-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VJsECZkam1F707nGJxOI8AFarUzCUYLIzYzzjP0o4nt+i5uoA2UBXpHQT08R5Qym 1X+e1ZedNPaZ3W4Bz/HzCQ== 0000739944-01-000002.txt : 20010329 0000739944-01-000002.hdr.sgml : 20010329 ACCESSION NUMBER: 0000739944-01-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010328 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MEDTOX SCIENTIFIC INC CENTRAL INDEX KEY: 0000739944 STANDARD INDUSTRIAL CLASSIFICATION: IN VITRO & IN VIVO DIAGNOSTIC SUBSTANCES [2835] IRS NUMBER: 953863205 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-11394 FILM NUMBER: 1582463 BUSINESS ADDRESS: STREET 1: 402 WEST COUNTY ROAD D CITY: ST PAUL STATE: MN ZIP: 55112 BUSINESS PHONE: 6126367466 MAIL ADDRESS: STREET 1: 402 WEST COUNTY ROAD D CITY: ST PAUL STATE: MN ZIP: 55112 FORMER COMPANY: FORMER CONFORMED NAME: EDITEK INC DATE OF NAME CHANGE: 19940902 FORMER COMPANY: FORMER CONFORMED NAME: ENVIRONMENTAL DIAGNOSTICS INC DATE OF NAME CHANGE: 19920703 10-K 1 0001.txt 2000 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 2000 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] Commission file number 1-11394 MEDTOX SCIENTIFIC, INC. ----------------------- (Exact name of Registrant as specified in its charter) Delaware 95-3863205 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 402 West County Road D, St. Paul, Minnesota 55112 ------------------------------------------- ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (651) 636-7466 -------------- Securities registered pursuant to Section 12(b) of the Act: Common Stock, par value $.15 per share -------------------------------------- (Title of Class) Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of Common Stock of the Registrant, $.15 par value ("Common Stock"), held by non-affiliates of the Registrant is approximately $26,519,633 as of March 20, 2001, based upon a price of $7.80 which price is equal to the closing price for the Common Stock on the American Stock Exchange. The number of shares of Common Stock outstanding as of March 20, 2001, was 3,537,179. MEDTOX SCIENTIFIC, INC. FORM 10-K ANNUAL REPORT FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 Table of Contents ITEM NO. PAGE - -------- ----- Part I 1. Business. . . . . . . . . . . . . . . . 4 2. Properties. . . . . . . . . . . . . . . 11 3. Legal Proceedings . . . . . . . . . . . . . 12 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . 13 Part II 5. Market for the Registrant's Common Equity and Related Stockholder Matters. . . . . . . . . . 14 6. Selected Financial Data . . . . . . . . . . . . . . . . . 15 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . . . . . . . . . . . . . . . . . . . 16 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . 23 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . . . . 23 Part III 10. Directors and Executive Officers . . . . . . . . . . . 24 11. Executive Compensation. . . . . . . . . . . . . . . . 26 12. Security Ownership of Certain Beneficial Owners and Management. . . . . . . . . . . . . . 33 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . 34 Part IV 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. . . . . . . . . . . . . . 35 Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 PART I Cautionary Statement Identifying Important Factors That Could Cause the Company's Actual Results to Differ From Those Projected in Forward Looking Statements In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, readers of this document and any document incorporated by reference herein, are advised that this document and documents incorporated by reference into this document contain both statements of historical facts and forward looking statements. Forward looking statements are subject to certain risks and uncertainties, which could cause actual results to differ materially from those indicated by the forward looking statements. Examples of forward looking statements include, but are not limited to (i) projections of revenues, income or loss, earnings or loss per share, capital expenditures, dividends, capital structure and other financial items, (ii) statements of the plans and objectives of the Company or its management or Board of Directors, including the introduction of new products, or estimates or predictions of actions by customers, suppliers, competitors or regulatory authorities, (iii) statements of future economic performance, and (iv) statements of assumptions underlying other statements and statements about the Company or its business. This document and any documents incorporated by reference herein also identify important factors which could cause actual results to differ materially from those indicated by the forward looking statements. These risks and uncertainties include price competition, the decisions of customers, the actions of competitors, the effects of government regulation, possible delays in the introduction of new products, customer acceptance of products and services, and other factors which are described herein and/or in documents incorporated by reference herein. The cautionary statements made pursuant to the Private Litigation Securities Reform Act of 1995 above and elsewhere by the Company should not be construed as exhaustive or as any admission regarding the adequacy of disclosures made by the Company prior to the effective date of such Act. Forward looking statements are beyond the ability of the Company to control and in many cases the Company cannot predict what factors would cause results to differ materially from those indicated by the forward looking statements. ITEM 1. BUSINESS. - ------- -------- 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. 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. 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. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS. No matter was submitted to a vote of the security holders during the fourth quarter of the fiscal year covered by this report. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Common Stock Since September 27, 1993, the Company's common stock has been listed on the American Stock Exchange and is currently trading under the symbol "TOX". As of March 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. 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)
2000 1999 1998 1997 1996 STATEMENT OF OPERATIONS DATA: Revenues $ 42,880 $ 35,003 $ 29,575 $ 28,594 $ 26,498 Cost of revenues 27,847 22,749 20,360 17,888 17,495 Selling, general, and administrative 15,480 9,348 8,974 9,510 11,725 Research and development 1,123 834 1,153 965 1,280 Restructuring costs (a) -- (164) 712 (397) 2,449 Goodwill write-off (b) -- -- -- -- 6,117 Other expense 991 817 673 603 241 --------- --------- --------- --------- --------- (Loss) income from operations $ (2,561) $ 1,419 $ (2,297) $ 25 $ (12,809) Preferred stock deemed dividend -- -- -- -- (6,783) (Loss) income from operations applicable to --------- --------- --------- --------- --------- common stockholders $ (2,561) $ 1,419 $ (2,297) $ 25 $ (19,592) ========== ========== ======== ====== ========== Basic (loss) earnings from operations per common share $ (0.81) $ 0.49 $ (0.79) $ 0.01 $ (11.71) ========= ========= ========== ========= ========= Diluted (loss) earnings from operations per common share $ (0.81) $ 0.48 $ (0.79) $ 0.01 $ (11.71) ========= ========= ========== ========= ========= Weighted average number of shares outstanding: Basic 3,142,588 2,902,087 2,893,399 2,566,966 1,672,793 Diluted 3,142,588 2,985,107 2,893,399 2,566,966 1,672,793 BALANCE SHEET DATA: Total assets $ 30,024 $ 26,271 $ 24,600 $ 24,881 $ 24,079 Long-term obligations 2,898 2,146 2,301 295 -- Total stockholders' equity 15,410 12,790 11,326 13,571 13,548 SEGMENT DATA: Net revenues: Laboratory Services $ 34,797 $ 31,012 $ 27,070 $ 25,899 $ 23,541 Product Sales 8,083 3,991 2,505 2,695 3,047 --------- --------- --------- ---------- --------- Total net revenues $ 42,880 $ 35,003 $ 29,575 $ 28,594 $ 26,588 ========= ========= ========= ========== ========= Segment (loss) income: Laboratory Services $ (3,374) $ 1,440 $ (1,391) $ 430 $ (9,155) Product Sales 813 (21) (906) (405) (3,653) --------- ---------- ---------- ---------- ---------- Total segment (loss) income $ (2,561) $ 1,419 $ (2,297) $ 25 $ (12,808) ========== ========== ========== ========== ========== Assets: Laboratory Services $ 26,498 $ 24,269 $ 23,289 $ 23,469 $ 22,479 Product Sales 3,526 2,002 1,311 1,412 1,600 --------- --------- --------- --------- --------- Total assets $ 30,024 $ 26,271 $ 24,600 $ 24,881 $ 24,079 ========= ========= ========= ========= ==========
(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. 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. 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. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Reference is made to the financial statements, financial statement schedules and notes thereto included later in this report under Item 14. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS 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. 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 $100,000 for the fiscal year ended December 31, 2000.
SUMMARY COMPENSATION TABLE Long Term Compensation Annual Compensation Awards Payouts Other Annual Restricted Options/ LTIP All Other Name and Principal Compen- Stock Awards SAR's Payouts Compen- Position Year Salary Bonus sation(3) ($)(4) (5) (#) (6) sation - -------------------------- ------- --------- ---------- ---------- ------------- --------- --------- ------------- Harry G. McCoy 2000 $225,000 -- -- $43,313 -- -- -- Former President and 1999 $200,000 -- -- -- 40,000 -- -- Chairman of the Board 1998 $200,000 $9,615 -- -- 50,000 -- -- of Directors; Director(1) Richard J. Braun 2000 $250,000 -- -- 15,000 -- $15,060 (7) Chairman of the Board of 1999 $200,000 -- -- $133,781 80,000 -- $11,910 (7) Directors, President, 1998 $200,000 $9,615 -- -- 50,000 -- $ 9,060 (7) Chief Executive Officer(2) James B. Lockhart 2000 $121,731 $43,000(12) -- $60,984 32,500 -- -- Chief Financial Officer and Vice President Finance and Administration (8) Kevin J. Wiersma 2000 $131,346 -- -- $76,734 10,000 -- -- Vice President and Chief 1999 $115,000 -- -- -- 17,500 -- -- Operating Officer of 1998 $ 92,144 $11,700 -- -- 5,000 -- -- Medtox Laboratories, Inc. (9) James A. Schoonover 2000 $131,346 -- -- $68,859 7,500 -- -- Vice President and Chief Marketing Officer (10) B. Mitchell Owens 2000 $131,346 -- -- $68,859 10,000 -- -- Vice President and Chief Operating Officer of Medtox Diagnostics, Inc. (11)
(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 $9,060 of premiums paid for by the Company for a life and disability insurance policy on Mr. Braun in 2000, 1999 and 1998, respectively. (8) Mr. Lockhart was appointed Chief Financial Officer on February 29, 2000. (9) Mr. Wiersma was appointed Vice President and Chief Operating Officer of MEDTOX Laboratories, Inc. on July 17, 2000. (10) Mr. Schoonover was appointed Vice President and Chief Marketing Officer on July 17, 2000. (11) Mr. Owens was appointed Vice President and Chief Operating Officer of MEDTOX Diagnostics, Inc. on July 17, 2000. (12) Mr. Lockhart received a guaranteed bonus payment in 2000 as part of his compensation in the initial year of employment with the Company. Stock Options Granted During Fiscal Year The following table sets forth information about the stock options granted to the named executive officers of the Company during 2000.
OPTION GRANTS IN LAST FISCAL YEAR Potential Realized Value at Assumed Annual Rates of Stock Price Appreciation for Individual Grants Option Term % of Total Options Number Granted to of Employees Exercise Options in Fiscal Price Expiration 5% ($) 10%( $) Name Granted Year ($/Sh) Date (1) (1) - ------------------------------------------------------------------------------------------------------------------- Richard J. 15,000 14% $ 12.0625 11/01/10 $294,728 $469,305 Braun James B. 25,000 24% $ 8.6875 01/03/10 $353,776 $563,328 Lockhart 7,500 7% $ 12.0625 11/01/10 $147,364 $234,653 Kevin J. 10,000 10% $ 12.0625 11/01/10 $196,485 $312,870 Wiersma James A. 7,500 7% $ 12.0625 11/01/10 $147,364 $234,653 Schoonover B. Mitchell 10,000 10% $ 12.0625 11/01/10 $196,485 $312,870 Owens
(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.
Number of Shares Number of Unexercised Value of Unexercised In-the Acquired Value Options at FY-End Money Options at FY-End Name on Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable (1) - ------------------------------------------------------------------------------------------------------------------------------ Harry G. McCoy - - 76,667/13,333 $100,001/$ 49,999 Richard J. Braun - - 104,126/40,874 $199,838/$100,163 James B. Lockhart - - 8,705/23,795 - / - Kevin J. Wiersma - - 16,200/16,300 $29,679/$14,852 James A. Schoonover - - 21,249/11,251 $29,679/$14,852 B. Mitchell Owens - - 19,200/16,300 $29,679/$14,852
(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. 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:
Number of Shares Percent of Common Name Beneficially Owned Stock Outstanding Harry G. McCoy, Pharm. D. 245,593 (1) 6.36 % Former President and Chairman of the Board of Directors; Director Richard J. Braun 139,127 (2) 3.61 % Chairman of the Board of Directors, President, Chief Executive Officer Samuel C. Powell, Ph.D., Director 105,519 (3) 2.73 % James W. Hansen, Director 15,796 (4) * Miles E. Efron, Director 9,580 (5) * Brian P. Johnson, Director 13,060 (6) * James B. Lockhart 25,350 (7) * Chief Financial Officer and Vice President Finance and Administration Kevin J. Wiersma 27,641 (8) * Vice President and Chief Operating Officer of Medtox Laboratories, Inc. James A. Schoonover 41,833 (9) 1.08 % Vice President and Chief Marketing Officer B. Mitchell Owens 29,859 (10) * Vice President and Chief Operating Officer of Medtox Diagnostics, Inc. All Directors and Executive Officers as a Group (10 in number) 653,358 (11) 16.93 % Perkins Capital Management, Inc. 528,300 13.69 % Pyramid Trading Limited Partnership 348,300 9.03 %
- ---------- * 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. 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 - 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.
CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2000 AND 1999 (In thousands, except share and per share data) - ------------------------------------------------------------------------------------------------------------------- 2000 1999 ASSETS CURRENT ASSETS: Cash and cash equivalents $ 213 $ 576 Accounts receivable: Trade, less allowance for doubtful accounts ($1,131 in 2000 and $274 in 1999) 7,873 6,982 Other 264 125 --------- --------- Total accounts receivable 8,137 7,107 Inventories 3,052 1,796 Prepaid expenses and other 830 815 --------- --------- Total current assets 12,232 10,294 EQUIPMENT AND IMPROVEMENTS, NET 5,211 2,816 GOODWILL, net of accumulated amortization of $4,438 in 2000 and $3,568 in 1999 12,291 13,161 OTHER ASSETS, net of accumulated amortization of $7 in 2000 290 - --------- --------- TOTAL ASSETS $ 30,024 $ 26,271 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Line of credit $ 3,724 $ 4,208 Accounts payable 2,819 3,682 Accrued expenses 3,213 1,554 Current portion of restructuring accrual 160 384 Current portion of long-term debt 1,579 1,236 Current portion of capital leases 221 186 --------- --------- Total current liabilities 11,716 11,250 LONG-TERM PORTION OF RESTRUCTURING ACCRUAL - 85 LONG-TERM DEBT 2,480 1,737 LONG-TERM PORTION OF CAPITAL LEASES 418 409 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock, $1.00 par value; authorized shares, 50,000; none issued and outstanding - - Common stock, $0.15 par value; authorized shares, 7,400,000; issued and outstanding shares, 3,508,151 in 2000 and 2,904,410 in 1999 526 436 Additional paid-in capital 65,422 59,859 Deferred stock-based compensation (472) - Accumulated deficit (49,890) (47,329) Treasury stock (176) (176) --------- --------- Total stockholders' equity 15,410 12,790 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 30,024 $ 26,271 ========= =========
See notes to consolidated financial statements. MEDTOX SCIENTIFIC, INC.
