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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, 2001
[ ] 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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
402 West County Road D, St. Paul, Minnesota 55112
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (651) 636-7466
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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 __ No X
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
$41,492,949 as of March 22, 2002, based upon a price of $9.90 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 22, 2002, was
4,353,939.
MEDTOX SCIENTIFIC, INC.
FORM 10-K ANNUAL REPORT
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
Table of Contents
ITEM NO. PAGE
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Part I
1. Business. . . . . . . . . . . . . . . . . . . 4
2. Properties. . . . . . . . . . . . . . . . . . 11
3. Legal Proceedings . . . . . . . . . . . . . . 12
4. Submission of Matters to a Vote of
Security Holders . . . . . . . . . . . . . . 12
Part II
5. Market for the Registrant's Common Equity
and Related Stockholder Matters. . . . . . . 13
6. Selected Financial Data . . . . . . . . . . . 14
7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations. . . . . . . . . . . . . . . . 15
7A. Quantitative and Qualitative Disclosures About
Market Risk . . . . . . . . . . . . . . . . . 25
8. Financial Statements and Supplementary
Data . . . . . . . . . . . . . . . . . . . . 25
9. Changes in and Disagreements With
Accountants on Accounting
and Financial Disclosure . . . . . . . . . . 25
Part III
10. Directors and Executive Officers . . . . . . . . . 26
11. Executive Compensation. . . . . . . . . . . . . . 26
12. Security Ownership of Certain Beneficial
Owners and Management. . . . . . . . . . . . . . 26
13. Certain Relationships and Related
Transactions . . . . . . . . . . . . . . . . . . . 26
Part IV
14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K. . . . . . . . . . . . . . 27
Signatures. . . . . . . . . . . . . . . . . . .. . . 35
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, earnings or loss per share, capital
expenditures, dividends, capital structure and other financial items, (ii)
statements of the plans and objectives of the Company or its management or Board
of Directors, including the introduction of new products, or estimates or
predictions of actions by customers, suppliers, competitors or regulatory
authorities, (iii) statements of future economic performance, and (iv)
statements of assumptions underlying other statements and statements about the
Company or its business.
This document and any documents incorporated by reference herein also
identify important factors which could cause actual results to differ materially
from those indicated by the forward-looking statements. These risks and
uncertainties include price competition, the decisions of customers, the actions
of competitors, the effects of government regulation, possible delays in the
introduction of new products, customer acceptance of products and services, and
other factors which are described herein and/or in documents incorporated by
reference herein.
The cautionary statements made pursuant to the Private Litigation
Securities Reform Act of 1995 above and elsewhere by the Company should not be
construed as exhaustive or as any admission regarding the adequacy of
disclosures made by the Company prior to the effective date of such Act.
Forward- looking statements are beyond the ability of the Company to control and
in many cases the Company cannot predict what factors would cause results to
differ materially from those indicated by the forward looking statements.
ITEM 1. BUSINESS.
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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., MEDTOX Diagnostics, Inc., and New Brighton Business Center,
LLC are referred to herein as "the Company". The Company is engaged primarily in
two distinct, but very much related businesses. The business of manufacturing
and distribution of diagnostic devices is carried on by MEDTOX Diagnostics, Inc.
from its facility in Burlington, North Carolina and the business of forensic and
clinical laboratory services is conducted by MEDTOX Laboratories, Inc. at its
facility in St. Paul, Minnesota. For the year ended December 31, 2001, sales
from the forensic and clinical laboratory services conducted by MEDTOX
Laboratories, Inc. accounted for 77% of the Company's revenues. Revenue from the
manufacture and distribution of diagnostic devices and other similar products,
including some contract manufacturing conducted by MEDTOX Diagnostics, Inc.
accounted for 23% of the total revenues of the Company for the year ended
December 31, 2001.
2. Principal Services, Products, and Markets.
General. The Company has two reportable segments: "Laboratory Services"
conducted by the Company's wholly owned subsidiaries, MEDTOX Laboratories, Inc.
and New Brighton Business Center, LLC and "Products Sales" conducted by the
Company's wholly owned subsidiary MEDTOX Diagnostics, Inc. Laboratory Services
include forensic toxicology, clinical toxicology, clinical testing for the
pharmaceutical industry (central laboratory services, bioanalytical and
pharmacokinetic testing), and analysis of heavy and trace metals. In addition,
the Laboratory Services segment provides logistical support, data management and
overall program management services. Product Sales include sales of a variety of
on-site screening products and contract manufacturing. For financial information
relating to the Company's segments, see Note 4 of Notes to the Consolidated
Financial Statements.
Laboratory Services
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, gas
chromatography/mass spectrometry and high performance liquid chromatography with
tandem mass spectrometry (LC/MS/MS). MEDTOX Laboratories, Inc. was one of the
charter laboratories to be certified by the federal government to perform drug
testing on employees covered by the Federal Workplace Drug Testing Guidelines.
The Company pioneered security and chain of custody procedures, including sample
bar coding and automated sample handling as well as stereospecific confirmation
methods that assist in maintaining the integrity of the specimens and the
confidentiality of the test results.
The Company's customers for substance abuse testing include
public and private corporations. In addition to public and private corporations,
substance abuse 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, gas
chromatography/mass spectrometry and tandem mass spectrometry. The Company
performs analytical testing for a wide variety of drug classes s including:
analgesic, antianxiety, anticholinergic, anticoagulant, anticonvulsant,
antidepressant, antidiabetic, antiemetic, antihistamine, antiinflammatory,
antimicrobial, antipsychotic, bronchodilator, 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 the
Company from clients across the country by the Company's own couriers,
contracted delivery services and commercial overnight couriers.
C. Clinical Testing for the Pharmaceutical Industry. The Company provides
laboratory testing for Phase 1-4 clinical trials including general laboratory
services, assay development, bio-analytical and pharmacokinetic testing. These
test are performed in the company's clinical laboratory and are conducted using
methodologies such as immunoassays, gas chromatography, high performance liquid
chromatography, gas chromatography/mass spectrometry and tandem mass
spectrometry.
The Company's clients for this market are clinical trial sponsors and Clinical
Research Organizations (CRO's).
D. Heavy Metal, Trace Element, and Solvent Analyses. The Company 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 and pediatricians
who need to test children for exposure to lead.
E. Logistics, Data, and Program Management Services. The
Company also provides services in the areas of logistics management, data
management, and program management. These services support the Company's
underlying business of laboratory analysis and provide added value to its
clients. Value-added services include courier services for medical specimen
transportation, management programs for on-site drug testing, data collection
and reporting services, coordination of specimen collection sites, and medical
surveillance program management.
Product Sales
The Company has taken a leadership role in the development and
distribution of diagnostic drug screening devices. The demand for fast,
inexpensive screening technology that detects the presence of a number of
substances in human urine, blood samples and other biological specimens
continues to increase.
In 1998, the Company received FDA 510(k) clearance on the
first of its second-generation on-site test products, PROFILE(R)-II.
PROFILE(R)-II, is a five-drug lateral flow device for the detection of
drugs-of-abuse in human urine. This single-step, immunoassay device has been
combined with the Company's data delivery system and laboratory confirmation
capability to produce the PROFILE(R)-II Test System. This integrated on-site
testing system is currently being marketed to occupational health clinics,
corporate clients, third party administrators, and drug abuse counseling and
treatment centers.
The Company also manufactures and distributes the
VERDICT(R)-II line of diagnostic drug screening products within the criminal
justice, temporary service and drug rehabilitation markets. In 2000, the Company
developed 10 additional panel configurations within the VERDICT(R)-II product
line, giving the company 12 FDA 510(k)-cleared products in all. These devices
are sold in multiple assay configurations, providing clients with flexibility in
terms of drug panel options and potential cost savings.
The Company continues to market the EZ-SCREEN(R) tests. These
tests are qualitative assays utilized in agricultural diagnostics to detect
mycotoxins and antibiotic residues. Mycotoxins are hazardous substances produced
by fungal growth and frequently contaminate corn, wheat, rye, barley, peanuts,
tree nuts, cottonseed, milk, rice, and livestock feeds. The EZ-SCREEN(R)
agridiagnostic tests are marketed to regulatory authorities and producers of
foodstuffs and feeds.
The Company distributes diagnostic tests for the detection of
alcohol with the EZ-SCREEN(R) 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 the EZ-SCREEN(R) Breath Alcohol Test through a
distribution agreement.
3. Marketing and Sales.
The Company believes that the combined operations of the
Laboratory Services business and the on-site test kits manufactured by the
Product Sales segment 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 and occupational medicine marketplace, including (1) on-site tests
for the detection of substance of abuse drugs; (2) SAMHSA (Substance Abuse
Mental Health Services Administration) certified laboratory testing (screening
and confirmation); (3) biological monitoring of occupational toxins; (4)
consultation; and (5) logistic, data management and program management services.
The Company has expanded its sales effort in the
pharmaceutical market by offering testing services for Phase 1-4 clinical trials
and working with sponsors and CRO's on assay development and bio-analytical and
pharmacokinetic studies. In addition, the Company has begun to market clinical
chemistry testing services to clinics, hospitals and physician offices on a
regional basis. With the acquisition of Leadtech in October 2001, the Company
expanded its presence in the pediatric lead testing market.
Major Customers. The Company had no single customer whose
sales amounted to more than 10% of consolidated revenues during the year ended
December 31, 2001.
4. New Products, Research and Development.
Laboratory Services. The research and development group for
Laboratory Services develops new assays for new drugs and compounds, develops
new assays for existing metabolites of drugs and other toxins, and improves
existing assays with the goal of improving the assays' robustness, sensitivity,
accuracy, precision, specificity, and cost. Numerous new laboratory-based assays
were developed during 2001 using immunochemistry, liquid chromatography (LC),
gas chromatography (GC), gas chromatography with mass spectrometry (GC/MS),
inductively coupled plasma mass spectrometry (ICP/MS), and LC with tandem mass
spectrometry (LC/MS/MS). The many new tests developed during 2001 expanded the
Company's capabilities in the esoteric reference clinical toxicology market
(providing sophisticated testing for hospitals and other reference
laboratories), expanded the Company's capabilities and laboratory services in
biological monitoring of toxins in the workplace, enhanced the Company's
capabilities in clinical and workplace drugs of abuse testing, and also expanded
the Company's capabilities in bioanalytical testing for pharmaceutical companies
and clinical trials.
Much of our new clinical toxicology test development efforts focused on
newly marketed anticonvulsant and antidepressant drugs, further strengthening
our expertise in neurological drug analysis. In 2001, the Company developed
several sophisticated, multi-component assays utilizing state of the art
LC/MS/MS technology which significantly enhances the analyses of these important
therapeutic compounds. The growth of the pediatric lead testing volume required
development of a more efficient analytical method to accommodate higher sample
throughput. In 2001, the Company purchased a third tandem mass spectrometer
(LC/MS/MS) to enhance current capabilities for drugs of abuse testing in urine
and to provide the necessary technology to develop more sensitive assays for
drugs of abuse in alternative matrices.
Product Sales. In July 2000, the Company filed a 510(k) with
the FDA for an additional test strip that includes benzodiazepines,
barbiturates, methadone and TCA (tricyclic antidepressants). The Company
received pre-marketing approval for this strip in early 2001, incorporated this
test strip with the PROFILE(R)-II test strip, and created the PROFILE(R)-II ER,
a dual-window device that can test for nine substances in a single device. The
PROFILE(R)-II ER is marketed primarily to hospital laboratories.
In 2001, the Company has brought a number of new products to
market, including the seven-panel PROFILE(R)-II and the PROFILE(R)-II LFAS, a
five-panel device with an "on-board" lateral flow adulteration strip. The
adulteration strip tests for pH, specific gravity, gluteraldehyde, nitrites and
a variety of oxidants.
The Company continues to develop new and innovative products
and services while expanding the laboratory's test menu to meet the demands of
both the drug testing and clinical markets.
Research and Development Expenses. The Company incurred costs
of $1.3 million, $1.1 million and $0.8 million for research and development
activities in 2001, 2000 and 1999, respectively.
5. Raw Materials.
Laboratory Services. 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 supplies. 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 numerous suppliers.
Product Sales. The primary raw materials required for the
immunoassay-based test kits produced by the Company consist of antibodies,
antigens and other reagents, plastic molded devices, wicking materials, filter
materials, absorbent 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
antigens. It has initiated production of antibodies and antigens for certain
tests. If the Company were to change certain raw materials used in a specific
test, additional development, validation, and accompanying costs, may be
required to adapt the alternate material to the specific diagnostic test.
6. Patents, Trademarks, Licensing and Other Proprietary Information.
Laboratory Services. 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.
Product Sales. The Company has a patent pending on the system that it
developed which integrates on-site scientific analysis with state-of-the-art
data collection and delivery. The system is currently being utilized with the
Company's PROFILE(R)-II and VERDICT(R)-II products.
The Company holds eight issued United States patents relating
to on-site testing technology. Seven of these patents generally form the basis
for the EZ-SCREEN(R) and one-step technologies, which include PROFILE(R)-II and
VERDICT(R)-II products. The other patent relates to methods of utilizing whole
blood as a sample medium on its immunoassay devices. Applications have also been
made for additional patents.
Of the seven U.S. patents mentioned above which generally form
the basis for the EZ-SCREEN(R) and one-step technologies, one expires in 2004,
five expire in 2007, and one expires in 2010. The patent relating 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 one or more 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.
General. The Company holds approximately 12 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 2003 to 2009. Applications have also
been made for additional trade names.
