended December 31,
1995. This increase in gross margin from product sales is primarily the result
of the increased sales of contract manufacturing services, sales of the
EZ-SCREEN PROFILE test kits, as well as sales of the agricultural products sold
through DIAGNOSTIX.
Selling, general and administration expenses for the year
ended December 31, 1996 were $11,725,000, compared to $4,630,000 for the year
ended December 31, 1995. Of the $7,095,000 increase, MEDTOX Laboratories, Inc.
related expenses totaled $6,568,000. Net of MEDTOX Laboratories, Inc., there was
an increase of $527,000 compared to the same period in 1995. This increase is
primarily due to $1,161,000 of amortization expense related to goodwill
resulting from the MEDTOX Laboratories, Inc. acquisition. In addition, the
Company has expensed in excess of $1,000,000 for legal fees during the year
ended December 31, 1996. These legal fees are primarily for expenses relating to
the Company's inability to issue shares to certain of the Series A Preferred
Shareholders.
Research and development expenses incurred during the year
ended December 31, 1996 were $1,280,000 as compared to $920,000 for the same
period in 1995. This increase of $360,000 was primarily the result of $398,000
of research and development expenses from MEDTOX Laboratories, Inc. as well as
increases in personnel costs.
For the year ended December 31, 1996, the Company incurred
interest expense of $469,000, compared to interest expense of $23,000 incurred
during the year ended December 31, 1995. This increase was the result of the
funds borrowed by the Company to complete the financing for the acquisition of
MEDTOX Laboratories, Inc.
In connection with the acquisition of MEDTOX Laboratories,
Inc., the Company determined that it would be beneficial to consolidate the
laboratory operations of PDLA into the laboratory operations at MEDTOX
Laboratories, Inc. as well as to down size certain administrative positions at
both PDLA and MEDTOX Laboratories, Inc. in order to eliminate duplicative
functions. The Company also determined that to improve the operating results of
the Company, it would be necessary to sell the former operations of Bioman,
close its farm facility and reduce its work force at its Burlington, North
Carolina location. As a result of these restructuring steps, the Company has
taken charges of $2,449,000 during the year ended December 31, 1996 to cover
certain costs of the restructurings, including $907,000 related to certain
severance payments (see Note 8 of the Financial Statements). The Company had no
such charge during the year ended December 31, 1995.
As previously reported, the Company completed a review of the
value of the goodwill associated with the acquisition of MEDTOX Laboratories,
Inc. in 1996. The purpose of the review was to determine if the value of the
goodwill, generated as a result of the price paid by the Company for MEDTOX
Laboratories, Inc., was in fact supported by the projected future benefit to the
Company as measured by generated cash flow.
Utilizing an undiscounted cash flow analysis, the Company
determined that the carrying value of the remaining goodwill associated with the
MEDTOX Laboratories, Inc. acquisition exceeded the estimated cash flows.
Accordingly, the Company recorded a write-off of $6,016,000 at December 31,
1996. The noncash write-off of the goodwill will reduce the future amortization
expense of the Company by $317,000 per year. At December 31, 1995, the Company
recorded a write-off of $3,073,000 of the goodwill associated with the
acquisition of PDLA.
As a result of the above, the net loss for the year ended December 31, 1996
was $12,809,000 compared to the net loss of $7,285,000 for the year ended
December 31, 1995.
In March 1997, the Securities and Exchange Commission Staff
(the "Staff") announced its position on accounting for preferred stock which is
convertible into common stock at a discount from the market rate at the date of
issuance. To comply with this position, the Company restated its loss for the
year ended December 31, 1996 applicable to common stockholders to reflect a
deemed dividend of $6,783,000 related to the January 1996 sales of the Series A
Preferred Stock. The restatement resulted in an increase in the previously
reported net loss applicable to common stockholders from the previously reported
$12,809,000 to $19,592,000 for the year ended December 31, 1996. The Company had
no such charge for the year ended December 31, 1995.
Management believes the acquisition of MEDTOX Laboratories,
Inc. has and will continue to improve the operating results of the Company.
Management expects net sales to grow through both the addition of new accounts,
through increased selling efforts, as well as the introduction of new products
and services, such as additional on-site tests and additional laboratory tests.
The Company will also continue to pursue strategic acquisitions to increase
sales.
Material Changes in Financial Condition
At December 31, 1997, net accounts receivable were $5,611,000.
This $1,058,000 increase as compared to $4,553,000 at December 31, 1996 was
primarily due to increased sales of laboratory services in the fourth quarter of
1997 as compared to the same quarter in 1996.
Prepaid expenses and other assets were $415,000 at December
31, 1997 as compared to $140,000 at December 31, 1996. The increase of $275,000
is primarily the result of the renewal of annual maintenance contracts, annual
licenses and fees, an increase in prepaid supplies, and prepayments made for the
purchase of certain laboratory equipment.
The balance of equipment and improvements at December 31, 1997
was $11,912,000 as compared to a balance of $10,129,000 at December 31, 1996.
The increase of $1,783,000 was the result of purchases of equipment and capital
improvements for the laboratory operation to improve efficiencies and reduce
operating costs.
As of December 31, 1997, accounts payable totaled $3,768,000
compared to $2,387,000 at December 31, 1996. The increase of $1,381,000, or 58%,
is primarily the result of increased purchases of kits, forms and other supplies
as a result of increased business for the laboratory testing services, as well
as certain capital expenditures.
Accrued expenses were $1,326,000 at December 31, 1997, as
compared to $2,074,000 at December 31, 1996. The decrease of $748,000, or 36%,
was the result of payments made during 1997 for expenses accrued at December 31,
1996.
At December 31, 1997, the Company had a total balance of
leases payable of $407,000 compared to a balance of $26,000 at December 31,
1996. The increase in the balance of the leases payable was the result of the
purchase of certain equipment to improve operating efficiencies in the
laboratory.
At December 31, 1997, the Company had a total balance of
restructuring accruals of $786,000 compared to a balance of $1,803,000 at
December 31, 1996. The decrease in the balance of the restructuring accruals of
$1,017,000, or 56%, was the result of payments made during 1997 and an
adjustment of $397,000 in the amount of certain accrued liabilities.
At December 31, 1997, the Company had a total loan balance
owed to its financial lender of $5,016,000, compared to a total balance of
$4,227,000 owed at December 31, 1996. The net increase of $789,000, or 19%, was
primarily the result of increased borrowings by the Company from its line of
credit to pay certain accrued expenses and restructuring accruals as well as
purchases of certain assets to improve operating efficiencies.
Liquidity and Capital Resources
Since its inception, the working capital requirements of the
Company have been funded primarily by cash received from equity investments in
the Company and more recently debt financing. At December 31, 1997, the Company
had cash and cash equivalents of $58,000. The Company is currently marginally
profitable and, as such, is relying on a continued positive cash flow from
operations and its line of credit to fund its working capital and asset
purchases. The amount of credit on the revolving line of credit is based
primarily on the receivables of the Company and, as such, varies with the
accounts receivable, and to a lesser degree the inventory of the Company. As of
December 31, 1997, the Company had total availability of $3,604,000 on the line
of credit of which $3,587,000 was borrowed, leaving a net availability of
$17,000 as of December 31, 1997.
On January 14, 1998, the Company entered into a Credit
Security Agreement (the "Norwest Credit Agreement") with Norwest Business Credit
("Norwest"). The Norwest Credit Agreement consists of (i) a term loan of
$2,125,000 which matures on January 15, 1999, (ii) a term loan of $700,000 which
matures on January 15, 1999, (iii) a revolving line of credit based upon the
balance of the Company's trade accounts receivable, and (iv) a note of up to
$1,200,000 for the purchase of capital equipment for 1998. The Company borrowed
$2.0 million of an available $2.8 million under the revolving line of credit.
The term loan of $2,125,000 carries an interest rate equal to 1.25% above the
publicly announced rate of interest by Norwest Bank Minnesota, N.A. (the "Base
Rate"). The $700,000 term loan has an interest rate equal to 3.00% above the
Base Rate as does the line of credit. The note for the capital expenditures
carries an interest rate equal to 1.25% above the Base Rate. The Company
utilized $4.5 million of the proceeds received from Norwest to pay off the
outstanding loan balance owed to its former lender.
In the short term, the Company believes that the
aforementioned capital will be sufficient to fund the Company's planned
operations through 1998, although there can be no assurance that the available
capital will be sufficient to fund the future operations of the Company beyond
1998. The Company believes that consistent profitable earnings, as well as
access to capital, will be the primary basis for funding the operations of the
Company for the long term.
The Company believes that the acquisition of MEDTOX
Laboratories, Inc., the subsequent consolidation of the laboratory operations
from PDLA into MEDTOX Laboratories, Inc., and other synergy that has been and
will continue to be realized from the acquisition of MEDTOX Laboratories, Inc.
will enable the Company to generate positive cash flow. The Company continues to
follow a plan which includes (i) continuing to aggressively monitor and control
costs, (ii) increasing revenue from sales of the Company's products, services,
and research and development contracts, as well as (iii) continue to selectively
pursue synergistic acquisitions to increase the Company's critical mass. There
can be no assurance that costs can be controlled, revenues can be increased,
financing may be obtained, acquisitions successfully consummated, or that the
Company will continue to be profitable.
The Company has created a Year 2000 Committee comprised of
management and technical personnel to assess the potential impact of the year
2000 on the processing of date-sensitive information by the Company's
computerized systems and on product purchases and product sales by the Company.
The Committee's assessment is expected to be complete and an action plan put in
place by mid-1998. While there can be no assurance that all problems arising
from the year 2000 will be identified and resolved satisfactorily prior to 2000,
the Company currently believes that the year 2000 problem will not create
significant operational problems for the Company or have a material effect on
the Company's financial condition, results of operations or liquidity.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Reference is made to the financial statements, financial
statement schedule and notes thereto included later in this report under Item
14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS.