CONSOLIDATED STATEMENTS OF operations YEARS ENDED december 31, 2000, 1999, AND 1998 (In thousands, except share and per share data) - ------------------------------------------------------------------------------------------------------------------- 2000 1999 1998 REVENUES: Laboratory service revenues $ 34,797 $ 31,012 $ 27,070 Product sales 8,083 3,991 2,505 ------------ ------------ ------------ 42,880 35,003 29,575 COST OF REVENUES: Cost of services 24,713 20,572 18,689 Cost of sales 3,134 2,177 1,671 ------------ ------------ ------------ 27,847 22,749 20,360 ------------ ------------ ------------ GROSS PROFIT 15,033 12,254 9,215 OPERATING EXPENSES: Selling, general, and administrative 15,480 9,348 8,974 Research and development 1,123 834 1,153 Restructuring costs - (164) 712 ------------ ------------- ------------ 16,603 10,018 10,839 ------------ ------------ ------------ (LOSS) INCOME FROM OPERATIONS (1,570) 2,236 (1,624) OTHER INCOME (EXPENSE): Interest and other income - - 1 Interest expense (991) (817) (674) ------------- ------------- ------------- (991) (817) (673) ------------- ------------- ------------- NET (LOSS) INCOME $ (2,561) $ 1,419 $ (2,297) ============= ============ ============= BASIC (LOSS) EARNINGS PER COMMON SHARE $ (0.81) $ 0.49 $ (0.79) ============ ============ ============= WEIGHTED AVERAGE NUMBER OF BASIC COMMON SHARES OUTSTANDING 3,142,588 2,902,087 2,893,399 =========== =========== =========== DILUTED (LOSS) EARNINGS PER COMMON SHARE $ (0.81) $ 0.48 $ (0.79) ============ ============ ============ WEIGHTED AVERAGE NUMBER OF DILUTED COMMON SHARES OUTSTANDING 3,142,588 2,985,107 2,893,399 ============ ============ ============
See notes to consolidated financial statements. MEDTOX SCIENTIFIC, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands, except share data) - ------------------------------------------------------------------------------------------------------------------- Preferred Stock Common Stock Additional Deferred Par Par Paid-in Stock-Based Accumulated Treasury Shares Value Shares Value Capital Compensation Deficit Stock Total BALANCE AT DECEMBER 31, 1997 4 $ - 2,841,409 $426 $ 59,772 $ - $ (46,451) $(176) $ 13,571 Issuance of common stock under employee stock plans 4,927 1 24 25 Conversion of preferred stock to common stock (4) 53,333 8 (8) Value of warrants issued 27 27 Net loss (2,297) (2,297) ------ ------- --------- ------ -------- ------------- ----------- ------ -------- BALANCE AT DECEMBER 31, 1998 - - 2,899,669 435 59,815 - (48,748) (176) 11,326 Issuance of common stock under employee stock plans 2,241 6 6 Stock issued for settlement 2,500 1 9 10 Value of warrants issued 29 29 Net income 1,419 1,419 ----- ------- ---------- ----- --------- ------------ --------- ------ ---------- BALANCE AT DECEMBER 31, 1999 - - 2,904,410 436 59,859 - (47,329) (176) 12,790 Issuance of common stock under employee stock plans 37,660 5 47 52 Private placement of common stock(net of offering costs of $0.6 million) 550,000 83 4,795 4,878 Stock issued in connection with acquisition 15,152 2 175 177 Exercise of stock options 929 5 5 Deferred stock-based compensation 541 (541) Amortization of deferred compensation 69 69 Net loss (2,561) (2,561) ----- ------- ---------- ----- ------- ------------ -------- ------ -------- BALANCE AT DECEMBER 31, 2000 - $ - 3,508,151 $ 526 $ 65,422 $ (472) $ (49,890) $(176) $ 15,410 ====== ======= ========= ===== ======== ========= ========= ====== =========
See notes to consolidated financial statements. MEDTOX SCIENTIFIC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998 (In thousands) 2000 1999 1998 CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income $ (2,561) $ 1,419 $ (2,297) Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: Depreciation and amortization 2,420 2,124 2,094 Provision for losses on accounts receivable 879 229 42 Gain on sale of equipment (35) - (4) Deferred compensation 69 - - Changes in operating assets and liabilities: Accounts receivable (1,909) (1,348) (476) Inventories (1,256) (689) 35 Prepaid expenses and other current assets (15) (291) (109) Other assets (54) - - Accounts payable and accrued expenses 796 (19) 161 Restructuring accruals (309) (687) 369 -------- --------- --------- Net cash (used in) provided by operating activities (1,975) 738 (185) CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of equipment and improvements (3,353) (1,119) (949) Proceeds from sale of equipment 35 - 4 Payment for acquisition of business (75) - - --------- -------- --------- Net cash used in investing activities (3,393) (1,119) (945) CASH FLOWS FROM FINANCING ACTIVITIES: (Decrease) increase in checks in excess of bank balances - (142) 142 Net proceeds from sale of common stock 4,935 6 25 Net (payments) proceeds on revolving credit facility (483) 1,113 (477) Proceeds from long-term debt 4,479 1,521 4,294 Principal payments on long-term debt (3,669) (1,472) (2,794) Principal payments on capital leases (257) (107) (118) Other - 38 - -------- -------- --------- Net cash provided by financing activities 5,005 957 1,072 -------- -------- --------- (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (363) 576 (58) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 576 - 58 ---------- -------- --------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 213 $ 576 $ - ========= ======== ========= SUPPLEMENTAL NONCASH ACTIVITIES: Additions to capital leases $ 557 $ 101 $ 414 Acquisitions: Fair value of assets acquired 252 Cash paid (75) Common stock issued (177) --------- $ - ========
See notes to consolidated financial statements. MEDTOX SCIENTIFIC, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of significant accounting policies The Company - The consolidated financial statements include the accounts of MEDTOX Scientific, Inc. and its wholly owned subsidiaries, MEDTOX Laboratories, Inc. (MEDTOX Laboratories) 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).
Segment Information (In thousands) Lab Services Product Sales Total 2000: Revenues $ 34,797 $ 8,083 $ 42,880 Interest expense 917 74 991 Depreciation and amortization 2,329 91 2,420 Segment (loss) income (3,374) 813 (2,561) Segment assets 26,498 3,526 30,024 Expenditures for segment assets 2,892 461 3,353 Lab Services Product Sales Total 1999: Revenues 31,012 3,991 35,003 Interest expense 752 65 817 Depreciation and amortization 2,042 82 2,124 Segment income (loss) 1,440 (21) 1,419 Segment assets 24,269 2,002 26,271 Expenditures for segment assets 1,025 94 1,119 1998: Revenues 27,070 2,505 29,575 Interest expense 615 59 674 Depreciation and amortization 1,980 114 2,094 Segment loss (1,391) (906) (2,297) Segment assets 23,289 1,311 24,600 Expenditures for segment assets 830 119 949
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
Long-term debt consisted of the following at December 31: (In thousands) 2000 1999 Term loan, due March 2003, 10.75% at December 31, 2000 $ 2,412 $ 1,358 Overadvance term loan, paid June 2000 350 Capex note, due March 2003, 10.75% at December 31, 2000 841 649 Subordinated notes, due December 2001, 12% at December 31, 2000 556 537 Various vehicle loans, due from October 2002 through December 2005, 2.90% to 10.34% 250 79 --------- --------- 4,059 2,973 Less current portion (1,579) (1,236) ------- ---------- $ 2,480 $ 1,737 ========= ========= Long-term debt maturities at December 31, 2000 were as follows: 2001 $ 1,579 2002 1,032 2003 1,419 2004 14 2005 15 --------- $ 4,059 =========
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:
Plan Options Outstanding ------------------------------------------- 1993 Non- Weighted Equity employee Average 1983 ISO Compensation Director Exercise Plan Plan Plan Price Balance at December 31, 1997 7,710 11,068 11,750 $49.80 Granted 97,248 10.01 Canceled (2,274) (35,307) (2,583) 55.63 -------- ------- -------- Balance at December 31, 1998 5,436 73,009 9,167 14.43 Granted 218,528 1,472 3.39 Canceled (508) (17,146) 3.42 -------- -------- ------- Balance at December 31, 1999 4,928 273,391 10,639 7.12 Granted 120,000 10.71 Exercised (929) 5.43 Canceled (225) (667) 72.98 -------- ----------- --------- Balance at December 31, 2000 4,703 393,462 9,972 $ 8.03 ========= =========== ===========
Plan Options Outstanding Options Exercisable --------------------------------------- ---------------------- Weighted Weighted Average Weighted Average Remaining Average Range of Number Exercise Contractual Number Exercise Exercise Prices Outstanding Price Life Exercisable Price $2.56 - $12.06 399,571 $ 6.39 8 202,605 $ 5.32 $30.00 - $59.99 1,276 53.26 3 1,276 53.26 $60.00 - $89.99 4,894 71.44 2 4,894 71.44 $90.00 - $119.99 625 102.24 2 625 102.24 $120.00 - $149.99 1,271 130.77 2 1,271 130.77 $153.80 500 153.80 2 500 153.80 --------- ------- 408,137 8.03 211,171 8.54
Options Outstanding Options Exercisable ------------------------ ---------------------- Weighted Weighted Range of Average Average Exercise Number Exercise Number Exercise Option Plan Prices Outstanding Price Exercisable Price 1983 Incentive Stock Option Plan $48.80 - $153.80 4,703 $ 98.46 4,703 $ 98.46 1993 Equity Compensation Plan $2.56 - $137.60 393,462 6.90 197,059 6.30 Nonemployee Director Plan $8.75 - $ 92.60 9,972 9.94 9,409 10.38 --------- ------- 408,137 8.03 211,171 8.54
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)
2000 1999 1998 Net income (loss) .............. As reported $ (2,561) $ 1,419 $ (2,297) Pro forma (2,976) 987 (2,746) Basic earnings (loss) per share..... As reported $ (0.81) $ 0.49 $ (0.79) Pro forma (0.94) 0.34 (0.95) Diluted earnings (loss) per share ... As reported $ (0.81) $ 0.48 $ (0.79) Pro forma (0.94) 0.33 (0.95)
The fair value of the options at the grant date was estimated using the Black-Scholes model with the following assumptions: 2000 1999 1998 Expected life (years) 5 5 5 Interest rate 5.75% 5.875% 4.25% Volatility 61.4% 61.9% 90.5% Dividend yield 0% 0% 0%
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)
2000 1999 1998 Net (loss) income (A) $ (2,561) $ 1,419 $ (2,297) =============== ============= =============== Weighted average number of basic common shares outstanding (B) 3,142,588 2,902,087 2,893,399 Dilutive effect of stock options and warrants computed based on the treasury stock method using average market price 83,020 -------------- ------------- -------------- Weighted average number of diluted common shares outstanding (C) 3,142,588 2,985,107 2,893,399 ============== ============= ============== Basic (loss) earnings per common share (A/B) $ (0.81) $ 0.49 $ (0.79) ============= ============= ============= Diluted (loss) earnings per common share (A/C) $ (0.81) $ 0.48 $ (0.79) ============= ============= =============
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)
2000 1999 Deferred tax liability - Equipment and improvements $ (205) $ (163) Deferred tax assets: Goodwill 971 1,196 Medical expense accrual 112 11 Bad debt reserve 430 Accrued severance 249 Net operating loss carryforwards 13,393 13,379 Research and experimental credit carryforwards 173 134 Restructuring costs 61 178 Legal reserve 3 Other 286 233 ----------- ---------- Total net deferred tax assets 15,470 14,971 Valuation allowance for deferred tax assets (15,470) (14,971) ----------- ---------- Net deferred tax asset $ - $ - =========== ==========
Following is a reconciliation of federal income tax at the statutory rate of 34% to the actual income taxes provided for:
2000 1999 1998 Computed expected federal income tax expense (benefit) $ (871) $ 482 $ (781) State tax, net of federal effect (98) 40 (134) Permanent differences 23 10 12 Change in valuation allowance 499 (739) (671) Adjustment to prior year provision 10 1,574 Expired net operating loss carryforwards 454 249 Other (17) (42) --------- ---------- --------- $ - $ - $ - ========= ========= =========
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)
First Second Third Fourth 2000 Quarter Quarter Quarter Quarter --------------------------------------------------------------------------------------------------- Revenues $ 9,676 $ 11,316 $ 11,573 $ 10,315 Gross profit 3,572 4,414 4,722 2,325 Net income (loss) (1) 297 481 477 (3,816) Basic earnings (loss) per share 0.10 0.17 0.15 (1.09) Diluted earnings (loss) per share 0.10 0.16 0.14 (1.09) First Second Third Fourth 1999 Quarter Quarter Quarter Quarter --------------------------------------------------------------------------------------------------- Revenues $ 7,835 $ 9,152 $ 9,074 $ 8,942 Gross profit 2,589 3,217 3,168 3,280 Net income 160 741 349 169 Basic earnings per share 0.06 0.26 0.12 0.06 Diluted earnings per share 0.06 0.25 0.12 0.06
(1) During the fourth quarter of 2000, the Company reported a net loss of $3.8 million due to decreased sample volume from existing drugs-of-abuse clients as a result of adverse weather conditions and the slowing economy. The Company also experienced higher than expected expenses during the quarter relating to the reorganization of laboratory operations and the Chapter 11 bankruptcy filings of two customers. SCHEDULE II-VALUATION & QUALIFYING ACCOUNTS
Balance at Charged to Charged to Balance at Beginning Costs and Other the End of of Period Expenses Accounts Deductions Period ------------------------------ ----------------------------------------------- Year ended December 31, 2000 Deducted from Asset Accounts Allowance for Doubtful Accounts $ 274,000 $ 879,000 $ 22,000(1) $ 1,131,000 Restructuring Accrual $ 469,000 $ - $ 309,000(3) $ 160,000 Year ended December 31, 1999 Deducted from Asset Accounts Allowance for Doubtful Accounts $ 245,000 $ 229,000 $ - $ 200,000(1) $ 274,000 Restructuring Accrual $ 1,155,000 $(165,000)(4) $ - $ 521,000(3) $ 469,000 Year ended December 31, 1998 Deducted from Asset Accounts Allowance for Doubtful Accounts $ 515,000 $ 42,000 $ - $ 312,000(1) $ 245,000 Restructuring Accrual $ 786,000 $711,000(2) $ - $ 342,000(2) $ 1,155,000
(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. EX-4.3 2 0002.txt EXHIBIT 4.3 Exhibit 4.3 THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR APPLICABLE STATE SECURITIES LAWS. THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE OFFERED FOR SALE, SOLD, PLEDGED, ASSIGNED OR OTHERWISE DISPOSED OF, AND NO TRANSFER OF THE SECURITIES WILL BE MADE BY THE COMPANY OR ITS TRANSFER AGENT, IN THE ABSENCE OF SUCH REGISTRATION OR AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED. WARRANT FOR PURCHASE OF SHARES OF COMMON STOCK OF medtox scientifIc, inc. July 31, 2000 For value received, _________________, ______, or their registered assigns (the "Holder"), is entitled to purchase from MEDTOX Scientific, Inc., a Delaware corporation (the "Company"), at any time during the five (5) year period commencing on the date hereof, 23,000 fully paid and nonassessable shares of the Company's Common Stock, $0.15 par value (such class of stock being hereinafter referred to as the "Common Stock" and such Common Stock as may be acquired upon exercise hereof being hereinafter referred to as the "Warrant Stock"), at the price of $12.50 per share. This Warrant is subject to the following provisions, terms and conditions: 1. The rights represented by this Warrant may be exercised by the Holder, in whole or in part (but not as to a fractional share of Common Stock), by written notice of exercise delivered to the Company accompanied by the surrender of this Warrant (properly endorsed if required) at the principal office of the Company and upon payment to it, by cash, certified check or bank draft, of the warrant exercise price for such shares. The Company agrees that the Warrant Stock so purchased shall be and is deemed to be issued as of the close of business on the date on which this Warrant shall have been surrendered and payment made for such Warrant Stock as aforesaid. Certificates for the shares of Warrant Stock so purchased shall be delivered to the Holder within 15 days after the rights represented by this Warrant shall have been so exercised, and, unless this Warrant has expired, a new Warrant representing the number of shares of Warrant Stock, if any, with respect to which this Warrant has not been exercised shall also be delivered to the Holder within such time. Notwithstanding the foregoing, however, the Company shall not be required to deliver any certificates for shares of Warrant Stock, except in accordance with the provisions and subject to the limitations of Paragraph 5 below. 2. The Company covenants and agrees that all shares of Warrant Stock that may be issued upon the exercise of this Warrant will, upon issuance, be duly authorized and issued, fully paid and nonassessable and free from all taxes, liens and charges with respect to the issuance thereof. The Company further covenants and agrees that until expiration of this Warrant, the Company will at all times have authorized, and reserved for the purpose of issuance or transfer upon exercise of this Warrant, a sufficient number of shares of Common Stock to provide for the exercise of this Warrant. 