7. Seasonality.
Laboratory Services. The Company believes that the laboratory
testing business is subject to seasonal fluctuations in pre-employment
screening. These seasonal fluctuations include reduced volume in the summer
months, year-end holiday periods, and other major holidays. In addition,
inclement weather may have a negative impact on volume thereby reducing net
revenues and cash flow.
Product Sales. The Company does not believe that seasonality is a
significant factor in the sale of its on-site immunoassay testing devices.
8. Backlog.
Laboratory Services. There exists a delay in recognition of
revenues when setting up new accounts for Laboratory Services. The time from
when an account becomes a client of the Company to the time the laboratory
starts receiving specimens may be up to four months. The delay in receiving
samples is primarily due to the necessity of establishing communication
capabilities between the client and the Company, the requirement to ship out
collection kits and forms, and the establishment of a collection site network.
At December 31, 2001, the Company had several accounts which were in the process
of being set up where revenues are not expected to be realized until 2002.
Product Sales. At December 31, 2001, MEDTOX Diagnostics, Inc. did not have
any significant backlog. The Company does not believe that sales backlog is a
significant factor in the Product Sales segment of its business.
9. Competition.
Laboratory Services. As of December 31, 2001 approximately 59
labs, including MEDTOX Laboratories, Inc. were certified by the Department of
Health and Human Services as having met the standards for Subpart C of Mandatory
Guidelines for Federal Workplace Drug Testing Programs (59 FR 29916, 29925).
Competitors and potential competitors include forensic testing units of large
clinical laboratories and other independent laboratories, specialized
laboratories, and in-house testing facilities maintained by hospitals.
Competitive factors include reliability and accuracy of tests,
price structure, service, transportation and 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 patents 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.
The Company's ability to successfully compete in the future
and maintain its margins will be based on its ability to maintain its quality
and customer service strength while maintaining efficiencies and low operating
costs. There can be no assurance that price competitiveness will not increase in
importance as a competitive factor in the laboratory testing business.
Product Sales. 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 and 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 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.
10. 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.
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. 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 16 different products.
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
pre-market product reviews, fines, civil penalties, recalls, seizures,
injunctions and criminal prosecution.
3. Centers for Medicare and Medicaid Services (CMS) formerly 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(R), PROFILE(R), PROFILE(R) II, VERDICT(R) and VERDICT(R) II 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 high complexity laboratory and is
accredited by the College of American Pathologists (CAP).
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. 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.
11. Product and Professional Liability.
Laboratory Services. 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 for damages resulting from a medical
incident, which arises out of a failure to render professional services. To
date, the Company has not paid any material dollar amounts for claims of this
type and no material professional service claims are currently pending.
Product Sales. Manufacturing and marketing of products by the
Company entail a risk of product liability claims. Since 1993, the Company has
maintained 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.
12. Employees.
As of December 31, 2001, the Company had a total of
approximately 455 full-time employee equivalents as compared to approximately
453 full-time employee equivalents at December 31, 2000. Of the approximate 455
employees, 407 work at MEDTOX Laboratories, Inc. while the remaining 48 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.
The Company believes that it maintains good relations with its employees.
ITEM 2. PROPERTIES.
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The administrative offices and laboratory operations for the
Laboratory Services segment of the Company's business are located primarily in a
53,576 square foot facility in St. Paul, Minnesota. Until March 16, 2001, the
Company leased this space at an annual rent, excluding operating costs, of
approximately $445,000 per year. On March 16, 2001 the Company purchased the
entire three building complex with a total of 129,039 square feet, which
included the 53,576 square feet utilized by the Company's Laboratory Services
segment. The purchasing entity was New Brighton Business Center LLC, a wholly
owned limited liability company, established by the Company for the sole purpose
of purchasing the entire three building complex. The selling entity was
PHL-OPCO, LP a Delaware limited partnership, which was an unrelated third party
who had operated the facility as its landlord until the sale of the property to
the Company. The purchase price, exclusive of expenses and closing costs, was
$6,350,000 and was financed by a mortgage loan from Principal Life Insurance
Company of Des Moines, Iowa in the amount of $6,200,000. The mortgage loan has a
term of ten years and is being repaid based on a 20 year amortization schedule
with a balloon payment at the end of the ten year term. The interest rate is
fixed at an annual rate of 7.23% for the first five years at which time the rate
will be renegotiated by the parties. The facility includes other commercial
tenants who have individual leases that range from 4 years to less then 1 year
in duration. The current annual rent paid by such third party tenants, excluding
their pro-rata share of operating expenses, is $431,000 per year. In addition,
effective September 1, 2001, the Laboratory Services segment entered into a
seven-year lease for 30,000 square feet to be used in connection with its
courier business and also as additional warehouse and shipping space. This
building is a special purpose facility and enables the Company to store its
vehicles indoors, when appropriate, and to perform routine maintenance of the
vehicles. The annual base rent on this second facility, exclusive of operating
expenses is currently $10,500 per year.
The operations for the Product Sales segment of the Company's
business are located in Burlington, North Carolina where the Company maintains
the offices, research and development laboratories, production operations, and
warehouse for MEDTOX Diagnostics, Inc. Effective March 28, 2001, the Company
entered into a 10-year lease of the entire building (approximately 39,500 square
feet) for an annual base rent of $197,000, exclusive of operating expenses. This
facility has always been owned and leased to the Company by Dr. Samuel C.
Powell, a member of the Board of Directors of the Company. In addition, under
the lease the Company will have up to $600,000 to spend on tenant improvements
of the building, which will then be amortized over the 10-year life of the lease
as additional rent at an assumed annual interest rate of 9.5%. The Company
believes it is renting this facility in Burlington on terms as favorable as
those available from third parties for equivalent premises.
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.
- ------ -----------------
In March 2000, the Company was served with a copy of a
complaint filed against the Company in the Circuit Court of Cook County,
Illinois, by the Plaintiff, The Methodist Medical Center of Illinois. The
Plaintiff alleged that the Company interfered with various contractual
relationships of the Plaintiff in connection with the referral of certain
customers to the Company by other defendants previously sued by the Plaintiff in
the same action. The Company had filed a cross claim against the other
defendants in the litigation based on such defendants' contractual obligation to
indemnify the Company against any damages, costs or expenses (including attorney
fees) incurred by the Company, arising out of any claim of contractual
interference by the Company in connection with the referral of the customers to
the Company by such defendants. The parties have reached an agreement to settle
the case, whereby the Company paid $75,000 with a full release of all claims and
a dismissal order entered in October 2001. The Company will voluntarily dismiss
its indemnity claims against the co-defendants for reimbursement of the $75,000
paid, with the right of refiling the indemnification claim existing for one
year. The Company will continue to pursue its right of indemnification for the
$75,000 during the next year.
In January 1997, the Company filed suit in Federal District
Court in Minnesota against Morgan Capital LLC, David Bistricer and Alex
Bistricer alleging violation of Section 16(b) of the Securities and Exchange Act
of 1934 and seeking recovery of more than $500,000 in short-swing profits.
Messrs. David and Alex Bistricer are former directors of the Company. On August
4, 1997, the U.S. District Court dismissed the Company's complaint and on
October 29, 1997, the Company filed an appeal of that decision to the United
States Court of Appeals for the Eighth Circuit. On July 21, 1998, the Eighth
Circuit reversed the District Court dismissal and remanded the case to the
District Court. On June 3, 1999 the U.S. District Court found that Morgan
Capital had violated Section 16(b) and ordered Morgan Capital to pay the Company
damages of $551,000 plus interest. On or about September 30, 2000 the parties
entered into a Stipulation and Mutual Release dismissing with prejudice all
claims and counterclaims between the parties regarding the transaction other
then the Company's Section 16(b) claim against the former stockholder, Morgan
Capital. The parties entered into this Stipulation along with an Escrow
Agreement requiring Morgan Capital to deposit into escrow 79,750 shares of
publicly registered common stock of the Company as collateral to secure payment
by Morgan Capital of the judgment to be entered in favor of the Company in the
amount of $675,000 plus any post-judgment interest. The Federal District Court
entered such judgment in favor of the Company on October 17, 2000. Morgan
Capital subsequently appealed the Federal District Court's decision to the
Eighth Circuit Court of Appeals. On August 3, 2001 the Eighth Circuit Court of
Appeals ruled in favor of the Company, affirming the District Court decision
awarding the Company $675,000 plus post judgment interest. Pursuant to the
Escrow Agreement, Morgan Capital paid the Company $715,000 in cash to satisfy
the judgment. On November 1, 2001, Morgan Capital filed a petition for a writ of
certiorari to the United States Supreme Court, seeking review of the judgment
against it. On February 19, 2002, the Supreme Court denied Morgan Capital's
petition.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.
- ------ -------------------------------------------------
No matter was submitted to a vote of the security holders
during the fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
Common Stock
Since September 27, 1993, the Company's common stock has been
listed on the American Stock Exchange and is currently trading under the symbol
"TOX". As of March 22, 2002, the number of holders of record of the Common Stock
was 2,645. 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, do not
necessarily reflect actual transactions, and have been adjusted for the 10%
stock dividend paid on November 9, 2001.
2001: High Low
----- ---- ----
First Quarter......................... $ 8.18 $ 5.34
Second Quarter........................ 11.58 6.59
Third Quarter......................... 13.96 8.36
Fourth Quarter........................ 15.75 10.36
2000:
First Quarter........................... $ 9.21 $ 7.39
Second Quarter........................ 9.21 6.36
Third Quarter........................... 11.93 9.55
Fourth Quarter......................... 11.14 5.34
No cash dividends have been declared or paid by the Company since
its inception and management of the Company has no plans to pay a cash dividend
in the foreseeable future. The Company's financial covenants under its debt
instrument may effectively preclude the Company from paying cash dividends.
On September 18, 1998, the Company's Board of Directors
authorized and declared a dividend of one preferred share purchase right for
each share of common stock then outstanding. Subsequent to that date the Company
maintains a plan in which one preferred share purchase right (Right) exists for
each common share of the Company. These Rights are exercisable only if a person
or group acquires beneficial ownership of 20 percent or more of the Company's
outstanding common stock.
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 were no shares of Series A
Preferred Stock outstanding as of December 31, 2001.
No dividends on the Series A preferred stock were declared or
paid prior to their conversion to common stock, which occurred on or before
January 30, 1998.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data is derived from the
consolidated financial statements of the Company and should be read in
conjunction with the consolidated financial statements, related notes, and other
financial information included herein.
(In thousands, except share and per share data) 2001 2000 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA:
Revenues $ 49,084 $ 42,880 $ 35,003 $ 29,575 $ 28,594
Cost of revenues 29,637 27,847 22,749 20,360 17,888
Selling, general, and administrative 14,436 15,480 9,348 8,974 9,510
Research and development 1,292 1,123 834 1,153 965
Restructuring costs -- -- (164) 712 (397)
Other expense 1,221 991 817 673 603
Income (loss) from operations applicable to --------- --------- --------- --------- ---------
common stockholders $ 2,498 $ (2,561) $ 1,419 $ (2,297) $ 25
========= ========== ========= ========== =========
Basic earnings (loss) from operations per common
share $ 0.62 $ (0.74) $ 0.44 $ (0.72) $ 0.01
========= ========= ========= ========= =========
Diluted earnings (loss) from operations per common
share $ 0.60 $ (0.74) $ 0.43 $ (0.72) $ 0.01
========= ========= ========= ========= =========
Weighted average number of shares outstanding:
Basic 4,001,772 3,456,847 3,192,296 3,182,739 2,823,663
Diluted 4,194,683 3,456,847 3,283,618 3,182,739 2,823,663
BALANCE SHEET DATA:
Total assets $ 44,156 $ 30,024 $ 26,271 $ 24,600 $ 24,881
Long-term obligations 10,015 2,898 2,146 2,301 295
Total stockholders' equity 22,520 15,410 12,790 11,326 13,571
SEGMENT DATA:
Net revenues:
Laboratory Services $ 37,990 $ 34,797 $ 31,012 $ 27,070 $ 25,899
Product Sales 11,094 8,083 3,991 2,505 2,695
--------- --------- --------- ---------- ---------
Total net revenues $ 49,084 $ 42,880 $ 35,003 $ 29,575 $ 28,594
========= ========= ========= ========== =========
Segment income (loss):
Laboratory Services $ 759 $ (3,374) $ 1,440 $ (1,391) $ 430
Product Sales 1,739 813 (21) (906) (405)
--------- --------- ---------- ---------- ----------
Total segment income (loss) $ 2,498 $ (2,561) $ 1,419 $ (2,297) $ 25
========= =========== ========= =========== =========
Assets:
Laboratory Services $ 39,358 $ 26,498 $ 24,269 $ 23,289 $ 23,469
Product Sales 4,798 3,526 2,002 1,311 1,412
--------- --------- --------- --------- ---------
Total assets $ 44,156 $ 30,024 $ 26,271 $ 24,600 $ 24,881
========= ========= ========= ========= ==========
All share and per share amounts have been restated for the 10% stock dividend
paid on November 9, 2001.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
General
MEDTOX Scientific, Inc. (formerly EDITEK, Inc.), a Delaware corporation,
was organized in September 1986 to succeed the operations of a predecessor
California corporation. MEDTOX Scientific, Inc. and its wholly-owned
subsidiaries, MEDTOX Laboratories, Inc., MEDTOX Diagnostics, Inc., and New
Brighton Business Center LLC are referred to herein as "the Company". The
Company is engaged primarily in two distinct, but very much related businesses.
The business of manufacturing and distribution of diagnostic devices is carried
on by MEDTOX Diagnostics, Inc. from its facility in Burlington, North Carolina
and the business of forensic and clinical laboratory services is conducted by
MEDTOX Laboratories, Inc. at its facility in St. Paul, Minnesota.
