ITEM 1. BUSINESS. - ------- --------
1. General.
MEDTOX Scientific, Inc. (formerly EDITEK, Inc.), a Delaware corporation, was organized in September 1986 to succeed the operations of a predecessor California corporation. MEDTOX Scientific, Inc. and its subsidiaries, MEDTOX Laboratories, Inc. and MEDTOX Diagnostics, Inc., are referred to herein as "the Company". 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, 2000, sales from the forensic and clinical laboratory services conducted by MEDTOX Laboratories, Inc. accounted for 81% 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 19% of the total revenues of the Company for the year ended December 31, 2000.
2. Principal Services, Products, and Markets.
General. The Company has two reportable segments: "Laboratory Services" conducted by the Company's wholly owned subsidiary, MEDTOX Laboratories, Inc. and "Products Sales" conducted by the Company's wholly owned subsidiary MEDTOX Diagnostics, Inc. Laboratory Services include forensic toxicology, clinical toxicology, and heavy metal analyses as well as logistics, data, and overall program management services. Product Sales include sales of a variety of on-site screening products and contract manufacturing. For financial information relating to the Company's segments, see Note 3 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, and gas chromatography/mass spectrometry. MEDTOX Laboratories, Inc. was one of the charter laboratories to be certified by the federal government to perform mandated drug testing on regulated employees. It pioneered security and chain of custody procedures, including sample bar coding 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 the analyses of many classes of drugs 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. 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.
D. 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 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 1-3 clinical trials and working with sponsors and Clinical Research Organization's (CRO's) on assay development and bio-analytical studies. In addition, the Company has begun to market clinical chemistry testing services to clinics, hospitals and physician offices on a regional basis.
Major Customers. The Company had no single customer whose sales amounted to more than 10% of its total revenues during the year ended December 31, 2000.
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 2000 using immunochemistry, liquid chromatography (LC), gas chromatography (GC), gas chromatography with mass spectrometry (GC/MS), atomic absorption (AA), inductively coupled plasma mass spectrometry (ICP/MS), and tandem mass spectrometry (LC/MS/MS). The many new tests developed during 2000 continued to expand the Company's capabilities in the esoteric reference clinical toxicology market (providing sophisticated testing for hospitals and other reference laboratories), expand our capabilities and laboratory services in biological monitoring of toxins in the workplace, expand our capabilities of detecting drugs of abuse for clinical and workplace analysis, and also expand our capabilities in pharmaceutical research analysis.
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 2000, the Company purchased an additional tandem mass spectrometer (LC/MS/MS) and continued to move many of existing assays to the new technology, resulting in dramatic increases in sensitivity, specificity and throughput. A number of multi-drug screening tests have also been successfully developed utilizing LC/MS/MS technology. In 2000, efforts have begun to explore the utility of new immunological techniques for both onsite and laboratory based testing.
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 will be marketed primarily to hospital laboratories.
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 $1.1 million, $0.8 million and $1.2 million for research and development activities in 2000, 1999 and 1998, 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 injection-molded devices, glass fiber, nitrocellulose filter materials, and packaging materials. The Company maintains an inventory of raw materials which, to date, has been acquired primarily from third parties. Currently, most raw materials are available from several sources. The Company possesses the technical capability to produce its own antibodies and has initiated production of antibodies for certain tests. However, if the Company were to change its source of supply for raw materials used in a specific test, additional development, and the accompanying costs, may be required to adapt the alternate material to the specific diagnostic test.
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 nine issued United States patents relating to on-site testing technology. Eight 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.
Of the eight U.S. patents mentioned above which generally form the basis for the EZ-SCREEN(R) and one-step technologies, one expired in 2000, 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 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 2001 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, 2000, the Company had several accounts, which were in the process of being set up where revenues are not expected to be realized until 2001.
Product Sales. At December 31, 2000, MEDTOX Diagnostics, Inc. did not have any significant backlog and normally does 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, 2000 approximately 63 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. hasbeen 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. 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 laboratory.
4. Drug Enforcement Administration (DEA). The primary business of the Company involves either testing for drugs of abuse or developing test kits for the detection of drugs/drug metabolites in urine. MEDTOX Laboratories, Inc. is registered with the DEA to conduct chemical analyses with controlled substances. The MEDTOX Diagnostics, Inc. facility in Burlington, N.C. is registered by the DEA to manufacture and distribute controlled substances and to conduct research with controlled substances. Maintenance of these registrations requires that the Company comply with applicable DEA regulations.
5. 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, 2000, the Company had a total of approximately 453 full-time employee equivalents as compared to approximately 340 full-time employee equivalents at December 31, 1999. Of the approximate 453 employees, 412 work at MEDTOX Laboratories, Inc. while the remaining 41 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.
ITEM 2. PROPERTIES.
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 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. For the last several years the Company has leased approximately 33,000 square feet on a month-to-month basis at an
annual base rent, excluding operating costs, of approximately $121,000. Effective March 28, 2001, the Company entered into a 10-year lease of the entire building (approximately 39,500 square feet) at the same location 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.
ITEM 3. LEGAL PROCEEDINGS.
In February 1999, the Company settled a claim of patent infringement brought against the Company by United States Drug Testing Laboratories on August 20, 1996. The Company, while denying any infringement, has settled the case by paying United States Drug Testing Laboratories $17,500 and issuing United States Drug Testing Laboratories 2,500 shares of common stock. The Company had previously accrued for this contingency. Accordingly, the settlement of this matter did not affect results of operations for the year ending December 31, 1999. Under the MEDTOX Laboratories acquisition agreement, pursuant to which the Company originally acquired MEDTOX Laboratories, Inc., the sellers of MEDTOX Laboratories, Inc. agreed to remain liable for any and all damages for any patent infringement which was alleged to have occurred prior to the closing of the Company's purchase of MEDTOX Laboratories, Inc. The acquisition agreement also provided for the sellers to indemnify and hold the Company harmless from and against any damages, loss, liability or expense, including reasonable attorneys' fees and court costs in connection with any infringement which was alleged to have occurred before the closing date. It is the Company's opinion that it is entitled to recover $79,000 in damages from the sellers in accordance with the above referenced provisions of the acquisition agreement. The parties have agreed that the matter may be arbitrated in Minneapolis, Minnesota rather then in Chicago as required by the original acquisition agreement. Management expects this matter will be resolved prior to the end of calendar year 2001.
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 16b of the Securities and Exchange Act of 1934 and seeking recovery of more than $500,000 in short-swing profits. Messrs. David and Alex Bistricer are former directors of the Company. On August 4, 1997, the U.S. District Court dismissed the Company's complaint and on October 29, 1997, the Company filed an appeal of that decision to the United States Court of Appeals for the Eighth Circuit. On July 21, 1998, the Eighth Circuit reversed the District Court dismissal and remanded the case to the District Court. On June 3, 1999 the U.S. District Court found that Morgan Capital had violated Section 16(b) and ordered Morgan Capital to pay the Company damages of $551,000 plus interest. On or about September 30, 2000 the parties entered into a Stipulation and Mutual Release dismissing with prejudice all claims and counterclaims between the parties regarding the transaction other then the Company's Section 16(b) claim against the former stockholder, Morgan Capital. The parties entered into this Stipulation along with an Escrow Agreement requiring Morgan Capital to deposit into escrow 72,500 shares of publicly registered common stock of the Company as collateral to secure payment by Morgan Capital of the judgment to be entered in favor of the Company in the amount of $675,000 plus any post-judgment interest. The Federal District Court entered such judgment in favor of the Company on October 17, 2000. Morgan Capital subsequently appealed the Federal District Court's decision to the Eighth Circuit Court of Appeals. The parties have completed and filed their respective appeal briefs with the Eighth Circuit Court of Appeals. The parties are now awaiting the scheduling of oral arguments which should occur sometime in
2001. The Company has not recorded a receivable for this amount due to the uncertainty of this matter.
In March 2000, the Company was served with a copy of a complaint filed against the Company in the Circuit Court of Cook County, Illinois, by the Plaintiff, The Methodist Medical Center of Illinois. The Plaintiff is alleging that the Company interfered with various contractual relationships of the Plaintiff in connection with the referral of certain customers to the Company by other defendants previously sued by the Plaintiff in the same action. The Company has filed a cross claim against the other defendants in the litigation based on such defendants' contractual obligation to indemnify the Company against any damages, costs or expense (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 are now engaged in pretrial discovery while at the same time settlement negotiations are underway between the parties. While it is too early to be confident as to the ultimate resolution of this matter, in light of the nature of plaintiff's claims, the nature of the discovery to date, the co-defendants indemnification obligation and the relative positions of the parties during the settlement discussion, management does not expect the ultimate resolution of this matter to have a material impact on the Company's financial condition or results of operations.