3. The foregoing provisions are, however, subject to the following: (a) The Warrant exercise price shall be subject to adjustment from time to time as hereinafter provided. Upon each adjustment of the Warrant exercise price, the holder of this Warrant shall thereafter be entitled to purchase, at the Warrant exercise price resulting from such adjustment, the number of shares obtained by multiplying the Warrant exercise price in effect immediately prior to such adjustment by the number of shares purchasable pursuant hereto immediately prior to such adjustment and dividing the product thereof by the Warrant exercise price resulting from such adjustment. (b) In case the Company shall at any time subdivide the outstanding Common Stock into a greater number of shares or declare a dividend payable in Common Stock, the Warrant exercise price in effect immediately prior to such subdivision shall be proportionately reduced, and conversely, in case the outstanding Common Stock shall be combined into a smaller number of shares, the Warrant exercise price in effect immediately prior to such combination shall be proportionately increased. (c) If any capital reorganization or reclassification of the capital stock of the Company, or consolidation or merger of the Company with another corporation, or the sale of all or substantially all of its assets to another corporation shall be effected in such a way that holders of Common Stock shall be entitled to receive stock, securities or assets ("substituted property") with respect to or in exchange for such Common Stock, then, as a condition of such reorganization, reclassification, consolidation, merger or sale, the Holder shall have the right to purchase and receive upon the basis and upon the terms and conditions specified in this Warrant and in lieu of the Common Stock of the Company immediately theretofore purchasable and receivable upon the exercise of the rights represented hereby, such substituted property as would have been issued or delivered to the Holder if it had exercised this Warrant and had received upon exercise of this Warrant the Common Stock prior to such reorganization, reclassification, consolidation, merger or sale. The Company shall not effect any such consolidation, merger or sale, unless prior to the consummation thereof the successor corporation (if other than the Company) resulting from such consolidation or merger or the corporation purchasing such assets shall assume by written instrument executed and mailed to the Holder at the last address of the Holder appearing on the books of the Company, the obligation to deliver to the Holder such shares of stock, securities or assets as, in accordance with the foregoing provisions, the Holder may be entitled to purchase. (d) If the Company takes any other action, or if any other event occurs which does not come within the scope of the provisions of Paragraphs 3(b) or 3(c), but which should result in an adjustment in the Warrant exercise price and/or the number of shares subject to the Warrant in order to fairly protect the purchase rights of the Holder, an appropriate adjustment in such purchase rights shall be made by the Company. (e) Upon any adjustment of the Warrant exercise price, the Company shall give written notice thereof, by first-class mail, postage prepaid, addressed to the Holder at the address of the Holder as shown on the books of the Company, which notice shall state the Warrant exercise price resulting from such adjustment and the increase or decrease, if any, in the number of shares purchasable at such price upon the exercise of this Warrant, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. 4. This Warrant shall not entitle the Holder to any voting rights or other rights as a shareholder of the Company. 5. The Holder, by acceptance hereof, represents and warrants that (a) it is acquiring this Warrant for its own account for investment purposes only and not with a view to its resale or distribution and (b) it has no present intention to resell or otherwise dispose of all or any part of this Warrant. Other than pursuant to registration under federal and state securities laws or an exemption from such registration, the availability of which the Company shall determine in its sole discretion, (y) the Company will not accept the exercise of this Warrant or issue certificates for shares of Warrant Stock and (z) neither this Warrant nor any shares of Warrant Stock may be sold, pledged, assigned or otherwise disposed of (whether voluntarily or involuntarily). The Company may condition such issuance or sale, pledge, assignment or other disposition on the receipt from the party to whom this Warrant is to be so transferred or to whom Warrant Stock is to be issued or so transferred of any representations and agreements requested by the Company in order to permit such issuance or transfer to be made pursuant to exemptions from registration under federal and applicable state securities laws. Each certificate representing the Warrant (or any part thereof) and any shares of Warrant Stock shall be stamped with appropriate legends setting forth these restrictions on transferability. The Holder, by acceptance hereof, agrees to give written notice to the Company before exercising or transferring this Warrant or transferring any shares of Warrant Stock of the Holder's intention to do so, describing briefly the manner of any proposed exercise or transfer. Within thirty (30) days after receiving such written notice, the Company shall notify the Holder as to whether such exercise or transfer may be effected. 6. This Warrant shall be transferable only on the books of the Company by the Holder in person, or by duly authorized attorney, on surrender of the Warrant, properly assigned. 7. Neither this Warrant nor any term hereof may be changed, waived, discharged or terminated orally but only by an instrument in writing signed by the party against which enforcement of the change, waiver, discharge or termination is sought. IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its duly authorized officer and to be dated as of the date set forth above. MEDTOX SCIENTIFIC, INC. By______________________________________ Name: Title: EX-10.46 3 0003.txt EXHIBIT 10.46 Exhibit 10.46 MEDTOX RESTATED EQUITY COMPENSATION PLAN as amended and restated effective as of May 10, 2000 ARTICLE I - GENERAL PROVISIONS 1.1 The Plan is designed, for the benefit of the Company, to attract and retain for the Company personnel of exceptional ability; to motivate such personnel through added incentives to make a maximum contribution to greater profitability; to develop and maintain a highly competent management team; and to be competitive with other companies with respect to executive compensation. 1.2 Awards under the Plan may be made to Participants in the form of (i) Incentive Stock Options; (ii) Nonqualified Stock Options; (iii) Stock Appreciation Rights; (iv) Restricted Stock; (v) Deferred Stock; (vi) Stock Awards; (vii) Performance Shares; and (viii) Other Stock-Based Awards and other forms of equity-based compensation as may be provided and are permissible under this Plan and the law. 1.3 The Plan, shall be effective October 26, 1993 (the "Effective Date"), subject to the approval of shareholders of the Company on such date. ARTICLE II - DEFINITIONS DEFINITIONS. Except where the context otherwise indicates, the following definitions apply: 2.1 "Acceleration Event" means the occurrence of an event defined in Article XIII of the Plan. 2.2 "Act" means the Securities Exchange Act of 1934, as now in effect or as hereafter amended. (All citations to sections of the Act or rules thereunder are to such sections or rules as they may from time to time be amended or renumbered.) 2.3 "Agreement" means the written agreement evidencing each Award granted to a Participant under the Plan. 2.4 "Award" means an award granted to a Participant in accordance with the provisions of the Plan, including, but not limited to, a Stock Option, Stock Right, Restricted or Deferred Stock, Stock Awards, Performance Shares, other Stock-Based Award, or any combination of the foregoing. 2.5 "Board" means the Board of Directors of MEDTOX SCIENTIFIC, INC. 2.6 "Code" means the Internal Revenue Code of 1986, as now in effect or as hereafter amended. (All citations to sections of the Code are to such sections as they may from time to time be amended or renumbered.) 2.7 "Committee" means the Compensation Committee or such other committee consisting of three or more members as may be appointed by the Board to administer this Plan pursuant to Article III. To the extent required by Rule 16b-3 under the Act, the Committee shall consist of individuals who are members of the Board and Disinterested Persons. Committee members may also be appointed for such limited purposes as may be provided by the Board. 2.8 "Company" means MEDTOX SCIENTIFIC, INC., a Delaware corporation, and its successors and assigns. The term "Company" shall include any corporation which is a member of a controlled group of corporations (as defined in Section 414(b) of the Code, as modified by Section 415(h) of the Code) which includes the Company; any trade or business (whether or not incorporated) which is under common control (as defined in Section 414(c) of the Code, as modified by Section 415(h) of the Code) with the Company; any organization (whether or not incorporated) which is a member of an affiliated service group (as defined in Section 414(m) of the Code) which includes the Company; and any other entity required to be aggregated with the Company pursuant to regulations under Section 414(o) of the Code. With respect to all purposes of the Plan, including, but not limited to, the establishment, amendment, termination, operation and administration of the Plan, MEDTOX SCIENTIFIC, INC. shall be authorized to act on behalf of all other entities included within the definition of Company. 2.9 "Deferred Stock" means the stock awarded under Article IX of the Plan. 2.10 "Disability" means disability as determined under procedures established by the Committee or in any Award. 2.11 "Discount Stock Options" means the Nonqualified Stock Options which provide for an exercise price of less than the Fair Market Value of the Stock at the date of the Award. 2.12 "Disinterested Person" shall have the meaning set forth in Rule 16b-3 under the Act. 2.13 "Early Retirement" means retirement from active employment with the Company, with the express consent of the Committee, pursuant to the early retirement provisions established by the Committee or in any Award. 2.14 "Eligible Participant" means any employee of the Company, as shall be determined by the Committee, as well as any other person, including directors, subject to such limitations imposed on a person designated as a Disinterested Person, whose participation the Committee determines is in the best interest of the Company, subject to limitations as may be provided by the Code, the Act or the Committee. 2.15 "Fair Market Value" means, with respect to any given day, the closing price of the Stock reported on the stock exchange on which the Stock is then listed for such day, as reported by such source as the Committee may select, provided there was a sale of at least 100 shares of Stock on such date. If there was not a sale of at least 100 shares of Stock on such day, the Fair Market Value shall be determined based on the closing price of the Stock reported on the stock exchange as of the last date on which there was a sale of at least 100 shares of Stock. The Committee may establish an alternative method of determining Fair Market Value. 2.16 "Incentive Stock Option" means a Stock Option granted under Article IV of the Plan, and as defined in Section 422 of the Code. 2.17 "Limited Stock Appreciation Rights" means a Stock Right which is exercisable only in the event of a Change in Control and/or a Potential Change in Control, as described in Section 6.9 of this Plan, which provides for an amount payable solely in cash, equal to the excess of the Stock Appreciation Right Fair Market Value of a share of Stock on the day the Stock Right is surrendered over the price at which a Participant could exercise a related Stock Option to purchase the share of Stock. 2.18 "Nonqualified Stock Option" means a Stock Option granted under Article V of the Plan. 2.19 "Normal Retirement" means retirement from active employment with the Company on or after age 65, or pursuant to such other requirements as may be established by the Committee or in any Award. 2.20 "Option Grant Date" means, as to any Stock Option, the latest of: (a) the date on which the Committee grants the Stock Option by entering into an Award Agreement with the Participant; (b) the date the Participant receiving the Stock Option becomes an employee of the Company, to the extent employment status is a condition of the grant or a requirement of the Code or the Act; or (c) such other date (later than the dates described in (i) and (ii) above) as the Committee may designate. 2.21 "Participant" means an Eligible Participant to whom an Award of equity-based compensation has been granted and who has entered into an Agreement evidencing the Award. 2.22 "Performance Share" means an Award under Article XI of the Plan of a unit valued by reference to a designated number of shares of Stock, which value may be paid to the Participant by delivery of such property as the Committee shall determine, including without limitation, cash or Stock, or any combination thereof, upon achievement of such Performance objectives during the Performance Period as the Committee shall establish at the time of such Award or thereafter. 2.23 "Plan" means the MEDTOX SCIENTIFIC, INC. Equity Compensation Plan, as amended from time to time. 2.24 "Restricted Stock" means an Award of Stock under Article VIII of the Plan, which Stock is issued with the restriction that the holder may not sell, transfer, pledge, or assign such Stock and with such other restrictions as the Committee, in its sole discretion, may impose, including without limitation, any restriction on the right to vote such Stock, and the right to receive any cash dividends, which restrictions may lapse separately or in combination at such time or times, in installments or otherwise, as the Committee may deem appropriate. 2.25 "Restriction Period" means the period commencing on the date an Award of Restricted Stock is granted and ending on such date as the Committee shall determine. 2.26 "Retirement" means Normal or Early Retirement. 2.27 "Stock" means shares of common stock of MEDTOX SCIENTIFIC, INC., as may be adjusted pursuant to the provisions of Section 3.11. 2.28 "Stock Appreciation Right" means a Stock Right, as described in Article VI of this Plan, which provides for an amount payable in Stock and/or cash, as determined by the Committee, equal to the excess of the Fair Market Value of a share of Stock on the day the Stock Right is exercised over the price at which the Participant could exercise a related Stock Option to purchase the share of Stock. 2.29 "Stock Appreciation Right Fair Market Value" means a value established by the Committee for the exercise of a Stock Appreciation Right or a Limited Stock Appreciation Right. If such exercise occurs during any quarterly "window period," as specified by Rule 16b-3 under the Act, the Committee may establish a common value for exercises during such window period. 2.30 "Stock Award" means an Award of Stock granted in payment of compensation, as provided in Article X of the Plan. 2.31 "Stock Option" means an Award under Article IV or V of the Plan of an option to purchase Stock. A Stock Option may be either an Incentive Stock Option or a Nonqualified Stock Option. 2.32 "Stock Right" means an Award under Article VI of the Plan. A Stock Right may be either a Stock Appreciation Right or a Limited Stock Appreciation Right. 2.33 "Termination of Employment" means the discontinuance of employment of a Participant with the Company for any reason. The determination of whether a Participant has discontinued employment shall be made by the Committee in its discretion. In determining whether a Termination of Employment has occurred, the Committee may provide that service as a consultant or service with a business enterprise in which the Company has a significant ownership interest shall be treated as employment with the Company. The Committee shall have the discretion, exercisable either at the time the Award is granted or at the time the Participant terminates employment, to establish as a provision applicable to the exercise of one or more Awards that during the limited period of exercisability following Termination of Employment, the Award may be exercised not only with respect to the number of shares of Stock for which it is exercisable at the time of the Termination of Employment but also with respect to one or more subsequent installments for which the Award would have become exercisable had the Termination of Employment not occurred. ARTICLE III - ADMINISTRATION 3.1 This Plan shall be administered by the Committee. A Committee member who is not a Disinterested Person, with respect to action to be taken by the Committee, shall not be able to participate in the decision to the extent prescribed by Rule 16b-3 under the Act. The Committee, in its discretion, may delegate to one or more of its members such of its powers as it deems appropriate. The Committee also may limit the power of any member to the extent necessary to comply with Rule 16b-3 under the Act or any other law. Members of the Committee shall be appointed originally, and as vacancies occur, by the Board, to serve at the pleasure of the Board. The Board may serve as the Committee, if by the terms of the Plan all Board members are otherwise eligible to serve on the Committee. 3.2 The Committee shall meet at such times and places as it determines. A majority of its members shall constitute a quorum, and the decision of a majority of those present at any meeting at which a quorum is present shall constitute the decision of the Committee. A memorandum signed by all of its members shall constitute the decision of the Committee without necessity, in such event, for holding an actual meeting. 3.3 The Committee shall have the exclusive right to interpret, construe and administer the Plan, to select the persons who are eligible to receive an Award, and to act in all matters pertaining to the granting of an Award and the contents of the Agreement evidencing the Award, including without limitation, the determination of the number of Stock Options, Stock Rights, shares of Stock or Performance Shares subject to an Award and the form, terms, conditions and duration of each Award, and any amendment thereof consistent with the provisions of the Plan. All acts, determinations and decisions of the Committee made or taken pursuant to grants of authority under the Plan or with respect to any questions arising in connection with the administration and interpretation of the Plan, including the severability of any and all of the provisions thereof, shall be conclusive, final and binding upon all Participants, Eligible Participants and their beneficiaries. 3.4 The Committee may adopt such rules, regulations and procedures of general application for the administration of this Plan, as it deems appropriate. 