The Company has two reportable segments: "Laboratory Services"
conducted by the Company's wholly owned subsidiary, MEDTOX Laboratories, Inc.
and "Products Sales" conducted by the Company's wholly owned subsidiary MEDTOX
Diagnostics, Inc. Laboratory Services include forensic toxicology, clinical
toxicology, clinical testing for the pharmaceutical industry and heavy metal
analyses as well as logistics, data, and overall program management services.
Product Sales include sales of a variety of point-of-collection (POC) screening
devices for therapeutic drugs and drugs of abuse. For the years ended December
31, 2001, 2000, and 1999, Laboratory Services revenue accounted for 77%, 81% and
89% of the Company's revenues, respectively. Revenue from Product Sales
accounted for 23%, 19% and 11% of the total revenues of the Company for the
years ended December 31, 2001, 2000 and 1999, respectively.
Critical Accounting Policies
The Company has identified the policies outlined below as critical to
its business operations and an understanding of results of operations. The
listing is not intended to be a comprehensive list of all accounting policies.
In many cases, the accounting treatment of a particular transaction is
specifically dictated by accounting principles generally accepted in the United
States, with no need for management's judgment in their application. The impact
and any associated risks related to these policies on the Company's business
operations is discussed throughout Management's Discussion and Analysis of
Financial Condition and Results of Operations where such policies affect
reported and expected financial results. For a detailed discussion on the
application of these and other accounting policies, see Note 1 in the Notes to
the Consolidated Financial Statements in Item 14 on Form 10-K, beginning on page
41. Note that the preparation of this Form 10-K requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities, disclosure of contingent assets and liabilities at the date of our
financial statements, and the reported amounts of revenue and expenses during
the reporting period. There can be no assurance that actual results will not
differ from those estimates.
The Company's critical accounting policies are as follows:
Accounts Receivable:
The Company performs ongoing credit evaluations of its customers and
adjusts credit limits based upon payment history and the customers' current
credit worthiness, as determined by management's review of their current credit
information. The Company continuously monitors collections and payments from its
customers and maintains a provision for estimated credit losses based upon the
Company's historical experience and any specific customer collection issues that
have been identified. While such credit losses have historically been within the
Company's general expectations and the provisions established, the Company
cannot guarantee that it will continue to experience the same credit loss rates
that have occurred in the past. The Company's consolidated trade accounts
receivable balance as of December 31, 2001 was $8.4 million, net of allowance
for doubtful accounts of $1.1 million.
Off-Site Supplies Inventory:
Off-site supplies represents collection kits and forms located at
collections sites throughout the United States used by Laboratory Services'
customers to submit specimens for testing services. At December 31, 2001,
off-site inventory was $0.8 million. The process for estimating off-site
inventory involves significant assumptions and judgments. The estimate is based
on the historical average time that a collection site uses the inventory, as
well as the amount of inventory expected to be scrapped.
Goodwill:
The Company continually evaluates whether events and changes in
circumstances warrant revised estimates of useful lives or recognition of an
impairment loss of unamortized goodwill. The conditions that would trigger an
impairment assessment of unamortized goodwill include a significant, sustained
negative trend in operating results or cash flows, a decrease in demand for the
Company's products or services, a change in the competitive environment, and
other industry and economic factors. The Company measures impairment of
unamortized goodwill utilizing the undiscounted cash flow method. The estimated
cash flows are then compared to recorded goodwill amounts; if the unamortized
balance of the goodwill exceeds the estimated cash flows, the excess of the
unamortized balance is written off. As of December 31, 2001, the Company
determined that there has been no impairment of goodwill.
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other
Intangible Assets" (SFAS 142). The Company will adopt SFAS No. 142 in the first
quarter of 2002. With the adoption of SFAS No. 142, the Company will assess the
impact based on a two-step approach to assess goodwill based on applicable
reporting units and will reassess any intangible assets, including goodwill,
recorded in connection with previous acquisitions. The Company recorded
approximately $0.8 million of goodwill amortization during 2001 and would have
recorded approximately $0.8 million of goodwill amortization during 2002. In
lieu of amortization, the Company will be required to perform an initial
impairment review of goodwill in 2002 and an annual impairment review
thereafter. The Company is currently assessing, but has not yet determined, the
impact the adoption of SFAS No. 142 will have on its consolidated financial
statements. As of December 31, 2001, the Company had unamortized goodwill of
$15.2 million.
Accounting for Income Taxes:
As part of the process of preparing the consolidated financial
statements, the Company is required to estimate income taxes in each of the
jurisdictions in which it operates. This process involves estimating actual
current tax exposure together with assessing temporary differences resulting
from differing treatment of items for tax and accounting purposes. These
differences result in deferred tax assets and liabilities. The Company must then
assess the likelihood that deferred tax assets will be recovered from future
taxable income and, to the extent management believes that recovery is not
likely, the Company must establish a valuation allowance. To the extent the
Company increases or decreases the valuation allowance in a period, the Company
must include an expense or benefit within the tax provision in the consolidated
statement of operations.
Significant management judgment is required in determining the
provision for income taxes, deferred tax assets and liabilities, and any
valuation allowance recorded against net deferred tax assets. As of December 31,
2001, the Company has recorded a full valuation allowance of $13.9 million due
to uncertainties related to the Company's ability to utilize the deferred tax
assets, primarily consisting of certain net operating losses (NOL) carried
forward, before they expire. The valuation allowance is based on management's
estimate of taxable income (primarily determined from four-year cumulative
historical results) and the period over which deferred tax assets will be
recoverable. It is possible that the Company could be profitable in the future
at levels which cause management to conclude that it is more likely than not
that the Company will realize all or a portion of the NOL carryforward. Upon
reaching such a conclusion, the Company would immediately record the estimated
net realizable value of the deferred tax asset at that time and would then
provide for income taxes at a rate equal to the Company's combined federal and
state effective rates, which would approximate 38% under current tax rates.
Subsequent revisions to the estimated net realizable value of the deferred tax
asset could cause the provision for income taxes to vary significantly from
period to period, although the Company's cash payments would remain unaffected
until the benefit of the NOL is utilized.
Results of Operations
In 2001, the Company achieved record revenues and net income, driven by
sales of the PROFILE(R) Test Systems and the expanding VERDICT(R)-II product
line, and an increase in volume from specialty laboratory testing services.
Gross margin improved due to the Company's continued focus on higher margin
products and testing. Selling, general, and administrative expenses decreased as
a percentage of sales reflecting continued efforts to reduce operating costs.
The following table sets forth the percentages of total revenues represented by
certain items reflected in the Company's Consolidated Statements of Operations:
YEARS ENDED DECEMBER 31,
2001 2000 1999
- -------------------------------------------------------------------------------
Revenues 100.0% 100.0% 100.0%
Cost of revenues 60.4 65.0 65.0
--------- ---------- ---------
Gross margin 39.6 35.0 35.0
Operating expenses:
Selling, general, and
administrative 29.4 36.1 26.7
Research and development 2.6 2.6 2.4
Restructuring costs - - (0.5)
-------------------------------------------
32.0 38.7 28.6
Other expense, primarily interest 2.5 2.3 2.3
---------- --------------------------
Net income (loss) 5.1% (6.0)% 4.1%
======= ========= =======
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
Revenues
Revenues increased 14.5% to $ 49.1 million in 2001, driven by a $3.0
million, or 37% increase in Product Sales revenues and a $3.2 million, or 9.2%
increase in Laboratory Services revenues.
The growth in Laboratory Services was primarily due to a 30% increase
in the Company's specialty laboratory services revenues. This increase is due to
the expansion of clinical testing for the pharmaceutical industry and the
October 2001 acquisition of Leadtech Corporation (Leadtech), a pediatric
lead-testing laboratory. The Company's research and development group continues
to improve and add to the over 900 proprietary bio-analytical assays that have
been developed. In the past, these tests have largely been marketed to
hospitals, clinics and other laboratories. However, in 2001, the Company has
increased its efforts to apply the assay development skills to the
bio-analytical needs of the pharmaceutical market. Specimen volume growth from
the occupational health and corporate clients was relatively flat in 2001. The
slowing economy and the impact of the tragic events occurring on September 11,
2001 caused volume from existing occupational health and corporate clients to be
below expectations. However, this impact has been largely mitigated by the
Company's continued success in acquiring new client relationships and gaining
market share. The Company believes that the current lower volume from existing
clients will continue to be offset by successful sales efforts to new clients.
The Product Sales segment achieved higher sales due to increased sales
of substance abuse testing products, partially offset by decreased sales of
agricultural diagnostic products. Product sales from substance abuse testing
products, which incorporates the EZ-SCREEN(R), PROFILE(R)-II, PROFILE(R)-ER and
VERDICT(R)-II on-site test kits and other ancillary products for the detection
of abused substances, increased $3.1 million to $9.4 million in 2001. This
growth reflected the sales and marketing efforts for the Company's
second-generation test kits, PROFILE(R)-II, PROFILE(R)-ER and VERDICT(R)-II. The
PROFILE(R)-ER device is an on-site, nine drugs-of-abuse panel, targeted at
hospital laboratories for emergency response screening in drugs-of-abuse
overdose situations. The Company received FDA approval for its PROFILE(R)-ER
device and for 10 configurations of its VERDICT(R)-II product in January 2001.
The VERDICT(R)-II was developed for the prison, probation, parole and
rehabilitation markets. The VERDICT(R)-II product line now consists of 16
different configurations to detect from one to seven drugs of abuse. The Company
continues to develop new products in this area, including the PROFILE-IIA(R)
device which was introduced in November 2001. The PROFILE-IIA(R) device screens
for five drugs of abuse and uses a unique lateral flow test strip to screen for
the five most common adulterants.
Sales of contract manufacturing services, microbiological and
associated products remained flat at $1.3 million in both 2001 and 2000. Product
sales from agricultural diagnostic products decreased 25% to $0.4 million
primarily as a result of decreased purchases by the U.S. Department of
Agriculture (USDA) for the Company's products. The USDA's needs for the
Company's products vary from year-to-year and sales to the USDA are expected to
fluctuate accordingly.
Gross profit
Consolidated gross margin improved to 39.6% in 2001 compared to 35.0%
in 2000, reflecting improvement in both Product Sales and Laboratory Services
gross margins, as well as the continuing shift in our business mix toward
Product Sales at significantly higher margins.
Laboratory Services gross margin was 31.9% in 2001, up from 29.0% in
2000. This improvement is primarily due to improved efficiencies and the
Company's continued focus on higher margin testing. Gross margin from Product
Sales improved to 66.1% from 61.2% in 2000, driven by an increased mix of higher
margin products and manufacturing efficiencies gained at the production
facility.
Selling, general and administrative expenses
Selling, general and administrative expenses were $14.4 million, or
29.4% of revenues in 2001, compared to $15.5 million, or 36.1% of revenues in
2000. The decrease in the percentage of revenues and in absolute dollars
primarily reflects the continued efforts taken to reduce overall operating costs
as well as the impact of charges incurred in the fourth quarter of 2000. (See
discussion of Year Ended December 31, 2000 Compared to Year Ended December 31,
1999 below.) This positive trend was offset slightly by the amortization of
intangible assets associated with the Leadtech acquisition in October 2001, as
well as expenses associated with operating the Leadtech facility in New Jersey
prior to it being merged into the Company's existing laboratory facility in
December 2001.
Research and development expenses
Research and development expenses increased by $0.2 million, or 15.1%,
in 2001, principally due to higher research and development expenses associated
with new product development for on-site and other ancillary products in the
Product Sales segment.
Other expense
Other expense consisted primarily of interest expense, which increased
by $0.1 million or 13.3% in 2001, reflecting higher average debt levels offset
by lower interest rates. Other expense also included a loss of $98,000 from the
Company's rental activities.
Net income (loss)
In 2001, the Company recorded net income of $2.5 million compared to a
net loss of $2.6 million in 2000, reflecting increased revenues and gross
margins in both the Product Sales and Laboratory Services segments, and
decreased selling, general and administrative expenses in the Laboratory
Services segment.
Laboratory Services reported net income of $0.8 million in 2001
compared to a net loss of $3.4 million in 2000. The increase was primarily
driven by higher sample volume from the Company's specialty laboratory testing
services, the Company's continued focus on higher margin testing, and a
reduction in selling, general and administrative expenses.
Product Sales net income was $1.7 million in 2001 compared to $0.8
million in 2000. This improvement was largely attributable to the growth in
sales and an improved gross margin.
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Revenues
Revenues increased 23% to $ 42.9 million in 2000, compared to $35.0
million in 1999, driven by a $4.1 million, or 103% increase in Product Sales
revenues and a $3.8 million, or 12% increase in Laboratory Services revenues.
The Product Sales segment achieved higher sales due to increased sales of
substance abuse testing products and contract manufacturing services, partially
offset by decreased sales of agricultural diagnostic products. The growth in
Laboratory Services revenues was primarily due to a 7% increase in laboratory
tests for employment drug testing services, partially offset by a 14% decline in
the average price per testing specimen.
Gross profit
Consolidated gross margin of 35.0% in 2000 remained flat compared to
1999, reflecting improvement in Product Sales gross margin, offset by a decline
in Laboratory Services gross margin. Laboratory Services gross margin was 29.0%
in 2000, down from 33.7% in 1999. The erosion of the gross margin was primarily
attributable to a 14% decline in the average price per testing specimen. The
drop in the average price per testing specimen stemmed from competitive market
conditions, which restricted the average price that the Company could charge new
customers. Gross margin was also impacted by an increase in the Company's
employee health insurance costs. Gross margin from Product Sales improved from
45.5% to 61.2% in 2000, driven by an increased mix of higher margin products and
manufacturing efficiencies gained at the production facility.