In January 2001, the Company was contacted by counsel for one of the Company's shareholders who had purchased stock in the Company's private placement in August 2000. The shareholder's counsel expressed the view that the decline in the Company's stock in December was directly attributable to the Company's announcement of a charge to earnings in the fourth quarter due to the bankruptcy filings of two of its customers. Counsel has asserted that since the bankruptcy filing by one of the customers had occurred prior to the closing of the private placement, the Company should have disclosed the fact of that filing in connection with the private placement. The Company is unable to ascertain whether the shareholder will actually pursue this matter through litigation.
ITEM 4.
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.
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 20, 2001, the number of holders of record of the Common Stock was 2,696. 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 1:20 reverse split which took effect on February 24, 1999.
2000: High Low
First Quarter............................. $10.13 $ 8.13 Second Quarter........................ 10.13 7.00 Third Quarter........................... 13.13 10.50 Fourth Quarter......................... 12.25 5.88
1999: First Quarter............................. $ 5.00 $ 2.56 Second Quarter........................ 7.50 2.63 Third Quarter........................... 10.06 6.50 Fourth Quarter......................... 9.63 7.25
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 are no remaining shares of Series A Preferred Stock outstanding as of December 31, 2000.
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.
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)
(a) During 1996, the Company recorded restructuring costs of $2.5 million as a result of the consolidation of the laboratory operations of PDLA into the laboratory operations of MEDTOX, the sale of the former operations of Bioman, and the reduction of its work force at certain of its facilities. Amounts reported as restructuring costs in 1999, 1998 and 1997 represent revaluations to the original restructuring reserve recorded in 1996.
(b) Represents the impairment of goodwill associated with the acquisition of MEDTOX in 1996.
ITEM 7.
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. and MEDTOX Diagnostics, Inc., are referred to herein as "the Company". The Company is engaged primarily in two distinct, but very much related businesses. The business of manufacturing and distribution of diagnostic devices is carried on by MEDTOX Diagnostics, Inc. from its facility in Burlington, North Carolina and the business of forensic and clinical laboratory services is conducted by MEDTOX Laboratories, Inc. at its facility in St. Paul, Minnesota.
The Company has two reportable segments: "Laboratory Services" conducted by the Company's wholly owned subsidiary, MEDTOX Laboratories, Inc. and "Products Sales" conducted by the Company's wholly owned subsidiary MEDTOX Diagnostics, Inc. Laboratory Services include forensic toxicology, clinical toxicology, and heavy metal analyses as well as logistics, data, and overall program management services. Product Sales include sales of a variety of on-site screening products and contract manufacturing. For the years ended December 31, 2000, 1999 and 1998, Laboratory Services revenue accounted for 81%, 89% and 92% of the Company's revenues, respectively. Revenue from Product Sales accounted for 19%, 11% and 8% of the total revenues of the Company for the years ended December 31, 2000, 1999 and 1998, respectively.
Results of Operations
In 2000, the Company achieved record revenues of $42.9 million, an increase of 23% over 1999, driven by the continued growth of the VERDICT(R) and PROFILE(R) product lines and an increase in the number of laboratory tests. However, a one-time charge to earnings of $0.6 million related to reorganization of the Company's Laboratory Services segment, a $0.5 million charge to reserve for potential losses attributable to the Chapter 11 bankruptcy filings of two customers (included in selling, general, and administrative expenses), coupled with higher than anticipated operating costs resulted in a net loss of $2.6 million for the year ended December 31, 2000. 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, 2000 1999 1998 - -------------------------------------------------------------------------------- Revenues 100.0% 100.0% 100.0% Cost of revenues 65.0 65.0 68.8 Operating expenses: Selling, general, and administrative 36.1 26.7 30.3 Research and development 2.6 2.4 4.0 Restructuring costs - (0.5) 2.4 ------ ------- ------- 38.7 28.6 36.7 Interest expense 2.3 2.3 2.3 ------ ------- ------- Net (loss) income (6.0)% 4.1% (7.8)% ====== ======= =======
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Revenues
Revenues increased 23% to $ 42.9 million in 2000, 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 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. The erosion in the average price per testing specimen stemmed from tougher market conditions, which reduced the average price that the Company could charge new customers. Despite the overall favorable sales trend, poor weather conditions and a slowing economy in the fourth quarter of 2000 resulted in lab sample volume from existing drugs-of-abuse clients to fall well below expectations. As a result, the Company has undertaken a reorganization, which includes refocusing the Laboratory operations to ensure that it operates with acceptable gross margins and targets appropriate markets. As part of the reorganization, the Company will emphasize the marketing, sales and operations of the Product Sales business rather than laboratory drugs-of-abuse screening. This includes converting where possible the drugs-of-abuse laboratory clients to the PROFILE(R)-II System for on-site screening. As more of the drugs-of-abuse screening converts away from the Laboratory to the Product Sales business, the Company will continue to expand and grow the esoteric laboratory business, which accounted for 25% of Laboratory revenues and grew by 20% in 2000. This is especially true in the occupational health area and in the Company's support of pharmaceutical trials.
The Product Sales segment achieved higher sales due to increased sales of substance abuse testing products and contract manufacturing services, partially offset by decreased sales of agricultural diagnostic products. Product sales from substance abuse testing products, which incorporates the EZ-SCREEN(R), PROFILE(R)-II and VERDICT(R)-II on-site test kits and other ancillary products for the detection of abused substances, increased $4.0 million to $6.3 million in 2000. This growth reflected the sales and marketing efforts for the Company's second-generation test kits, PROFILE(R)-II and VERDICT(R)-II. The VERDICT(R)-II was developed for the prison, probation, parole and rehabilitation markets. The VERDICT(R)-II product line now consists of 13 different configurations to detect from one to five drugs of abuse. With the expansion of the sales group and additional device configurations, the Company expects significant growth of VERDICT(R)-II sales in 2001. The Company continues to develop new products in this area, including the PROFILE(R)-ER device which will be introduced in early 2001. The PROFILE(R)-ER device is an on-site, nine drugs-of-abuse panel, targeted at hospital laboratories for emergency response screening in drugs-of-abuse overdose situations. The Company received FDA approval for its PROFILE(R)-ER device and for 10 configurations of its VERDICT(R)-II product in January 2001.
Sales of contract manufacturing services, microbiological and associated products increased 31% to $1.3 million due to increased revenues from both historical customers and new customers. Product sales from agricultural diagnostic products decreased 15% to $.5 million primarily as a result of decreased purchases by the USDA for the Company's products. The USDA's needs for the Company's products vary from year-to-year and sales to the USDA are expected to fluctuate accordingly.
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 efficiencies gained at the production facility.
The Company anticipates that accelerating both the sales efforts and converting drugs-of-abuse laboratory testing to the PROFILE(R)-II on-site testing system should have a significant positive impact on the Company's consolidated gross margin in 2001. However, the Company remains vulnerable to any major overall economic downturn, such as the one experienced in the fourth quarter of 2000.
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. While this effort impacted earnings in 2000, the Company anticipates a fully staffed sales and marketing group for all of 2001, without any significant additional increase in expenses.
The Company also incurred a one-time 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 Company does not anticipate that these charges will negatively impact revenues or earnings in 2001.
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 debt levels and increasing interest rates (see Note 6 of Notes to Consolidated Financial Statements).
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 efficiencies gained at the production facility.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Revenues
Revenues increased 18% to $35.0 million in 1999 compared to $29.6 million in 1998. Revenues from Laboratory Services increased 15% to $31.0 million in 1999 primarily due to a 19% increase in laboratory tests for employment drug testing services, partially offset by an 8% decrease in average per unit prices. Revenues from Product Sales increased 59% to $4.0 million in 1999, reflecting significant growth in sales of the PROFILE(R)- II and VERDICT(R)- II on-site testing kits. Revenues from Product Sales were also favorably impacted by increased sales of agricultural diagnostic products and contract manufacturing services, microbiological and associated products.
Gross profit
Gross margin improved to 35.0% in 1999 from 31.2% in 1998. This improvement was driven by an increase in Laboratory Services gross margin of 2.8% and a 12.2% increase in Product Sales gross margin. Laboratory Services gross margin improved primarily due to cost savings and improvements in the efficiency of laboratory operations, which more than offset an 8% decrease in average per unit prices. Gross margin from Product Sales was positively impacted by the substantial increase in overall sales of products with a higher gross margin, particularly the substance abuse testing products.
Selling, general and administrative expenses
Selling, general and administrative expenses were $9.3 million or 26.7% of revenues in 1999, compared to $9.0 million or 30.3% of revenues in 1998. As a percentage of total revenues, selling, general and administrative expenses decreased primarily due to the Company's efforts to reduce and monitor operating costs. This decrease was partially offset by higher sales and marketing expenses within the Product Sales segment as a result of implementation costs associated with the introduction and sale of the Company's new generation on-site products.
Research and development expenses
Research and development expenses decreased $0.3 million, or 28%, in 1999. Laboratory Services research and development expenses declined $0.2 million or 40% primarily due to a reduction in the number of laboratory-based assays being developed in 1999 compared to 1998. Product Sales research and development expenses decreased $0.1 million or 18%, reflecting the completion of a significant portion of the development costs associated with the Company's new generation of on-site products.