3.5 Without limiting the foregoing Sections 3.1, 3.2, 3.3 and 3.4, and notwithstanding any other provisions of the Plan, the Committee is authorized to take such action as it determines to be necessary or advisable, and fair and equitable to Participants, with respect to an Award in the event of an Acceleration Event as defined in Article XIII. Such action may include, but shall not be limited to, establishing, amending or waiving the forms, terms, conditions and duration of an Award and the Award Agreement, so as to provide for earlier, later, extended or additional times for exercise or payments, differing methods for calculating payments, alternate forms and amounts of payment, an accelerated release of restrictions or other modifications. The Committee may take such actions pursuant to this Section 3.5 by adopting rules and regulations of general applicability to all Participants or to certain categories of Participants, by including, amending or waiving terms and conditions in an Award and the Award Agreement, or by taking action with respect to individual Participants. 3.6 The aggregate number of shares of Stock which are subject to an Award under the Plan shall be an amount equal to sixteen percent (16%) of the Company's Common Stock, issued and outstanding from time to time. Such shares of Stock shall be made available from authorized and un-issued shares of the Company. All of such shares of Stock may be subject to Incentive Stock Option Awards pursuant to Article IV hereof. (a) If, for any reason, any shares of Stock or Performance Shares awarded or subject to purchase under the Plan are not delivered or purchased, or are reacquired by the Company, for reasons including, but not limited to, a forfeiture of Restricted Stock or termination, expiration or cancellation of a Stock Option, Stock Right or Performance Share, or any other termination of an Award without payment being made in the form of Stock, whether or not Restricted Stock, such shares of Stock or Performance Shares shall not be charged against the aggregate number of shares of Stock available for Awards under the Plan, and may again be available for Award under the Plan. (b) For all purposes under the Plan, each Performance Share awarded shall be counted as one share of Stock subject to an Award. (c) To the extent a Stock Right granted in connection with a Stock Option is exercised without payment being made in the form of Stock, whether or not Restricted Stock, the shares of Stock which otherwise would have been issued upon the exercise of such related Stock Option shall not be charged against the aggregate number of shares of Stock subject to Awards under the Plan, and may again be available for Award under the Plan. 3.7 Each Award granted under the Plan shall be evidenced by a written Award Agreement. Each Award Agreement shall be subject to and incorporate, by reference or otherwise, the applicable terms and conditions of the Plan, and any other terms and conditions, not inconsistent with the Plan, required by the Committee. 3.8 The Company shall not be required to issue or deliver any certificates for shares of Stock prior to: (a) the listing of such shares on any stock exchange on which the Stock may then be listed; and (b) the completion of any registration or qualification of such shares of Stock under any federal or state law, or any ruling or regulation of any government body which the Company shall, in its discretion, determine to be necessary or advisable. 3.9 All certificates for shares of Stock delivered under the Plan shall also be subject to such stop-transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations, and other requirements of the Securities and Exchange Commission, any stock exchange upon which the Stock is then listed and any applicable federal or state laws, and the Committee may cause a legend or legends to be placed on any such certificates to make appropriate reference to such restrictions. In making such determination, the Committee may rely upon an opinion of counsel for the Company. 3.10 Subject to the restrictions on Restricted Stock, as provided in Article VIII of the Plan and in the Restricted Stock Award Agreement, each Participant who receives an Award of Restricted Stock shall have all of the rights of a shareholder with respect to such shares of Stock, including the right to vote the shares to the extent, if any, such shares possess voting rights and receive dividends and other distributions. Except as provided otherwise in the Plan or in an Award Agreement, no Participant awarded a Stock Option, Stock Right, Deferred Stock, Stock Award or Performance Share shall have any right as a shareholder with respect to any shares of Stock covered by his or her Stock Option, Stock Right, Deferred Stock, Stock Award or Performance Share prior to the date of issuance to him or her of a certificate or certificates for such shares of Stock. 3.11 If any reorganization, recapitalization, reclassification, stock split-up, stock dividend, or consolidation of shares of Stock, merger or consolidation of the Company or sale or other disposition by the Company of all or a portion of its assets, any other change in the Company's corporate structure, or any distribution to shareholders other than a cash dividend results in the outstanding shares of Stock, or any securities exchanged therefor or received in their place, being exchanged for a different number or class of shares of Stock or other securities of the Company, or for shares of Stock or other securities of any other corporation; or new, different or additional shares or other securities of the Company or of any other corporation being received by the holders of outstanding shares of Stock, then equitable adjustments shall be made by the Committee in: (a) the limitation of the aggregate number of shares of Stock that may be awarded as set forth in Section 3.6 of the Plan; (b) the number and class of Stock that may be subject to an Award, and which have not been issued or transferred under an outstanding Award; (c) the purchase price to be paid per share of Stock under outstanding Stock Options and the number of shares of Stock to be transferred in settlement of outstanding Stock Rights; and (d) the terms, conditions or restrictions of any Award and Award Agreement, including the price payable for the acquisition of Stock; provided, however, that all adjustments made as the result of the foregoing in respect of each Incentive Stock Option shall be made so that such Stock Option shall continue to be an Incentive Stock Option, as defined in Section 422 of the Code. 3.12 In addition to such other rights of indemnification as they may have as directors or as members of the Committee, the members of the Committee shall be indemnified by the Company against reasonable expenses, including attorney's fees, actually and necessarily incurred in connection with the defense of any action, suit or proceeding, or in connection with any appeal therein, to which they or any of them may be a party by reason of any action taken or failure to act under or in connection with the Plan or any Award granted thereunder, and against all amounts paid by them in settlement thereof, provided such settlement is approved by independent legal counsel selected by the Company, or paid by them in satisfaction of a judgment or settlement in any such action, suit or proceeding, except as to matters as to which the Committee member has been negligent or engaged in misconduct in the performance of his duties; provided, that within 60 days after institution of any such action, suit or proceeding, a Committee member shall in writing offer the Company the opportunity, at its own expense, to handle and defend the same. 3.13 The Committee may require each person purchasing shares of Stock pursuant to a Stock Option or other Award under the Plan to represent to and agree with the Company in writing that he is acquiring the shares of Stock without a view to distribution thereof. The certificates for such shares of Stock may include any legend which the Committee deems appropriate to reflect any restrictions on transfer. 3.14 The Committee shall be authorized to make adjustments in performance based criteria or in the terms and conditions of other Awards in recognition of unusual or nonrecurring events affecting the Company or its financial statements or changes in applicable laws, regulations or accounting principles. The Committee may correct any defect, supply any omission or reconcile any inconsistency in the Plan or any Award Agreement in the manner and to the extent it shall deem desirable to carry it into effect. In the event the Company shall assume outstanding employee benefit awards or the right or obligation to make future such awards in connection with the acquisition of another corporation or business entity, the Committee may, in its discretion, make such adjustments in the terms of Awards under the Plan as it shall deem appropriate. 3.15 The Committee shall have full power and authority to determine whether, to what extent and under what circumstances, any Award shall be canceled or suspended. In particular, but without limitation, all outstanding Awards to any Participant may be canceled if (a) the Participant, without the consent of the Committee, while employed by the Company or after termination of such employment, becomes associated with, employed by, renders services to, or owns any interest in, other than any non-substantial interest, as determined by the Committee, any business that is in competition with the Company or with any business in which the Company has a substantial interest as determined by the Committee; or (b) is terminated for cause as determined by the Committee. ARTICLE IV - INCENTIVE STOCK OPTIONS 4.1 Each provision of this Article IV and of each Incentive Stock Option granted hereunder shall be construed in accordance with the provisions of Section 422 of the Code, and any provision hereof that cannot be so construed shall be disregarded. 4.2 Incentive Stock Options shall be granted only to Eligible Participants who are in the active employment of the Company, each of whom may be granted one or more such Incentive Stock Options for a reason related to his employment at such time or times determined by the Committee following the Effective Date until October 26, 2003, subject to the following conditions: (a) The Incentive Stock Option price per share of Stock shall be set in the Award Agreement, but shall not be less than 100% of the Fair Market Value of the Stock on the Option Grant Date. If the Optionee owns more than 10% of the outstanding Stock (as determined pursuant to Section 424(d) of the Code) on the Option Grant Date, the Incentive Stock Option price per share shall not be less than 110% of the Fair Market Value of the Stock on the Option Grant Date. (b) The Incentive Stock Option and its related Stock Right, if any, may be exercised in whole or in part from time to time within ten (10) years from the Option Grant Date (five (5) years if the Optionee owns more than 10% of the Stock on the Option Grant Date), or such shorter period as may be specified by the Committee in the Award; provided, that in any event, the Incentive Stock Option and related Stock Right shall lapse and cease to be exercisable upon, or within such period following, a Termination of Employment as shall have been determined by the Committee and as specified in the Incentive Stock Option Award Agreement or its related Stock Right Award Agreement; provided, however, that such period following a Termination of Employment shall not exceed three months unless employment shall have terminated: (i) as a result of death or Disability, in which event, such period shall not exceed one year after the date of death or Disability; and (ii) as a result of death, if death shall have occurred following a Termination of Employment and while the Incentive Stock Option or Stock Right was still exercisable, in which event, such period shall not exceed one year after the date of death; provided, further, that such period following a Termination of Employment shall in no event extend the original exercise period of the Incentive Stock Option or any related Stock Right. (c) The aggregate Fair Market Value, determined as of the Option Grant Date, of the shares of Stock with respect to which Incentive Stock Options are first exercisable during any calendar year by any Eligible Participant shall not exceed $100,000; provided, however, to the extent permitted under Section 422 of the Code: (i) if a Participant's employment is terminated by reason of death, Disability or Retirement and the portion of any Incentive Stock Option that is otherwise exercisable during the post-termination period applied without regard to the $100,000 limitation contained in section 422(b)(6) of the Code is greater than the portion of such option that is immediately exercisable as an Incentive Stock Option during such post-termination period under Section 422, such excess shall be treated as a Nonqualified Stock Option; and (ii) if the exercise of an Incentive Stock Option is accelerated by reason of an Acceleration Event, any portion of such Award that is not exercisable as an Incentive Stock Option by reason of the $100,000 limitation contained in Section 422(b)(6) of the Code shall be treated as a Nonqualified Stock Option. (d) The Committee may adopt any other terms and conditions which it determines should be imposed for the Incentive Stock Option to qualify under Section 422 of the Code, as well as any other terms and conditions not inconsistent with this Article IV as determined by the Committee. 4.3 The Committee may at any time offer to buy out for a payment in cash, Stock, Deferred Stock or Restricted Stock an Incentive Stock Option previously granted, based on such terms and conditions as the Committee shall establish and communicate to the Participant at the time that such offer is made. 4.4 If the Incentive Stock Option Award Agreement so provides, the Committee may require that all or part of the shares of Stock to be issued upon the exercise of an Incentive Stock Option shall take the form of Deferred or Restricted Stock, which shall be valued on the date of exercise, as determined by the Committee, on the basis of the Fair Market Value of such Deferred Stock or Restricted Stock determined without regard to the deferral limitations and/or forfeiture restrictions involved. ARTICLE V - NONQUALIFIED STOCK OPTIONS 5.1 One or more Stock Options may be granted as Nonqualified Stock Options to Eligible Participants to purchase shares of Stock at such time or times determined by the Committee, following the Effective Date, subject to the terms and conditions set forth in this Article V. 5.2 The Nonqualified Stock Option price per share of Stock shall be established in the Award Agreement and may be less than 100% of the Fair Market Value at the time of the grant, or at such later date as the Committee shall determine. 5.3 The Nonqualified Stock Option and its related Stock Right, if any, may be exercised in full or in part from time to time within such period as may be specified by the Committee or in the Award Agreement; provided, that, in any event, the Nonqualified Stock Option and the related Stock Right shall lapse and cease to be exercisable upon, or within such period following, Termination of Employment as shall have been determined by the Committee and as specified in the Nonqualified Stock Option Award Agreement or Stock Right Award Agreement; provided, however, that such period following Termination of Employment shall not exceed three months unless employment shall have terminated: (a) as a result of Retirement or Disability, in which event, such period shall not exceed one year after the date of Retirement or Disability, or within such longer period as the Committee may specify; and (b) as a result of death, or if death shall have occurred following a Termination of Employment and while the Nonqualified Stock Option or Stock Right was still exercisable, in which event, such period may exceed one year after the date of death, as provided by the Committee or in the Award Agreement. 5.4 The Nonqualified Stock Option Award Agreement may include any other terms and conditions not inconsistent with this Article V or in Article VII, as determined by the Committee. ARTICLE VI - STOCK APPRECIATION RIGHTS 6.1 A Stock Appreciation Right may be granted to an Eligible Participant in connection with an Incentive Stock Option or a Nonqualified Stock Option granted under Article IV or Article V of this Plan, or may be granted independent of any related Stock Option. 6.2 A related Stock Appreciation Right shall entitle a holder of a Stock Option, within the period specified for the exercise of the Stock Option, to surrender the unexercised Stock Option, or a portion thereof, and to receive in exchange therefor a payment in cash or shares of Stock having an aggregate value equal to the amount by which the Fair Market Value of each share of Stock exceeds the Stock Option price per share of Stock, times the number of shares of Stock under the Stock Option, or portion thereof, which is surrendered. 6.3 Each related Stock Appreciation Right granted hereunder shall be subject to the same terms and conditions as the related Stock Option, including limitations on transferability, and shall be exercisable only to the extent such Stock Option is exercisable and shall terminate or lapse and cease to be exercisable when the related Stock Option terminates or lapses. The grant of Stock Appreciation Rights related to Incentive Stock Options must be concurrent with the grant of the Incentive Stock Options. With respect to Nonqualified Stock Options, the grant either may be concurrent with the grant of the Nonqualified Stock Options, or in connection with Nonqualified Stock Options previously granted under Article V, which are unexercised and have not terminated or lapsed. 6.4 The Committee shall have sole discretion to determine in each case whether the payment with respect to the exercise of a Stock Appreciation Right will be in the form of all cash or all Stock, or any combination thereof. If payment is to be made in Stock, the number of shares of Stock shall be determined based on the Fair Market Value of the Stock on the date of exercise. If the Committee elects to make full payment in Stock, no fractional shares of Stock shall be issued and cash payments shall be made in lieu of fractional shares. 6.5 The Committee shall have sole discretion as to the timing of any payment made in cash or Stock, or a combination thereof, upon exercise of Stock Appreciation Rights. Payment may be made in a lump sum, in annual installments or may be otherwise deferred; and the Committee shall have sole discretion to determine whether any deferred payments may bear amounts equivalent to interest or cash dividends. 