Selling, general and administrative expenses
Selling, general and administrative expenses were $15.5 million, or
36.1% of revenues in 2000, compared to $9.3 million or 26.7% of revenues in
1999. The increase, in both the absolute amount and percentage of revenues, was
primarily the result of the buildup of the Company's sales and marketing group
throughout 2000, which affected both the Laboratory Services and the Product
Sales segments.
The Company also incurred a charge of $0.6 million related to the
reorganization of its laboratory operations. The charge primarily represented
severance and other costs associated with certain management changes.
Additionally, the Company recorded a $0.5 million charge to reserve for
potential losses attributable to the Chapter 11 bankruptcy filings of two
Laboratory Services customers. Both customers remain as clients, and subsequent
to bankruptcy filings, are current on their obligations to the Company.
The increase in the absolute dollar amount of selling, general and
administrative expenses also reflected the higher revenue level in 2000.
Research and development expenses
Research and development expenses increased by $0.3 million, or 35%, in
2000, principally due to higher research and development expenses associated
with new product development for on-site and other ancillary products in the
Product Sales segment.
Interest expense
Interest expense increased by $0.2 million, or 21%, in 2000, reflecting
higher average debt levels and increasing interest rates.
Net (loss) income
In 2000, the Company recorded a net loss of $2.6 million compared to
net income of $1.4 million in 1999, reflecting higher overall operating costs
and a reduced gross margin in the Laboratory Services segment, partially offset
by higher revenues in both the Product Sales and Laboratory Services segments.
Laboratory Services reported a net loss of $3.4 million in 2000
compared to net income of $1.4 million in 1999. The decline was primarily due to
increased selling, general and administrative expenses associated with the
buildup of the Company's sales and marketing group, the reorganization of
laboratory operations and the Chapter 11 bankruptcy of two customers. Although
revenues increased 12%, this improvement was offset by a reduced gross margin,
which was impacted by a reduction in the average price per specimen and an
increase in the Company's employee health insurance costs.
Product Sales net income was $0.8 million in 2000 compared to a net
loss of $21,000 in 1999. This improvement was attributable to the growth in
sales and an improved gross margin, which was driven by an increased mix of
higher margin products and manufacturing efficiencies gained at the production
facility.
Liquidity and Capital Resources
The working capital requirements of the Company have been funded
primarily by cash received from debt financing and the sale of equity
securities. Cash and cash equivalents at December 31, 2001 were $0.1 million,
compared to $0.2 million at December 31, 2000.
Net cash provided by operating activities was $3.5 million in 2001
compared to net cash used in operating activities of $2.0 million in 2000. Net
cash provided by operating activities was $0.7 million in 1999. The increase of
$5.5 million in 2001 was primarily due to an improvement in operating results.
Net cash used in investing activities was $10.9 million in 2001
compared to $3.4 million and $1.2 million in 2000 and 1999, respectively. In
2001, the Company's investing activities consisted of capital expenditures
(primarily the building purchase discussed below) and cash paid for the
acquisition of Leadtech.
In March 2001, the Company purchased the three building, 129,039 square
foot complex in St. Paul, Minnesota, where the Company's laboratory segment
formerly leased 53,576 square feet. The purchase price, exclusive of expenses
and closing costs, was $6.35 million and was financed by a mortgage loan from
Principal Life Insurance Company of Des Moines, Iowa in the amount of $6.2
million. The mortgage loan has a term of ten years and is being repaid based on
a 20-year amortization schedule with a balloon payment at the end of the
ten-year term. The interest rate is fixed at an annual rate of 7.23% for the
first five years at which time the rate will be renegotiated by the parties. The
facility includes other commercial tenants who have individual leases that range
from 4 years to less then 1 year in duration. The current annual rent paid by
such third party tenants, excluding their pro-rata share of operating expenses,
is approximately $431,000 per year.
In October 2001, the Company completed the acquisition of Leadtech, a
private company operating as an independent clinical laboratory devoted
primarily to the examination of blood lead concentrations in pediatric patients.
The purchase price of $6.1 million consisted of $2.5 million in cash, the
issuance of $2.7 million of the Company's common stock and $0.9 million of
seller financing payable over 24 months. The initial cash payment of $2.5
million was funded primarily from proceeds received from private placement of
subordinated debt in October 2001, net proceeds from the legal settlement with
Morgan Capital LLC, and operating cash flows.
The Company expects equipment and capital improvement expenditures to
be between $5.0 million and $6.0 million in 2002. These expenditures are
intended primarily to continue to improve efficiencies and reduce operating
costs within the Laboratory Services and Product Sales businesses. Such
expenditures are expected to be funded through borrowings under the Company's
credit facilities and cash provided by operating activities.
Net cash provided by financing activities was $7.3 million in 2001,
compared to $5.0 million and $1.0 million in 2000 and 1999, respectively. The
increase was principally associated with proceeds received under the mortgage
loan discussed above, the Company's credit agreement for the purchase of capital
equipment, and the private placement of subordinated debt in October and
November 2001(discussed below). In addition, in September 2001, the Company
received net proceeds of $0.6 million as settlement in the Company's lawsuit
against Morgan Capital LLC under Section 16(b) of the Securities Exchange Act of
1934. The increase in 2000 over 1999 was primarily due to proceeds of $4.9
million from the Company's private equity placement.
In January 1998, the Company entered into a Credit Security Agreement
(the Wells Fargo Credit Agreement) with Wells Fargo Business Credit, Inc. The
Wells Fargo Credit Agreement, as amended, consists of (i) a term loan of $3.185
million bearing interest at prime + 1.25%; (ii) a revolving line of credit,
payable on demand, of not more than $6.0 million or 85% of the Company's
eligible trade accounts receivable bearing interest at prime + 1%; and (iii) a
capex note of up to $3.5 million for the purchase of capital equipment bearing
interest at prime + 1.25% and (iv) availability of letters of credit in amounts
not to exceed the lesser of $300,000 (less outstanding letters of credit) or the
unborrowed portion of the revolving line of credit (less outstanding letters of
credit).
The Wells Fargo Credit Agreement requires the Company to comply with
certain covenants and maintain certain quarterly financial ratios as to minimum
debt service coverage and maximum debt to book net worth. It also sets minimum
quarterly net income and book net worth levels, which restrict the payment of
dividends. As of December 31, 2001, the Company was in compliance with the
financial covenants of the Wells Fargo Credit Agreement.
The Company received a total of $1.05 million from private placements
of subordinated debt and warrants in October and November 2001. The notes
require payment of the principal amounts on September 30, 2004. Interest at 10%
per annum is paid semi-annually on June 30 and December 31. In connection with
the issuance of the subordinated notes, the Company issued warrants to purchase
54,265 shares of common stock at $9.675 per share. The Company has determined
the value of the warrants at the dates of issuance to be $281,000 based upon the
Black-Scholes option pricing model. The value of the warrants has been accounted
for as additional paid-in capital and deducted from the principal of the
subordinated notes as discount on debt issued. The discount will be amortized to
interest expense over the term of the debt. The effective interest rate of the
subordinated debt including the warrants is 23.0%.
The Company is relying on expected positive cash flow from operations
and its line of credit to fund its future working capital and asset purchases.
The amount available on the revolving line of credit is based primarily on the
receivables of the Company and, as such, varies with accounts receivable, and to
a lesser degree, the inventory of the Company. As of December 31, 2001, the
Company had total borrowing capacity of $5.5 million on its line of credit, of
which $2.9 million was borrowed, leaving a net availability of $2.6 million.
In the short term, the Company believes that the aforementioned capital
will be sufficient to fund the Company's planned operations through 2002. While
there can be no assurance that the available capital will be sufficient to fund
the future operations of the Company beyond 2002, the Company believes that
future profitable operations, as well as access to additional capital through
debt or equity financings, will be the primary means for funding the operations
of the Company for the long term.
Impact of Inflation and Changing Prices
The impact of inflation and changing prices on the Company has been
primarily limited to salary, laboratory and operating supplies and rent
increases and has historically not been material to the Company's operations. In
the future, the Company may not be able to increase the prices of laboratory
testing by an amount sufficient to cover the cost of inflation, although the
Company is responding to these concerns by refocusing the laboratory operations
towards higher margin testing (including clinical and pharmaceutical trials) as
well as emphasizing the marketing, sales and operations of the Product Sales
business.
Impact of New Accounting Standards
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, "Business Combinations." This Statement supersedes APB Opinion No. 16,
"Business Combinations" and SFAS No. 38. "Accounting for Preacquisition
Contingencies of Purchased Enterprises" and eliminates the pooling method of
accounting for business acquisitions. This Statement requires all business
combinations to be accounted for using the purchase method for all transactions
initiated after June 30, 2001.
In June 2001, the Financial Accounting Standards Board (FASB) issued
SFAS No. 142, "Goodwill and Other Intangible Assets." This statement applies to
intangibles and goodwill acquired after June 30, 2001, as well as goodwill and
intangibles previously acquired. Under this statement, goodwill as well as other
intangibles determined to have an infinite life will no longer be amortized;
however, these assets will be reviewed for impairment on a periodic basis. SFAS
No. 142 also includes provisions for the reclassification of certain existing
recognized intangibles as goodwill, reclassification of certain intangibles out
of previously reported goodwill and the identification of reporting units for
purposes of assessing potential future impairments of goodwill. SFAS No. 142 is
effective for the Company on January 1, 2002. In accordance with this statement,
the Company is not required to complete the transitional goodwill impairment
test until June 30, 2002. The Company is currently assessing but has not yet
determined the impact of SFAS No. 142 on its financial position and results of
operations. As of December 31, 2001 the Company had net goodwill and other
intangible assets of approximately $15.2 million and $2.6 million, respectively.
Goodwill amortization expense was approximately $0.8 million for each of the
years ended December 31, 2001, 2000 and 1999. Amortization expense of other
intangible assets was approximately $0.3 million, $0.1 million and $0.1 million
for the years ended December 31, 2001, 2000 and 1999 respectively.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of long-lived assets
and the associated asset retirement costs. SFAS No. 143 is effective for the
Company on January 1, 2003. The Company is currently in the process of
evaluating the impact of the adoption of SFAS No. 143.
In August 2001, the FASB issued SFAS No. 144, "Accounting for Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" and addresses the financial accounting and reporting for the
impairment or disposal of long-lived assets. SFAS No. 144 is effective for the
Company on January 1, 2002. The Company is currently in the process of
evaluating the impact of the adoption of SFAS No. 144.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Market risk is the risk that the Company will incur losses due to
adverse changes in interest rates or currency exchange rates and prices. The
Company's primary market risk exposures are to changes in interest rates. During
2001, 2000 and 1999, the Company did not have sales denominated in foreign
currencies nor did it have any subsidiaries located in foreign countries. As
such, the Company is not exposed to market risk associated with currency
exchange rates and prices.
At December 31, 2001 the Company had $1.05 million and $100,000 of
subordinated notes outstanding at fixed interest rates of 10% and 8.5%,
respectively. In addition, at December 31, 2001, the Company had a $6.1 million
mortgage loan payable to Principal Life insurance Company at a fixed annual rate
of 7.23% for the first five years at which time the rate will be renegotiated by
the parties. At December 31, 2000, the Company had $575,000 of subordinated
notes outstanding at a fixed interest rate of 12%. The Company also had capital
leases at various fixed rates. These financial instruments are subject to
interest rate risk and will increase or decrease in value if market interest
rates change.
The Company had approximately $6.6 million and $7.0 million outstanding
on its line of credit and long-term debt issued under the Wells Fargo Credit
Agreement as of December 31, 2001 and 2000. The debt under the Wells Fargo
Credit Agreement is held at variable interest rates. The Company has cash flow
exposure on its committed and uncommitted line of credit and long-term debt due
to its variable prime rate pricing. At December 31, 2001 and 2000, a 1% change
in the prime rate would not materially increase or decrease interest expense or
cash flows.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
-------------------------------------------
Reference is made to the financial statements, financial statement
schedules 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 OF THE REGISTRANT.
This information will be contained in the Definitive Proxy
Statement with respect to the 2002 Annual Meeting of
Stockholders of MEDTOX Scientific, Inc., to be filed with the
Securities and Exchange Commission within 120 days following
the end of the fiscal year ended December 31, 2001.
ITEM 11. EXECUTIVE COMPENSATION.
This information will be contained in the Definitive Proxy
Statement with respect to the 2002 Annual Meeting of
Stockholders of MEDTOX Scientific, Inc., to be filed with the
Securities and Exchange Commission within 120 days following
the end of the fiscal year ended December 31, 2001.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
This information will be contained in the Definitive Proxy
Statement with respect to the 2002 Annual Meeting of
Stockholders of MEDTOX Scientific, Inc., to be filed with the
Securities and Exchange Commission within 120 days following
the end of the fiscal year ended December 31, 2001.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
This information will be contained in the Definitive Proxy
Statement with respect to the 2002 Annual Meeting of
Stockholders of MEDTOX Scientific, Inc., to be filed with the
Securities and Exchange Commission within 120 days following
the end of the fiscal year ended December 31, 2001.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.
a. (i) Financial Statements Page
--------------------
Independent Auditors' Report ....................... 36
Consolidated Balance Sheets at December
31, 2001 and 2000.................................. 37
Consolidated Statements of Operations
for the Years Ended December 31,
2001, 2000 and 1999................................ 38
Consolidated Statements of Stockholders'
Equity for the Years
Ended December 31, 2001,
2000 and 1999...................................... 39
Consolidated Statements of Cash
Flows for the Years Ended
December 31, 2001, 2000 and 1999........... 40
Notes to Consolidated Financial
Statements......................................... 41
(ii) Consolidated Financial Statement Schedules
Schedule II - Valuation and
Qualifying Accounts .............................. 57
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
(incorporated by reference to Appendix A filed with the
Registrant's Proxy Statement on September 29, 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).