Restructuring costs
The Company used $0.7 million of its restructuring reserve in 1999, which reduced the remaining balance of this reserve to $0.5 million as of December 31, 1999. The reduction in the restructuring reserve was due to payments of $0.5 million and a decrease in the reserve by an additional $0.2 million, as a result of the settlement of certain litigation brought against the Company for less than the Company had previously accrued for in 1998. The $0.2 million adjustment was recorded as a reduction in restructuring costs.
Interest expense
Interest expenses increased $0.1 million, or 21%, in 1999, principally due to higher debt levels.
Net income (loss)
Net income was $1.4 million in 1999 compared to a net loss of $2.3 million in 1998. The Laboratory Services segment achieved net income of $1.4 million in 1999 compared to a net loss of $1.4 million in 1998. The Product Sales segment recorded a net loss of $21,000 in 1999 compared to a net loss of $0.9 million in 1998. The improvement in both segments resulted from increased sales, improved gross margins and reduced operating costs.
Liquidity and Capital Resources
The working capital requirements of the Company have been funded primarily by cash received from bank financing and the sale of equity securities. Cash and cash equivalents at December 31, 2000 were $0.2 million, compared to $0.6 million at December 31, 1999.
Net cash used in operating activities was $2.0 million in 2000 compared to net cash provided by operating activities of $0.7 million in 1999. Net cash used in operating activities was $0.2 million in 1998. The decrease of $2.7 million in 2000 was primarily due to a $2.6 million net loss, as well as higher
levels of accounts receivable and inventories, partially offset by increased accrued expenses and an increase in the provision for doubtful accounts. Accounts receivable before allowance for doubtful accounts increased $1.9 million, or 26% to $9.3 million at December 31, 2000, primarily due to a significant increase in Product Sales revenues in the fourth quarter of 2000 over the corresponding quarter of 1999, as well as the impact of a slowing economy in the Laboratory Services business. Inventories increased $1.3 million, or 70%, to $3.1 million at December 31, 2000, principally to support the higher production levels of substance abuse testing products related to the year-over-year increase in sales within the Product Sales segment. The increased inventory level also resulted from additional supplies (forms, labels, and collection kits) shipped to new and existing collection sites to support a projected increase in sales volume for 2001 within the Laboratory Services segment. In 2000, the Company also revised its assumptions for calculating off-site inventory located at collection sites throughout the United States. The revised assumptions reduced the amount of expected scrap inventory and changed the projected time that a collection site uses the collection kits from three months to twelve months. Accrued expenses were $3.2 million at December 31, 2000, up $1.7 million from 1999, primarily related to the reorganization of the laboratory operations and an increase in the Company's employee health insurance costs. The increase of $0.9 million in the provision for doubtful accounts in 2000 was primarily related to a $0.5 million reserve established in connection with the bankruptcy filings of two Laboratory Services customers.
Net cash used in investing activities was $3.4 million in 2000 compared to $1.1 million and $0.9 million in 1999 and 1998, respectively. The Company's investing activities consisted primarily of equipment and capital improvement expenditures. The increased spending for equipment and capital improvement expenditures in 2000 reflected purchases primarily for Laboratory Services to improve efficiencies and reduce operating costs. The Company expects equipment and capital improvement expenditures to be between $4.0 million and $5.0 million in 2001. 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 profitable operations.
Net cash provided by financing activities was $5.0 million in 2000, compared to $1.0 million and $1.1 million in 1999 and 1998, respectively. In 2000, the Company completed a private equity placement through the sale, exclusively to accredited investors, of 550,000 units at an aggregate price of $5.5 million, or $10.00 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 $12.50.
In January 1998, the Company entered into a Credit Security Agreement (the Wells Fargo Credit Agreement) with Wells Fargo Business Credit (Wells Fargo). The Wells Fargo Credit Agreement, as amended, consists of (i) a term loan of $3.185 million bearing interest at prime + 1.25%; (ii) an overadvance term loan of $.7 million bearing interest at prime + 3%; (iii) 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 (iv) a capex note of up to $2.45 million for the purchase of capital equipment bearing interest at prime + 1.25%.
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, 2000, the Company was not in compliance with the minimum debt service coverage and minimum quarterly net income level covenants of the Wells Fargo Credit Agreement. Wells Fargo has waived the aforementioned defaults of the Company.
The Company has 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 a number of shares of common stock equal to 25% of the face amount of the subordinated notes divided by an exercise price of $3.25 per share. The Company has determined the value of the warrants at the dates of the grants to be $56,000 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 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 of credit on the revolving line of credit is based primarily on the receivables of the Company and, as such, varies with the accounts receivable, and to a lesser degree, the inventory of the Company. As of December 31, 2000, the Company had total borrowing capacity of $4.7 million on its line of credit, of which $3.7 million was borrowed, leaving a net availability of $1.0 million as of December 31, 2000.
In the short term, the Company believes that the aforementioned capital will be sufficient to fund the Company's planned operations through 2001. While there can be no assurance that the available capital will be sufficient to fund the future operations of the Company beyond 2001, the Company believes that future profitable operations, as well as access to additional capital through debt or equity financings, will be the primary means for funding the operations of the Company for the long term.
The Company continues to follow a plan which includes (i) aggressively monitoring and controlling costs, (ii) increasing revenue from sales of the Company's existing products and services (iii) developing new products and services, as well as (iv) continuing to selectively pursue synergistic acquisitions to increase the Company's critical mass. However, there can be no assurance that costs can be controlled, revenues can be increased, financing may be obtained, acquisitions successfully consummated, or that the Company will be profitable.
Impact of Inflation and Changing Prices
The impact of inflation and changing prices on the Company has been primarily limited to salary, laboratory and operating supplies and rent increases and has not been material to date to the Company's operations. In the future, the Company may not be able to increase the prices of laboratory testing by an amount sufficient to cover the cost of inflation, although the Company is responding to these concerns by refocusing the laboratory operations towards higher margin testing (including clinical and pharmaceutical trials) as well as emphasizing the marketing, sales and operations of the Product Sales business.
Seasonality
The Company believes that the laboratory testing business is subject to seasonal fluctuations in pre-employment screening. These seasonal fluctuations include reduced volume in the summer months, year-end holiday periods, and other
major holidays. In addition, inclement weather may have a negative impact on volume thereby reducing net revenues and cash flow.
ITEM 7A.
ITEM 7A. QUALITATIVE AND QUANTITATIVE 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 2000, 1999 and 1998, the Company did not have sales denominated in foreign currencies nor did it have any subsidiaries located in foreign countries. As such, the Company is not exposed to market risk associated with currency exchange rates and prices.
The Company had $575,000 of subordinated notes outstanding as of December 31, 2000 and 1999, respectively, at a fixed interest rate of 12% per annum. The Company also had capital leases at various fixed rates. These financial instruments are subject to interest rate risk and will increase or decrease in value if market interest rates change.
The Company had approximately $7.0 million and $6.6 million outstanding on its line of credit and long-term debt issued under the Wells Fargo Credit Agreement as of December 31, 2000 and 1999. 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, 2000 and 1999, a 1% change in the prime rate would not materially increase or decrease interest expense or cash flows.
ITEM 8.
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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS Initial Name Age Position with the Company Effective Date
Harry G. McCoy 49 Former President and Chairman 1996 of the Board of Directors; Director Richard J. Braun 56 Chairman of the Board of Directors, 1996 President, Chief Executive Officer Samuel C. Powell, Ph.D. 48 Director 1987 James W. Hansen 45 Director 1996 Miles E. Efron 74 Director 1997 Brian P. Johnson 51 Director 2000 James B. Lockhart 50 Chief Financial Officer and 2000 Vice President of Finance and Administration Kevin J. Wiersma 39 Vice President and Chief 1998 Operating Officer of Medtox Laboratories, Inc. James A. Schoonover 44 Vice President and Chief 2000 Marketing Officer B. Mitchell Owens 44 Vice President and Chief Operating 2000 Officer of Medtox Diagnostics, Inc.
Harry G. McCoy, Pharm.D., Dr. McCoy served as Chairman of the Board of Directors and President from July 1996 until October 26, 2000. Dr. McCoy founded MEDTOX in 1984, and served as both Clinical Director and member of the MEDTOX Board of Directors until its acquisition by the Company in January 1996. He continued as President of MEDTOX following its acquisition by the Company. Dr. McCoy also has academic appointments with the University of Minnesota and the University of North Dakota, and is Chairman and CEO of the Nova Jazz Corporation, a Minnesota non-profit company.