Initial
Name Age Position with the Company Effective Date
Harry G. McCoy 46 Chairman of the Board of Directors, 1996
President and Director
Richard J. Braun 53 Chief Executive Officer and Director 1996
Peter J. Heath 39 Secretary, Vice President Finance, 1991
Chief Financial Officer
Samuel C. Powell, Ph.D. 45 Director 1987
Louis Perlman 64 Director 1996
James W. Hansen 42 Director 1996
Miles E. Efron 71 Director 1997
Harry G. McCoy, Pharm.D., was elected Chairman of the Board of Directors
and President in July 1996 and has served as a Director since January, 1996. Dr.
McCoy founded MEDTOX in 1984, and served as both Clinical Director and member of
the MEDTOX Board of Directors until its acquisition by the Company in January,
1996. Dr. McCoy continued as President of MEDTOX following its acquisition by
the Company. Dr. McCoy also has academic appointments with the University of
Minnesota and the University of North Dakota, and is Chairman and CEO of the
Nova Jazz Corporation, a Minnesota non-profit company.
Richard J. Braun was named as a Director and elected as Chief Executive
Officer in July, 1996. From 1994 until joining the Company, Mr. Braun acted as a
private investor and provided management consulting services to the health care
and technology industries. From 1992 until 1994, Mr. Braun served as Chief
Operating Officer and as a Director of EBP, Inc., a NYSE company engaged in
managed care. From 1989 through 1991, Mr. Braun served as Executive Vice
President, Chief Operating Officer and Director of Reich and Tang L.P., a NYSE
investment advisory and broker dealer firm. Mr. Braun currently is a Director of
Endstar, Inc., a public company with investments in health care, and
computer connectivity, and networking.
Peter J. Heath was appointed Vice President - Finance and Chief Financial
Officer on April 29, 1991. Mr. Heath was appointed Secretary and Chief
Accounting Officer effective October 31, 1990. Mr. Heath has held the position
of Controller of the Company since July, 1986. Mr. Heath was employed as
Controller and Office Manager of Granite from January, 1984 until its
acquisition by the Company in June 1986.
Samuel C. Powell, Ph.D., served as Chairman of the Board of Directors
from November 1987 to June 1994 and has served as a Director of the Company
since September, 1986. Dr. Powell served as Chairman of the Board and Chief
Executive Officer of Granite Technological Enterprises, from January, 1984 until
its acquisition by the Company in June 1986. Since 1987, he has been President
of Powell Enterprises, Burlington, North Carolina, offering financial and
management services to a variety of businesses and real estate ventures.
Additionally, Dr. Powell has been involved in local politics since 1985 as
Councilman for the City of Burlington, N.C. Dr. Powell has also been appointed
to serve on the North Carolina Board of Science and Technology from 1989 to
1995, and as a Board Member and Chairman of the N.C. State Alcoholism Research
Authority.
Louis Perlman was named as a Director in July, 1996. Since 1987, Mr.
Perlman has served as a director of Alliance National, Inc., an executive office
suite company. Mr. Perlman is also the President of Amsterdam Industries, a
company which markets women's apparel, a position he has held since 1973. Since
1980, Mr. Perlman has been Executive Vice President and Director of House of
Ronnie, a manufacturer of women's and children's apparel.
James W. Hansen was named as a Director in September, 1996. Mr. Hansen
has, since November, 1996, been Chairman, CEO and Treasurer of Videolabs, Inc.,
a NASDAQ traded, technology company and is CEO of Prevention First, a
development stage medical services provider. From 1986 to 1992, Mr. Hansen was
Senior Vice President and General Manager of the Pension Division of Washington
Square Capital, a Reliastar company which is a NYSE traded financial services
company. Since 1992, Mr. Hansen has served as an Investor, Director, President
or Vice President of several private companies in medical services and
technology. He also serves as a Director of UBIQ, Inc., Videolabs, Inc. and
Prevention First and has taught in the MBA program at the University of St.
Thomas since 1984.
Miles E. Efron was named as a Director in January, 1997. From 1988 to 1993,
Mr. Efron served as Chief Executive Officer of North Star Universal, a holding
company with interests in health care, food products and computer connectivity
and networking. Since 1993, Mr. Efron has served as Chairman of North Star
Universal. Mr. Efron currently serves on the Board of Directors of several
companies, none of which are related to the Company.
ITEM 11. EXECUTIVE COMPENSATION
The following table and the narrative text discuss the compensation
paid during 1997 and the two prior fiscal years to the Company's President and
Chief Executive Officer and to the other executive officers whose annual salary
and bonuses exceeded $100,000 during 1997.
Summary Compensation Table
Long Term Compensation
-----------------------------------------------------------------------
Annual Compensation Awards Payouts
Other
Annual Restricted Options/ LTIP All Other
Name and Principal Compen- Stock SAR's Payouts Compen-
Position Year Salary Bonus sation(1) Awards (2) (#) (2) sation
Harry G. McCoy 1997 $199,489 -- -- -- -- -- --
Chairman of the Board 1996 $166,648 -- -- -- -- -- --
and President (3) 1995 -- -- -- -- -- -- --
Richard J. Braun 1997 $193,479 -- -- -- -- -- $3,195(5)
Chief Executive 1996 $ 72,696 -- -- -- -- -- --
Officer(4) 1995 -- -- -- -- -- -- --
Peter J. Heath 1997 $119,235 -- -- -- -- -- $3,000
Vice President of 1996 $113,677 $30,000 -- -- 75,000 -- $1,400
Finance 1995 $101,541 -- -- -- 17,660 -- --
and Chief Financial
Officer
Michael A. Terretti 1997 $ 44,013 -- -- -- 154,794 -- $94,667
Vice President of 1996 $144,354 $25,000 -- -- 50,000 -- $4,200
Sales and Marketing (6) 1995 $132,952 -- -- -- 3,910 -- --
(1) Other Annual Compensation for executive officers is not reported as it
is less than the required reporting threshold of the Securities and
Exchange Commission.
(2) Not applicable. No compensation of this type received.
(3) Dr. McCoy was appointed Chairman of the Board and President on July 3,
1996.
(4) Mr. Braun was appointed Chief Executive Officer on July 25, 1996.
(5) Includes $3,195 of premiums paid for by the Company for a disability
insurance policy on Mr. Braun.
(6) Mr. Terretti resigned as a Vice President of Sales and Marketing on
April 30, 1997. As part of Mr. Terretti's separation agreement, he is to
receive $142,000 payable over twelve months. During 1997, Mr. Terretti
received $94,667 pursuant to the separation agreement.
Stock Options Granted During Fiscal Year
The following table sets forth information about the stock options
granted to the named executive officers of the Company during 1997.
Option Grants In Last Fiscal Year
Potential Realized
Value at Assumed
Annual Rates of
Stock Price
Appreciation for
Individual Grants Option Term
% of Total
Options
Number Granted to
of Employees Exercise
Options in Fiscal Price Expiration 5% ($) 10% ($)
Name Granted(3) Year(1) ($/Sh) Date (2) (2)
- --------------------------------------------------------------------------------------------------------
Michael A.
Terretti 154,794 100% .4375 04/30/07 42,588 107,931
(1) In connection with Mr. Terretti's resignation as Vice President of
Sales and Marketing, Mr. Terretti received options to purchase 154,794
shares of common stock. 54,794 of the options are exercisable at
12/31/97. The remaining 100,000 options are not exercisable until April
30, 1999 subject to certain terms and conditions of Mr. Terretti's
separation agreement. No other stock options to employees were granted
during the year ended December 31, 1997. 230,000 options to acquire
common stock were granted to the non-employee directors of the Company
during 1997. No stock appreciation rights were granted to the named
executive officers during 1997.
(2) The potential realizable value of the options reported above was
calculated by assuming 5% and 10% annual rates of appreciation of the
Common Stock of the Company from the date of grant of the options until
the expiration of the options. These assumed annual rates of
appreciation were used in compliance with the rules of the Securities
and Exchange Commission and are not intended to forecast future price
appreciation of the Common Stock of the Company. The Company chose not
to report the present value of the options, which is an alternative
under Securities and Exchange Commission rules, because the Company
does not believe any formula will determine with reasonable accuracy a
present value based on unknown or volatile factors. The actual value
realized from the options could be substantially higher or lower than
the values reported above, depending upon the future appreciation or
depreciation of the Common Stock during the option period and the
timing of exercise of the options.
Stock Options Exercised During Fiscal Year and Year-End Values of Unexercised
Options
The following table sets forth information about the stock options held
by the named executive officers of the Company at December 31, 1997.
Number of
Shares Number of Unexercised Value of Unexercised In-the
Acquired Value Options at FY-End Money Options at FY-End
Name on Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable (1)
Harry G. McCoy - - - / - $0/$0
Richard J. Braun - - - / - $0/$0
Peter J. Heath - - 155,581/4,144 $0/$0
Michael A Terretti - - 54,794/100,000 $0/$0
(1) The closing price of the Common Stock of the Company at December 31,
1997 was $.3125 per share.
Long-Term Incentive Plans and Pension Plans
The Company does not contribute to any Long-Term Incentive Plan or
Pension Plan for its executive officers as those terms are defined in the rules
of the Securities and Exchange Commission. The Company relies on its stock
option plans to provide long-term incentives for executive officers. The Company
has three stock option plans, a 1983 Stock Option Plan for employees which
expired on June 23, 1993, the Equity Compensation Plan which was adopted by the
shareholders of the annual meeting in 1993 to replace the 1983 Incentive Stock
Option Plan, and a 1991 Non-Employee Director's Plan for members of the Board of
Directors who are not employees of the Company.
Compensation of Directors
All directors who are not employees of the Company receive $500 per
month for their service as a director. All directors are also reimbursed for
expenses incurred in attending board of directors' meetings and participating in
other activities. In addition, each non-employee director receives incentive
stock options to purchase 15,000 shares of common stock at each annual
anniversary date of their election to the board of directors. In 1997, each
non-employee director also received incentive stock options to purchase 50,000
shares of common stock.