6.6 Upon exercise of a Stock Appreciation Right, the number of shares of Stock subject to exercise under any related Stock Option shall automatically be reduced by the number of shares of Stock represented by the Stock Option or portion thereof which is surrendered. 6.7 Notwithstanding any other provision of the Plan, the exercise of a Stock Appreciation Right is required to satisfy the applicable requirements under Rule 16b-3 of the Act. 6.8 The Committee, in its sole discretion, may also provide that, in the event of a Change in Control and/or a Potential Change in Control, as defined in Article XIII, the amount to be paid upon the exercise of a Stock Appreciation Right or Limited Stock Appreciation Right shall be based on the Change in Control Price, as defined in Section 13.9, subject to such terms and conditions as the Committee may specify. 6.9 In its sole discretion, the Committee may grant Limited Stock Appreciation Rights under this Article VI. Limited Stock Appreciation Rights become exercisable only in the event of a Change in Control and/or a Potential Change in Control, subject to such terms and conditions as the Committee, in its sole discretion, may specify. Such Limited Stock Appreciation Rights shall be settled solely in cash. A Limited Stock Appreciation Right shall entitle the holder of the related Stock Option to surrender such Stock Option, or any portion thereof, to the extent unexercised in respect of the number of shares of Stock as to which such Limited Stock Appreciation Right is exercised, and to receive a cash payment equal to the difference between (a) the Stock Appreciation Right Fair Market Value, at the date of surrender, of a share of Stock for which the surrendered Stock Option or portion thereof is then exercisable, and (b) the price at which a Participant could exercise a related Stock Option to purchase the share of Stock. Such Stock Option shall, to the extent so surrendered, thereupon cease to be exercisable. A Limited Stock Appreciation Right shall be subject to such further terms and conditions as the Committee shall, in its sole discretion, deem appropriate, including any restrictions necessary to comply with Section 16(b) of the Act. ARTICLE VII - INCIDENTS OF STOCK OPTIONS AND STOCK RIGHTS 7.1 Each Stock Option and Stock Right shall be granted subject to such terms and conditions, if any, not inconsistent with this Plan, as shall be determined by the Committee, including any provisions as to continued employment as consideration for the grant or exercise of such Stock Option or Stock Right and any provisions which may be advisable to comply with applicable laws, regulations or rulings of any governmental authority. 7.2 A Stock Option or Stock Right shall not be transferable by the Participant other than by will or by the laws of descent and distribution, or, to the extent otherwise allowed by Rule 16b-3 under the Act, or other applicable law, pursuant to a qualified domestic relations order as defined by the Code or the Employee Retirement Income Security Act, or the rules thereunder, and shall be exercisable during the lifetime of the Participant only by him or by his guardian or legal representative. 7.3 Shares of Stock purchased upon exercise of a Stock Option shall be paid for in such amounts, at such times and upon such terms as shall be determined by the Committee, subject to limitations set forth in the Stock Option Award Agreement. Without limiting the foregoing, the Committee may establish payment terms for the exercise of Stock Options which permit the Participant to deliver shares of Stock, or other evidence of ownership of Stock satisfactory to the Company, with a Fair Market Value equal to the Stock Option price as payment. 7.4 No cash dividends shall be paid on shares of Stock subject to unexercised Stock Options. The Committee may provide, however, that a Participant to whom a Stock Option has been granted which is exercisable in whole or in part at a future time for shares of Stock shall be entitled to receive an amount per share equal in value to the cash dividends, if any, paid per share on issued and outstanding Stock, as of the dividend record dates occurring during the period between the date of the grant and the time each such share of Stock is delivered pursuant to exercise of such Stock Option or the related Stock Right. Such amounts (herein called "dividend equivalents") may, in the discretion of the Committee, be: (a) paid in cash or Stock either from time to time prior to, or at the time of the delivery of, such Stock, or upon expiration of the Stock Option if it shall not have been fully exercised; or (b) converted into contingently credited shares of Stock, with respect to which dividend equivalents may accrue, in such manner, at such value, and deliverable at such time or times, as may be determined by the Committee. Such Stock, whether delivered or contingently credited, shall be charged against the limitations set forth in Section 3.6. 7.5 The Committee, in its sole discretion, may authorize payment of interest equivalents on dividend equivalents which are payable in cash at a future time. 7.6 In the event of Disability or death, the Committee, with the consent of the Participant or his legal representative, may authorize payment, in cash or in Stock, or partly in cash and partly in Stock, as the Committee may direct, of an amount equal to the difference at the time between the Fair Market Value of the Stock subject to a Stock Option and the option price in consideration of the surrender of the Stock Option. 7.7 If a Participant is required to pay to the Company an amount with respect to income and employment tax withholding obligations in connection with exercise of a Nonqualified Stock Option, and/or with respect to certain dispositions of Stock acquired upon the exercise of an Incentive Stock Option, the Committee, in its discretion and subject to such rules as it may adopt, may permit the Participant to satisfy the obligation, in whole or in part, by making an irrevocable election that a portion of the total Fair Market Value of the shares of Stock subject to the Nonqualified Stock Option and/or with respect to certain dispositions of Stock acquired upon the exercise of an Incentive Stock Option, be paid in the form of cash in lieu of the issuance of Stock and that such cash payment be applied to the satisfaction of the withholding obligations. The amount to be withheld shall not exceed the statutory minimum federal and state income and employment tax liability arising from the Stock Option exercise transaction. Notwithstanding any other provision of the Plan, any election under this Section 7.7 is required to satisfy the applicable requirements under Rule 16b-3 of the Act. 7.8 The Committee may permit the voluntary surrender of all or a portion of any Stock Option granted under the Plan to be conditioned upon the granting to the Participant of a new Stock Option for the same or a different number of shares of Stock as the Stock Option surrendered, or may require such surrender as a condition precedent to a grant of a new Stock Option to such Participant. Subject to the provisions of the Plan, such new Stock Option shall be exercisable at the same price, during such period and on such other terms and conditions as are specified by the Committee at the time the new Stock Option is granted. Upon surrender, the Stock Options surrendered shall be canceled and the shares of Stock previously subject to them shall be available for the grant of other Stock Options. ARTICLE VIII - RESTRICTED STOCK 8.1 Restricted Stock Awards may be made to certain Participants as an incentive for the performance of future services that will contribute materially to the successful operation of the Company. Awards of Restricted Stock may be made either alone, in addition to or in tandem with other Awards granted under the Plan and/or cash payments made outside of the Plan. 8.2 With respect to Awards of Restricted Stock, the Committee shall: (a) determine the purchase price, if any, to be paid for such Restricted Stock, which may be equal to or less than par value and may be zero, subject to such minimum consideration as may be required by applicable law; (b) determine the length of the Restriction Period; (c) determine any restrictions applicable to the Restricted Stock such as service or performance, other than those set forth in this Article VIII; (d) determine if the restrictions shall lapse as to all shares of Restricted Stock at the end of the Restriction Period or as to a portion of the shares of Restricted Stock in installments during the Restriction Period; and (e) determine if dividends and other distributions on the Restricted Stock are to be paid currently to the Participant or paid to the Company for the account of the Participant. 8.3 Awards of Restricted Stock must be accepted within a period of 60 days, or such shorter period as the Committee may specify, by executing a Restricted Stock Award Agreement and paying whatever price, if any, is required. The prospective recipient of a Restricted Stock Award shall not have any rights with respect to such Award, unless such recipient has executed a Restricted Stock Award Agreement and has delivered a fully executed copy thereof to the Committee, and has otherwise complied with the applicable terms and conditions of such Award. 8.4 Except when the Committee determines otherwise, or as otherwise provided in the Restricted Stock Award Agreement, if a Participant terminates employment with the Company for any reason before the expiration of the Restriction Period, all shares of Restricted Stock still subject to restriction shall be forfeited by the Participant and shall be reacquired by the Company. 8.5 Except as otherwise provided in this Article VIII, no shares of Restricted Stock received by a Participant shall be sold, exchanged, transferred, pledged, hypothecated or otherwise disposed of during the Restriction Period. 8.6 To the extent not otherwise provided in a Restricted Stock Award Agreement, in cases of death, Disability or Retirement or in cases of special circumstances, the Committee, if it finds that a waiver would be appropriate, may elect to waive any or all remaining restrictions with respect to such Participant's Restricted Stock. 8.7 In the event of hardship or other special circumstances of a Participant whose employment with the Company is involuntarily terminated, the Committee may waive in whole or in part any or all remaining restrictions with respect to any or all of the Participant's Restricted Stock, based on such factors and criteria as the Committee may deem appropriate. 8.8 The certificates representing shares of Restricted Stock may either: (a) be held in custody by the Company until the Restriction Period expires or until restrictions thereon otherwise lapse, and the Participant shall deliver to the Company a stock power endorsed in blank relating to the Restricted Stock; and/or (b) be issued to the Participant and registered in the name of the Participant, and shall bear an appropriate restrictive legend and shall be subject to appropriate stop-transfer orders. 8.9 Except as provided in this Article VIII, a Participant receiving a Restricted Stock Award shall have, with respect to the shares of Restricted Stock covered by any Award, all of the rights of a shareholder of the Company, including the right to vote the shares to the extent, if any, such shares possess voting rights and the right to receive any dividends; provided, however, the Committee may require that any dividends on such shares of Restricted Stock shall be automatically deferred and reinvested in additional Restricted Stock subject to the same restrictions as the underlying Award, or may require that dividends and other distributions on Restricted Stock shall be paid to the Company for the account of the Participant. The Committee shall determine whether interest shall be paid on such amounts, the rate of any such interest, and the other terms applicable to such amounts. 8.10 If and when the Restriction Period expires without a prior forfeiture of the Restricted Stock subject to such Restriction Period, unrestricted certificates for such shares shall be delivered to the Participant. 8.11 In order to better ensure that Award payments actually reflect the performance of the Company and the service of the Participant, the Committee may provide, in its sole discretion, for a tandem performance-based or other Award designed to guarantee a minimum value, payable in cash or Stock to the recipient of a Restricted Stock Award, subject to such performance, future service, deferral and other terms and conditions as may be specified by the Committee. ARTICLE IX - DEFERRED STOCK 9.1 Shares of Deferred Stock together with cash dividend equivalents, if so determined by the Committee, may be issued either alone or in addition to other Awards granted under the Plan in the discretion of the Committee. The Committee shall determine the individuals to whom, and the time or times at which, such Awards will be made, the number of shares to be awarded, the price, if any, to be paid by the recipient of a Deferred Stock Award, the time or times within which such Awards may be subject to forfeiture, and all other conditions of the Awards. The Committee may condition Awards of Deferred Stock upon the attainment of specified performance goals or such other factors or criteria as the Committee may determine. 9.2 Deferred Stock Awards shall be subject to the following terms and conditions: (a) Subject to the provisions of this Plan and the applicable Award Agreement, Deferred Stock Awards may not be sold, transferred, pledged, assigned or otherwise encumbered during the period specified by the Committee for purposes of such Award (the "Deferral Period"). At the expiration of the Deferral Period, or the Elective Deferral Period defined in Section 9.3, share certificates shall be delivered to the Participant, or his legal representative, in a number equal to the number of shares of Stock covered by the Deferred Stock Award. Based on service, performance and/or such other factors or criteria as the Committee may determine, the Committee, however, at or after grant, may accelerate the vesting of all or any part of any Deferred Stock Award and/or waive the deferral limitations for all or any part of such Award. (b) Unless otherwise determined by the Committee, amounts equal to any dividends that would have been payable during the Deferral Period with respect to the number of shares of Stock covered by a Deferred Stock Award if such shares of Stock had been outstanding shall be automatically deferred and deemed to be reinvested in additional Deferred Stock, subject to the same deferral limitations as the underlying Award. (c) Except to the extent otherwise provided in this Plan or in the applicable Award Agreement, upon Termination of Employment during the Deferral Period for a given Award, the Deferred Stock covered by such Award shall be forfeited by the Participant; provided, however, the Committee may provide for accelerated vesting in the event of Termination of Employment due to death, Disability or Retirement, or in the event of hardship or other special circumstances as the Committee deems appropriate. (d) The Committee may require that a designated percentage of the total Fair Market Value of the shares of Deferred Stock held by one or more Participants be paid in the form of cash in lieu of the issuance of Stock and that such cash payment be applied to the satisfaction of the federal and state income and employment tax withholding obligations that arise at the time the Deferred Stock becomes free of all restrictions. The designated percentage shall be equal to the minimum income and employment tax withholding rate in effect at the time under applicable federal and state laws. (e) The Committee may provide one or more Participants subject to the mandatory cash payment with an election to receive an additional percentage of the total value of the Deferred Stock in the form of a cash payment in lieu of the issuance of Deferred Stock. The additional percentage shall not exceed the difference between 50% and the designated percentage cash payment. (f) The Committee may impose such further terms and conditions on partial cash payments with respect to Deferred Stock as it deems appropriate, including any restrictions necessary to comply with Section 16(b) of the Act. 9.3 A Participant may elect to further defer receipt of Deferred Stock for a specified period or until a specified event (the "Elective Deferral Period"), subject in each case to the Committee's approval and to such terms as are determined by the Committee. Subject to any exceptions adopted by the Committee, such election must generally be made at least 12 months prior to completion of the Deferral Period for the Deferred Stock Award in question, or for the applicable installment of such an Award. 9.4 Each Award shall be confirmed by, and subject to the terms of, a Deferred Stock Award Agreement. 9.5 In order to better ensure that the Award actually reflects the performance of the Company and the service of the Participant, the Committee may provide, in its sole discretion, for a tandem performance-based or other Award designed to guarantee a minimum value, payable in cash or Stock to the recipient of a Deferred Stock Award, subject to such performance, future service, deferral and other terms and conditions as may be specified by the Committee. ARTICLE X - STOCK AWARDS 10.1 A Stock Award shall be granted only in payment of compensation that has been earned or as compensation to be earned, including without limitation, compensation awarded concurrently with or prior to the grant of the Stock Award. 10.2 For the purposes of this Plan, in determining the value of a Stock Award, all shares of Stock subject to such Stock Award shall be valued at not less than 100% of the Fair Market Value of such shares of Stock on the date such Stock Award is granted, regardless of whether or when such shares of Stock are issued or transferred to the Participant and whether or not such shares of Stock are subject to restrictions which affect their value. 