Richard J. Braun, MBA, JD, CPA, was named Chairman of the Board of Directors and President on October 26, 2000. Mr. Braun was named a Director and elected as Chief Executive Officer in July 1996. From 1994 until joining the Company, Mr. Braun acted as a private investor and provided management consulting services to the health care and technology industries. From 1992 until 1994, he served as Chief Operating Officer and as a Director of EBP, Inc., a NYSE company engaged in managed care. From 1989 through 1991, Mr. Braun served as Executive Vice President, Chief Operating Officer and Director of Reich and Tang L.P., a NYSE investment advisory and broker dealer firm.
Samuel C. Powell, Ph.D., served as Chairman of the Board of Directors from November 1987 to June 1994 and has served as a Director of the Company since September 1986. Dr. Powell served as Chairman of the Board and Chief Executive Officer of Granite Technological Enterprises, from January 1984 until its acquisition by the Company in June 1986. Since 1987, he has been President of Powell Enterprises, Burlington, North Carolina, offering financial and management services to a variety of businesses and real estate ventures. Additionally, Dr. Powell has been involved in local politics since 1985 as Councilman for the City of Burlington, N.C. Dr. Powell has also been appointed to serve on the North Carolina Board of Science and Technology from 1989 to 1995, and as a Board Member and Chairman of the N.C. State Alcoholism Research Authority.
James W. Hansen was named as a Director in September 1996. Mr. Hansen has, since November, 1996, been Chairman, CEO and Treasurer of Videolabs, Inc., a NASDAQ traded, technology company and is CEO of Prevention First, a development stage medical services provider. From 1986 to 1992, Mr. Hansen was Senior Vice
President and General Manager of the Pension Division of Washington Square Capital, a Reliastar company, which is a NYSE traded financial services company. Since 1992, Mr. Hansen has served as an Investor, Director, President or Vice President of several private companies in medical services and technology. He also serves as a Director of UBIQ, Inc., Videolabs, Inc. and Prevention First and has taught in the MBA program at the University of St. Thomas since 1984.
Miles E. Efron was named as a Director in January, 1997. From 1988 to 1993, Mr. Efron served as Chief Executive Officer of North Star Universal, a holding company with interests in health care, food products and computer connectivity and networking. Since 1993, Mr. Efron has served as Chairman of North Star Universal. Mr. Efron currently serves on the Board of Directors of several companies, none of which are related to the Company.
Brian P. Johnson, MBA, was named as a Director on June 5, 2000. Mr. Johnson is a general partner of Touchstone Venture Partners. Mr. Johnson holds a bachelor's degree from the University of South Dakota and a master's degree in business administration in marketing from the University of St. Thomas. He has also served on a number of civic boards in addition to business boards.
James B. Lockhart was named Chief Financial Officer on February 29, 2000. Prior to joining the Company, Mr. Lockhart practiced in the area of corporate, tax, and business planning for nearly 25 years. He has acted as an outside adviser to boards of directors of public companies on numerous issues including both operational matters and matters involving mergers and acquisition. Mr. Lockhart has also personally served as a board member of a NYSE listed public company, where he sat on the audit committee and chaired the investment committee.
Kevin J. Wiersma was named Chief Operating Officer of MEDTOX Laboratories, Inc. on July 17, 2000. Mr. Wiersma was named Secretary, Vice President and Controller on July 20, 1998. Mr. Wiersma joined MEDTOX Laboratories in 1982 and continued with the MEDTOX following its acquisition by the Company. Mr. Wiersma has served in various positions with the Company relating to finance and operations management.
James A. Schoonover was named Vice President and Chief Marketing Officer on July 17, 2000. Mr. Schoonover joined the Company in 1997 as Vice President of Business Development. Prior to joining the Company, Mr. Schoonover was a divisional Vice President for a subsidiary of Olsten Corporation and Vice President of Sales for a national collection site management company.
B. Mitchell Owens, MBA, CPIM, was named Vice President and Chief Operating Officer of MEDTOX Diagnostics, Inc. on July 17, 2000. Mr. Owens joined the Company in 1988 and has served in various positions including Director of Operations and General Manager. Prior to joining the Company, Mr. Owens was employed by GTE Technical Products Division and Kayser-Roth Corporation in related operations management positions.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The following table discloses the compensation earned by the Company's Chief Executive Officer and Former Chairman of the Board and President and the four other most highly compensated executive officers whose total annual salary exceeded $100,000 for the fiscal year ended December 31, 2000.
(1) Dr. McCoy was replaced as Chairman and President of the Company on October 26, 2000. Pursuant to the terms of the Employment Agreement dated January 1, 2000, between Dr. McCoy and the Company, Dr. McCoy is to continue to receive payments based on his combined salary and bonus for the balance of his term of employment. See Employment Contracts for further information.
(2) Mr. Braun was elected Chairman of the Board of Directors and President on October 26, 2000.
(3) Other Annual Compensation for executive officers is not reported as it is less than the required reporting threshold of the Securities and Exchange Commission.
(4) 2000 restricted stock awards were made pursuant to the Restated Equity Compensation Plan adopted by the Board of Directors effective May 10, 2000. The value of each award shown is based upon the closing market price of the Company's common stock on the date of grant ($7.88 per
share on May 1, 2000 and $12.06 per share on November 1, 2000). Awards granted under the Restated Equity Compensation Plan vest over a three year period. A total of 45,500 shares of restricted stock were granted to the executives named in the table in the respective numbers indicated: Harry G. McCoy, 5,500; Richard J. Braun, 13,000 shares; James B. Lockhart, 5,750 shares; Kevin J. Wiersma, 7,750 shares; James A. Schoonover, 6,750 shares; and B. Mitchell Owens, 6,750 shares. Any dividends declared on the Company's common stock will be paid on all shares of restricted stock granted under the Restated Equity Compensation Plan.
(5) As of December 31, 2000, the number and fair market value, based on the closing market price of the Company's common stock of $6.3125 on December 29, 2000, of the aggregate restricted stock holdings granted to the named executive officers were: Harry G. McCoy, 5,500 shares and $34,719; Richard J. Braun, 13,000 shares and $82,063; James B. Lockhart, 5,750 shares and $36,297; Kevin J. Wiersma, 7,750 shares and $48,922; James A. Schoonover, 6,750 shares and $42,609; and B. Mitchell Owens, 6,750 shares and $42,609.
(6) Not applicable. No compensation of this type received.
(7) Includes $15,060, $11,910 and $9,060 of premiums paid for by the Company for a life and disability insurance policy on Mr. Braun in 2000, 1999 and 1998, respectively.
(8) Mr. Lockhart was appointed Chief Financial Officer on February 29, 2000.
(9) Mr. Wiersma was appointed Vice President and Chief Operating Officer of MEDTOX Laboratories, Inc. on July 17, 2000.
(10) Mr. Schoonover was appointed Vice President and Chief Marketing Officer on July 17, 2000.
(11) Mr. Owens was appointed Vice President and Chief Operating Officer of MEDTOX Diagnostics, Inc. on July 17, 2000.
(12) Mr. Lockhart received a guaranteed bonus payment in 2000 as part of his compensation in the initial year of employment with the Company.
Stock Options Granted During Fiscal Year
The following table sets forth information about the stock options granted to the named executive officers of the Company during 2000.
(1) The potential realizable value of the options reported above was calculated by assuming 5% and 10% annual rates of appreciation of the common stock of the Company from the date of grant of the options until the expiration of the options. These assumed annual rates of appreciation were used in compliance with the rules of the Securities and Exchange Commission and are not intended to forecast future price appreciation of the common stock of the Company. The Company chose not to report the present value of the options, which is an alternative under Securities and Exchange Commission rules, because the Company does not believe any formula will determine with reasonable accuracy a present value based on unknown or volatile factors. The actual value realized from the options could be substantially higher or lower than the values reported above, depending upon the future appreciation or depreciation of the common stock during the option period and the timing of exercise of the options.
Stock Options Exercised During Fiscal Year and Year-End Values of Unexercised Options
The following table sets forth information about the stock options held by the named executive officers of the Company at December 31, 2000.
(1) The closing price of the Common Stock of the Company at December 31, 2000 was $6.3125 per share.
Long-Term Incentive Plans and Pension Plans
The Company does not contribute to any Long-Term Incentive Plan or Pension Plan for its executive officers as those terms are defined in the rules of the Securities and Exchange Commission. The Company relies on its stock option and restricted stock plans to provide long-term incentives for executive officers. The Company has three stock option plans: a 1983 Stock Option Plan for employees which expired on June 23, 1993; the Restated Equity Compensation Plan which was originally adopted by the shareholders of the annual meeting in 1993 to replace the 1983 Incentive Stock Option Plan and was restated and adopted by the Board of Directors on May 10, 2000; and a 1991 Non-Employee Director's Plan for members of the Board of Directors who are not employees of the Company. In addition, the Company has granted separately to various existing and former executive employees, including Mr. Braun and Dr. McCoy, non-qualified options to purchase shares of the Company's Common Stock.
Compensation of Directors
All directors who are not employees of the Company receive $500 per month for their service as a director. All directors are also reimbursed for expenses incurred in attending board of directors' meetings and participating in other activities.