Employment Contracts
Harry G. McCoy, Chairman of the Board of Directors and President of the
Company, has an employment agreement with the Company covering the period ending
December 31, 1999, which by its term is extended thereafter in one-year
increments unless Dr. McCoy provides written notice of termination to the
Company at least sixty (60) days prior to the date of termination. The agreement
may also be terminated by mutual consent or due to death or for "cause," or as
described below. The employment agreement provides for an annual salary of at
least $199,650 and certain fringe benefits. If Dr. McCoy's employment is
terminated by the Company other than for cause, or if Dr. McCoy chooses to
terminate the agreement voluntarily, following (i) a change in control; (ii) any
relocation to which Dr. McCoy has not agreed to of greater than fifty (50)
miles; or (iii) any material reduction in the level of Dr. McCoy's
responsibility, position, authorities or duties; or (iv) the Company breaches
any of its obligations under the Agreement, Dr. McCoy will be entitled to a
Severance Award. The Severance Award consists of Dr. McCoy's base salary, health
insurance and bonus plan payments for the greater of twelve (12) months or the
then remaining term of employment under the Agreement.
The employment agreement contains a Covenant Not to Compete whereby for
a period of twelve (12) months after the termination of employment with the
Company, Dr. McCoy agrees that he will not, directly or indirectly, either (a)
have any interest in (b) enter the employment of, (c) act as agent, broker, or
distributor for or advisor or consultant to, or (d) provide information useful
in conducting the business of the Company to solicit customers or employees on
behalf of the Company to any person, firm, corporation or business entity which
is engaged, or which Dr. McCoy reasonably knows is undertaking to become
engaged, in the United States in the business of the Company.
Richard J. Braun, Chief Executive Officer, has the same employment
agreement with the Company as Dr. McCoy.
Peter J. Heath, Vice President-Finance, Chief Financial Officer and
Secretary of the Company, has a severance agreement with the Company covering
the period ending December 31, 1998, which by its term is extended thereafter in
one-year increments unless either the Company or Mr. Heath provides written
notice to the other party at least six (6) months prior to the end of the
original term or each renewal period or unless the agreement is otherwise
terminated due to death, permanent disability, or for "cause." The employment
agreement provides for an annual salary of at least $120,000 and certain fringe
benefits. If Mr. Heath's employment with the Company terminates during the term
of the agreement involuntarily, other than an involuntary termination on account
of misconduct, he will be entitled to a Severance Award. The Severance Award
consists of payment of an amount equal to Mr. Heath's then current annual salary
plus certain health benefits over the course of the twelve (12) month period
following Mr. Heath's termination.
Seven other key employees of the Company have severance agreements
similar to Mr. Heath's agreement.
Compensation Committee and Decision Making
The compensation of executive officers of the Company for 1996 was
determined by the Compensation Committee which is currently comprised of James
W. Hansen, Miles E. Efron, and Samuel C. Powell. Stock options are awarded under
the Company's Equity Compensation Plan and Non-Employee Director Plan by the
Compensation Committee. All non-employee directors were eligible to receive
stock options under the Company's 1991 Non-Employee Director Plan, which is a
formula plan in accordance with the requirements of Rule 16b-3 under the
Securities Act of 1934, as amended.
Report of the Compensation Committee on Executive Compensation
In General
The Committee has three primary goals for executive compensation at the
Company.
Retaining good performers,
Rewarding executives appropriately for performance, and
Aligning executives' interests with those of stockholders.
Currently, executive pay consists of three elements that are designed
to meet those objectives:
Base salary is paid based primarily on job responsibilities and industry
job comparison. The Committee believes that base salaries at
approximately industry averages are essential to retaining good
performers.
Stock options, which allow executives to benefit when the market price of
the Company's stock increases.
Bonuses to be paid upon the attainment of certain financial objectives
and individual circumstances when warranted.
Following is additional information regarding each of the above elements.
Base Salary
Base salary increases for executive officers have been modest and
consistent with job performance and increases in responsibility.
Bonus
There were no bonuses paid to the executive officers during 1997.
Stock Options
There were no stock options issued to the executive officers during
1997, with the exception of the 154,794 options that were granted to Mr.
Terretti as part of his separation agreement.
Summary
Currently, the Company's executive compensation program rewards the
following elements of performance.
Individual performance is rewarded through continued employment with the
Company.
Stock price performance is rewarded through increases in the
value of stock options.
Financial performance of the Company is rewarded through payments of
bonuses upon the attainment of certain financial goals
The Committee believes that the current program has been effective in
rewarding executives appropriately for performance, retaining good performers,
and aligning executives' interests with those of stockholders. While the
Committee is satisfied with the current compensation system, it reserves the
right to make changes to the program as are necessary to continue to meet its
stated goals in future years.
Benefits also are offered to officers that are not based on
performance. Such benefits provide a safety net of protection in the event of
illness, disability, death, retirement, etc. Such a safety net is provided to
all full time employees of the Company.
Chief Executive Officer Pay
Amounts earned during 1997 by the Chief Executive Officer, Richard J.
Braun, are shown in the Summary Compensation Table. Achievements by the Company
which were deemed material to the Chief Executive Officer's compensation include
the attainment of profitability for 1997 for the first time in the Company's
history. For the year ended December 31, 1997, the Compensation Committee used,
in its deliberations on executive compensation, these criteria and other
accomplishments.
Submitted by the Compensation Committee of the Company's Board of Directors
James W. Hansen
Miles E. Efron
Samuel C. Powell
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth information available to the Company as
of March 23, 1998 regarding the beneficial ownership of the Common Stock by (i)
each person known by the Company to beneficially own more than Five Percent (5%)
of the outstanding Common Stock, (ii) each of the Directors, (iii) the Chief
Executive Officer and all executive officers whose compensation was $100,000 or
greater during 1997, and (iv) all executive officers and Directors of the
Company as a group:
Number of Shares Percent of Common
Name Beneficially Owned Stock Outstanding
Executive Officers and Directors:
Harry G. McCoy, Pharm. D.
Chairman and President 3,626,967 (1) 6.25%
Richard J. Braun
Chief Executive Officer and Director 520,000 (2) *
Samuel C. Powell, Ph.D., Director 1,113,034 (3) 1.93%
Louis Perlman, Director 1,073,055 (4) 1.86%
James W. Hansen, Director 77,778 (5) *
Miles E. Efron, Director 72,222 (6) *
Peter J. Heath
Vice President-Finance, CFO and
Secretary 263,993 (7) *
Michael A. Terretti
Vice President of Sales and Marketing 54,794 (8) *
All Directors and Executive Officers
As a Group (8 in number) 6,801,843 (9) 11.53 %
- ----------
* Less than one percent (1%)
(1) Includes 460,000 shares of Common Stock issuable under options which
are or which will become exercisable within the next 60 days.
(2) Includes 460,000 shares of Common Stock issuable under options which
are or which will become exercisable within the next 60 days.
(3) Includes 61,389 shares of Common Stock issuable under stock options and
32,679 shares of Common Stock issuable under Common Stock Purchase
Warrants which are or will become exercisable within the next 60 days.
(4) Includes 43,055 shares of Common Stock issuable under options which are
or which will become exercisable within the next 60 days.
(5) Includes 27,778 shares of Common Stock issuable under options which are
or which will become exercisable within the next 60 days.
(6) Includes 22,222 shares of Common Stock issuable under options which are
or which will become exercisable within the next 60 days.
(7) Includes 247,802 shares of Common Stock issuable under options which
are or will become exercisable within the next 60 days.
(8) Includes 54,794 shares of Common Stock issuable under options which are
or will become exercisable within the next 60 days.
(9) Includes 1,409,719 shares of Common Stock issuable under options or
warrants which are or will become exercisable within the next 60 days.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Lease Agreement with Dr. Samuel C. Powell
In July 1986, the Company executed a lease agreement with Dr. Powell
providing for a lease to the Company of approximately 16,743 square feet of
space at 1238 Anthony Road, Burlington, North Carolina. Since 1986, the Company
has expanded the space rented under the lease to approximately 33,000 square
feet. Upon the expiration of the original lease, the Company entered into a new
lease with Dr. Powell for the same space and at the same base rental rate for a
term of one year ending on May 31, 1990. Effective June 1, 1990, the Company has
been leasing the space on a month-to-month basis. The Company is currently
leasing space at a rate of approximately $10,000 per month. The Company intends
to negotiate a new lease with Dr. Powell in the near future. The Company holds
certain rights of first refusal to lease additional space in the building if it
becomes available (the building contains a total of 42,900 square feet). The
total rent paid by the Company to Dr. Powell during the fiscal year ended
December 31, 1996 was approximately $122,000. The Company believes the rent
amount paid to Dr. Powell is consistent with market rates.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULE, REPORTS ON FORM 8-K.
a. (i) Financial Statements Page
Report of Independent Auditors................... 43
Consolidated Balance Sheets at December
31, 1997 and 1996............................... 44
Consolidated Statements of Operations
for the years ended December 31,
1997, 1996 and 1995............................. 46
Consolidated Statements of Stockholders'
Equity for the years
ended December 31, 1997,
1996 and 1995................................... 47
Consolidated Statements of Cash
Flows for the years ended
December 31, 1997, 1996 and 1995........... 48
Notes to Consolidated Financial
Statements...................................... 50
(ii) Consolidated Financial Statement Schedule
Schedule II - Valuation and
Qualifying Accounts ............................. 67
All other financial statement schedules normally required under Regulation S-X
are omitted as the required information is inapplicable.
(iii) Exhibits
3.1 Bylaws of the Registrant (incorporated by reference to Exhibit 4.2
filed with the Registrant's Report on Form 10-Q for the quarter ended December
31, 1986).
3.2 Restated Certificate of Incorporation of the Registrant filed with the
Delaware Secretary of State on July 29, 1994 (incorporated by reference to
Exhibit 3.8 filed with the Registrant's Form 10-K for fiscal year ended December
31, 1994).