10.3 Shares of Stock subject to a Stock Award may be issued or transferred to the Participant at the time the Stock Award is granted, or at any time subsequent thereto, or in installments from time to time, as the Committee shall determine. If any such issuance or transfer shall not be made to the Participant at the time the Stock Award is granted, the Committee may provide for payment to such Participant, either in cash or shares of Stock, from time to time or at the time or times such shares of Stock shall be issued or transferred to such Participant, of amounts not exceeding the dividends which would have been payable to such Participant in respect of such shares of Stock, as adjusted under Section 3.11, if such shares of Stock had been issued or transferred to such Participant at the time such Stock Award was granted. Any issuance payable in shares of Stock under the terms of a Stock Award, at the discretion of the Committee, may be paid in cash on each date on which delivery of shares of Stock would otherwise have been made, in an amount equal to the Fair Market Value on such date of the shares of Stock which would otherwise have been delivered. 10.4 A Stock Award shall be subject to such terms and conditions, including without limitation, restrictions on the sale or other disposition of the Stock Award or of the shares of Stock issued or transferred pursuant to such Stock Award, as the Committee shall determine; provided, however, that upon the issuance or transfer of shares pursuant to a Stock Award, the Participant, with respect to such shares of Stock, shall be and become a shareholder of the Company fully entitled to receive dividends, to vote to the extent, if any, such shares possess voting rights and to exercise all other rights of a shareholder except to the extent otherwise provided in the Stock Award. Each Stock Award shall be evidenced by a written Award Agreement in such form as the Committee shall determine. ARTICLE XI - PERFORMANCE SHARES 11.1 Awards of Performance Shares may be made to certain Participants as an incentive for the performance of future services that will contribute materially to the successful operation of the Company. Awards of Performance Shares may be made either alone, in addition to or in tandem with other Awards granted under the Plan and/or cash payments made outside of the Plan. 11.2 With respect to Awards of Performance Shares, which may be issued for no consideration or such minimum consideration as is required by applicable law, the Committee shall: (a) determine and designate from time to time those Participants to whom Awards of Performance Shares are to be made; (b) determine the performance period (the "Performance Period") and/or performance objectives (the "Performance Objectives") applicable to such Awards; (c) determine the form of settlement of a Performance Share; and (d) generally determine the terms and conditions of each such Award. At any date, each Performance Share shall have a value equal to the Fair Market Value, determined as set forth in Section 2.15. 11.3 Performance Periods may overlap, and Participants may participate simultaneously with respect to Performance Shares for which different Performance Periods are prescribed. 11.4 The Committee shall determine the Performance Objectives of Awards of Performance Shares. Performance Objectives may vary from Participant to Participant and between Awards and shall be based upon such performance criteria or combination of factors as the Committee may deem appropriate, including for example, but not limited to, minimum earnings per share or return on equity. If during the course of a Performance Period there shall occur significant events which the Committee expects to have a substantial effect on the applicable Performance Objectives during such period, the Committee may revise such Performance Objectives. 11.5 The Committee shall determine for each Participant the number of Performance Shares which shall be paid to the Participant if the applicable Performance Objectives are exceeded or met in whole or in part. 11.6 If a Participant terminates service with the Company during a Performance Period because of death, Disability, Retirement or under other circumstances in which the Committee in its discretion finds that a waiver would be appropriate, that Participant, as determined by the Committee, may be entitled to a payment of Performance Shares at the end of the Performance Period based upon the extent to which the Performance Objectives were satisfied at the end of such period and pro rated for the portion of the Performance Period during which the Participant was employed by the Company; provided, however, the Committee may provide for an earlier payment in settlement of such Performance Shares in such amount and under such terms and conditions as the Committee deems appropriate or desirable. If a Participant terminates service with the Company during a Performance Period for any other reason, then such Participant shall not be entitled to any payment with respect to that Performance Period unless the Committee shall otherwise determine. 11.7 Each Award of a Performance Share shall be paid in whole shares of Stock, or cash, or a combination of Stock and cash as the Committee shall determine, with payment to be made as soon as practicable after the end of the relevant Performance Period. 11.8 The Committee shall have the authority to approve requests by Participants to defer payment of Performance Shares on terms and conditions approved by the Committee and set forth in a written Award Agreement between the Participant and the Company entered into in advance of the time of receipt or constructive receipt of payment by the Participant. ARTICLE XII - OTHER STOCK-BASED AWARDS 12.1 Other awards that are valued in whole or in part by reference to, or are otherwise based on, Stock ("Other Stock-Based Awards"), including without limitation, convertible preferred stock, convertible debentures, exchangeable securities, phantom stock and Stock awards or options valued by reference to book value or performance, may be granted either alone or in addition to or in tandem with Stock Options, Stock Rights, Restricted Stock, Deferred Stock or Stock Awards granted under the Plan and/or cash awards made outside of the Plan. Subject to the provisions of the Plan, the Committee shall have authority to determine the Eligible Participants to whom and the time or times at which such Awards shall be made, the number of shares of Stock subject to such Awards, and all other conditions of the Awards. The Committee also may provide for the grant of shares of Stock upon the completion of a specified Performance Period. The provisions of Other Stock-Based Awards need not be the same with respect to each recipient. 12.2 Other Stock-Based Awards made pursuant to this Article XII shall be subject to the following terms and conditions: (a) Subject to the provisions of this Plan and the Award Agreement, shares of Stock subject to Awards made under this Article XII may not be sold, assigned, transferred, pledged or otherwise encumbered prior to the date on which the shares are issued, or, if later, the date on which any applicable restriction, performance or deferral period lapses. (b) Subject to the provisions of this Plan and the Award Agreement and unless otherwise determined by the Committee at the time of the Award, the recipient of an Award under this Article XII shall be entitled to receive, currently or on a deferred basis, interest or dividends or interest or dividend equivalents with respect to the number of shares covered by the Award, as determined at the time of the Award by the Committee, in its sole discretion, and the Committee may provide that such amounts, if any, shall be deemed to have been reinvested in additional Stock or otherwise reinvested. (c) Any Award under this Article XII and any Stock covered by any such Award shall vest or be forfeited to the extent so provided in the Award Agreement, as determined by the Committee, in its sole discretion. (d) Upon the Participant's Retirement, Disability or death, or in cases of special circumstances, the Committee may, in its sole discretion, waive in whole or in part any or all of the remaining limitations imposed hereunder, if any, with respect to any or all of an Award under this Article XII. (e) Each Award under this Article XII shall be confirmed by, and subject to the terms of, an Award Agreement. (f) Stock, including securities convertible into Stock, issued on a bonus basis under this Article XII may be issued for no cash consideration. 12.3 Other Stock-Based Awards may include a phantom stock Award, which is subject to the following terms and conditions: (a) The Committee shall select the Eligible Participants who may receive phantom stock Awards. The Eligible Participant shall be awarded a phantom stock unit, which shall be the equivalent to a share of Stock. (b) Under an Award of phantom stock, payment shall be made on the dates or dates as specified by the Committee or as stated in the Award Agreement and phantom stock Awards may be settled in cash, Stock, or some combination thereof. (c) The Committee shall determine such other terms and conditions of each Award as it deems necessary in its sole discretion. ARTICLE XIII - ACCELERATION EVENTS 13.1 For the purposes of the Plan, an Acceleration Event shall occur in the event of a "Potential Change in Control," or "Change in Control" or a "Board-Approved Change in Control", as those terms are defined below. 13.2 A "Change in Control" shall be deemed to have occurred if: (a) Any "Person" as defined in Section 3(a)(9) of the Act, including a "group" (as that term is used in Sections 13(d)(3) and 14(d)(2) of the Act), but excluding the Company and any employee benefit plan sponsored or maintained by the Company, including any trustee of such plan acting as trustee, who: (i) makes a tender or exchange offer for any shares of the Company's Stock (as defined below) pursuant to which any shares of the Company's Stock are purchased (an "Offer"); or (ii) together with its "affiliates" and "associates" (as those terms are defined in Rule 12b-2 under the Act) becomes the "Beneficial Owner" (within the meaning of Rule 13d-3 under the Act) of at least 20% of the Company's Stock (an "Acquisition"); (b) The shareholders of the Company approve a definitive agreement or plan to merge or consolidate the Company with or into another corporation, to sell or otherwise dispose of all or substantially all of its assets, or to liquidate the Company (individually, a "Transaction"); or (c) When, during any period of 24 consecutive months during the existence of the Plan, the individuals who, at the beginning of such period, constitute the Board (the "Incumbent Directors") cease for any reason other than death to constitute at least a majority thereof; provided, however, that a director who was not a director at the beginning of such 24 month period shall be deemed to have satisfied such 24 month requirement, and be an Incumbent Director, if such director was elected by, or on the recommendation of or with the approval of, at least two-thirds of the directors who then qualified as Incumbent Directors either actually, because they were directors at the beginning of such 24 month period, or by prior operation of this Section 13.2(c). 13.3 A "Board-Approved Change in Control" shall be deemed to have occurred if the Offer, Acquisition or Transaction, as the case may be, is approved by a majority of the Directors serving as members of the Board at the time of the Potential Change in Control or Change in Control. 13.4 A "Potential Change in Control" means the happening of any one of the following: (a) The approval by shareholders of an agreement by the Company, the consummation of which would result in a Change in Control of the Company, as defined in Section 13.2; or (b) The acquisition of Beneficial Ownership, directly or indirectly, by any entity, person or group, other than the Company or any Company employee benefit plan, including any trustee of such plan acting as such trustee, of securities of the Company representing five percent or more of the combined voting power of the Company's outstanding securities and the adoption by the Board of a resolution to the effect that a Potential Change in Control of the Company has occurred for the purposes of this Plan. 13.5 Upon the occurrence of an Acceleration Event, subject to the approval of the Committee if the Acceleration Event results from a Board-Approved Change in Control, all then outstanding Performance Shares with respect to which the applicable Performance Period has not been completed shall be paid as soon as practicable as follows: (a) all Performance Objectives applicable to the Award of Performance Shares shall be deemed to have been satisfied to the extent necessary to result in payment of 100% of the Performance Shares covered by the Award; and (b) the applicable Performance Period shall be deemed to have ended on the date of the Acceleration Event; (c) the payment to the Participant shall be the amount determined either by the Committee, in its sole discretion, or in the manner stated in the Award Agreement. This amount shall then be multiplied by a fraction, the numerator of which is the number of full calendar months of the applicable Performance Period that have elapsed prior to the date of the Acceleration Event, and the denominator of which is the total number of months in the original Performance Period; and (d) upon the making of any such payment, the Award Agreement as to which it relates shall be deemed canceled and of no further force and effect. 13.6 Upon the occurrence of an Acceleration Event, subject to the approval of the Committee if the Acceleration Event results from a Board-Approved Change in Control, the Committee in its discretion may declare any or all then outstanding Stock Options, and any or all related Stock Rights outstanding for at least six months, not previously exercisable and vested as immediately exercisable and fully vested, in whole or in part. 13.7 Upon the occurrence of an Acceleration Event, subject to the approval of the Committee if the Acceleration Event results from a Board-Approved Change in Control, the Committee in its discretion, may declare the restrictions applicable to Awards of Restricted Stock, Deferred Stock or Other Stock-Based Awards to have lapsed, in which case the Company shall remove all restrictive legends and stop-transfer orders applicable to the certificates for such shares of Stock, and deliver such certificates to the Participants in whose names they are registered. 13.8 The value of all outstanding Stock Options, Stock Rights, Restricted Stock, Deferred Stock, Performance Shares, Stock Awards and Other Stock-Based Awards, in each case to the extent vested, shall, unless otherwise determined by the Committee in its sole discretion at or after grant but prior to any Change in Control, be cashed out on the basis of the "Change in Control Price," as defined in Section 13.9 as of the date such Change in Control or such Potential Change in Control is determined to have occurred or such other date as the Committee may determine prior to the Change in Control. 13.9 For purposes of Section 13.8, "Change in Control Price" means the highest price per share of Stock paid in any transaction reported on the exchange on which the Stock is then traded, or paid or offered in any bona fide transaction related to a Potential or actual Change in Control of the Company at any time during the 60 day period immediately preceding the occurrence of the Change in Control, or, where applicable, the occurrence of the Potential Change in Control event, in each case as determined by the Committee except that, in the case of Incentive Stock Options and Stock Appreciation Rights, or Limited Stock Appreciation Rights, relating to such Incentive Stock Options, such price shall be based only on transactions reported for the date on which the optionee exercises such Stock Appreciation Rights, or Limited Stock Appreciation Rights. ARTICLE XIV - AMENDMENT AND TERMINATION 14.1 The Board, upon recommendation of the Committee, or otherwise, at any time and from time to time, may amend or terminate the Plan. To the extent required by Rule 16b-3 under the Act, no amendment, without approval by the Company's shareholders, shall: (a) alter the group of persons eligible to participate in the Plan; (b) except as provided in Section 3.6, increase the maximum number of shares of Stock or Stock Options or Stock Rights which are available for Awards under the Plan; (c) extend the period during which Incentive Stock Option Awards may be granted beyond September 15, 2003; (d) limit or restrict the powers of the Committee with respect to the administration of this Plan; (e) change the definition of an Eligible Participant for the purpose of an Incentive Stock Option or increase the limit or the value of shares of Stock for which an Eligible Participant may be granted an Incentive Stock Option; (f) materially increase the benefits accruing to Participants under this Plan; (g) materially modify the requirements as to eligibility for participation in this Plan; or (h) change any of the provisions of this Article XIV. 14.2 No amendment to or discontinuance of this Plan or any provision thereof by the Board or the shareholders of the Company shall, without the written consent of the Participant, adversely affect, as shall be determined by the Committee, any Award theretofore granted to such Participant under this Plan; provided, however, the Committee retains the right and power to: (a) annul any Award if the Participant is terminated for cause as determined by the Committee; (b) provide for the forfeiture of shares of Stock or other gain under an Award as determined by the Committee for competing against the Company; and (c) convert any outstanding Incentive Stock Option to a Nonqualified Stock Option. 