Employment Contracts
Harry G. McCoy, former Chairman of the Board of Directors and former President of the Company, has an employment agreement with the Company dated January 1, 2000. The initial term of the agreement is through December 31, 2002, and thereafter is renewed automatically for one-year terms unless otherwise terminated in accordance with the terms of the agreement. The agreement provides for an annual base salary of $225,000 and additional bonuses, fringe benefits and grants of restricted stock which, except for the fringe benefits, are performance based. The agreement also provides for a Severance Award equal to base salary, health insurance and bonus plan payments for the greater of twelve (12) months or the then remaining term of employment under the agreement. The Severance Award is payable following termination by the Company other than for
cause, or if the employee voluntarily terminates following (i) a change in control; (ii) any relocation of greater than fifty (50) miles; or (iii) any material reduction in the level of the employee's responsibility, position, authorities or duties; or (iv) the Company breaches any of its obligations under the Agreement.
The employment agreement contains a covenant not to compete whereby for a period of twelve (12) months after the termination of employment with the Company, the employee agrees that they will not, directly or indirectly, either (a) have any interest in (b) enter the employment of, (c) act as agent, broker, or distributor for or advisor or consultant to, or (d) provide information useful in conducting the business of the Company to solicit customers or employees on behalf of the Company to any person, firm, corporation or business entity which is engaged, or which employee reasonably knows is undertaking to become engaged, in the United States in the business of the Company.
Richard J. Braun, Chairman of the Board of Directors, President, and Chief Executive Officer, has an employment agreement with the Company dated January 1, 2000. The initial term of the agreement is through December 31, 2002, and thereafter is renewed automatically for one-year terms unless otherwise terminated in accordance with the terms of the agreement. The agreement provides for an annual base salary of $250,000 and additional bonuses, fringe benefits and grants of restricted stock which, except for the fringe benefits, are performance based. The agreement also provides for a Severance Award equal to base salary, health insurance and bonus plan payments for the greater of twelve (12) months or the then remaining term of employment under the agreement. The Severance Award is payable following termination by the Company other than for cause, or if the employee voluntarily terminates following (i) a change in control; (ii) any relocation of greater than fifty (50) miles; or (iii) any material reduction in the level of the employee's responsibility, position, authorities or duties; or (iv) the Company breaches any of its obligations under the Agreement.
The employment agreement contains a covenant not to compete whereby for a period of twelve (12) months after the termination of employment with the Company, the employee agrees that they will not, directly or indirectly, either (a) have any interest in (b) enter the employment of, (c) act as agent, broker, or distributor for or advisor or consultant to, or (d) provide information useful in conducting the business of the Company to solicit customers or employees on behalf of the Company to any person, firm, corporation or business entity which is engaged, or which employee reasonably knows is undertaking to become engaged, in the United States in the business of the Company..
The Company has entered into severance agreements with James B. Lockhart, Kevin J. Wiersma, James A. Schoonover and B. Mitchell Owens, at various times in 2000 as each individual was appointed to the position of Vice President. The initial term of the severance agreement is one year and each shall automatically be extended for one additional year unless, not later than July 1 of the preceding year, either the Company or the individual provides written notice to the other party or unless the agreement is otherwise terminated due to death, permanent disability, or for "cause." If during the term of the severance agreement, the Company terminates the employment of the individual other than for "cause," the individual shall be entitled to a severance award. The severance award consists of payment of an amount equal to the individual's then current base salary plus certain health benefits over the course of the twelve month period following the date of the individual's termination.
The severance agreements for Mr. Lockhart, Mr. Wiersma, Mr. Schoonover and Mr. Owens agreement contain a covenant not to compete whereby the individual agrees that during the twelve (12) month period following the Date of Termination during which the individual receives severance payments, the individual will not directly or indirectly own, manage, operate, control, be employed by, participate in or be connected in any manner with the ownership, management, operation or control of any business providing or delivering products or services which compete with the business, products or services of the Company or its affiliates, in the geographic markets in which the Company operates.
Compensation Committee and Decision Making
The compensation of executive officers of the Company for 2000 was determined by the Compensation Committee which is currently comprised of James W. Hansen, Miles E. Efron, and Samuel C. Powell. Stock options are awarded under the Company's Restated Equity Compensation Plan and Non-Employee Director Plan by the Compensation Committee. All non-employee directors were eligible to receive stock options under the Company's 1991 Non-Employee Director Plan.
Report of the Compensation Committee on Executive Compensation
In General
The Committee has three primary goals for executive compensation at the Company.
o Retaining good performers, o Rewarding executives appropriately for performance, and o Aligning executives' interests with those of stockholders.
Currently, executive pay consists of three elements that are designed to meet those objectives:
o Base salary is paid based primarily on job responsibilities and industry job comparison. The Committee believes that base salaries at approximately industry averages are essential to retaining good performers. o Stock options, which allow executives to benefit when the market price of the Company's stock increases. o Bonuses to be paid upon the attainment of certain financial objectives and individual circumstances when warranted.
Following is additional information regarding each of the above elements.
Base Salary
Base salary increases for executive officers have been modest and consistent with job performance and increases in responsibility.
Bonus
James B. Lockhart received a guaranteed bonus payment in 2000 as part of his compensation in the initial year of employment with the Company.
Stock Options
In 2000, certain executive officers received incentive stock options to purchase a total of 75,000 shares. The number of options granted to the executive officers represented 72% of the total options granted in 2000 to all employees.
Restricted Stock
In 2000, certain executive officers received restricted stock awards for a total of 45,500 shares. The number of restricted stock awards granted to the executive officers represented 82% of the total restricted stock awards granted in 2000 to all employees.
Summary
Currently, the Company's executive compensation program rewards the following elements of performance.
o Individual performance is rewarded through continued employment with the Company. o Stock price performance is rewarded through increases in the value of stock options. o Financial performance of the Company is rewarded through payments of bonuses upon the attainment of certain financial goals
The Committee believes that the current program has been effective in rewarding executives appropriately for performance, retaining good performers, and aligning executives' interests with those of stockholders. While the Committee is satisfied with the current compensation system, it reserves the right to make changes to the program as are necessary to continue to meet its stated goals in future years.
Benefits also are offered to officers that are not based on performance. Such benefits provide a safety net of protection in the event of illness, disability, death, retirement, etc. Such a safety net is provided to all full time employees of the Company.
Chief Executive Officer Pay
Amounts earned during 2000 by the Chief Executive Officer, Richard J. Braun, are shown in the Summary Compensation Table. Achievements by the Company which were deemed material to the Chief Executive Officer's compensation include record increases in total revenue, record growth of the Diagnostic segment of the Company and new product development. For the year ended December 31, 2000, the Compensation Committee used, in its deliberations on executive compensation, these criteria and other accomplishments.
Submitted by the Compensation Committee of the Company's Board of Directors
James W. Hansen Miles E. Efron Samuel C. Powell
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information available to the Company as of March 20, 2001 regarding the beneficial ownership of the common stock by (i) each person known by the Company to beneficially own more than five percent (5%) of the outstanding common stock, (ii) each of the Directors, (iii) the Chief Executive Officer and all executive officers whose compensation was $100,000 or greater during 2000, and (iv) all executive officers and Directors of the Company as a group:
- ----------
* Less than one percent (1%)
1. Includes 81,745 shares of common stock issuable under options which are or which will become exercisable within the next 60 days. Also includes 5,500 shares of restricted stock which will not become vested until 5/1/03.
2. Includes 116,177 shares of common stock issuable under options which are or which will become exercisable within the next 60 days. Also includes 5,500 shares of restricted stock which will not become vested until 5/1/03 and 7,500 shares which will not become vested until 11/1/03.
3. Includes 8,080 shares of common stock issuable under stock options and 7,692 shares of common stock issuable under common stock purchase warrants which are or will become exercisable within the next 60 days.
4. Includes 10,796 shares of common stock issuable under stock options which are or will become exercisable within the next 60 days.
5. Includes 7,080 shares of common stock issuable under stock options which are or will become exercisable within the next 60 days.
6. Includes 1,714 shares of common stock issuable under stock options and 3,846 shares of Common Stock issuable under common stock purchase warrants and which are or will become exercisable within the next 60 days.
7. Includes 12,831 shares of common stock issuable under stock options and 5,769 shares of common stock issuable under common stock purchase warrants and which are or will become exercisable within the next 60 days. Also includes 2,000 shares of restricted stock which will not become vested until 5/1/03 and 3,750 shares which will not become vested until 11/1/03.
8. Includes 19,691 shares of common stock issuable under stock options which are or will become exercisable within the next 60 days. Also includes 4,000 shares of restricted stock which will not become vested until 5/1/03 and 3,750 shares which will not become vested until 11/1/03.
9. Includes 23,787 shares of common stock issuable under options which are or will become exercisable within the next 60 days. Also includes 3,000 shares of restricted stock which will not become vested until 5/1/03 and 3,750 shares which will not become vested until 11/1/03.