3.3 Certificate of Amendment of Certificate of Incorporation of the
Registrant, filed with the Delaware Secretary of State on November 27, 1995.
3.4 Amended Certificate of Designations of Preferred Stock (Series A
Convertible Preferred Stock) of the Registrant, filed with the Delaware
Secretary of State on January 29, 1996 (incorporated by reference to Exhibit 3.1
filed with the Registrant's report on Form 8-K dated January 30, 1996.)
10.2 Registrant's Stock Option Plan (as amended and restated) (incorporated
by reference to Exhibit 10.2 filed with the Registrant's Report on Form 10-K for
the fiscal year ended December 30, 1990).
10.3 Second Amendment dated December 31, 1986 to Exclusive License
Agreement amending and restating exclusive license granted by the Registrant to
Disease Detection International, Inc. (incorporated by reference to Exhibit
10.25 filed with the Registration Statement on Form S-1 dated August 26, 1987,
Commission File No. 33-15543).
10.5 Non-Qualified Stock Option Agreement between the Registrant and James
D. Skinner dated as of July 1, 1987 (incorporated by reference to Exhibit 10.26
filed with the Registrant's Registration Statement on Form S-1 dated August 26,
1987, Commission File No. 33-15543).
10.6 Non-Qualified Stock Option Agreement between the Registrant and James
D. Skinner (incorporated by reference to Exhibit 10.17 filed with the
Registrant's Form 10-K for the fiscal year ended December 31, 1988).
10.7 Non-Qualified Stock Option Agreement between the Registrant and James
D. Skinner dated as of August 10, 1988 (incorporated by reference to Exhibit
10.18 filed with the Registrant's Form 10-K for the fiscal year ended December
31, 1987).
10.8 Lease Agreement, dated as of June 1, 1989 between Samuel C. Powell, as
lessor, and EDITEK, as lessee relating to premises located at 1238 Anthony Road,
Burlington, North Carolina (incorporated by reference as filed with the
Registrant's report on Form 10-Q for the quarter ended June 30, 1989).
10.12 Stock Option Agreement dated May 4, 1990 between the Registrant and
Samuel C. Powell amending and restating the Non-Qualified Stock Option Agreement
between the Registrant and Samuel C. Powell dated as of May 23, 1988.
(Incorporated by reference to Exhibit 10.34 filed with the Registrant's Form
10-K for the fiscal year ended December 31, 1990).
10.13 Loan Modification Agreement dated May 3, 1990 between the Registrant
and James D. Skinner regarding the Promissory Note dated as of September 10,
1988 by James D. Skinner to the Registrant. (Incorporated by reference to
Exhibit 10.36 filed with the Registrant's Form 10-K for the fiscal year ended
December 31, 1990).
10.14 Stock Purchase Agreements dated as of July 19, 1991 between the
Registrant and Walter O. Fredericks, Peter J. Heath, Samuel C. Powell, and James
D. Skinner. (Incorporated by reference to Exhibit (a) filed with the
Registrant's Form 10-Q for the quarter ended June 30, 1991).
10.15 Form of Stock Purchase Agreement dated as of September 3, 1992
between the Registrant and Purchasers of EDITEK's common stock in a private
placement on September 3, 1992. (Incorporated by reference in Exhibit 10.46
filed with the Registrant's Form 10-K for the fiscal year ended December 31,
1992).
10.16 Agreement and Plan of Merger between the Registrant, PDLA Acquisition
Corporation, and Princeton Diagnostic Laboratories of America, Inc. dated
October 12, 1993. (Incorporated by reference to Exhibit (a) filed with the
Registrant's Form 10-Q for the quarter ended December 31, 1993.)
10.17 Registrant's Amended and Restated Stock Option Plan for non-employee
directors (incorporated by reference to Exhibit 4 filed with the Registrant's
Registration Statement on Form S-8 dated February 21, 1995, Commission File No.
33-89646).
10.18 Registrant's Equity Compensation Plan (incorporated by reference to
Exhibit 4 filed with the Registrant's Registration Statement on Form S-8 dated
November 11, 1993, Commission File No. 33-71490).
10.19 Registrant's Amended and Restated Qualified Employee Stock Purchase
Plan (incorporated by reference to Exhibit 4 filed with the Registrant's
Registration Statement on Form S-8 dated November 11, 1993, Commission File No.
33-71596).
10.20 Non-Qualified Stock Option Agreement between the Registrant an Mark
D. Dibner dated January 14, 1993 (incorporated by reference to Exhibit 4.2 filed
with the Registrant's Registration Statement on Form S-8 dated February 21,
1995, Commission File No. 33-89646).
10.22 Asset Purchase Agreement dated as of July 1, 1995 between the
Registrant and MEDTOX Laboratories, Inc. (incorporated by reference to Exhibit
10.1 filed with the Registrant's Report on Form 8-K dated January 30, 1996).
10.23 Amendment Agreement dated as of January 2, 1996 between the
Registrant and MEDTOX Laboratories, Inc. (incorporated by reference to Exhibit
10.2 filed with the Registrant's Report on Form 8-K dated January 30, 1996).
10.24 Assignment Agreement dated as of January 10, 1996 between and among
the Registrant, MEDTOX Laboratories, Inc. and Psychiatric Diagnostic
Laboratories of America, Inc. (incorporated by reference to Exhibit 10.3 filed
with the Registrant's Report on Form 8-K dated January 30, 1996).
10.25 Amendment Agreement dated as of January 30, 1996 among the
Registrant, MEDTOX Laboratories, Inc. and Psychiatric Diagnostic Laboratories of
America, Inc. (incorporated by reference to Exhibit 10.25 filed with the
Registrant's Report on Form 10-K for the fiscal year ended December 31, 1996).
10.26 Loan and Security Agreement (together with the Exhibits and Schedules
thereto) by and between the Registrant, Psychiatric Diagnostic Laboratories of
America, Inc., diAGnostix, Inc. and Heller Financial, Inc. dated January 30,
1996 (incorporated by reference to Exhibit 10.4 filed with the Registrant's
Report on Form 8-K dated January 30, 1996).
10.27 Term Note A executed by the Registrant, Psychiatric Diagnostic
Laboratories of America, Inc. and diAGnostix, Inc. in favor of Heller Financial,
Inc. dated January 30, 1996 (incorporated by reference to Exhibit 10.5 filed
with the Registrant's Report on Form 8-K dated January 30, 1996).
10.28 Term Note B executed by the Registrant, Psychiatric Diagnostic
Laboratories of America, Inc. and diAGnostix, Inc. in favor of Heller Financial,
Inc., dated January 30, 1996 (incorporated by reference to Exhibit 10.6 filed
with the Registrant's Report on Form 8-K dated January 30, 1996).
10.29 Assignment for Security (Patents) executed by the Registrant in favor
of Heller Financial, Inc., dated January 30, 1996 (incorporated by reference to
Exhibit 10.7 filed with the Registrant's Report on Form 8-K dated January 30,
1996).
10.30 Assignment for Security - EDITEK (Trademarks) executed by the
Registrant in favor of Heller Financial, Inc., dated January 30, 1996
(incorporated by reference to Exhibit 10.8 filed with the Registrant's Report on
Form 8-K dated January 30, 1996).
10.31 Assignment for Security - Princeton (Trademarks) executed by
Princeton Diagnostic Laboratories of America, Inc. in favor of Heller Financial,
Inc., dated January 30, 1996 (incorporated by reference to Exhibit 10.9 filed
with the Registrant's Report on Form 8-K dated January 30, 1996).
10.32 Lease Agreement between MEDTOX Laboratories, Inc. and Phoenix Home
Life Mutual Ins. Co. dated April 1, 1992, and amendments thereto (incorporated
by reference to Exhibit 10.10 filed with the Registrant's Report on Form 8-K
dated January 30, 1996).
10.33 Employment Agreement between the Registrant and Harry G. McCoy dated
January 30, 1996. (Incorporated by reference to Exhibit 10.33 filed with the
Registrant's Report on Form 10-K for the fiscal year ended December 31, 1995.)
10.34 Registrant's Amended and Restated Equity Compensation Plan
(increasing shares to 3,000,000). (Incorporated by reference to Exhibit 10.34
filed with the Registrant's Report on Form 10-K for the fiscal year ended
December 31, 1995.)
10.35 Asset Purchase Agreement dated as of May 31, 1995 between the
Registrant, Bioman Products, Inc. and NOVAMANN International, Inc. (Incorporated
by reference to Exhibit 10.35 filed with the Registrant's Report on Form 10-K
for the fiscal year ended December 31, 1995.)
10.36 Securities Purchase Agreement dated January 31, 1996 between the
Registrant and Harry G. McCoy. (Incorporated by reference to Exhibit 10.36 filed
with the Registrant's Report on Form 10-K for the fiscal year ended December 31,
1995.)
10.37 Registration Rights Agreement dated February 1, 1996 between the
Registrant and Harry G. McCoy. (Incorporated by reference to Exhibit 10.37 filed
with the Registrant's Report on Form 10-K for the fiscal year ended December 31,
1995.)
10.38 Agreement regarding rights to "MEDTOX Laboratories, Inc." name dated
as of January 30, 1996 between the Registrant and Harry G. McCoy. (Incorporated
by reference to Exhibit 10.38 filed with the Registrant's Report on Form 10-K
for the fiscal year ended December 31, 1995.)
10.39 Warrant Agreement dated as of December 18, 1995 between Samuel C.
Powell and the Registrant. (Incorporated by reference to Exhibit 10.39 filed
with the Registrant's Report on Form 10-K for the fiscal year ended December 31,
1995.)
10.40 Termination and Settlement Agreement dated as of July 3, 1996 between
the Registrant and James D. Skinner. (incorporated by reference to Exhibit 10.40
filed with the Registrant's Report on Form 10-K for the fiscal year ended
December 31, 1996).