3.5 Certificate of Amendment of Certificate of
Incorporation of MEDTOX Scientific, Inc. filed with
Delaware Secretary of State on September 17, 1998
(incorporated by reference to Exhibit 3.5 filed with
the Registrant's Report on Form 10-K for the fiscal
year ended December 31, 1998).
3.6 Certificate of Amendment of Certificate of
Incorporation of MEDTOX Scientific, Inc. filed with
Delaware Secretary of State on November 19, 1999
(incorporated by reference to Exhibit 3.6 filed with
the Registrant's Report on Form 10-K for the fiscal
year ended December 31, 1999).
4.1 Form of 12% Subordinated Notes issued by the Registrant
through the first quarter of 1999 to raise an aggregate
amount of $575,000 in subordinate debt, all with a
maturity date of December 31, 2001 (incorporated by
reference to Exhibit 4.1 filed with the Registrant's
Report on Form 10-K for the fiscal year ended December
31, 1999).
4.2 Form of Warrant accompanying the 12% Subordinated Notes
issued through the first quarter of 1999 (incorporated
by reference to Exhibit 4.2 filed with the Registrant's
Report on Form 10-K for the fiscal year ended December
31, 1999).
4.3 Form of Warrant accompanying the Stock Purchase
Agreement dated July 31, 2000. (Incorporated by
reference to Exhibit 4.3 filed with the Registrant's
Report on Form 10-K for the fiscal year ended December
31, 2000).
4.4 Form of 10% Subordinated Notes issued by the Registrant
in October and November 2001 to raise an aggregate
amount of $1.5 million in subordinate debt, all with a
maturity of September 30, 2004. (Incorporated by
reference to Exhibit 4.4 filed with the Registrant's
Report on Form 10-Q for the quarter ended September 30,
2001).
4.5 Form of Warrant accompanying the 10% Subordinated Notes
issued in October and November 2001. (Incorporated by
reference to Exhibit 4.5 filed with the Registrant's
Report on Form 10-Q for the quarter ended September 30,
2001).
4.6 Rights Agreement dated September 18, 1998 between the
Registrant and American Stock Transfer & Trust Company
(incorporated by reference to Exhibit 4.1 filed with
the Registrant's Report on Form 8-K dated September 21,
1998).
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).
10.14Stock 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 and 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).
10.24Assignment 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).
10.25Amendment 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.)
10.26Loan 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).
10.27Term Note A executed by the Registrant, Psychiatric
Diagnostic Laboratories of America, Inc. and diAGnostix 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).
10.28Term Note B executed by the Registrant, Psychiatric
Diagnostic Laboratories of America, Inc. and diAGnostix 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).
10.31Assignment 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).
10.32Lease 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" 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" 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.)
10.42 Employment Agreement dated January 1, 1997 between the
Registrant and Harry G. McCoy. (Incorporated by
reference to Exhibit 10.42 filed with the Registrant's
Report on form 10-K for the fiscal year ended December
31, 1997.)
10.43 Employment Agreement dated January 1, 1997 between the
Registrant and Richard J. Braun. (Incorporated by
reference to Exhibit 10.43 filed with the Registrant's
Report on form 10-K for the fiscal year ended December
31, 1997.)
10.44 Employment Agreement dated January 1, 2000 between the
Registrant and Richard J. Braun. (Incorporated by
reference to Exhibit 10.44 filed with the Registrant's
Report on form 10-K for the fiscal year ended December
31, 1999.)
10.45Employment Agreement dated January 1, 2000 between the
Registrant and Harry G. McCoy. (Incorporated by reference to
Exhibit 10.45 filed with the Registrant's Report on form
10-K for the fiscal year ended December 31, 1999.)
10.46Registrant's Restated Equity Compensation Plan dated May
10, 2000. (Incorporated by reference to exhibit 10.46 filed
with the Registrant's Report on form 10-K for the fiscal
year ended December 31, 2000.)
10.47Form of Severance Agreement between the Registrant and
James B. Lockhart, James A. Schoonover, B. Mitchell Owens,
and Kevin J. Wiersma. (Incorporated by reference to exhibit
10.47 filed with the Registrant's Report on form 10-K for
the fiscal year ended December 31, 2000).
10.48Purchase and Sale Agreement dated July 27, 2000 by and
between the Registrant and NMRO, Inc. (Incorporated by
reference to exhibit 10.48 filed with the Registrant's
Report on form 10-K for the fiscal year ended December 31,
2000).
10.50Registration Rights Agreement dated July 31, 2000 among the
Registrant, certain investors, and Miller, Johnson, & Kuehn,
Inc. ("MJK"). (Incorporated by reference to exhibit 10.50
filed with the Registrant's Report on form 10-K for the
fiscal year ended December 31, 2000).
10.51Stock Purchase Agreement dated July 31, 2000 between the
Registrant and certain investors. (Incorporated by reference
to exhibit 10.51 filed with the Registrant's Report on form
10-K for the fiscal year ended December 31, 2000).
10.52Purchase and Sale Agreement dated December 29, 2000 by and
between MEDTOX Laboratories, Inc. and PHL-OPCO, LP.
(Incorporated by reference to exhibit 10.52 filed with the
Registrant's Report on form 10-K for the fiscal year ended
December 31, 2000).
10.53Mortgage and Security Agreement dated March 16, 2001 by and
between New Brighton Business Center LLC and Principal Life
Insurance Company. (Incorporated by reference to exhibit
10.53 filed with the Registrant's Report on form 10-K for
the fiscal year ended December 31, 2000).
10.54Secured Promissory Note dated March 16, 2001 by and between
New Brighton Business Center LLC and Principal Life
Insurance Company. (Incorporated by reference to exhibit
10.54 filed with the Registrant's Report on Form 10-K for
the fiscal year ended December 31, 2000).
10.55Nova Building Lease dated March 28, 2001 by and between
Samuel C. Powell and Karen G. Powell and MEDTOX Diagnostics,
Inc. (Incorporated by reference to exhibit 10.55 filed with
the Registrant's Report on Form 10-Q for The quarter ended
September 30, 2001.
10.56Amendment No. 1 to Nova Building Lease dated April 1, 2001
by and between Samuel C. Powell and Karen G. Powell and
MEDTOX Diagnostics, Inc. (Incorporated by reference to
exhibit 10.56 filed with the Registrant's Report on Form
10-Q for the quarter ended September 30, 2001.
10.57Amended and Restated Credit and Security Agreement dated
March 31, 2001 by and among MEDTOX Scientific, Inc., MEDTOX
Laboratories, Inc., MEDTOX Diagnostics, Inc., Consolidated
Medical Services, Inc. and Wells Fargo Business Credit, Inc.
(Incorporated by reference to exhibit 10.57 filed with the
Registrant's Report on form 10-Q for the quarter ended
September 30, 2001).
b. Reports on Form 8-K
On October 24, 2001, the Company issued a press
release announcing the completion of an acquisition of a pediatric
lead testing laboratory, Leadtech Corporation.
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
MEDTOX SCIENTIFIC, INC.
Report on Form 10-K
For year ended December 31, 2001
INDEX TO EXHIBITS FILED SEPARATELY WITH FORM 10-K
EXHIBIT # DESCRIPTION OF EXHIBIT
23 Consent of Deloitte & Touche LLP
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 28th
of March 2002.
MEDTOX Scientific, Inc.
Registrant
By:/s/ Richard J. Braun
Richard J. Braun
President, Chief Executive Officer and
Chairman of the Board of Directors
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/ Richard J. Braun President, Chief Executive Officer, March 28, 2002
Richard J. Braun and Chairman of the Board of Directors
(Principal Executive Officer)
/s/ Kevin J. Wiersma Vice President and Chief Operating March 28, 2002
Kevin J. Wiersma Officer (Principal Financial Officer)
/s/ Kari L. Golembeck Controller (Principal Accounting March 28, 2002
Kari L. Golembeck Officer)
/s/ Samuel C. Powell Director March 28, 2002
Samuel C. Powell, Ph.D.
/s/ Miles E. Efron Director March 28, 2002
Miles E. Efron
/s/ James W. Hansen Director March 28, 2002
James W. Hansen
/s/ Brian P. Johnson Director March 28, 2002
Brian P. Johnson
/s/ Harry W. Alcorn, Jr. Director March 28, 2002
Harry W. Alcorn, Jr. Ph.D.
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors
MEDTOX Scientific, Inc.
We have audited the accompanying consolidated balance sheets of MEDTOX
Scientific, Inc. (the Company) as of December 31, 2001 and 2000 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 2001. Our audits also
included the financial statement schedule listed in the index as Item 14.a.(ii).
These consolidated financial statements and the financial statement schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 our audits provide a reasonable
basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of MEDTOX Scientific, Inc. as of
December 31, 2001 and 2000 and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2001, in conformity
with accounting principles generally accepted in the United States of America.
Also, in our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
February 22, 2002
MEDTOX SCIENTIFIC, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND 2000
(In thousands, except share and per share data)
- -------------------------------------------------------------------------------------------------------------------
2001 2000
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 67 $ 213
Accounts receivable:
Trade, less allowance for doubtful accounts ($1,069 in 2001 and $1,131 in 2000) 8,439 7,873
Other 181 264
--------- ---------
Total accounts receivable 8,620 8,137
Inventories 3,897 3,052
Prepaid expenses and other 1,617 830
--------- ---------
Total current assets 14,201 12,232
BUILDING, EQUIPMENT AND IMPROVEMENTS, net 12,200 5,211
GOODWILL, net of accumulated amortization of $5,133 in 2001 and $4,438 in 2000 15,197 12,291
OTHER INTANGIBLE ASSETS, net of accumulated amortization of $187 in 2001
and $7 in 2000 2,213 290
OTHER ASSETS 345 -
--------- --------
TOTAL ASSETS $ 44,156 $ 30,024
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ 2,914 $ 3,724
Accounts payable 2,914 2,819
Accrued expenses 3,450 3,213
Restructuring accrual - 160
Current portion of long-term debt 2,120 1,579
Current portion of capital leases 223 221
--------- ---------
Total current liabilities 11,621 11,716
LONG-TERM DEBT, net of current portion 9,749 2,480
LONG-TERM PORTION OF CAPITAL LEASES, net of current portion 266 418
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value; authorized shares, 50,000; none issued and
outstanding - -
Common stock, $0.15 par value; authorized shares, 14,400,000; issued and
outstanding shares, 4,315,211 in 2001 and 3,858,966 in 2000 647 526
Additional paid-in capital 75,199 65,422
Deferred stock-based compensation (463) (472)
Accumulated deficit (52,584) (49,890)
Note receivable from related party (103) -
Treasury stock (176) (176)
--------- --------
Total stockholders' equity 22,520 15,410
--------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 44,156 $ 30,024
========= =========
See notes to consolidated financial statements.
MEDTOX SCIENTIFIC, INC.
CONSOLIDATED STATEMENTS OF operations
YEARS ENDED december 31, 2001, 2000, AND 1999
(In thousands, except share and per share data)
- -------------------------------------------------------------------------------------------------------------------
2001 2000 1999
REVENUES:
Laboratory service revenues $ 37,990 $ 34,797 $ 31,012
Product sales 11,094 8,083 3,991
------------ ------------ ------------
49,084 42,880 35,003
COST OF REVENUES:
Cost of services 25,878 24,713 20,572
Cost of sales 3,759 3,134 2,177
------------ ------------ ------------
29,637 27,847 22,749
------------ ------------ ------------
GROSS PROFIT 19,447 15,033 12,254
OPERATING EXPENSES:
Selling, general, and administrative 14,436 15,480 9,348
Research and development 1,292 1,123 834
Restructuring costs - - (164)
------------ ------------ -------------
15,728 16,603 10,018
------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS 3,719 (1,570) 2,236
OTHER INCOME (EXPENSE):
Interest expense, net (1,123) (991) (817)
Other expense, net (98) - -
------------- ------------ ------------
(1,221) (991) (817)
------------- ------------- -------------
NET INCOME (LOSS) $ 2,498 $ (2,561) $ 1,419
============ ============= ============
BASIC EARNINGS (LOSS) PER COMMON SHARE $ 0.62 $ (0.74) $ 0.44
============ ============ ============
WEIGHTED AVERAGE NUMBER OF BASIC COMMON
SHARES OUTSTANDING 4,001,772 3,456,846 3,192,296
=========== =========== ===========
DILUTED EARNINGS (LOSS) PER COMMON SHARE $ 0.60 $ (0.74) $ 0.43
============ ============ ============
WEIGHTED AVERAGE NUMBER OF DILUTED
COMMON SHARES OUTSTANDING 4,194,683 3,456,846 3,283,618
============ ============ ============
See notes to consolidated financial statements.