14.3 If an Acceleration Event has occurred, no amendment or termination shall impair the rights of any person with respect to an outstanding Award as provided in Article XIII. ARTICLE XV - MISCELLANEOUS PROVISIONS 15.1 Nothing in the Plan or any Award granted hereunder shall confer upon any Participant any right to continue in the employ of the Company, or to serve as a director thereof, or interfere in any way with the right of the Company to terminate his or her employment at any time. Unless specifically provided otherwise, no Award granted under the Plan shall be deemed salary or compensation for the purpose of computing benefits under any employee benefit plan or other arrangement of the Company for the benefit of its employees unless the Company shall determine otherwise. No Participant shall have any claim to an Award until it is actually granted under the Plan. To the extent that any person acquires a right to receive payments from the Company under the Plan, such right shall, except as otherwise provided by the Committee, be no greater than the right of an unsecured general creditor of the Company. All payments to be made hereunder shall be paid from the general funds of the Company, and no special or separate fund shall be established and no segregation of assets shall be made to assure payment of such amounts, except as provided in Article VIII with respect to Restricted Stock and except as otherwise provided by the Committee. 15.2 The Company may make such provisions and take such steps as it may deem necessary or appropriate for the withholding of any taxes which the Company is required by any law or regulation of any governmental authority, whether federal, state or local, domestic or foreign, to withhold in connection with any Stock Option or the exercise thereof, any Stock Right or the exercise thereof, or in connection with any other type of equity-based compensation provided hereunder or the exercise thereof, including, but not limited to, the withholding of payment of all or any portion of such Award or another Award under this Plan until the Participant reimburses the Company for the amount the Company is required to withhold with respect to such taxes, or canceling any portion of such Award or another Award under this Plan in an amount sufficient to reimburse itself for the amount it is required to so withhold, or selling any property contingently credited by the Company for the purpose of paying such Award or another Award under this Plan, in order to withhold or reimburse itself for the amount it is required to so withhold. 15.3 The Plan and the grant of Awards shall be subject to all applicable federal and state laws, rules, and regulations and to such approvals by any United States government or regulatory agency as may be required. Any provision herein relating to compliance with Rule 16b-3 under the Act shall not be applicable with respect to participation in the Plan by Participants who are not subject to Section 16(b) of the Act. 15.4 The terms of the Plan shall be binding upon the Company, and its successors and assigns. 15.5 Neither a Stock Option, Stock Right, nor any other type of equity-based compensation provided for hereunder, shall be transferable except as provided for herein. Unless otherwise provided by the Committee or in an Award Agreement, transfer restrictions shall only apply to Incentive Stock Options as required in Article IV and to the extent otherwise required by federal or state securities laws. If any Participant makes such a transfer in violation hereof, any obligation of the Company shall forthwith terminate. 15.6 This Plan and all actions taken hereunder shall be governed by the laws of the State of Delaware, except to the extent preempted by the Employee Retirement Income Security Act of 1974, as amended. 15.7 The Plan is intended to constitute an "unfunded" plan for incentive and deferred compensation. With respect to any payments not yet made to a Participant by the Company, nothing contained herein shall give any such Participant any rights that are greater than those of a general creditor of the Company. In its sole discretion, the Committee may authorize the creation of trusts or other arrangements to meet the obligations created under the Plan to deliver shares of Stock or payments in lieu of or with respect to Awards hereunder; provided, however, that, unless the Committee otherwise determines with the consent of the affected Participant, the existence of such trusts or other arrangements is consistent with the "unfunded" status of the Plan. 15.8 Each Participant exercising an Award hereunder agrees to give the Committee prompt written notice of any election made by such Participant under Section 83(b) of the Code, or any similar provision thereof. 15.9 If any provision of this Plan or an Award Agreement is or becomes or is deemed invalid, illegal or unenforceable in any jurisdiction, or would disqualify the Plan or any Award Agreement under any law deemed applicable by the Committee, such provision shall be construed or deemed amended to conform to applicable laws or if it cannot be construed or deemed amended without, in the determination of the Committee, materially altering the intent of the Plan or the Award Agreement, it shall be stricken and the remainder of the Plan or the Award Agreement shall remain in full force and effect. MEDTOX SCIENTIFIC, INC. ATTEST: By: ______________________________ Authorized Officer (Corporate Seal) - ----------------------------- Secretary EX-10.47 4 0004.txt EXHIBIT 10.47 Exhibit 10.47 SEVERANCE AGREEMENT THIS SEVERANCE AGREEMENT ("Agreement") is made effective as of _________, 2000 between MEDTOX Scientific, Inc., a Delaware corporation (the "Company") and ______________ (the "Employee"). RECITALS WHEREAS, the Company desires to foster the continuous employment of certain key management personnel and to induce Employee to remain in the employ of the Company, and in consideration of the agreement of Employee in Section 3 below, the Company and Employee agree as follows: 1. Definitions. The following defined terms have the respective meanings described below: 1.1 Cause. Termination by the Company of the Employee's employment for "Cause" shall mean termination upon: (a) the willful and continued failure by the Employee to substantially perform Employee's duties with the Company (other than any such failure resulting from Employee's incapacity due to physical or mental illness) after a written demand for substantial performance is delivered to the Employee by the Company's Chief Executive Officer, which demand specifically identifies the manner in which the Company believes that Employee has not substantially performed Employee's duties; or (b) the willful engaging by the Employee in conduct which is demonstrably and materially injurious to the Company, monetarily or otherwise. For purposes of this Section 1.1 no act, or failure to act, on the Employee's part shall be deemed "willful" unless done, or omitted to be done, by the Employee not in good faith and without reasonable belief that the Employee's action or omission was in the best interest of the Company. 1.2 Company. The term "Company" means MEDTOX Scientific, Inc. and any successors and assigns of the Company. 2. Term of Agreement. This Agreement shall commence on the above effective date and continue in effect through January 2, 2001 (the "Term"). Commencing on January 3, 2000 and each January 3 thereafter, the Term of this Agreement shall automatically be extended for one additional year unless, not later than July 1 of the preceding year, the Company gives Employee written notice that it does not desire to extend this Agreement. The Term of this Agreement shall be subject to earlier termination as described in Section 4 below. 3. Notice and Date of Termination. If the Company elects to terminate the employment of Employee, the Company will provide Employee a "Notice of Termination" which shall state Employee's final day of employment (the "Date of Termination") and whether or not such termination is for Cause. 4. Severance Payment for Termination by Company Other Than For Cause. If during the Term of this Agreement the Company terminates the employment of Employee other than for Cause, Employee shall be entitled to the following benefits subject to the provisions of Section 6 of this Agreement: (a) the Company will pay to Employee the Employee's then current base salary during the twelve (12) month period following the Date of Termination subject to applicable withholdings and in accordance with the regular payroll practices of the Company. (b) continuous coverage, at the Company's expense, under any group health plan maintained by or on behalf of the Company, in which Employee participated as of the Date of Termination, during the twelve (12) month period following the Date of Termination. Employee's right to continued coverage under this section shall in no way reduce or limit any continuation coverage under such group health plan to which Employee or any of Employee's qualified beneficiaries are entitled under the provisions of the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA") or Minnesota Statutes ss.ss. 61A.092 and 62A.17 et seq. This extension of coverage, however, shall be coordinated with, and shall be provided concurrently with, any benefits or continuation rights otherwise available to Employee and Employee's eligible dependents under state or federal continuation of coverage statutes, including but not limited to, Minnesota Statutes ss.ss. 61A.092 and 62A.17 et seq. and the federal Consolidated Omnibus Budget Reconciliation Act ("COBRA"). Accordingly, within ten (10) days after the Date of Termination, Employee and Employee's dependents who are eligible for such statutory continuation rights shall complete all forms and papers necessary and customary to elect such continuation coverage. The Parties expressly agree that the extension of benefits provided for by this Agreement is not intended to create a retiree health plan covering any other employees. In all other respects, the payment of benefits, including the amounts and timing thereof, to Employee and Employee's eligible dependents will be governed by the terms of applicable employee benefit plans for which Employee and Employee's dependents are eligible. Employer will answer any reasonable questions that Employee may have from time to time and will offer him the same assistance given other participants in employee benefit plans so long as Employee is entitled to benefits as provided herein or under the terms of those plans. Nothing in this Agreement, including the Severance Payments described in this Section 4, shall in any way be construed to extend the period of Employee's employment with the Company, and the Date of Termination shall not be extended beyond the date as specified by the Company pursuant to Section 4 of this Agreement. 5. Sole Remedy. The payments under Section 4 shall be the sole remedy of Employee in connection with the termination of Employee's employment by the Company under the circumstances described in Section 4 of this Agreement. 6. Conditions of Receiving Severance Payments. As a condition of receiving the benefits described in Section of this Agreement, and in consideration of receiving the Severance Payment described therein, Employee agrees as follows: 6.1 Release of Claims. Employee agrees to execute a general release in favor of the Company in the form attached hereto as Exhibit A within ten (10) days of the Date of Termination. Severance benefits as described in Section 4 shall be provisionally made to Employee during this ten (10) day period, and during the "Consideration Period and Rescission of Release" period described in Exhibit A, Section 3, provided that Employee shall immediately reimburse the Company for any such payments upon Employee's failure to sign Exhibit A within the ten (10) day period, or upon Employee's rescission of the general release contained in Exhibit A as provided therein. If Employee fails to sign the general release contained in Exhibit A within ten (10) days of the Date of Termination, or subsequently rescinds the release as provided in Exhibit A, Section 3, the Company shall have no obligation to provide benefits to Employee as provided in Section 4 of this Agreement. 6.2 Covenant Not to Compete. Employee agrees that during the twelve (12) month period following the Date of Termination during which Employee receives Severance Payments as described in Section 4, Employee 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. The parties believe that this Covenant Not to Compete is reasonable and fully enforceable. Nevertheless, if a court of competent jurisdiction or arbitrator with authority to interpret and enforce this Agreement finds any portion of this Covenant Not to Compete unreasonable in geographic scope or duration, such court or arbitrator shall have the power to modify this Covenant Not to Compete so as to render it reasonable and enforceable, while still protecting the Company's legitimate employer interests. 6.3 Covenant Not to Solicit. Employee agrees that during the twelve (12) month period following the Date of Termination during which Employee receives Severance Payments as described in Section 4, Employee will not, either personally, or through an employer, firm, agent, servant, employee, partner, shareholder, representative, affiliate, or any other entity: (a) Solicit any customer which is or was a customer of the Company or its affiliates as of the date of the Date of Termination or the twelve (12) month period immediately preceding the Date of Termination, for the purposes of providing or delivering products or services which compete with the business, products or services of the Company or its affiliates, without the prior written consent of the Company's Chief Executive Officer. (b) Employ or offer to employ any individual employed by the Company within the twelve (12) month period immediately preceding the Date of Termination, or request, advise or entice any such individual to leave the employment of the Company, without the prior written consent of the Company. 6.4 Assignment of Intellectual Property. Employee agrees to acknowledge that all documents and other tangible property relating in any way to the business of the Company which were conceived or generated by Employee or came into Employee's possession during the period of Employee's employment by the Company are the exclusive property of the Company. By accepting payments pursuant to Section 4 of this Agreement, Employee thereby assigns, transfers, and sells to the Company any rights Employee may have in all improvements, inventions, designs, ideas, works of authorship, copyrightable works, discoveries, trademarks, copyrights, trade secrets, formulae, processes, techniques, know-how, and data, whether or not patentable, made or conceived or reduced to practice or learned by Employee, either alone or jointly with others, during the period of Employee's employment by the Company (whether or not during normal working hours), or that resulted from tasks assigned to Employee by the Company or resulted from use of premises, equipment, or resources owned, leased, or contracted for by the Company (collectively referred to as "Inventions"). Employee agrees to provide all reasonable assistance to the Company in perfecting and maintaining its rights to the Inventions, including the execution of documents and things memorializing the assignment of ownership of such Inventions to the Company as provided herein. 6.5 Nondisclosure. Employee agrees not to use or disclose any information owned by, developed by, for, or about the Company, or in any respect concerning or relating to the Company's business, or the business of any of its clients or customers, that Employee has acquired during Employee's employment by the Company ("Confidential Information"). Such Confidential Information shall include, but not be limited to, all computer programs, product designs, product specifications, pricing, discounting, marketing, research, development, business affairs, future plans, technical data, customer lists, Inventions (as defined in Paragraph 6.4 of this Agreement), or any other information which Employee has received as a result of Employee's employment by the Company, whether or not acquired or developed by the Company. Employee acknowledges the Company's right to prohibit Employee's disclosure of Confidential Information and that the rights created by this Agreement are in addition to all other rights which the Company has to prevent the disclosure of trade secret information. Employee agrees not to use such Confidential Information himself or disclose such information to any other party, directly or indirectly without the prior written consent of the Company. To the extent not inconsistent with this Section 6.5, nothing herein shall in any way prevent Employee from utilizing Employee's general business, management, and financial skills, techniques, and abilities. By accepting payments pursuant to Section 4 of this Agreement, Employee thereby agrees to the terms provided in this Section 6.5. 6.6 Return of Records, Documents and Property. Employee will return to the Company all its records, equipment, machinery, keys, correspondence, documents, Inventions (as defined in Paragraph 6.4 of this Agreement), and Confidential Information (as defined in Paragraph 6.5 of this Agreement) in Employee's possession within three (3) days of the Date of Termination. By accepting payments pursuant to Section 4 of this Agreement, Employee thereby agrees to the terms provided in this Section 6.6. 6.7 Remedy for Breach. Employee agrees that in the event Employee breaches any of the covenants contained in Sections 6.1, 6.2, 6.3, 6.4, 6.5, and/or 6.6 of this Agreement, irreparable injury will result to the Company, the Company's remedy at law will be inadequate, and the Company will be entitled to an injunction to restrain the continuing breach of this Agreement by Employee, or Employee's partners, agents, servants, employees, or representatives, or any other persons or entities acting for or with Employee, in addition to any other rights or remedies which the Company may have at law or in equity. In the event of any violation by Employee of this Section 6, Employee agrees to pay the reasonable costs and attorneys' fees which the Company incurs in pursuing any of its rights with respect to this Section 6, in addition to the damages sustained by the Company. 7. Termination of Agreement. If (a) the Company terminates the employment of Employee for Cause, (b) Employee voluntarily resigns from full time employment with the Company, (c) Employee retires from full time employment with the Company, (d) Employee dies or (e) Employee is no longer actively employed by the Company due to disability (as such term is defined under the Company's employee benefit programs); then (1) the Term of this Agreement shall automatically terminate and (2) Employee shall have no right to any severance payments or other benefits from the Company (except for applicable COBRA requirements or applicable benefits under the Company's stock option plans) or any other right or remedy under this Agreement. 