10.41 Agreement dated as of March 17, 1997 between the Registrant and Harry
G. McCoy whereby Dr. McCoy assigns his rights to the name "MEDTOX Laboratories,
Inc." to the Registrant. (incorporated by reference to Exhibit 10.41 filed with
the Registrant's Report on Form 10-K for the fiscal year ended December 31,
1996).
24.1 Consent of Ernst & Young LLP
10.42 Employment Agreement dated January 1, 1997 between the Registrant
and Harry G. McCoy.
10.43 Employment Agreement dated January 1, 1997 between the Registrant
and Richard J. Braun.
b. Reports on Form 8-K
There was no report on Form 8-K filed for the three months ended
December 31, 1997.
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
MEDTOX SCIENTIFIC, INC.
Report on Form 10-K
for year ended December 31, 1997
INDEX TO EXHIBITS FILED SEPARATELY WITH FORM 10-K
EXHIBIT # DESCRIPTION OF EXHIBIT
24.1 Consent of Ernst & Young LLP
10.42 Employment Agreement dated January 1, 1997 between the
Registrant and Harry G. McCoy.
10.43 Employment Agreement dated January 1, 1997 between the
Registrant and Richard J. Braun.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Act of 1934, the Registrant has duly caused this Annual Report to be
signed on its behalf by the undersigned, thereunto duly authorized on the 30th
day of March 1998.
MEDTOX Scientific, Inc.
Registrant
By:/s/ Harry G. McCoy, Pharm.D.
Harry G. McCoy, Pharm.D.
President and
Chairman of the Board
Pursuant to the requirements of the Securities Act of 1934,
this Registration Statement has been signed below by the following persons on
behalf of the Registrant in the capacities and on the dates indicated.
Signature Title Date
/s/ Harry G. McCoy, Pharm.D. President, March 30, 1998
Harry G. McCoy and Chairman of the Board
/s/ Richard J. Braun Chief Executive Officer March 30, 1998
Richard J. Braun Director
/s/ Peter J. Heath Vice President of March 30, 1998
Peter J. Heath Finance and Chief
Financial Officer
/s/ Samuel C. Powell Director March 30, 1998
Samuel C. Powell, Ph.D.
/s/ Louis Perlman Director March 30, 1998
Louis Perlman
/s/ James W. Hansen Director March 30, 1998
James W. Hansen
/s/ Miles E. Efron Director March 30, 1998
Miles E. Efron
Report of Independent Auditors
The Board of Directors
MEDTOX Scientific, Inc. (formerly EDITEK, Inc.)
We have audited the accompanying consolidated balance sheets of MEDTOX
Scientific, Inc. (formerly EDITEK, Inc.) as of December 31, 1997 and 1996, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a). These consolidated financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of MEDTOX
Scientific, Inc. (formerly "EDITEK, Inc.") at December 31, 1997 and 1996, and
the results of its operations and its cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the consolidated financial statements
taken as a whole, presents fairly in all material respects the information set
forth therein.
/s/ Ernst & Young
Minneapolis, Minnesota
February 6, 1998
MEDTOX Scientific, Inc.
Consolidated Balance Sheets
(In thousands, except for number of shares)
December 31
1997 1996
-----------------------------
Assets
Current assets:
Cash and cash equivalents $ 58 $ 82
Accounts receivable:
Trade, less allowance for doubtful accounts
(1997--$514; 1996-- $358) 5,443 4,476
Other 110 77
------------------------------
5,553 4,553
Inventories:
Raw materials 414 488
Work in process 134 146
Finished goods 594 656
--------------------------------
1,142 1,290
Prepaid expenses and other 415 140
--------------------------------
Total current assets 7,168 6,065
Equipment and improvements:
Furniture and equipment 10,669 9,200
Leasehold improvements 1,243 929
---------------------------------
11,912 10,129
Less accumulated depreciation and amortization (8,946) (7,951)
---------------------------------
2,966 2,178
Goodwill, net of accumulated amortization of $2,273
in 1997 and $1,184 in 1996 (Notes 2 and 3) 14,747 15,836
---------------------------------
Total assets $24,881 $ 24,079
=================================
December 31
1997 1996
------------------------------------
Liabilities and stockholders' equity
Current liabilities:
Line of credit (Note 4) $ 3,572 $ 1,437
Accounts payable 3,768 2,387
Accrued expenses 1,326 2,074
Current portion of restructuring accrual 521 899
Current portion of long-term debt (Note 4) 1,444 2,790
Other current liabilities 119 40
------------------------------------
Total current liabilities 10,750 9,627
Long-term portion of restructuring accrual 265 904
Long-term portion of capital leases 295 -
Stockholders' equity (Notes 5 and 6): Preferred Stock, $1.00 par value:
Authorized shares - 1,000,000
Issued and outstanding shares - 4 in 1997
and 238 in 1996 - -
Common Stock, $.15 par value:
Authorized shares - 60,000,000
Issued and outstanding shares - 56,828,173 in 1997
and 25,555,796 in 1996 8,525 3,834
Additional paid-in capital 51,673 56,366
Accumulated deficit (46,451) (46,476)
------------------------------------
13,747 13,724
Treasury stock (176) (176)
------------------------------------
Total stockholders' equity 13,571 13,548
------------------------------------
Total liabilities and stockholders' equity $24,881 $24,079
====================================
See accompanying notes
MEDTOX Scientific, Inc.
Consolidated Statements of Operations
Year ended December 31
1997 1996 1995
------------------------------------------------------
(In thousands, except share and
per share data)
Revenues:
Laboratory service revenues $25,899 $ 23,541 $ 4,312
Product sales 2,695 2,957 2,725
Royalties and fees - 90 300
Interest and other income 6 138 189
------------------------------------------------------
28,600 26,726 7,526
Costs and expenses:
Cost of services 16,191 15,344 3,925
Cost of sales 1,697 2,151 2,240
Selling, general and administrative 9,113 11,725 4,630
Research and development 965 1,280 920
Interest and financing costs 609 469 23
Restructuring costs (Note 8) - 2,449 -
Goodwill write-off (Note 3) - 6,117 3,073
------------------------------------------------------
28,575 39,535 14,811
------------------------------------------------------
Net income (loss) 25 (12,809) (7,285)
Less preferred stock deemed dividend - (6,783) -
------------------------------------------------------
Net income (loss) applicable to common stockholders
$ 25 $(19,592) $(7,285)
======================================================
Income (loss) per share applicable
to common stockholders - basic
and diluted $ - $(.59) $(.77)
======================================================
Weighted average number of shares of common stock
outstanding 51,339,326 33,455,867 9,445,707
======================================================
See accompanying notes.
MEDTOX Scientific, Inc.
Consolidated Statements of Stockholders' Equity
Note
Additional Receivable
Preferred Stock Common Stock Paid-In Accumulated from Treasury
Shares Par Value Shares Par Value Capital Deficit Stockholder Stock Total
-------------------------------------------------------------------------------------------
(In thousands, except for number of shares)
Balances at December 31, 1994 - $- 8,075,339 $1,211 $30,132 $(26,382) $(100) $ (5) $ 4,856
Exercise of stock options and - - 156,347 23 170 - - - 193
warrants
Stock issued for Bioman acquisition - - 21,489 3 58 - - - 61
Sale of common stock - - 12,037 2 25 - - - 27
Stock issued for conversion of debt - - 16,100 3 59 - - - 62
Purchase of treasury stock - - - - - - - (71) (71)
Private placement of common stock - - 2,158,463 324 3,529 - - - 3,853
Net loss - - - - - (7,285) - - (7,285)
---------------------------------------------------------------------------------------------
Balances at December 31, 1995 - - 10,439,775 1,566 33,973 (33,667) (100) (76) 1,696
Exercise of stock options and - - 100,422 15 31 - - - 46
warrants
Stock issued for MEDTOX acquisition - - 2,517,306 378 4,447 - - - 4,825
Sale of preferred stock 407 - - - 19,126 - - - 19,126
Cancellation of note receivable from
officer in exchange for common
stock - - - - - - 100 (100) -
Sale of common stock - - 76,483 12 52 - - - 64
Conversion of preferred stock to
common stock (169) - 12,186,515 1,828 (1,828) - - - -
Private placement of common stock - - 235,295 35 565 - - - 600
Net loss - - - - - (12,809) - - (12,809)
---------------------------------------------------------------------------------------------
Balances at December 31, 1996 238 - 25,555,796 3,834 56,366 (46,476) - (176) 13,548
Stock issued for MEDTOX acquisition - - 8,345,837 1,252 (1,252) - - - -
Sale of common stock - - 210,485 32 43 - - - 75
Conversion of preferred stock to
common stock (234) - 22,716,055 3,407 (3,484) - - - (77)
Net income - 25 - - 25
---------------------------------------------------------------------------------------------
Balances at December 31, 1997 4 $- 56,828,173 $8,525 $51,673 $(46,451) $ - $(176) $13,571
=============================================================================================
See accompanying notes
MEDTOX Scientific, Inc.
Consolidated Statements of Cash Flows
Year ended December 31
1997 1996 1995
-----------------------------------------
(In Thousands)
Operating activities
Net income (loss) $ 25 $(12,809) $(7,285)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization 2,083 2,265 644
Goodwill write-off - 6,117 3,073
PDLA write-off - 284 -
Provision for losses on accounts receivable 156 128 (54)
Provision for obsolete inventory (84) 97 (13)
Gain on sale or retirement of equipment - (42) -
Changes in operating assets and liabilities, net of acquisition:
Accounts receivable (1,156) (749) (22)
Inventories 232 (87) (58)
Prepaid expenses and other (275) 365 (589)
Accounts payable, accrued expenses and other 627 1,025 430
Deferred revenues - (97) 3
Restructuring accruals (1,017) 1,072 -
-----------------------------------------
Net cash provided by (used in) operating activities 591 (2,431) (3,871)
Investing activities
Purchase of equipment and improvements (1,315) (1,118) (177)
Proceeds from sale of equipment - 45 -
Acquisitions, net of cash acquired - (19,630) (37)
-----------------------------------------
Net cash used in investing activities (1,315) (20,703) (214)
Financing activities
Net proceeds from sale of preferred stock - 19,126 -
Net proceeds from sale of common stock (2) 710 4,073
Purchase of treasury stock - - (71)
Net proceeds from line of credit, term loans and notes payable 2,135 5,437 119
Principal payments on capital leases (87) - -
Principal payments on line of credit, term loans and notes payable (1,346) (2,315) (883)
-----------------------------------------
Net cash provided by financing activities 700 22,958 3,238
-----------------------------------------
Decrease in cash and cash equivalents (24) (176) (847)
Cash and cash equivalents at beginning of year 82 258 1,105
-----------------------------------------
Cash and cash equivalents at end of year $ 58 $ 82 $ 258
=========================================
MEDTOX Scientific, Inc.