10. Includes 22,691 shares of common stock issuable under options which are or will become exercisable within the next 60 days. Also includes 3,000 shares of restricted stock which will not become vested until 5/1/03 and 3,750 shares which will not become vested until 11/1/03.
11. Includes 321,899 shares of common stock issuable under options or warrants which are or will become exercisable within the next 60 days and 45,500 shares of restricted stock.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Lease Agreement with Dr. Samuel C. Powell
In July 1986, the Company executed a lease agreement with Dr. Powell providing for a lease to the Company of approximately 16,743 square feet of space at 1238 Anthony Road, Burlington, North Carolina. Since 1986, the Company has expanded the space rented under the lease to approximately 33,000 square feet. For the last several years, the Company has leased this same approximately 33,000 square feet on a month-to-month basis at an annual base rent, excluding operating cost, of approximately $121,000. Effective March 28, 2001, the Company entered into a 10-year lease of the entire building (approximately 39,500 square feet) at the same location for an annual base rent of $197,000, exclusive of certain operating expenses. In addition, under the lease the Company will have available to it, 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.
PART IV
ITEM 14
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
a. (i) Financial Statements Page --------------------
Independent Auditors' Report ............ 43 Consolidated Balance Sheets at December 31, 2000 and 1999...................... 44 Consolidated Statements of Operations for the Years Ended December 31, 2000, 1999 and 1998.................... 45 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2000, 1999 and 1998.......................... 46 Consolidated Statements of Cash Flows for the Years Ended December 31, 2000, 1999 and 1998....... 47 Notes to Consolidated Financial Statements............................. 48
(ii) Consolidated Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts ................... 64
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).
10.2 Registrant's Stock Option Plan (as amended and restated) (incorporated by reference to Exhibit 10.2 filed with the Registrant's Report on Form 10-K for the fiscal year ended December 30, 1990).
10.3 Second Amendment dated December 31, 1986 to Exclusive License Agreement amending and restating exclusive license granted by the Registrant to Disease Detection International, Inc. (incorporated by reference to Exhibit 10.25 filed with the Registration Statement on Form S-1 dated August 26, 1987, Commission File No. 33-15543).
10.5 Non-Qualified Stock Option Agreement between the Registrant and James D. Skinner dated as of July 1, 1987 (incorporated by reference to Exhibit 10.26 filed with the Registrant's Registration Statement on Form S-1 dated August 26, 1987, Commission File No. 33-15543).
10.6 Non-Qualified Stock Option Agreement between the Registrant and James D. Skinner (incorporated by reference to Exhibit 10.17 filed with the Registrant's Form 10-K for the fiscal year ended December 31, 1988).
10.7 Non-Qualified Stock Option Agreement between the Registrant and James D. Skinner dated as of August 10, 1988 (incorporated by reference to Exhibit 10.18 filed with the Registrant's Form 10-K for the fiscal year ended December 31, 1987).
10.8 Lease Agreement, dated as of June 1, 1989 between Samuel C. Powell, as lessor, and EDITEK, as lessee relating to premises located at 1238 Anthony Road, Burlington, North Carolina (incorporated by reference as filed with the Registrant's report on Form 10-Q for the quarter ended June 30, 1989).
10.12 Stock Option Agreement dated May 4, 1990 between the Registrant and Samuel C. Powell amending and restating the Non-Qualified Stock Option Agreement between the Registrant and Samuel C. Powell dated as of May 23, 1988. (Incorporated by reference to Exhibit 10.34 filed with the Registrant's Form 10-K for the fiscal year ended December 31, 1990).
10.13 Loan Modification Agreement dated May 3, 1990 between the Registrant and James D. Skinner regarding the Promissory Note dated as of September 10, 1988 by James D. Skinner to the Registrant. (Incorporated by reference to Exhibit 10.36 filed with the Registrant's Form 10-K for the fiscal year ended December 31, 1990).
10.14 Stock Purchase Agreements dated as of July 19, 1991 between the Registrant and Walter O. Fredericks, Peter J. Heath, Samuel C. Powell, and James D. Skinner. (Incorporated by reference to Exhibit (a) filed with the Registrant's Form 10-Q for the quarter ended June 30, 1991).
10.15 Form of Stock Purchase Agreement dated as of September 3, 1992 between the Registrant and Purchasers of EDITEK's common stock in a private placement on September 3, 1992. (Incorporated by reference in Exhibit 10.46 filed with the Registrant's Form 10-K for the fiscal year ended December 31, 1992).
10.16 Agreement and Plan of Merger between the Registrant, PDLA Acquisition Corporation, and Princeton Diagnostic Laboratories of America, Inc. dated October 12, 1993. (Incorporated by reference to Exhibit (a) filed with the Registrant's Form 10-Q for the quarter ended December 31, 1993.)
10.17 Registrant's Amended and Restated Stock Option Plan for non-employee directors (incorporated by reference to Exhibit 4 filed with the Registrant's Registration Statement on Form S-8 dated February 21, 1995, Commission File No. 33-89646).
10.18 Registrant's Equity Compensation Plan (incorporated by reference to Exhibit 4 filed with the Registrant's Registration Statement on Form S-8 dated November 11, 1993, Commission File No. 33-71490).
10.19 Registrant's Amended and Restated Qualified Employee Stock Purchase Plan (incorporated by reference to Exhibit 4 filed with the Registrant's Registration Statement on Form S-8 dated November 11, 1993, Commission File No. 33-71596).
10.20 Non-Qualified Stock Option Agreement between the Registrant 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).
10.24 Assignment Agreement dated as of January 10, 1996 between and among the Registrant, MEDTOX Laboratories, Inc. and Psychiatric Diagnostic Laboratories of America, Inc. (incorporated by reference to Exhibit 10.3 filed with the Registrant's Report on Form 8-K dated January 30, 1996).
10.25 Amendment Agreement dated as of January 30, 1996 among the Registrant, MEDTOX Laboratories, Inc. and Psychiatric Diagnostic Laboratories of America, Inc. (incorporated by reference to Exhibit 10.25 filed with the Registrant's Report on Form 10-K for the fiscal year ended December 31, 1996.)
10.26 Loan and Security Agreement (together with the Exhibits and Schedules thereto) by and between the Registrant, Psychiatric Diagnostic Laboratories of America, Inc., diAGnostix, inc. and Heller Financial, Inc. dated January 30, 1996 (incorporated by reference to Exhibit 10.4 filed with the Registrant's Report on form 8-K dated January 30, 1996).
10.27 Term Note A executed by the Registrant, Psychiatric Diagnostic Laboratories of America, Inc.and diAGnostix in favor of Heller Financial, Inc. dated January 30, 1996 (incorporated by reference to Exhibit 10.5 filed with the Registrant's Report on Form 8-K dated January 30, 1996).
10.28 Term Note B executed by the Registrant, Psychiatric Diagnostic Laboratories of America,Inc. and diAGnostix in favor of Heller Financial, Inc., dated January 30, 1996 (incorporated by reference to Exhibit 10.6 filed with the Registrant's Report on Form 8-K dated January 30, 1996).
10.29 Assignment for Security (Patents) executed by the Registrant in favor of Heller Financial, Inc., dated January 30, 1996 (incorporated by reference to Exhibit 10.7 filed with the Registrant's Report on Form 8-K dated January 30, 1996).
10.30 Assignment for Security - EDITEK (Trademarks) executed by the Registrant in favor of Heller Financial, Inc., dated January 30, 1996 (incorporated by reference to Exhibit 10.8 filed with the Registrant's Report on Form 8-K dated January 30, 1996).
10.31 Assignment for Security-Princeton (Trademarks)executed by Princeton Diagnostic Laboratories of America,
Inc. in favor of Heller Financial, Inc., dated January 30, 1996 (incorporated by reference to Exhibit 10.9 filed with the Registrant's Report on Form 8-K dated January 30, 1996).
10.32 Lease Agreement between MEDTOX Laboratories, Inc. and Phoenix Home Life Mutual Ins. Co. dated April 1, 1992, and amendments thereto (incorporated by reference to Exhibit 10.10 filed with the Registrant's Report on Form 8-K dated January 30, 1996).
10.33 Employment Agreement between the Registrant and Harry G. McCoy dated January 30, 1996. (Incorporated by reference to Exhibit 10.33 filed with the Registrant's Report on Form 10-K for the fiscal year ended December 31, 1995.)
10.34 Registrant's Amended and Restated Equity Compensation Plan (increasing shares to 3,000,000). (Incorporated by reference to Exhibit 10.34 filed with the Registrant's Report on Form 10-K for the fiscal year ended December 31, 1995.)
10.35 Asset Purchase Agreement dated as of May 31, 1995 between the Registrant, Bioman Products, Inc. and NOVAMANN International, Inc. (Incorporated by reference to Exhibit 10.35 filed with the Registrant's Report on Form 10-K for the fiscal year ended December 31, 1995.)