MEDTOX SCIENTIFIC, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
- ---------------------------------------------------------------------------------------------------------------------
Note
Common Stock Additional Deferred Receivable
Par Paid-in Stock-Based Accumulated from Related Treasury
Shares Value Capital Compensation Deficit Party Stock Total
BALANCE AT DECEMBER 31, 1998 2,899,669 $ 435 $ 59,815 $ - $(48,748) $ - $ (176) $ 11,326
Issuance of common stock under
employee stock plans 2,241 6 6
Stock issued for settlement 2,500 1 9 10
Value of warrants issued 29 29
Net income 1,419 1,419
---------- ------ --------- ------------ ------- --------- --------- ---------
BALANCE AT DECEMBER 31, 1999 2,904,410 436 59,859 - (47,329) - (176) 12,790
Issuance of common stock
under employee stock plans 37,660 5 47 52
Private placement of common stock
(net of offering costs of
$0.6 million) 550,000 83 4,795 4,878
Stock issued in connection
with acquisition 15,152 2 175 177
Exercise of stock options 929 5 5
Deferred stock-based compensation 541 (541) -
Amortization of deferred compensation 69 69
Net loss (2,561) (2,561)
------- ----- ------- ----- ----------- -------- -------- --------
BALANCE AT DECEMBER 31, 2000 3,508,151 526 65,422 (472) (49,890) - (176) 15,410
Issuance of common stock under
employee stock plans 18,853 3 125 128
Stock issued in connection with
acquisition 206,994 31 2,627 2,658
Settlement of lawsuit 628 628
Value of warrants issued 281 281
Note receivable from former Director (103) (103)
Exercise of stock options 127,419 19 566 585
Deferred stock-based compensation 67,619 10 416 (174) 252
Amortization of deferred compensation 183 183
Issuance of 10% stock dividend 386,175 58 5,134 (5,192) -
Net income 2,498 2,498
---------- ------ ------ ------- ---------- ------ ------- -------
BALANCE AT DECEMBER 31, 2001 4,315,211 $ 647 $75,199 $ (463) $ (52,584) $(103) $ (176) $22,520
========== ====== ======= ======= ========== ====== ======= =======
See notes to consolidated financial statements.
MEDTOX SCIENTIFIC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
(In thousands)
2001 2000 1999
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 2,498 $ (2,561) $ 1,419
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,595 2,420 2,124
Provision for losses on accounts receivable 384 879 229
Gain on sale of equipment 1 (35) -
Deferred compensation 183 69 -
Changes in operating assets and liabilities:
Accounts receivable (422) (1,909) (1,348)
Inventories (845) (1,256) (689)
Prepaid expenses and other current assets (87) (15) (291)
Other assets (508) (54) -
Accounts payable and accrued expenses (138) 796 (19)
Restructuring accruals (160) (309) (687)
--------- --------- ----------
Net cash provided by (used in) operating activities 3,501 (1,975) 738
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of building, equipment and improvements (8,459) (3,353) (1,119)
Proceeds from sale of equipment 1 35 -
Payment for acquisition of business, net of cash acquired (2,473) (75) -
--------- ---------- ---------
Net cash used in investing activities (10,931) (3,393) (1,119)
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in checks in excess of bank balances - - (142)
Net proceeds from sale of common stock 595 4,935 6
Net proceeds from legal settlement 628 - -
Net (payments) proceeds on revolving credit facility (810) (483) 1,113
Proceeds from long-term debt 9,010 4,479 1,521
Principal payments on long-term debt (1,930) (3,669) (1,472)
Principal payments on capital leases (225) (257) (107)
Other 16 - 38
-------- -------- ---------
Net cash provided by financing activities 7,284 5,005 957
-------- -------- ---------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (146) (363) 576
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 213 576 -
---------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 67 $ 213 $ 576
========= ======== =========
SUPPLEMENTAL NONCASH ACTIVITIES:
Additions to capital leases $ 75 $ 557 $ 101
Note receivable for exercise of stock options 103 - -
Acquisitions:
Fair value of assets acquired 6,088 252
Cash paid (2,473) (75)
Note payable (957) -
Common stock issued (2,658) (177)
--------- ---------
$ - -
======== =========
See notes to consolidated financial statements.
MEDTOX SCIENTIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
1. Summary of significant accounting policies
The Company - The consolidated financial statements include the accounts
of MEDTOX Scientific, Inc. and its wholly owned subsidiaries, MEDTOX
Laboratories, Inc. (MEDTOX Laboratories), MEDTOX Diagnostics, Inc.
(MEDTOX Diagnostics), and New Brighton Business Center LLC (NBBC),
(collectively referred to as the Company).
MEDTOX Laboratories provides laboratory analyses, logistics management,
data management, and program management services. Laboratory analyses
include clinical testing services for the detection of substances of
abuse and other toxins in biological fluids and tissues. Logistics,
data, and program management services include courier services for
medical specimen transportation, management programs for on-site drug
testing, data collection and reporting services, coordination of
specimen collection sites, and medical surveillance program management.
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.
NBBC conducts the Company's building rental activities. The operations
of NBBC are shown in the statements of operations as "other expense."
All significant intercompany transactions and balances have been
eliminated.
Use of Estimates - The preparation of the consolidated financial
statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the
amounts reported in the consolidated financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents - Cash equivalents include highly liquid
investments maturing within three months of purchase.
Trade Accounts Receivable - Sales are made to local and national
customers including corporations, clinical laboratories, government
agencies, medical professionals, law enforcement agencies, and health
care facilities. 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.
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.
Intangible Assets - Goodwill represents the cost in excess of fair value
of net assets acquired in business combinations accounted for by the
purchase method and is amortized on a straight-line basis over 20 years
for acquisitions prior to July 1, 2001. Customer lists are amortized on
a straight-line basis over the expected periods to be benefited or
amortized based upon projected cash flows. The carrying value of
intangible assets is reviewed if the facts and circumstances suggest
that it may be impaired. If this review indicates that an asset will not
be recoverable, as determined based on the undiscounted cash flows to be
generated by the asset over the remaining amortization period, the
Company's carrying value of the asset is reduced by the estimated
shortfall of discounted cash flows. Based on the Company's analysis of
future cash flows, the carrying value of goodwill and customer lists
appeared recoverable as of December 31, 2001 and 2000.
Impairment of Long-Lived Assets - The Company periodically evaluates the
carrying value of long-lived assets for potential impairment. The
Company considers projected future operating results, cash flows,
trends, and other circumstances in making such estimates and
evaluations. When the carrying value of any long-lived asset exceeds its
projected undiscounted cash flows, an impairment is recognized to reduce
the carrying value to its fair market value.
Revenue Recognition - Revenues from Laboratory Services are recognized
as earned at such time as the Company has completed services. The
Company's services are considered to be complete when it has performed
the applicable laboratory testing services and the results have been
sent to the Company's customers or posted to the Company's secure
website. Revenues from Product Sales are recognized FOB shipping point.
When shipment occurs, the sales price is fixed and determinable, and
collection of the resulting receivable is reasonably assured.
Freight charges to customers are included in product sales and freight
costs are included in cost of sales.
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.
Earnings (Loss) per Common Share - Basic earnings (loss) per common
share equals net earnings (loss) divided by the weighted average common
shares outstanding during the period. Diluted earnings (loss) per common
share equals net earnings (loss) divided by the sum of weighted average
common shares outstanding during the period plus common stock
equivalents. Common stock equivalents are shares assumed to be issued if
outstanding stock options or warrants were exercised. Common stock
equivalents that are anti-dilutive are excluded from net earnings per
common share. Common stock equivalents are not considered in periods
with a net loss as the effect would be anti-dilutive.
Fair Value of Financial Instruments - The carrying amounts of cash and
cash equivalents, accounts receivable and accounts payable are
considered to be representative of their respective fair values due to
their short-term nature. The carrying amount of the line of credit and
long-term debt approximated fair value at December 31, 2001 and 2000.
The fair value of the Company's debt was estimated using interest rates
that are representative of debt with similar terms and maturities.
Concentrations of Credit Risk - Concentrations of credit risk with
respect to accounts receivable are limited due to the diversity of the
Company's clients as well as their dispersion across many different
geographic regions. The Company had no customers that accounted for more
than 10% of consolidated revenues in 2001, 2000, or 1999.
Stock-Based Compensation - Statement of Financial Accounting Standards
(SFAS) No. 123, "Accounting for Stock-Based Compensation," requires
companies to measure employee stock compensation plans and non-employee
stock-based compensation based on the fair value method of accounting.
However, for stock compensation granted to employees, SFAS No. 123 allows
the alternative of continued use of Accounting Principles Board Opinion
(APBO) No. 25, "Accounting for Stock Issued to Employees," with pro forma
disclosure of net income and earnings per share determined as if the fair
value method had been applied in measuring compensation cost. The Company
elected the continued use of APBO No. 25.
Comprehensive Earnings (Loss) - Comprehensive earnings (loss) is a
measure of all nonowner changes in shareholders' equity and includes
such items as net earnings (loss), certain foreign currency translation
items, minimum pension liability adjustments, and changes in the value
of available-for-sale securities. In 2001, 2000 and 1999, comprehensive
earnings (loss) for the Company were equivalent to net earnings (loss)
as reported.
Derivative Instruments and Hedging Activities - Effective January 1,
2001, the Company adopted SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended by SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging
Activities." SFAS No. 133 establishes accounting and reporting standards
for derivative instruments and for hedging activities. It requires that
all derivatives, including those embedded in other contracts, be
recognized as either assets or liabilities and that those financial
instruments be measured at fair value. The accounting for changes in the
fair value of derivatives depends on their intended use and designation.
Management has reviewed the requirements of SFAS No. 133 and has
determined that they have no free-standing or embedded derivatives. All
contracts that contain provisions meeting the definition of a derivative
also meet the requirements of, and have been designated as, normal
purchases or sales. The Company's policy is to not use free-standing
derivatives and to not enter into contracts with terms that cannot be
designated as normal purchases or sales.
New Accounting Standards - In June 2001, the Financial Accounting
Standards Board (FASB) issued SFAS No. 141, "Business Combinations."
This Statement supercedes APB Opinion No. 16, "Business Combinations"
and SFAS No. 38. "Accounting for Preacquisition Contingencies of
Purchased Enterprises" and eliminates the pooling method of accounting
for business acquisitions. This Statement requires all business
combinations to be accounted for using the purchase method for all
transactions initiated after June 30, 2001.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets." This statement applies to intangibles and goodwill
acquired after June 30, 2001, as well as goodwill and intangibles
previously acquired. Under this statement, goodwill as well as other
intangibles determined to have an infinite life will no longer be
amortized; however, these assets will be reviewed for impairment on a
periodic basis. SFAS No. 142 also includes provisions for the
reclassification of certain existing recognized intangibles as goodwill,
reclassification of certain intangibles out of previously reported
goodwill and the identification of reporting units for purposes of
assessing potential future impairments of goodwill. SFAS No. 142 is
effective for the Company on January 1, 2002. In accordance with this
statement, the Company is not required to complete the transitional
goodwill impairment test until June 30, 2002. The Company is currently
assessing but has not yet determined the impact of SFAS No. 142 on its
financial position and results of operations. As of December 31, 2001
the Company had net goodwill and other intangible assets of
approximately $15.2 million and $2.6 million, respectively. Goodwill
amortization expense was approximately $0.8 million for each of the
years ended December 31, 2001, 2000 and 1999. Amortization expense of
other intangible assets was approximately $0.3 million, $0.1 million and
$0.1 million for the years ended December 31, 2001, 2000 and 1999
respectively.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 addresses financial accounting
and reporting for obligations associated with the retirement of
long-lived assets and the associated asset retirement costs. SFAS No.
143 is effective for the Company on January 1, 2003. The Company is
currently in the process of evaluating the impact of the adoption of
SFAS No. 143.
In August 2001, the FASB issued SFAS No. 144, "Accounting for
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of" and addresses the financial
accounting and reporting for the impairment or disposal of long-lived
assets. SFAS No. 144 is effective for the Company on January 1, 2002.
The Company is currently in the process of evaluating the impact of
the adoption of SFAS No. 144.
Reclassifications - Certain reclassifications have been made to the 2000
and 1999 consolidated financial statements to conform with the 2001
presentation. These reclassifications had no effect on net earnings
(loss) or total stockholders' equity as previously reported.
2. ACQUISITIONS
In October 2001, the Company completed the acquisition of Leadtech
Corporation, (Leadtech), a private company operating as an independent
clinical laboratory devoted primarily to the examination of blood lead
concentrations in pediatric patients. For the year ended December 31,
2000, Leadtech had unaudited net revenue of approximately $1.8 million
and unaudited earnings before interest, taxes, depreciation and
amortization, adjusted for certain shareholder distributions, of $1.0
million. Operations at the Leadtech facility in New Jersey were merged
into the MEDTOX laboratory facility in St. Paul, Minnesota in December
2001. The purchase price of $6.1 million consisted of $2.5 million in
cash, the issuance of 227,693 shares of the Company's common stock valued
at $2.7 million, and $0.9 million of seller financing payable over 24
months. The value of the 227,693 shares issued was determined based on
the average market price of the Company's common stock over the two-day
period before and after the number of shares issuable became fixed and
determinable.
The following table summarizes the fair value of the Leadtech assets
acquired:
(In thousands)
Goodwill $ 3,727
Customer list 2,141
Non-compete agreement 250
--------
$ 6,118
In accordance with SFAS No. 142, the goodwill will be assessed for
impairment annually and will not be amortized, the customer list will be
amortized over a ten-year period based upon projected cash flows, and the
non-compete agreement will be amortized on a straight-line basis over a
two-year period. Goodwill is not expected to be tax deductible.
The following unaudited pro forma information presents a summary of
combined results of operations of the Company and Leadtech as if the
acquisition had occurred on January 1, 2000, along with certain pro forma
adjustments to give effect to amortization of intangible assets, interest
expense on acquisition debt and the stock issued to purchase Leadtech.