Consolidated Statements of Cash Flows (continued)
Supplemental Noncash Activities
During 1997, the Company entered into capital lease agreements totaling
$468,000.
During 1996, the Company canceled the note receivable from an officer of
$100,000 in exchange for 13,334 shares of common stock.
In January 1996, the Company acquired MEDTOX Laboratories, Inc. The purchase
price was $24 million, which included $19 million cash and the issuance of
$5,000,000 in common stock (2,517,306 shares).
During 1995, the Company issued $62,000 of common stock related to the
conversion of debt and issued $61,000 of common stock in connection with the
acquisition of Bioman.
See accompanying notes.
MEDTOX Scientific, Inc.
Notes to Consolidated Financial Statements
December 31, 1997
1. Summary of Significant Accounting Policies
The Company
In May, 1997, the Company changed its corporate name form Editek, Inc. to
MEDTOX Scientific, Inc. ("MEDTOX"). The consolidated financial statements
include the accounts of MEDTOX and its wholly-owned subsidiaries, MEDTOX
Laboratories, Inc. ("MEDTOX Laboratories") and MEDTOX Diagnostics, Inc. ("MEDTOX
Diagnostics") (collectively referred to as "the Company"). MEDTOX Laboratories
provides clinical testing services for the detection of substances of abuse and
other toxins in biological fluids and tissues. MEDTOX Diagnostics is engaged in
the research, development and sale of products based upon enzyme immunoassay
technology for the detection of antibiotic residues, mycotoxins, drugs of abuse
and other hazardous substances as well as distribution of agridiagnostic and
food safety testing products. All significant intercompany transactions and
balances have been eliminated.
Trade Accounts Receivable
Sales are made to local, national and international customers including
corporations, clinical laboratories, government agencies, medical professionals,
law enforcement agencies and healthcare facilities. Concentration of credit risk
is limited due to the large number of customers to which the Company sells its
products and services. The Company extends credit based on an evaluation of the
customer's financial condition, and receivables are generally unsecured. The
Company provides an allowance for doubtful accounts equal to the estimated
losses expected to be incurred in the collection of accounts receivable.
Inventories
Inventories are valued at the lower of cost (first-in, first-out method) or
market. At December 31, 1997 and 1996, the inventory included reserves of
$25,000 and $109,000, respectively, for lower of cost or market and for
obsolescence.
MEDTOX Scientific, Inc.
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Equipment and Improvements
Equipment and improvements are stated at cost. Provisions for depreciation have
been computed using the straight-line method to amortize the cost of depreciable
assets over their estimated useful lives. Leasehold improvements are amortized
over the lesser of the lease term or the economic useful lives of the
improvements.
Revenue Recognition
Sales are recognized in the statement of operations when products are shipped or
services are rendered.
Research and Development
Research and development expenditures are charged to expense as incurred.
Income Taxes
The Company uses the liability method of accounting for income taxes. Under this
method, deferred tax assets and liabilities are determined based on differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
Cash and Cash Equivalents
Cash and cash equivalents include cash and highly liquid investments maturing
within three months when purchased.
Income (Loss) Per Share of Common Stock
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, "Earnings Per Share." Statement 128 replaced the
previously reported primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes
MEDTOX Scientific, Inc.
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
any dilutive effects of options, warrants, and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented and, where necessary, restated to conform to the Statement 128
requirements.
Income (loss) per share of common stock amounts are based on the weighted
average number of shares of common stock outstanding, as well as shares of
common stock that would have been issued and outstanding in certain transactions
had the Company had the necessary number of authorized shares of common stock.
All other common stock equivalents, including convertible debt disclosed in Note
4, were anti-dilutive and therefore were not included in the computation of
income (loss) per share, for all periods presented.
Goodwill
Goodwill is amortized on a straight-line basis over 20 years. The carrying value
of goodwill is reviewed if the facts and circumstances suggest that it may be
impaired. If this review indicates that goodwill will not be recoverable, as
determined based on the undiscounted cash flows of the entity acquired over the
remaining amortization period, the Company's carrying value of the goodwill is
reduced by the estimated shortfall of cash flows (see Note 3).
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Impairment of Long-Lived Assets
In March 1995, the Financial Accounting Standards Board issued Statement No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of," which requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows
MEDTOX Scientific, Inc.
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
estimated to be generated by those assets are less than the assets' carrying
amount. Statement 121 also addresses the accounting for long-lived assets that
are expected to be disposed of. The Company adopted Statement 121 in 1996, with
no impact on the consolidated financial statements.
Reclassifications
Certain reclassifications have been made to the 1996 financial statements to
conform with the 1997 presentation.
2. Acquisitions
In January 1996, the Company acquired MEDTOX Laboratories, a toxicology
laboratory located in St. Paul, Minnesota. The purchase price was $24 million,
which included $19 million cash and the issuance of 2,517,306 shares of common
stock. The acquisition was accounted for under the purchase method of accounting
under which the Company recorded approximately $22 million of goodwill. The
goodwill is being amortized over a period of 20 years (see Note 3).
The Company financed the acquisition by issuing $19 million of convertible
preferred stock and borrowing $4 million under two $2 million term loans. In
connection with the acquisition, the Company entered into a revolving line of
credit of up to $7 million for working capital purposes.
The following unaudited pro forma information presents the combined results of
operations of the Company and MEDTOX Laboratories for the years ended December
31, 1996 and 1995, as if the acquisition had been consummated as of January 1,
1995.
1996 1995
-------------------
Revenues $ 27,926 $27,745
===================
Net loss applicable to common stockholders $(19,736) $(4,459)
=====================
Net loss per share applicable to common stockholders $ (.59) $ (.37)
=====================
MEDTOX Scientific, Inc.
Notes to Consolidated Financial Statements (continued)
2. Acquisitions (continued)
On June 1, 1995, the Company acquired Bioman Products, Inc. ("Bioman"), an
environmental diagnostics company. The purchase price was $140,000, which
included cash and the issuance of 21,489 shares of common stock. The acquisition
was accounted for under the purchase method of accounting under which the
Company recorded $117,000 of goodwill, which was being amortized over a period
of 20 years. The consolidated results of operations for the year ended December
31, 1995 included the results of the Bioman operations from June 1, 1995 to
December 31, 1995. In September 1996, the Company sold the Bioman operations to
a company headed by former employees of the Company and Bioman.
The Company acquired Princeton Diagnostics Laboratories of America, Inc. (PDLA)
on February 11, 1994 by issuing 826,790 shares of its common stock in exchange
for all of the outstanding shares of PDLA's stock. The total value of the
exchange was $3,876,000. The acquisition was accounted for under the purchase
method of accounting and the Company recorded goodwill of $3,394,000 (see Note
3).
3. Goodwill Write-Off
In 1996, the Company reviewed the value of the goodwill associated with the
acquisition of MEDTOX Laboratories. The purpose of the review was to determine
if the value of the goodwill, generated as a result of the price paid by the
Company for MEDTOX Laboratories, was in fact supported by the projected future
benefit to the Company as measured by generated cash flows.
Given the highly-competitive nature of the testing marketplace, the industry and
MEDTOX Laboratories had begun to experience a declining average selling price.
In addition the Company believed that alternative testing methods, including
on-site testing, are available or may become available in future years that may
make the then existing forms of laboratory testing less competitive. While the
Company expected to continue to develop and or evaluate new testing
technologies, the then existing form of laboratory testing at MEDTOX
Laboratories was unable to support the carrying value of the goodwill generated
from the sale of that laboratory to the Company.
MEDTOX Scientific, Inc.
Notes to Consolidated Financial Statements (continued)
3. Goodwill Write-Off (continued)
Utilizing an undiscounted cash flow analysis, the Company concluded that the
carrying value of the remaining goodwill associated with the MEDTOX Laboratories
acquisition exceeded the estimated future cash flows. Accordingly, the Company
recorded a write-off of $6,016,000 in December 1996.
In September 1996, the Company recorded a write-off of the goodwill associated
with the acquisition of Bioman of $101,000 as a result of the sale of Bioman in
September 1996.
The continued operating losses and negative cash flows of the PDLA operations
resulted in an evaluation during the fourth quarter of 1995 of the PDLA goodwill
for possible impairment. The Company determined that the operations of PDLA did
not have long-term future viability as a stand-alone laboratory operation and
would not be supported by the Company on a stand-alone basis. The underlying
factors contributing to the financial results for PDLA include competitive
pricing pressures in the market place, the loss of preacquisition customers and
the inability of the Company to generate sufficient PDLA business volume that
would result in positive cash flows and profitable operations. The Company
performed an analysis of the PDLA undiscounted cash flows over the remaining
amortization period and determined that the estimated shortfall of cash flows
exceeded the carrying value of the remaining PDLA goodwill. As a result, the
Company recorded a write-off of goodwill of $3,073,000 at December 31, 1995.
4. Debt
On August 15, 1989, the Company entered into a long-term loan agreement with a
state funded, non-profit organization whereby the Company borrowed an aggregate
of $125,000 to fund the development cost of a test for chlamydia, a sexually
transmitted disease. The loan originally had an interest rate of seven and
one-half percent (7.5%) per annum with all principal and interest due on August
15, 1994. The Company amended the loan agreement on the due date and issued
16,100 shares of common stock during 1995 as repayment for $62,000 of the loan.