10.36 Securities Purchase Agreement dated January 31, 1996 between the Registrant and Harry G. McCoy. (Incorporated by reference to Exhibit 10.36 filed with the Registrant's Report on Form 10-K for the fiscal year ended December 31, 1995.)
10.37 Registration Rights Agreement dated February 1, 1996 between the Registrant and Harry G. McCoy. (Incorporated by reference to Exhibit 10.37 filed with the Registrant's Report on Form 10-K for the fiscal year ended December 31, 1995.)
10.38 Agreement regarding rights to "MEDTOX" 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.)
10.45 Employment 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.)
b. Reports on Form 8-K
On December 5, 2000, the Company announced that it would take a $500,000 charge against earnings in the quarter ended December 31, 2000. The reserve is for potential losses attributable to the Chapter 11 bankruptcy filings reported earlier in 2000 by both Safety-Kleen Corp and Southern Medical Arts Companies.
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 MEDTOX SCIENTIFIC, INC. Report on Form 10-K For year ended December 31, 2000
INDEX TO EXHIBITS FILED SEPARATELY WITH FORM 10-K
EXHIBIT # DESCRIPTION OF EXHIBIT
4.3 Form of Warrant accompanying the Stock Purchase Agreement dated July 31, 2000.
10.46 Registrant's Restated Equity Compensation Plan dated May 10, 2000.
10.47 Form of Severance Agreement between the Registrant and James B. Lockhart, James A. Schoonover, B. Mitchell Owens, and Kevin J. Wiersma.
10.48 Purchase and Sale Agreement dated July 27, 2000 by and between the Registrant and NMRO, Inc.
10.50 Registration Rights Agreement dated July 31, 2000 among the Registrant, certain investors, and Miller, Johnson, & Kuehn, Inc. ("MJK").
10.51 Stock Purchase Agreement dated July 31, 2000 between the Registrant and certain investors.
10.52 Purchase and Sale Agreement dated December 29, 2000 by and between MEDTOX Laboratories, Inc. and PHL-OPCO, LP.
10.53 Mortgage and Security Agreement dated March 16, 2001 by and between New Brighton Business Center LLC and Principal Life Insurance Company.
10.54 Secured Promissory Note dated March 16, 2001 by and between New Brighton Business Center LLC and Principal Life Insurance Company.
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 2001.
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, 2001 Richard J. Braun and Chairman of the Board of Directors (Principal Executive Officer)
/s/ James B. Lockhart Chief Financial Officer and Vice March 28, 2001 James B. Lockhart President of Finance and Administration (Principal Financial Officer)
/s/ Kari L. Golembeck Controller March 28, 2001 Kari L. Golembeck (Principal Accounting Officer)
/s/ Samuel C. Powell Director March 28, 2001 Samuel C. Powell, Ph.D.
/s/ Miles E. Efron Director March 28, 2001 Miles E. Efron
/s/ James W. Hansen Director March 28, 2001 James W. Hansen
/s/ Brian P. Johnson Director March 28, 2001 Brian P. Johnson
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, 2000 and 1999 and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2000. 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, 2000 and 1999 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2000, 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 23, 2001 (March 16, 2001 as to Note 15)
MEDTOX SCIENTIFIC, INC.
See notes to consolidated financial statements.
MEDTOX SCIENTIFIC, INC.
See notes to consolidated financial statements.
MEDTOX SCIENTIFIC, INC.
See notes to consolidated financial statements.
MEDTOX SCIENTIFIC, INC.
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) and MEDTOX Diagnostics, Inc. (MEDTOX Diagnostics) (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.
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. Concentration of credit risk is limited due to the large number of customers to which the Company sells its products and services. The Company extends credit based on an evaluation of the customer's financial condition, and receivables are generally unsecured. The Company provides an allowance for doubtful accounts equal to the estimated losses expected to be incurred in the collection of accounts receivable.
Inventories - Inventories are valued at the lower of cost (first-in, first-out method) or market.
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 and customer lists are amortized on a straight-line basis over the expected periods to be benefited, generally 20 years. 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 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, 2000 and 1999.
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 when services are provided. Revenues from Product Sales are recognized when the products are shipped.
In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements. SAB No. 101 summarizes the SEC staff's views in applying generally accepted accounting principles to recognition, presentation, and disclosure of revenue in financial statements. During the fourth quarter of 2000, the Company performed a review of its revenue recognition policies and determined that it is in compliance with the guidance provided in SAB No. 101.
Freight charges to customers are included in product sales and freight costs are included in cost of sales, in accordance with EITF No. 00-10, Accounting for Shipping and Handling Fees and Costs.
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 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 amounts of the line of credit and long-term debt are considered to be representative of their respective fair values as their interest rates are based on market rates.
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 2000, 1999, or 1998.
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 2000, 1999 and 1998, comprehensive earnings (loss) for the Company were equivalent to net earnings (loss) as reported.
Derivative Instruments and Hedging Activities - On 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.
Reclassifications - Certain reclassifications have been made to the 1999 and 1998 consolidated financial statements to conform with the 2000 presentation. These reclassifications had no effect on net earnings (loss) or total stockholders' equity as previously reported.
2. ACQUISITION
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 intends to depreciate 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 are not material to the financial condition or results of operations of the Company.
3. SEGMENTS
The Company has two reportable segments: Lab Services and Product Sales. The Lab Services segment consists of MEDTOX Laboratories. Services provided include forensic toxicology, clinical toxicology, heavy metals analyses, courier delivery, and medical surveillance. The Product Sales segment consists of MEDTOX Diagnostics. Products manufactured include easy to use, inexpensive, on-site drug tests such as PROFILE(R)-II, EZ-SCREEN and VERDICT(R)-II.
The Company's reportable segments are strategic business units that offer different products and services. They are managed separately as each business requires different products, services and marketing strategies.
In evaluating financial performance, management focuses on net income as a segment's measure of profit or loss. The accounting policies of the segments are the same as those described in the summary of significant accounting policies (see Note 1).
4. INVENTORIES
Inventories consisted of the following at December 31: (In thousands) 2000 1999
Raw materials $ 910 $ 462 Work in process 322 230 Finished goods 373 126 Supplies 1,447 978 -------- -------- $ 3,052 $ 1,796 ======== ========
5. EQUIPMENT AND IMPROVEMENTS
Equipment and improvements consisted of the following at December 31: (In thousands) 2000 1999
Furniture and equipment $ 12,222 $ 12,820 Leasehold improvements 1,566 1,354 --------- --------- 13,788 14,174 Less accumulated depreciation (8,577) (11,358) --------- --------- $ 5,211 $ 2,816 =========== ===========
Depreciation expense was $1.5 million, $1.3 million and $1.4 million for the years ended December 31, 2000, 1999 and 1998, respectively.
6. DEBT
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 (Wells Fargo). The Wells Fargo Credit Agreement, as amended, consists of (i) a term loan of $3.185 million bearing interest at prime + 1.25%; (ii) an overadvance term loan of $0.7 million bearing interest at prime + 3%; (iii) 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 (iv) a capex note of up to $2.45 million for the purchase of capital equipment bearing interest at prime + 1.25%.
At December 31, 2000, $3.7 million was outstanding under the revolving line of credit, and $1.0 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 9.5% and 8.5% for the years ended December 31, 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, 2000, the Company was not in compliance with the minimum debt service coverage and minimum quarterly net income level covenants of the Wells Fargo Credit Agreement. Wells Fargo has waived the aforementioned defaults of the Company.
Subordinated Debt - The Company has 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 a number of shares of common stock equal to 25% of the face amount of the subordinated notes divided by an exercise price of $3.25 per share. The Company has determined the value of the warrants at the dates of the grants to be $56,000 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.
Interest paid for all outstanding debt was $0.9 million, $0.8 million and $0.6 million for the years ended December 31, 2000, 1999 and 1998, respectively.
7. STOCKHOLDERS' EQUITY
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 550,000 units at an aggregate price of $5.5 million, or $10.00 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 $12.50. In connection with the private placement, the Company also issued warrants to the placement agent to purchase 55,000 shares of common stock at an exercise price of $12.50 per share. The warrants are currently exercisable and expire five years from the date of issuance.
At December 31, 2000, 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
Subordinated notes 12% $ 3.25 December 15, 1999 to 44,230 December 31, 2001
Private equity placement $ 12.50 July 31, 2000 to 495,000 July 30, 2005
Private equity placement $ 12.50 August 31, 2000 to 110,000 August 30, 2005
In addition, at December 31, 2000, 167,842 shares of common stock were reserved for future issuances under the stock option plans discussed in Note 8.
In September 1998, the Company's Board of Directors authorized and declared a dividend of one preferred share purchase right for each
common share 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. Each Right entitles its 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.