The pro forma results were derived using Leadtech's unaudited results.
The pro forma information also does not attempt to show how we would
actually have performed on a combined basis had the companies been
combined throughout these periods. The following pro forma information,
therefore, although helpful in illustrating the financial characteristics
of our combined company under one set of assumptions, does not attempt to
predict or suggest future results:
(In thousands, except share and per share data)
Nine months ended Year ended
Sept. 30, 2001 Dec. 31, 2000
--------------------------
Net sales $ 38,304 $ 44,721
Net earnings (loss) 1,851 (3,175)
Net earnings (loss) per share:
Basic $ 0.45 $ (0.86)
Diluted 0.42 (0.86)
Weighted average shares outstanding:
Basic 4,127,503 3,684,539
Diluted 4,358,672 3,684,539
In August 2000, the Company purchased customer lists and certain other
assets of National Medical Review Offices, Inc. (NMRO), a Minnesota-based
company specializing in specimen collection services. The purchase price
of approximately $252,000 included an initial payment of $75,000 in cash
plus the issuance of 15,152 shares of the Company's common stock at
$11.69 per share. The Company accounted for its acquisition of NMRO using
the purchase method of accounting. The following table summarizes the
fair value of the NMRO assets acquired:
(In thousands)
Equipment $ 9
Non-compete agreement 21
Customer lists 222
--------
$ 252
The Company is depreciating/amortizing the equipment, non-compete
agreement, and customer lists on a straight-line basis over periods of
five, three, and twenty years, respectively. Pro forma results related to
the NMRO acquisition are not material to the financial condition or
results of operations of the Company.
3. RELATED PARTY TRANSACTIONS
In October and November 2001, the Company received approximately $1.05
million from private placements of subordinated debt. Of this amount,
$290,000 was received from an officer and two directors of the Company
(see Note 7).
In March 2001, the Company entered into a 10-year lease of the
Burlington, North Carolina production facility for an annual base rent of
$197,000, exclusive of operating expenses. This facility has always been
owned and leased to the Company by a director of the Company. In
addition, under the lease the Company will have up to $600,000 to spend
on tenant improvements of the building, which will then be amortized over
the 10-year life of the lease as additional rent at an assumed annual
interest rate of 9.5%. The Company believes it is renting this facility
in Burlington on terms as favorable as those available from third parties
for equivalent premises.
In October 2000, Harry McCoy was replaced as Chairman and President of
the Company but continued to receive payments as an employee under an
employment agreement with the Company. At that time, the Company recorded
$600,000 as the estimated amount payable to Mr. McCoy under the
employment agreement. The Company and Mr. McCoy disputed the effect of
the termination of his employment with the Company. In September 2001,
the Company entered into an agreement with Mr. McCoy resolving these
issues. The parties agreed to a mutual release of claims. Mr. McCoy
resigned his position on the Board of Directors and agreed to serve as an
ongoing consultant to the Company. In exchange, the Company agreed to
provide Mr. McCoy with a lump sum payment of $250,000, and an additional
amount of $250,000 in restricted common stock. In exchange for McCoy's
ongoing consulting relationship, he will receive $35,000 annually over
the next five years. The Company also advanced Mr. McCoy $102,500 in
cash, subject to a five-year promissory note, representing the amount
necessary for Mr. McCoy to exercise his previously held options to 44,000
shares of the Company's common stock.
4. SEGMENTS
The Company has two reportable segments: Laboratory Services and Product
Sales. The Laboratory Services segment consists of MEDTOX Laboratories,
Inc. Services provided include forensic toxicology, clinical toxicology,
clinical testing for the pharmaceutical industry, pediatric lead
testing, heavy metals analyses, courier delivery, and medical
surveillance. Providing revenues from external customers for each group
of services within the Laboratory Services segment is impracticable. The
Product Sales segment consists of MEDTOX Diagnostics, Inc. Products
manufactured include easy to use, inexpensive, on-site drug tests such
as PROFILE(R)-II, EZ-SCREEN(R), and VERDICT(R)-II.
The Company's reportable segments are strategic business units that
offer different products and services. They are managed separately as
each business requires different products, services and marketing
strategies.
In evaluating financial performance, management focuses on income before
income tax benefit as a segment's measure of profit or loss. The
accounting policies of the segments are the same as those described in
the summary of significant accounting policies (see Note 1).
Segment Information
(In thousands)
Laboratory Services Product Sales Total
2001:
Revenues $ 37,990 $ 11,094 $ 49,084
Interest expense 1,075 48 1,123
Depreciation and amortization 2,459 136 2,595
Segment income 759 1,739 2,498
Segment assets 39,358 4,798 44,156
Expenditures for segment assets 8,108 351 8,459
Laboratory Services Product Sales Total
2000:
Revenues $ 34,797 $ 8,083 $ 42,880
Interest expense 917 74 991
Depreciation and amortization 2,329 91 2,420
Segment (loss) income (3,374) 813 (2,561)
Segment assets 26,498 3,526 30,024
Expenditures for segment assets 2,892 461 3,353
1999:
Revenues 31,012 3,991 35,003
Interest expense 752 65 817
Depreciation and amortization 2,042 82 2,124
Segment income (loss) 1,440 (21) 1,419
Segment assets 24,269 2,002 26,271
Expenditures for segment assets 1,025 94 1,119
The following is a summary of revenues from external customers for each
group of products and services provided within the Product Sales
segment:
(In thousands)
2001 2000 1999
Substance abuse testing products $ 9,427 $ 6,339 $ 2,471
Contract manufacturing services 1,318 1,278 972
Agricultural diagnostic products 349 466 548
---------- --------- ---------
$ 11,094 $ 8,083 $ 3,991
========== ========= =========
5. INVENTORIES
Inventories consisted of the following at December 31:
(In thousands)
2001 2000
Raw materials $ 1,570 $ 910
Work in process 414 322
Finished goods 460 373
Supplies, including off-site inventory 1,453 1,447
-------- --------
$ 3,897 $ 3,052
======== ========
6. BUILDING, EQUIPMENT AND IMPROVEMENTS
Building, equipment and improvements consisted of the following
at December 31:
(In thousands)
2001 2000
Furniture and equipment $ 13,645 $ 12,222
Building 6,886
Leasehold improvements 1,836 1,566
--------- ---------
22,367 13,788
Less accumulated depreciation (10,167) (8,577)
---------- ---------
$ 12,200 $ 5,211
=========== ============
Depreciation expense was $1.5 million, $1.5 million and $1.3 million for
the years ended December 31, 2001, 2000 and 1999, respectively.
7. DEBT
Long-term debt consisted of the following at December 31:
(In thousands)
2001 2000
Term loan, due March 2003, 6.0% at December 31, 2001 $ 1,858 $ 2,412
Capex note, due March 2003, 6.0% at December 31, 2001 1,853 841
Subordinated notes, due December 2002, 8.5% at December 31, 2001 100 556
Subordinated notes, due September 2004, 10.0% at December 31, 2001
(discount is based on imputed interest rate of 23.0%) 786
Non-interest bearing promissory notes issued in connection with
acquisition, due October 2003 (discount is based on imputed
interest rate of 23.0%) 874
Mortgage loan, due April 2011, 7.23% at December 31, 2001 6,105
Various vehicle loans, due from October 2002 through April 2006,
0.0% to 10.3% 293 250
--------- ---------
11,869 4,059
Less current portion (2,120) (1,579)
--------- ----------
$ 9,749 $ 2,480
========= =========
Long-term debt maturities at December 31, 2001 were as follows:
2002 $ 2,120
2003 3,144
2004 1,005
2005 217
2006 and thereafter 5,383
---------
$11,869
Wells Fargo Credit Agreement - In January 1998, the Company entered into
a Credit Security Agreement (the Wells Fargo Credit Agreement) with
Wells Fargo Business Credit, Inc. The Wells Fargo Credit Agreement, as
amended, consists of (i) a term loan of $3.185 million bearing interest
at prime + 1.25%; (ii) a revolving line of credit, payable on demand, of
not more than $6.0 million or 85% of the Company's eligible trade
accounts receivable bearing interest at prime + 1%; and (iii) a capex
note of up to $3.5 million for the purchase of capital equipment bearing
interest at prime + 1.25% and (iv) availability of letters of credit in
amounts not to exceed the lesser of $300,000 (less outstanding letters
of credit) or the unborrowed portion of the revolving line of credit
(less outstanding letters of credit).
At December 31, 2001, $2.9 million was outstanding under the revolving
line of credit, and $2.6 million was available to be advanced under the
borrowing base formula. The Wells Fargo Credit Agreement is secured by
virtually all of the Company's assets, including equipment, general
intangibles, inventories, and receivables. The weighted average interest
rate on borrowings outstanding under the revolving line of credit was
6.8%, 9.5% and 8.5% for the years ended December 31, 2001, 2000, and
1999, respectively.
The Wells Fargo Credit Agreement requires the Company to comply with
certain covenants and maintain certain quarterly financial ratios as to
minimum debt service coverage and maximum debt to book net worth. It
also sets minimum quarterly net income and book net worth levels, which
restrict the payment of dividends. As of December 31, 2001, the Company
was in compliance with the provisions of the financial covenants of the
Wells Fargo Credit Agreement.
Subordinated Debt - In October and November 2001, the Company received
approximately $1.05 million from private placements of subordinated debt.
The notes require payment of the principal amounts on September 30, 2004.
Interest at 10% per annum is paid semi-annually on June 30 and December
31. In connection with the issuance of the subordinated notes, the
Company issued warrants to purchase 54,265 shares of common stock at
$9.675 per share. The Company has determined the value of the warrants at
the dates of issuance to be $281,000 based upon the Black-Scholes
option-pricing model. The value of the warrants has been accounted for as
additional paid-in capital and deducted from the principal of the
subordinated notes as discount on debt issued. The effective interest
rate of the subordinated debt including the warrants is 23.0%.
The Company received a total of $575,000 from private placements of
subordinated debt and warrants from 1998 through 1999. The notes require
payment of the principal amounts on December 31, 2001. Interest at 12%
per annum is paid semi-annually on June 30 and December 31. In connection
with the issuance of the subordinated notes, the Company issued warrants
to purchase 49,144 shares of common stock at $2.925 per share. At
December 31, 2001, the Company had repaid $475,000 of the principal
amount of the notes. The remaining $100,000 was renewed at 8.5% interest
per annum paid semi-annually and requires payment of the principal amount
on December 31, 2002.
Cash paid for interest for all outstanding debt was $1.2 million, $0.9
million and $0.8 million for the years ended December 31, 2001, 2000 and
1999, respectively.
8. STOCKHOLDERS' EQUITY
On September 26, 2001, the Board of Directors declared a 10% stock
dividend on the Company's common stock, which was paid on November 9,
2001 to stockholders of record on October 26, 2001. The dividend was
charged to retained earnings in the amount of $5.2 million, which was
based on the fair value of the Company's common stock. Accordingly, all
stock option, warrant, share, and per share data included in the
consolidated financial statements have been restated to reflect the 10%
stock dividend.
The Board of Directors declared a one-for-twenty reverse stock split
effective February 24, 1999. Accordingly, all stock option, warrant,
share, and per share data included in the consolidated financial
statements have been restated to reflect the reverse split.
In July and August 2000, the Company completed a private equity placement
through the sale, exclusively to accredited investors, of 611,111 units
at an aggregate price of $5.5 million, or $9.00 per unit, resulting in
net proceeds of approximately $4.9 million after deducting agents'
commissions of $0.6 million and other expenses. Each unit consisted of
one share of common stock and one warrant to purchase one additional
share of common stock at an exercise price of $11.25. In connection with
the private placement, the Company also issued warrants to the placement
agent to purchase 61,111 shares of common stock at an exercise price of
$11.25 per share. The warrants are currently exercisable and expire five
years from the date of issuance.
At December 31, 2001, shares of common stock reserved for future issuance
upon exercise of outstanding common stock warrants are as follows:
Number of
Exercise Price Period Shares
Per Share Exercisable Reserved
Private equity placement $ 11.25 July 31, 2000 to 550,000
July 30, 2005
Private equity placement $ 11.25 August 31, 2000 to 122,222
August 30, 2005
Subordinated notes 10% $ 9.68 September 20, 2002 to 54,265
September 30, 2004
In addition, at December 31, 2001, 154,679 shares of common stock were
reserved for future issuances under the stock option plans discussed in
Note 9.
In September 1998, the Company's Board of Directors declared a dividend
of one preferred share purchase right for each common share then
outstanding. The Rights were distributed pursuant to a Rights Agreement
between the Company and American Stock Transfer & Trust Company. Each
Right entitles the holder to purchase one one-hundredth of a share of a
new series of junior participating preferred stock at an exercise price
of $29.80, subject to adjustment. The Rights are exercisable only if a
person or group acquires beneficial ownership of 20 percent or more of
the Company's outstanding common stock..
9. 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, nonqualified 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) of stock options 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. Restricted stock
awards are awarded with a fixed restriction period.