In 1996, the remaining principal, $63,000, was repaid.
On December 18, 1995, the Company borrowed $100,000 from a director at an
interest rate of 10.5%. The Company repaid the principal and interest in
February 1996.
MEDTOX Scientific, Inc.
Notes to Consolidated Financial Statements (continued)
4. Debt (continued)
On January 30, 1996, the Company entered into a loan agreement with a financial
institution to help finance the acquisition of MEDTOX Laboratories. The debt
financing consisted of two eighteen-month term loans of $2,000,000 each and a
revolving line of credit. The two term loans and the revolving line of credit
were secured by a lien on all equipment, inventory and receivables and,
depending on the amount of such inventory, or receivables, up to $7,000,000 was
available for borrowing under the revolving line of credit.
As of July 1, 1997, the Company had repaid the total amount of the first term
loan and as of December 31, 1997, the balance of the remaining term loan was
$1,444,000. At December 31, 1997, $3,572,000 had been borrowed against the
revolving line of credit. The term loan and the line of credit carry an interest
rate of 11% and 10.5%, respectively, at December 31, 1997.
On November 25, 1997, the Company entered into an amendment agreement to the
loan agreement whereby the financial institution agreed to refrain from
exercising its rights under the loan agreement as a result of the Company not
being in compliance with certain financial covenants in its loan agreement
including but not limited to, tangible net worth and interest coverage. This
amendment agreement required, among other things, the Company to obtain
alternative financing proposals.
On January 14, 1998, the Company entered into a Credit Security Agreement (the
"Norwest Credit Agreement") with Norwest Business Credit ("Norwest"). The
Norwest Credit Agreement consists of (i) a term loan of $2,125,000 which matures
on January 15, 2001, (ii) a term loan of $700,000 which matures on January 15,
1999, (iii) a revolving line of credit based upon the balance of the Company's
trade accounts receivable, and (iv) a note of up to $1,200,000 for the purchase
of capital equipment for 1998. The Company borrowed $2.0 million of an available
$2.8 million under the revolving line of credit. The term loan of $2,125,000
carries an interest rate equal to 1.25% above the publicly announced rate of
interest by Norwest Bank Minnesota, N.A. (the "Base Rate", 8.5% at January 14,
1998). The $700,000 term loan has an interest rate equal to 3.00% above the Base
Rate as does the line of credit. The note for the capital expenditures carries
an interest rate equal to 1.25% above the Base Rate. The Company utilized $4.5
million of the proceeds received from Norwest to pay off the outstanding loan
balances owed to its former lender.
MEDTOX Scientific, Inc.
Notes to Consolidated Financial Statements (continued)
4. Debt (continued)
Interest paid for all outstanding debt was $576,000, $424,000 and $19,000 for
the years ended December 31, 1997, 1996 and 1995, respectively.
5. Stockholders' Equity
The Company has sold its common stock in various private transactions as
follows:
Number Price Net
of Shares Per Share Proceeds
1996 235,295 $2.55 $ 600,000
1995 2,158,463 $1.63 to $2.25 $ 3,853,000
In January 1996 the Company sold 407 shares of Series A Preferred Stock at a
price of $50,000 per share. Pursuant to the Conversion Right of each share of
Series A Preferred Stock, each share may be converted to shares of common stock.
The amount of common shares to be issued upon the exercise of the Conversion
Right is derived by dividing (i) the purchase price of one share of Series A
Preferred Stock, $50,000 by (ii) the lower of (x) $2.775 or (y) 75% of the
Market Price of the Common Stock on the date the Conversion Right is exercised.
The "Market Price" is defined as the daily average of the closing bid prices
quoted on the American Stock Exchange for the five trading days immediately
preceding the date the Conversion Right is exercised. At December 31, 1997, 403
shares of Series A Preferred Stock had been converted into 34,902,570 shares of
common stock.
On January 26, 1998, the remaining 4 shares of Series A Preferred Stock were
converted into 1,066,667 shares of common stock.
The market price of the Company's common stock was $3.50 on the date of issuance
of the Series A Preferred Stock. The reduction in the conversion price of the
Series A Preferred Stock from $3.50 to $2.625 per share was valued at $6,783,333
and recorded as a preferred stock dividend to arrive at the 1996 net loss
available to holders of common stock in the calculation of net loss per share.
MEDTOX Scientific, Inc.
Notes to Consolidated Financial Statements (continued)
5. Stockholders' Equity (continued)
As part of the purchase price paid by the Company for the acquisition of MEDTOX
Laboratories the Company issued 2,517,306 shares of common stock.
In connection with the issuance of the common shares the Company agreed that if
after the Closing Date the market value of the common stock of the Company
declines below approximately $1.98 per share, the Company would issue additional
shares of common stock ("Additional Shares") to shareholders of MEDTOX
Laboratories who retain their shares of common stock through specified dates
(the "Repricing Dates") to compensate the MEDTOX Laboratories shareholders for
decreases after the closing of the MEDTOX Laboratories transaction in the market
price of the common stock of the Company below approximately $1.98 per share.
The following is a summary of the price resets, the market price per share used
for purposes of calculating the reset quantity of shares, and the quantity of
additional shares that were issued:
Market Price Related to Shares
Repricing Date Repricing Date Issued
May 23,1996 $1.56 1,119,057
November 22, 1996 $0.95 1,293,458
March 27, 1997 $0.4125 5,168,363
November 19, 1997 $0.375 775,363
-------------------
8,356,241
===================
MEDTOX Scientific, Inc.
Notes to Consolidated Financial Statements (continued)
5. Stockholders' Equity (continued)
At December 31, 1997, shares of common stock reserved for future issuance are as
follows:
Common stock warrants:
Series K 50,000
Series L 320,000
Series M 10,550
Series N 32,679
Series O 586,667
Common stock options:
Incentive (1983 plan) 154,199
Non-Employee Director 228,310
Equity Compensation Plan (1993 plan) 6,042,029
Nonqualified 195,887
Qualified Employee Stock Purchase Plan 210,761
Preferred stock convertible 1,066,667
The conversion prices for the warrants range from $2.77 to $4.44, and the
warrants expire in 1998 and 1999.
6. Stock Option and Purchase Plans
The Company has stock option plans to provide incentives to eligible employees,
officers, and directors in the form of incentive stock options, non-qualified
stock options, stock appreciation rights, restricted and unrestricted stock
awards, performance shares, and other stock-based awards. The Compensation
Committee of the Board of Directors determines the exercise price (not to be
less than the fair market value of the underlying stock) at the date of grant.
Options generally become exercisable in installments over a period of one to
five years and expire ten years from the date of grant.
MEDTOX Scientific, Inc.
Notes to Consolidated Financial Statements (continued)
6. Stock Option and Purchase Plans (continued)
The following table summarizes information about stock options outstanding at
December 31, 1997:
Plan Options Outstanding Weighted
Non Average
Shares Employee Exercise
Available 1983 ISO 1993 Director Price
for Grant Plan Plan Plan Share
--------------- ---------------------------------------------------------
Balance at December 31, 1994 3,481,220 461,657 447,007 70,094 $3.35
Additional shares reserved
for issuance 140,432 - - - -
Granted (300,742) - 300,742 - 3.19
Canceled 25,043 (12,251) (25,043) - 2.74
Exercised - - (1,667) (22,230) .60
--------------- -------------------------------------------
Balance at December 31, 1995 3,345,953 449,406 721,039 47,864 3.34
Additional shares reserved
for issuance 900,936 - - - -
Granted (238,300) - 225,000 13,300 2.83
Canceled 484,614 (153,986) (439,680) (44,934) 3.24
Exercised - (89,192) - (11,230) .46
--------------- -------------------------------------------
Balance at December 31, 1996 4,493,203 206,228 506,359 5,000 3.47
Additional shares reserved
for issuance 1,876,343 - - - -
Granted (230,000) - - 230,000 .44
Canceled 284,992 (52,029) (284,992) - 3.19
Exercised - - - - -
-------------- -------------------------------------------
Balance at December 31, 1997 6,424,538 154,199 221,367 235,000 $2.49
=============== ===========================================
MEDTOX Scientific, Inc.
Notes to Consolidated Financial Statements (continued)
6. Stock Option and Purchase Plans (continued)
Options Outstanding Options Exercisable
------------------------------------------------ ---------------------------------
Weighted
Weighted Average Weighted
Average Remaining Average
Range of Number Exercise Contractual Number Exercise
Exercise Prices Outstanding Price Life Exercisable Price
- -------------------------- ------------------------------------------------ ---------------------------------
$.44 230,000 $.44 9 69,448 $.44
$1.41 - $2.50 22,500 $1.97 4 22,500 $1.97
$2.51 - $3.00 106,400 $2.84 6 97,986 $2.83
$3.01 - $3.44 101,992 $3.21 7 99,355 $3.21
$3.75 39,425 $3.75 3 39,425 $3.75
$3.94 - $7.69 110,249 $5.41 4 110,249 $5.41
----------------- -----------------
610,566 $2.49 5 438,963 $3.22
Options Outstanding Options Exercisable
---------------------------------------------------------
Weighted Weighted
Range of Average Average
Exercise Number Exercise Number Exercise
Option Plan Price Outstanding Price Exercisable Price
- ----------------------------------- ---------------- ---------------------------------------------------------
1983 Incentive Stock Option Plan $1.41 - $7.19 154,199 $4.39 154,199 $4.39
1993 Equity Compensation Plan $2.31 - $7.69 221,367 $3.24 210,316 $3.25
Non Employee Director Plan $0.44 - $4.63 235,000 $ .53 74,448 $ .72
------------ ---------------
610,566 $2.49 438,963 $3.22
Nonqualified Stock Options
On July 1, 1987, the Company granted nonqualified options to purchase 66,667
shares of common stock to an officer at $14.70 per share. Subsequently, 26,667
of the options were canceled and reissued under the Incentive Stock Option Plan
and the remaining 40,000 options were canceled and reissued at $7.50 per share.