8. 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, 2000:
Nonqualified Stock Options - At December 31, 2000, 1999 and 1998, the Company had 99,999, 102,054 and 102,054, 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 $8.75, $10.42 and $10.42, at December 31, 2000, 1999, and 1998, 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 made to certain key employees as an incentive for the performance of future services that will contribute materially to the successful operation of the Company. In 2000, the Company awarded 55,250 restricted shares to certain key employees with a restriction period of three years. The awards had a market value of $541,000 on the date of the grants, which 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 $69,000 in 2000.
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 150,000. 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 7,703, 2,416 and 4,891 during the years ended December 31, 2000, 1999, and 1998, respectively. As of December 31, 2000, 119,422 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)
The weighted average fair value of options granted in 2000, 1999, and 1998 was $6.17, 1.97 and $5.22 per share, respectively.
9. 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)
Options and warrants to purchase 253,743 shares of common stock were outstanding during 1999 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 1,157,366 and 197,227 shares of common stock were outstanding during 2000 and 1998 and were excluded from the computation of dilutive earnings per share as their inclusion would have been anti-dilutive due to net losses in those years.
10. LEASES
The Company leases office and research facilities from a director under a month-to-month operating lease. Rental payments to the director were approximately $121,000, $121,000, and $122,000 for the years ended December 31, 2000, 1999 and 1998, respectively.
The Company leases other offices and facilities and office equipment under certain operating leases, which expire on various dates through August 2007. Under the terms of the facility leases, a pro rata share of operating expenses and real estate taxes are charged as additional rent. See also Note 11 regarding restructuring costs relative to certain facility leases. The Company subleases one of its facilities to another party whereby that party makes payments directly to the lessor.
As of December 31, 2000, the Company is obligated for future minimum lease payments (excluding payments under the leases vacated as part of the 1997 restructuring discussed in Note 11) without regard for sublease payments under noncancelable leases as follows: (In thousands) Capital Operating Leases Leases
2001 $ 274 $ 675 2002 246 495 2003 87 487 2004 72 433 2005 65 351 2006 and thereafter 7 1,286 -------- -------- 751 $ 3,727 ======== Amount representing interest 112 -------- Present value of net minimum 639 lease payments Less current portion 221 -------- Long-term capital lease obligations $ 418 ========
Rent expense (including amounts for the facilities leased from the director) amounted to $1.2 million, $0.8 million and $0.8 million for the years ended December 31, 2000, 1999 and 1998, respectively.
11. RESTRUCTURING COSTS
In 1996, the Company closed two facilities located in Illinois and New Jersey and recorded restructuring costs relating to the remaining lease obligations and to the reduction in its work force at those facilities.
In 1998, restructuring reserves increased by $0.4 million to $1.2 million at December 31, 1998. An increase in the estimate of the required reserve of $0.7 million resulted from preliminary unfavorable
court rulings relative to certain lease contingencies originally accrued for in 1996. In addition, the reserve decreased by $0.3 million as a result of payments made pursuant to the lease obligations with both facilities.
In 1999, restructuring reserves decreased by $0.7 million to $0.5 million, due to payments of $0.5 million pursuant to the lease obligations with both facilities and a decrease in the reserve of $0.2 million due to a more favorable settlement of certain lease contingencies originally accrued for in 1998.
In 2000, restructuring reserves decreased by $0.3 million to $0.2 million at December 31, 2000 due to payments of $0.1 million pursuant to the lease obligations with both facilities. The final payment for the Illinois facility is due July 1, 2001. All payments have been made for the New Jersey facility.
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)
Following is a reconciliation of federal income tax at the statutory rate of 34% to the actual income taxes provided for:
At December 31, 2000, the Company had net operating loss carryforwards (NOL) of approximately $35.2 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 might not be realized.
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, 2000, 1999 and 1998 was $0.2 million, $0.1 million and $0.1 million, respectively.
14. COMMITMENTS AND CONTINGENCIES
In February 1999, the Company settled a claim of patent infringement brought against the Company by United States Drug Testing Laboratories on August 20,1996. The Company, while denying any infringement, has settled the case by paying United States Drug Testing Laboratories $17,500 and issuing United States Drug Testing Laboratories 2,500 shares of common stock. The Company had previously accrued for this contingency. Accordingly, the settlement of this matter did not affect results of operations for the year ending December 31, 1999. Under the MEDTOX Laboratories acquisition agreement, pursuant to which the Company originally acquired MEDTOX Laboratories, Inc., the sellers of MEDTOX Laboratories, Inc. agreed to remain liable for any and all damages for any patent infringement which was alleged to have occurred prior to the closing of the Company's purchase of MEDTOX Laboratories, Inc. The acquisition agreement also provided for the sellers to indemnify and hold
the Company harmless from and against any damages, loss, liability or expense, including reasonable attorneys' fees and court costs in connection with any infringement which was alleged to have occurred before the closing date. It is the Company's opinion that it is entitled to recover $79,000 in damages from the sellers in accordance with the above referenced provisions of the acquisition agreement. The parties have agreed that the matter may be arbitrated in Minneapolis, Minnesota rather then in Chicago as required by the original acquisition agreement. Management expects this matter will be finally resolved prior to the end of calendar year 2001.
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 16b of the Securities and Exchange Act of 1934 and seeking recovery of more than $500,000 in short-swing profits. Messrs. David and Alex Bistricer are former directors of the Company. On August 4, 1997, the U.S. District Court dismissed the Company's complaint and on October 29, 1997, the Company filed an appeal of that decision to the United States Court of Appeals for the Eighth Circuit. On July 21, 1998, the Eighth Circuit reversed the District Court dismissal and remanded the case to the District Court. On June 3, 1999 the U.S. District Court found that Morgan Capital had violated Section 16(b) and ordered Morgan Capital to pay the Company damages of $551,000 plus interest. On or about September 30, 2000 the parties entered into a Stipulation and Mutual Release dismissing with prejudice all claims and counterclaims between the parties regarding the transaction other then the Company's Section 16(b) claim against the former stockholder, Morgan Capital. The parties entered into this Stipulation along with an Escrow Agreement requiring Morgan Capital to deposit into escrow 72,500 shares of publicly registered common stock of the Company as collateral to secure payment by Morgan Capital of the judgment to be entered in favor of the Company in the amount of $675,000 plus any post-judgment interest. The Federal District Court entered such judgment in favor of the Company on October 17, 2000. Morgan Capital subsequently appealed the Federal District Court's decision to the Eighth Circuit Court of Appeals. The parties have completed and filed their respective appeal briefs with the Eighth Circuit Court of Appeals. The parties are now awaiting the scheduling of oral arguments which should occur sometime in 2001. The Company has not recorded a receivable for this amount due to the uncertainty of this matter.
In March 2000, the Company was served with a copy of a complaint filed against the Company in the Circuit Court of Cook County, Illinois, by the Plaintiff, The Methodist Medical Center of Illinois. The Plaintiff is alleging that the Company interfered with various contractual relationships of the Plaintiff in connection with the referral of certain customers to the Company by other defendants previously sued by the Plaintiff in the same action. The Company has filed a cross claim against the other defendants in the litigation based on such defendants' contractually obligation to indemnify the Company against any damages, costs or expense (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 are now engaged in pretrial discovery while at the same time settlement negotiations are underway between the parties. While it is too early to be confident as to the ultimate resolution of this matter, in light of the nature of plaintiff's claims, the nature of the discovery to date, the co-defendants indemnification obligation and the relative positions of the parties during the settlement discussion, management does not expect the ultimate resolution of this matter to have a material impact on the Company's financial condition or results of operations.
In January 2001, the Company was contacted by counsel for one of the Company's shareholders who had purchased stock in the Company's private
placement in August 2000. The shareholder's counsel expressed the view that the decline in the Company's stock in December was directly attributable to the Company's announcement of a charge to earnings in the fourth quarter due to the bankruptcy filings of two of its customers. Counsel asserted that since the bankruptcy filing by one of the customers had occurred prior to the closing of the private placement, the Company should have disclosed the fact of that filing in connection with the private placement. The Company is unable to ascertain whether the shareholder will actually pursue the matter through litigation.
15. SUBSEQUENT EVENT
On March 16, 2001 the Company purchased the entire three building complex with a total of 129,039 square feet, which included the 53,576 square feet formerly leased by the Company's Laboratory Services segment. The purchasing entity was New Brighton Business Center LLC, a wholly owned limited liability company, established by the Company for the sole purpose of purchasing the entire three building complex. The selling entity was PHL-OPCO, LP, a Delaware limited partnership, which was an unrelated third party who had operated the facility as its landlord until the sale 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.
16. QUARTERLY INFORMATION (UNAUDITED) (In thousands, except per share amounts)
(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
(1) Uncollectible accounts written off, net of recoveries. (2) Represents payments of lease obligations and an increase of estimate on future lease payments. (3) Represents payments of lease obligations. (4) Represents a decrease in reserves due to a more favorable settlement of certain lease Contingencies originally accrued for in 1998.