The following table summarizes information about stock options
outstanding at December 31, 2001:
Plan Options Outstanding
-------------------------------------------
1993 Non- Weighted
Equity employee Average
1983 ISO Compensation Director Exercise
Plan Plan Plan Price
Balance at December 31, 1998 6,030 81,121 10,187 $12.99
Granted 243,642 1,636 3.05
Canceled (564) (5,147) 3.08
------ -------- ---------
Balance at December 31, 1999 5,466 319,616 11,822 6.41
Granted 133,333 9.64
Exercised (1,032) 4.89
Canceled (250) (741) 65.68
-------- -------- -------
Balance at December 31, 2000 5,216 451,917 11,081 7.24
Granted 113,056 7.29
Exercised (77,013) 4.37
Canceled (2,236) (56,069) 11.42
------- ---------- --------
Balance at December 31, 2001 2,980 431,891 11,081 $ 7.20
======== ========== =========
Plan 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
$2.31 - $2.48 152,779 $ 2.35 7.2 144,598 $ 2.35
$3.41 - $7.02 134,712 6.85 8.8 53,388 6.68
$7.43 - $7.88 80,840 7.81 6.7 71,746 7.84
$10.86 - $138.42 77,621 16.72 8.2 32,899 24.44
-------- -------
445,952 7.20 7.8 302,631 6.82
======== =======
Nonqualified Stock Options - At December 31, 2001, 2000 and 1999, the
Company had 111,112, 122,490 and 124,342, respectively, of nonqualified
stock options outstanding to certain current and former officers of the
Company. The weighted average exercise price of nonqualified stock
options outstanding was $7.88, $7.88 and $8.76, at December 31, 2001,
2000, and 1999, respectively. The shares of common stock covered by
nonqualified options are restricted as to transfer under applicable
securities laws.
Restricted Stock Awards- Restricted stock awards are issued to certain
key employees as an incentive for the performance of future services
that will contribute materially to the successful operation of the
Company. Owners of restricted stock awards have the rights of
shareowners, including the right to vote. The Company awarded 44,550 and
60,775 restricted shares in 2001 and 2000, respectively, to certain key
employees with a restriction period of three years. The market value of
the awards on the date of the grant was recorded as deferred stock-based
compensation and additional paid-in capital. Compensation is charged to
operations on a straight-line basis over the restriction periods and
amounted to $183,000 and $69,000 in 2001 and 2000, respectively.
Restricted stock awards outstanding totaled 88,550 and 60,775 at
December 31, 2001 and 2000, respectively, with a weighted average grant
date fair value of $8.00 and $8.81 in 2001 and 2000, respectively.
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 165,000. 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. Shares issued under the Purchase Plan were 20,738, 8,473, and
2,658 during the years ended December 31, 2001, 2000, and 1999,
respectively. As of December 31, 2001, 110,626 shares of common stock
were available for issuance under the Purchase Plan.
The Company applies APBO No. 25, Accounting for Stock Issued to
Employees, and related interpretations, in accounting for its
stock-based compensation plan. 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 the Company determined compensation expense based on the fair value
at the grant date for its stock options under SFAS No. 123, Accounting
for Stock-Based Compensation, the Company's net income (loss) and
earnings (loss) per share would have been changed to the pro forma
amounts indicated below:
(In thousands, except per share data)
2001 2000 1999
Net income (loss) .............. As reported $ 2,498 $ (2,561) $ 1,419
Pro forma 2,000 (2,976) 987
Basic earnings (loss) per share.. As reported $ 0.62 $ (0.74) $ 0.44
Pro forma 0.50 (0.85) 0.31
Diluted earnings (loss) per share. As reported $ 0.60 $ (0.74) $ 0.43
Pro forma 0.48 (0.85) 0.30
The fair value of the options at the grant date was estimated using the
Black-Scholes model with the following assumptions:
2001 2000 1999
Expected life (years) 4 5 5
Interest rate 4.0% 5.75% 5.875%
Volatility 123.6% 61.4% 61.9%
Dividend yield 0% 0% 0%
The weighted average fair value of options granted in 2001, 2000, and
1998, using the above assumptions, was $5.83, $5.55, and $1.77 and per
share, respectively.
10. EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted
earnings (loss) per common share:
(Dollars in thousands, except per share amounts)
2001 2000 1999
Net income (loss) (A) $ 2,498 $ (2,561) $ 1,419
============== ============== ==============
Weighted average number of basic common
shares outstanding (B) 4,001,772 3,456,846 3,192,296
Dilutive effect of stock options and warrants
computed based on the treasury stock method
using average market price 192,911 91,322
-------------- ------------- --------------
Weighted average number of diluted
common shares outstanding (C) 4,194,683 3,456,846 3,283,618
============== ============= ==============
Basic earnings (loss) per common share (A/B) $ 0.62 $ (0.74) $ 0.44
============= ============= =============
Diluted earnings (loss) per common share (A/C) $ 0.60 $ (0.74) $ 0.43
============= ============= =============
Options and warrants to purchase 752,873 and 279,117 shares of common
stock were outstanding during 2001 and 1999, respectively, but were not
included in the computation of diluted earnings per share as their
exercise prices were greater than the average market price of the common
shares. Options and warrants to purchase an aggregate 1,273,103 shares
of common stock were outstanding during 2000 and were excluded from the
computation of dilutive earnings per share as their inclusion would have
been anti-dilutive due to a net loss in that year.
11. LEASES
The Company leases office and research facilities from a director under
a fixed term operating lease. Rental payments to the director were
approximately $138,000, $121,000, and $121,000 for the years ended
December 31, 2001, 2000 and 1999, respectively.
The Company leases other offices and facilities and office equipment
under certain operating leases, which expire on various dates through
April 2011. Under the terms of the facility leases, a pro rata share of
operating expenses and real estate taxes are charged as additional rent.
As of December 31, 2001, 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
2002 $ 260 $ 583
2003 103 525
2004 87 440
2005 80 341
2006 21 346
2007 and thereafter 23 939
-------- ---------
574 $ 3,174
=========
Amount representing interest 85
--------
Present value of net minimum lease payments 489
Less current portion 223
--------
Long-term capital lease obligations $ 266
========
Rent expense (including amounts for the facilities leased from the
director) amounted to $1.4 million, $1.2 million and $0.8 million for
the years ended December 31, 2001, 2000 and 1999, respectively.
12. 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:
(In thousands)
2001 2000
Deferred tax liability -
Building, equipment and improvements $ (310) $ (205)
Deferred tax assets:
Goodwill 745 971
Medical expense accrual 90 112
Bad debt reserve 406 430
Accrued severance 249
Net operating loss carryforwards 12,178 13,393
Research and experimental credit carryforwards 203 173
Restructuring costs 61
Legal reserve 13
Other 609 286
----------- ----------
Total net deferred tax assets 13,934 15,470
Valuation allowance for deferred tax assets (13,934) (15,470)
------------ ----------
Net deferred tax asset $ - $ -
=========== ==========
Following is a reconciliation of federal income tax at the statutory
rate of 34% to the actual income taxes provided for:
2001 2000 1999
Computed expected federal income tax
expense (benefit) $ 849 $ (871) $482
State tax, net of federal effect 101 (98) 40
Permanent differences 18 23 10
Change in valuation allowance (1,536) 499 (739)
Adjustment to prior year provision 1 10
Expired net operating loss carryforwards 680 454 249
Other (113) (17) (42)
---------- ---- ----
$ - $ - $ -
========== ======= =======
At December 31, 2001, the Company had net operating loss carryforwards
(NOL) of approximately $32.0 million, which are available to offset
taxable income through 2014 and began to expire in 1999. For financial
reporting purposes, a valuation allowance has been recorded to offset
deferred tax assets that more likely than not will not be realized based
on the Company's projected future taxable income.
Section 382 of the Internal Revenue Code restricts the annual
utilization of the NOLs incurred prior to a change in ownership. Such a
change in ownership may have occurred in connection with stock
transactions in 1996, and another change in ownership may have occurred
in connection with the conversion of Series A Preferred Stock in 1997
and 1998. As a result of these changes in ownership, the future
availability of the NOL to offset taxable income is likely substantially
curtailed.
13. EMPLOYEE BENEFIT PLAN
The Company has a defined contribution benefit plan that covers
substantially all employees who meet certain age and length of service
requirements. Contributions to the plan are at the discretion of the
Board of Directors. The 401(k) expense for the years ended December 31,
2001, 2000 and 1999 was $0.2 million, $0.2 million and $0.1 million,
respectively.
14. COMMITMENTS AND CONTINGENCIES
In March 2000, the Company was served with a copy of a complaint filed
against the Company in the Circuit Court of Cook County, Illinois, by the
Plaintiff, The Methodist Medical Center of Illinois. The Plaintiff
alleged that the Company interfered with various contractual
relationships of the Plaintiff in connection with the referral of certain
customers to the Company by other defendants previously sued by the
Plaintiff in the same action. The Company had filed a cross claim against
the other defendants in the litigation based on such defendants'
contractual obligation to indemnify the Company against any damages,
costs or expenses (including attorney fees) incurred by the Company,
arising out of any claim of contractual interference by the Company in
connection with the referral of the customers to the Company by such
defendants. The parties have reached an agreement to settle the case,
whereby the Company paid $75,000 with a full release of all claims and a
dismissal order entered in October 2001. The Company will voluntarily
dismiss its indemnity claims against the co-defendants for reimbursement
of the $75,000 paid, with the right of refiling the indemnification claim
existing for one year. The Company will continue to pursue its right of
indemnification for the $75,000 during the next year.
In January 1997, the Company filed suit in Federal District Court in
Minnesota against Morgan Capital LLC, David Bistricer and Alex Bistricer
alleging violation of Section 16(b) of the Securities and Exchange Act of
1934 and seeking recovery of more than $500,000 in short-swing profits.
Messrs. David and Alex Bistricer are former directors of the Company. On
August 4, 1997, the U.S. District Court dismissed the Company's complaint
and on October 29, 1997, the Company filed an appeal of that decision to
the United States Court of Appeals for the Eighth Circuit. On July 21,
1998, the Eighth Circuit reversed the District Court dismissal and
remanded the case to the District Court. On June 3, 1999 the U.S.
District Court found that Morgan Capital had violated Section 16(b) and
ordered Morgan Capital to pay the Company damages of $551,000 plus
interest. On or about September 30, 2000 the parties entered into a
Stipulation and Mutual Release dismissing with prejudice all claims and
counterclaims between the parties regarding the transaction other then
the Company's Section 16(b) claim against the former stockholder, Morgan
Capital. The parties entered into this Stipulation along with an Escrow
Agreement requiring Morgan Capital to deposit into escrow 79,750 shares
of publicly registered common stock of the Company as collateral to
secure payment by Morgan Capital of the judgment to be entered in favor
of the Company in the amount of $675,000 plus any post-judgment interest.
The Federal District Court entered such judgment in favor of the Company
on October 17, 2000. Morgan Capital subsequently appealed the Federal
District Court's decision to the Eighth Circuit Court of Appeals. On
August 3, 2001 the Eighth Circuit Court of Appeals ruled in favor of the
Company, affirming the District Court decision awarding the Company
$675,000 plus post judgment interest. Pursuant to the Escrow Agreement,
Morgan Capital paid the Company $715,000 in cash to satisfy the judgment.
On November 1, 2001, Morgan Capital filed a petition for a writ of
certiorari to the United States Supreme Court, seeking review of the
judgment against it. On February 19, 2002, the Supreme Court denied
Morgan Capital's petition. The net proceeds from the settlement were
recorded as additional paid-in capital.
15. QUARTERLY INFORMATION (UNAUDITED)
(In thousands, except per share amounts)
First Second Third Fourth
2001 Quarter Quarter Quarter Quarter
---------------------------------------------------------------------------------------------------
Revenues $ 11,606 $ 12,561 $ 12,581 $ 12,336
Gross profit 4,158 5,036 4,994 5,259
Net income 438 960 790 310
Basic earnings per share 0.11 0.25 0.20 0.07
Diluted earnings per share 0.11 0.23 0.18 0.07
First Second Third Fourth
2000 Quarter Quarter Quarter Quarter (1)
-----------------------------------------------------------------------------------------------------
Revenues $ 9,676 $ 11,316 $ 11,573 $ 10,315
Gross profit 3,572 4,414 4,722 2,325
Net income (loss) 297 481 477 (3,816)
Basic earnings (loss) per share 0.09 0.15 0.13 (0.99)
Diluted earnings (loss) per share 0.09 0.14 0.12 (0.99)
(1) During the fourth quarter of 2000, the Company reported a net loss of
$3.8 million due to decreased sample volume from existing
drugs-of-abuse clients as a result of adverse weather conditions and
the slowing economy. The Company also experienced higher than expected
expenses during the quarter relating to the reorganization of
laboratory operations and the Chapter 11 bankruptcy filings of two
customers.
SCHEDULE II-VALUATION & QUALIFYING ACCOUNTS
Balance at Charged to Charged to Balance at
Beginning Costs and Other the End of
of Period Expenses Accounts Deductions Period
------------------------------ -----------------------------------------------
Year ended December 31, 2001
Deducted from Asset Accounts
Allowance for Doubtful Accounts $ 1,131,000 $ 384,000 $ - $ 446,000 (1) $ 1,069,000
Restructuring Accrual $ 160,000 $ - $ - $ 160,000 (3) $ -
Year ended December 31, 2000
Deducted from Asset Accounts
Allowance for Doubtful Accounts $ 274,000 $ 879,000 $ - $ 22,000 (1) $ 1,131,000
Restructuring Accrual $ 469,000 $ - $ - $ 309,000 (3) $ 160,000
Year ended December 31, 1999
Deducted from Asset Accounts
Allowance for Doubtful Accounts $ 245,000 $ 229,000 $ - $ 200,000 (1) $ 274,000
Restructuring Accrual $ 1,155,000 $(165,000) (2) $ - $ 521,000 (3) $ 469,000
(1) Uncollectible accounts written off, net of recoveries.
(2) Represents a decrease in reserves due to a more favorable settlement
of certain lease contingencies originally accrued for in 1998.
(3) Represents payments of lease obligations.