In September 1988 the officer exercised options to purchase 13,334 shares of
common stock. Pursuant to the terms of the option agreement, the Company
provided a loan to the officer for the amount of the funds necessary to exercise
the options. In May 1990, the remaining 26,666 options were
MEDTOX Scientific, Inc.
Notes to Consolidated Financial Statements (continued)
6. Stock Option and Purchase Plans (continued)
canceled and reissued at $3.75 per share. In July 1996, the officer resigned
from the Company. As part of the resignation agreement, the Company forgave the
outstanding loan in return for 13,334 shares of common stock.
On August 10, 1988, the Company granted nonqualified options to purchase 6,667
shares of common stock to an officer at $3.75 per share. At December 31, 1997,
the 6,667 options are exercisable.
On January 14, 1993, the Company granted nonqualified options to purchase 7,760
shares of common stock to a director at $8.19 per share. At December 31, 1997,
the 7,760 options are exercisable.
On April 30, 1997, the Company granted nonqualified options to purchase 154,794
shares of common stock to a former officer of the Company at $.44 per share. At
December 31, 1997, 54,794 options are exercisable.
The shares of common stock covered by these nonqualified options are restricted
as to transfer under applicable securities laws.
Qualified Employee Stock Purchase Plan
The Company has a Qualified Employee Stock Purchase Plan (the "Purchase Plan")
under which all employees meeting certain criteria may subscribe to and purchase
shares of common stock. The number of shares of common stock authorized to be
issued under the Purchase Plan is 500,000. The subscription price of the shares
is 85% of the fair market value of the common stock on the day the executed
subscription form is received by the Company. The purchase price for the shares
is the lesser of the subscription price or 85% of the fair market value of the
shares on the day the right to purchase is exercised. Payment for common stock
is made through a payroll deduction plan.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees", and related interpretations, in accounting for its
stock-based compensation plans. Accordingly, no compensation expense has been
recognized for its stock option awards, because the exercise price of all
options equals the market price of the stock on the grant date. Had compensation
expense for the Company's stock option
MEDTOX Scientific, Inc.
Notes to Consolidated Financial Statements (continued)
6. Stock Option and Purchase Plans (continued)
awards been determined based upon their grant date fair value consistent with
the methodology prescribed under Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation," the Company's net loss and loss
per share would have been $87,000 ($0 per share), $13,244,000 ($.60 per share)
and $7,447,000 ($.79 per share) for 1997, 1996 and 1995, respectively. These
amounts are not necessarily indicative of the amounts that will be reported in
the future. The fair value of the options at the grant date was estimated using
the Black-Scholes model with the following weighted average assumptions:
1997 1996 1995
-------------------------------------------
Expected life (years) 5 5 5
Interest rate 6.0% 6.0% 6.0%
Volatility 103.0% 119.5% 119.5%
Dividend yield 0% 0% 0%
The fair value of options granted in 1997 was $0.29 per share.
7. Leases
The Company leases office and research facilities from a director under a
month-to-month operating lease. Rental payments to the director were
approximately $121,000, $122,000 and $121,000 for the years ended December 31,
1997, 1996 and 1995, respectively.
The Company leases other offices and facilities and office equipment under
certain operating leases which expire on various dates through April 2000. Under
the terms of the facility leases, a pro rata share of operating expenses and
real estate taxes are charged as additional rent. See also Note 8 regarding
restructuring costs relative to certain facility leases. The Company subleases
one of its facilities to another party whereby that party makes payments
directly to the lessor.
MEDTOX Scientific, Inc.
Notes to Consolidated Financial Statements (continued)
7. Leases (continued)
As of December 31, 1997, the Company is obligated for future minimum lease
payments without regard for sublease payments under noncancelable leases as
follows (in thousands):
Capital Operating
Leases Leases
-----------------------------
1998 $146,000 $ 850,561
1999 140,000 409,241
2000 102,000 78,240
2001 64,000 -
2002 40,000 -
-----------------------------
492,000 $ 1,338,042
===========
Amount representing interest 87,000
----------
Present value of net minimum lease payments 405,000
Current portion (in other current liabilities) 110,000
--------
Long-term capital lease obligations $295,000
==========
Rent expense (including amounts for the facilities leased from the director)
amounted to $582,000, $638,000, and $435,000 for the years ended December 31,
1997, 1996 and 1995, respectively.
8. Restructuring Costs
During 1996 the Company recorded restructuring costs of $2,449,000 as a result
of the consolidation of the laboratory operations of PDLA into the laboratory
operations at MEDTOX Laboratories, the sale of the former operations of Bioman,
and the reduction of its work force at certain of its facilities. In fiscal
1996, payments of $646,000 were made against the restructuring reserves.
In fiscal 1997, restructuring reserves decreased by $1,017,000 to $786,000 at
December 31, 1997, due to payments of $620,000 and a change in the estimate of
the required reserve of $397,000 in December 1997.
MEDTOX Scientific, Inc.
Notes to Consolidated Financial Statements (continued)
9. Income Taxes
Deferred income taxes reflect the tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes.
Significant components of the Company's deferred tax liabilities and assets are
as follows:
December 31
1997 1996
---------------------------
(In thousands)
Deferred tax assets:
Excess fixed asset basis $ 169 $ 315
Excess goodwill basis 1,897 2,154
Net acquisition costs - 241
Net operating loss carryforwards 13,487 11,254
Research and experimental credit carryforwards 41 -
Restructuring costs 298 672
Legal reserve 76 198
Other 413 418
---------------------------
Total deferred tax assets 16,381 15,252
Valuation allowance for deferred tax assets (16,381) (15,252)
============================
Net deferred tax asset $ - $ -
==============================
At December 31, 1997, the Company had net operating loss carryforwards (NOL's)
of approximately $35,000,000 which are available to offset taxable income though
2012 and begin to expire in 1998. For financial reporting purposes, a valuation
allowance has been recorded to offset deferred tax assets that might not be
realized.
Section 382 of the Internal Revenue Code restricts the annual utilization of the
NOL's incurred prior to a change in ownership. Such a change in ownership may
have occurred in connection with stock transactions in 1997 and 1996.
MEDTOX Scientific, Inc.
Notes to Consolidated Financial Statements (continued)
10. Benefit Plans
The Company has defined contribution benefit plans that cover substantially all
employees who meet certain age and length of service requirements. Contributions
to the plans are at the discretion of the Board of Directors. The 401(k) expense
for the years ended December 31, 1997, 1996 and 1995 was $152,000, $80,000 and
$0, respectively.
11. Contingencies
The Company is a defendant in a suit filed in Circuit Court of Cook County,
Illinois to a claim of unpaid rent obligations associated with an idle facility
in Illinois. The Company has answered the complaint denying responsibility for
the obligation. The Company intends to vigorously defend this action.
The Company is a defendant to claims of patent infringement asserted on August
20, 1996. It is alleged the Company infringes two patents allegedly owned by the
plaintiff relating to forensically acceptable determinations of gestational
fetal exposure to drugs and other chemical agents. The Company has answered the
complaint denying any infringement and has counterclaimed for a declaratory
judgment that the patents are invalid, unenforceable, and not infringed. It also
has counterclaimed for unfair competition under federal and state law,
requesting money damages as well as injunctive relief. The Company intends to
vigorously pursue its defense of the claims and to vigorously prosecute its
counterclaims.
The Company believes that the probable resolution of the above contingencies
will not materially affect the financial position or results of operations of
the Company.
On January 31, 1997, the Company filed suit in Federal District Court in
Minnesota against a majority shareholder and two former outside directors of the
Company alleging violation of Section 16b of the Securities Exchange Act of 1934
and seeking recovery of more than $500,000 in short-swing profits. On August 4,
1997, the U.S. District Court granted the defendants' Motion to Dismiss the
Company's complaint, ruling that the defendants' conduct did not constitute a
violation of Section 16(b). On October 29, 1997, the Company filed an appeal of
that decision to the United States Court of Appeals for the Eighth Circuit. That
appeal is currently pending.
SCHEDULE II - VALUATION & QUALIFYING ACCOUNTS
Balance At Charged Balance At
Beginning To Costs Charged To The End Of
Of Period And Expenses Other Deductions Period
Accounts
Year Ended December 31, 1997:
Deducted from Asset Accounts:
Allowance for Doubtful
Accounts.................... $ 358,000 $ 157,000 $ - $ - $ 515,000
Allowance for Excess and
Obsolete Inventory .......... $ 109,000 $ 13,000 $ - $ 98,000 $ 24,000
Restructuring Accrual............ $ 1,803,000 - $ - $1,017,000 (5) $ 786,000
Year Ended December 31, 1996:
Deducted from Asset Accounts:
Allowance for Doubtful
Accounts..................... $ 130,000 $ 241,000 $100,000(3) $ 113,000(4) $ 358,000
Allowance for Excess and
Obsolete Inventory ........... $ 12,000 $ 97,000 $ - $ - $ 109,000
Restructuring Accrual ....... $ - $ 2,449,000 $ - $ 646,000(2) $ 1,803,000
Year Ended December 31, 1995:
Deducted from Asset Accounts:
Allowance for Doubtful
Accounts.................... $ 206,000 $ 89,000 $ - $ 165,000(1) $ 130,000
Allowance for Excess and
Obsolete Inventory ......... $ 25,000 $ 2,000 $ - $ 15,000 $ 12,000
1) Includes $36,000 of Accounts Receivable determined to be uncollectible
which were written off.
2) Represents severance payments and payments on lease obligations.
3) $100,000 charged to Other Accounts represents the amount acquired through
the MEDTOX acquisition.
4) Uncollectible accounts written off, net of recoveries.
5) Includes a reduction of $397,000 of Lease Liability deemed to no longer be
an obligation of the Company. The remainder is due to payments towards the
liability.