8. Confidentiality. The existence of this Agreement, and each of the terms and provisions of this Agreement, are confidential and shall not be disclosed by Employee in any manner (other than to Employee's counsel who agrees to comply with this provision of confidentiality) without the prior written consent of the Company's Chief Executive Officer. 9. Arbitration. Except as provided in Section 6.7 of this Agreement, any dispute or claim under this Agreement, not resolved by the parties, shall be resolved by final and binding arbitration. Unless the parties agree otherwise, the arbitration shall be conducted in accordance with the rules of the American Arbitration Association. There shall be a single arbitrator, whose award shall become final ten (10) days after it is delivered in writing to the parties for their final comment. The arbitration shall be governed by the United States Arbitration Act, 9 U.S.C. ss. 1 et seq. Judgment upon the arbitrator's award may be entered by any court having jurisdiction thereof. The prevailing party shall also be entitled to recovery of reasonable attorneys' fees. The arbitration shall be conducted in Minneapolis, Minnesota and any awards shall be subject to the limitations of liability expressed in this Agreement. 10. No Employment Contract. Nothing in this Agreement shall be construed to require the Company to continue the employment of Employee. 11. Assignment. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, personal representatives, successors and assigns. Employee may not assign Employee's rights under this Agreement. 12. Notice. Any notice given under this Agreement must be in writing and delivered to the last known address of the party receiving said notice. 13. Governing Law. This Agreement and any disputes arising under or in connection with it, shall be governed by the laws of the State of Minnesota. 14. Entire Agreement and Amendment. This Agreement contains the entire agreement between the parties pertaining to the subject matter hereof. This Agreement may only be amended in writing signed by Employee and by the Chief Executive Officer acting on behalf of the Company. IN WITNESS WHEREOF, the Company and Employee have executed this Agreement effective as of the day and year first above written. MEDTOX SCIENTIFIC, INC. Employee Name By ------------------------------ ----------------------------------- Its: ------------------------------ (Employee's signature) Date Date ------------------------------- ------------------------------ EXHIBIT A GENERAL RELEASE 1. Definitions. I intend all words used in this Release to have their plain meanings in ordinary English. Technical legal words are not needed to describe what I mean. Specific terms I use in this Release have the following meanings: a. "I" "me" and "my", as used herein, shall at all times mean Employee and anyone who has or obtains any legal rights or claims through said named person. b. "the Company", as used herein, shall at all times mean MEDTOX Scientific, Inc., its parent corporations, subsidiaries, successors and assigns, partners, any affiliated and predecessor companies, their affiliated and predecessor or management companies, their successors and assigns, and the present and former officers, directors, shareholders, partners, employees, attorneys, and agents of any of them, whether in their individual or official capacities, and the current and former trustees or administrators of any pension, welfare, or other employee benefit plan of the Company, in their official and individual capacities. c. "My Claims" mean all of the claims I have now against the Company, whether or not I know about those claims, including but not limited to, claims for any action or inaction, loss, expense, or any damages of whatever nature arising from any occurrence or occurrences from the beginning of time until the date of this Release, including claims for: breach of contract; payment of wages, commissions, reimbursements, sick pay, vacation pay, employee benefits, insurance, pension, or other compensation; fraud or misrepresentation; violation of any federal, state, and/or local law, regulation or rule, including but not limited to, the Minnesota Human Rights Act, Title VII of the Civil Rights Act of 1964, the Americans with Disabilities Act, the Rehabilitation Act, the Age Discrimination in Employment Act, the Employee Retirement Income Security Act, the Consolidated Omnibus Budget Reconciliation Act, the Family and Medical Leave Act, the Fair Labor Standards Act, the Worker Adjustment and Retraining Notification Act, and all other federal, state, and/or local civil rights laws prohibiting discrimination or other unlawful activity on the basis of race, color, creed, marital status, sex, age, religion, national origin, disability, pregnancy, sexual orientation, political affiliation, status with respect to public assistance, membership in local commission, or any other protected class status; sexual harassment; retaliation; defamation; intentional or negligent infliction of emotional distress; breach of the covenant of good faith and fair dealing; promissory estoppel; unjust enrichment; negligence; wrongful termination of employment; constructive discharge; invasion of privacy; fraudulent inducement; negligent hiring, retention, training, and/or supervision; all other claims for unlawful employment practices; all claims for attorney's fees, costs, disbursements, fees, or other payments; and all other common law, legal, equitable or statutory claims (whether on a contract, tort, or other theory), whether they could be brought directly by me on my own behalf or by any other person, agency, or organization on my behalf. 2. Agreement to Release My Claims. On behalf of myself, my attorneys, heirs, executors, administrators, successors and assigns, I agree to release, discharge, and give up all My Claims against the Company in exchange for the compensation, promises and undertakings as described in the Severance Agreement between me and the Company. I agree to release and discharge the Company not only from any and all of My Claims that I could make on my own behalf, but also from those claims that may or could be brought by any other person or organization on my behalf. I have not caused or permitted to be served, filed, or commenced, and I will not cause or permit to be served, filed, or commenced, any lawsuits, charges, complaints, actions, notices, or other demands against the Company with any federal, state, or local judicial or administrative agency or body based on My Claims. In the event any such claim has been or is asserted, I agree that this Release shall act as a total and complete bar to my re-employment or to recovery of any relief or sum or amount whatsoever from the Company, whether labeled award, liability, damages, judgment, backpay, wages, fine, or penalty, or otherwise resulting directly or indirectly from any lawsuit, remedy, charge, or complaint, whether brought privately by me or by anyone else, including any federal, state, or local judicial or administrative agency or body, whether or not on my behalf or at my request. The payments I am receiving represent full and fair compensation for the release of all My Claims. The Company shall not be obligated and does not owe me anything in addition to that described above. This release shall not affect any claims which could be made under any employee welfare benefit plan or any pension or retirement plan through the Company. 3. Non-Admission. Even though the Company is paying me to release My Claims, the Company does not admit that it is responsible or legally obligated to me. In fact, the Company denies that it is responsible or legally obligated to me or that it has engaged in any wrongdoing. 4. Consideration Period and Rescission of Release. I understand that I may take up to twenty-one (21) calendar days after receiving this General Release to consider whether I wish to sign this General Release. In addition, I understand that I may rescind (i.e., revoke and cancel) my release of claims arising under the federal Age Discrimination in Employment Act, 29 U.S.C.ss. 621 et seq., within seven (7) calendar days of signing this General Release. I understand that I also may rescind (i.e., revoke and cancel) my release of claims arising under the Minnesota Human Rights Act within fifteen (15) calendar days of signing this General Release. I understand that to be effective, the rescission/revocation must be in writing and delivered to the Company, in care of Richard Braun, Chief Executive Officer, either by hand or by mail within the respective rescission/revocation periods. If sent by mail, the rescission must be: 1. Postmarked within the respective rescission/revocation periods as stated above; 2. Properly addressed, as stated above; and 3. Sent by certified mail, return receipt requested. 5. Knowing and Voluntary. I have read this General Release carefully and understand and agree to all of its terms. I have been advised to discuss this Release with my own attorney. In agreeing to sign this and Release, I have not relied on any statements or explanations made by the Company or its attorneys. ----------------------------------- Employee SUBSCRIBED AND SWORN to before me this ____ day of ________________, 2000 - ------------------------------------ Notary Public EX-10.48 5 0005.txt EXHIBIT 10.48 Exhibit 10.48 PURCHASE & SALE AGREEMENT THIS AGREEMENT is entered into effective the 27th day of July 2000 by and between Medtox Scientific, Inc., a Delaware corporation ("Buyer"); and NMRO, Inc., a Michigan corporation ("Seller")and ESP Employment Screening Partners, Inc., a Delaware corporation ("Selling Shareholder") sometimes hereinafter collectively referred to as ("Sellers"), and solely as to Section 2 hereof, by Dr Murray Lappe, a California resident ("Lappe"). RECITALS: 1. Selling Shareholder is the owner of 100% of all the issued and outstanding stock and equity of Seller and Lappe is the controlling shareholder of Selling Shareholder. 2. Seller and Selling Shareholder are the owners and operators of a specimen collection business ("Business") operating out of the Sellers business location at 8100, 26th Avenue South, Bloomington MN. 55425 ("Premises"). 3. Seller and Selling Shareholder now wish to close down their operations at the Premises and sell the Business to Buyer in exchange for the consideration as hereinafter provided. NOW, THEREFORE, in consideration of the representations, warranties, covenants and agreements of the parties herein contained, and intending to be legally bound thereby, the parties mutually agree as follows: Section 1. Purchase and Sale of Business. Subject to and in express reliance of the warranties, representations and covenants contained in this Agreement, and subject to the terms and conditions hereof, Seller and Selling Shareholder hereby agree to sell, assign, convey and transfer to Buyer all of their right, title and interest, in and to the specific assets of the Business, as described in detail on Exhibit "A" attached hereto and made a part hereof, for the consideration set forth herein (the "Assets"). Simultaneous with the Closing, Seller and Selling Shareholder shall do all things as may be reasonably required to put Buyer into possession and effective control over the conduct of the Business with the specific customers identified in the list attached as Exhibit "B" (the "Customer List"). Section 2. Confidentiality and Non-Competition Agreements. A. Seller and Selling Shareholder acknowledge that their services and their knowledge of the Business are of unique value; and the entrance of Seller or Selling Shareholders into competition, with Buyer, or any of its wholly owned subsidiaries, directly or indirectly, by use of name, reference, or otherwise, in the operation of the Business within the Restricted Territory, as defined below, cannot adequately be compensated by damages in an action at law. In view of the necessity of Seller and Selling Shareholder not entering into competition with Buyer or any of its wholly owned subsidiaries, in the operation of the Business within the Restricted Territory and as a material inducement to Buyer to enter into this Agreement and to pay for the Business, Seller and Selling Shareholder hereby covenant and agree that they will not directly or indirectly, either as principal, agent, manager, employee, owner, partner, shareholder, officer or director of a proprietorship, partnership, corporation or otherwise engage in any activity competitive with the Business for the specific customers identified in the Customer List within a fifty (50) mile radius of the Premises (the "Restricted Territory"); or disparage or otherwise criticize the products or services being provided by, or sold by Buyer or any of its wholly owned subsidiaries within the Restricted Territory for a period of three (3) years from the Closing Date; provided however, that the foregoing non-competition covenant and the other provisions of this Section, shall not apply to either of the following: (1) the solicitation for sale or the sale of on-site testing services offered by eScreen, Inc, a subsidiary of Selling Shareholder ("eScreen"), within the Restricted Territory, to the following persons or entities: Wal Mart, Target, Best Buy, Galyan's, ChoicePoint, UPS, Aerotek, Hyatt, Yellow Freight, or Host Marriott; or (2) the solicitation for sale or the sale of eScreen on-site testing services within the Restricted Territory, by any eScreen-contracting physician, physician group, medical group, medical clinic, occupational clinic or rehabilitation clinic (each, an "eScreen Contractor"), to any persons or entities, regardless of whether they are included on the Customers List, provided only that Sellers do not provide to any such eScreen Contractor a copy of the Customer List or any names therefrom that are not excluded under the immediately preceding clause (1) of this paragraph. Buyer shall have the right to enforce the provisions of this Section and the Confidentiality and Non-competition Agreement by specific remedies including but not limited to temporary restraining orders, and temporary and permanent injunctions, but such remedies shall be cumulative and shall not preclude said parties from seeking damages resulting from a breach of this provision. Seller and Selling Shareholder have carefully read and considered the provisions of this Section and, having done so, agree that the restrictions set forth herein, including but not limited to the time period of the restrictions, the geographical limitation to the Restricted Territory, and the application of such restrictions to particular customers are fair and reasonable and are reasonably required for the protection of the interests of Buyer in the Business. In the event that, notwithstanding the foregoing, any of the provisions of this section shall be held to be invalid or unenforceable, the remaining provisions hereof shall nevertheless continue to be valid and enforceable as though the invalid or unenforceable parts had not been included herein. B. Seller and Selling Shareholder shall keep in confidence all confidential and proprietary information about the Business and the Business operations of Seller being acquired by Buyer. All information relating to such Business operations shall be presumed to be Confidential Information except to the extent that such Confidential Information is otherwise publicly available or is received from a third party not affiliated with Seller or Buyer after the Closing Date. Seller and Selling Shareholder shall keep in confidence all such Confidential Information and other financial information relating to Seller, the Assets and Business operations and will not, without the prior written consent of Buyer, except to the extent required by law or to the extent any such information is otherwise publicly available or received from a third party not affiliated with Buyer or Seller, reveal any such Confidential Information to any third party. All documents relating to the Assets being acquired by Buyer shall be delivered to Buyer at the Closing Date or thereafter if not available or found as of the Closing Date. No such documents shall be reproduced without Buyer's prior written approval. C. Lappe represents and warrants that as the controlling shareholder of the Selling Shareholder, Lappe will derive an indirect but nonetheless recognizable economic benefit from the completion of the transactions contemplated hereby, and therefor as an inducement to Buyer and in consideration of Buyer's entering into this agreement, Lappe agrees that in addition to Sellers, he too shall be personally bound by and shall personally comply with each of the covenants contained within the Confidentiality and Non-Competition Agreements set forth in this Section 2. Lappe represents and warrants that Lappe has carefully read and considered the provisions of this Section and, having done so, agrees that the restrictions set forth herein, including but not limited to the time period of the restrictions, the geographical limitation to the Restricted Territory, and the application of such restrictions to particular customers are fair and reasonable and are reasonably required for the protection of the interests of Buyer in the Business. Section 3. Purchase Price and Allocation. The purchase price for the Business, and the Sellers covenants contained in Section 2 hereof and all other assets being acquired hereunder shall be Two Hundred and Ten Thousand Dollars ($210,000) ("Purchase Price"). It is agreed that the Purchase Price reflects the fair market value of the Business and agreements contained herein. The parties agree to allocate ten percent (10%) of the Purchase Price as consideration for the Confidentiality and Non-Competition Agreements of Sellers and Lappe. Section 4. Payment of Purchase Price. The Purchase Price set forth in Section 3, shall be payable as follows: A. Seventy-Five Thousand Dollars ($75,000) shall be paid in three equal installments of $25,000 each. The first installment shall be due at the time of Closing and the remaining two $25.000 installments payable on the 30th and 60th day, respectively, following the Closing. B. One Hundred Thirty-Five Thousand Dollars ($135,000) in non-cash consideration shall be paid by Buyer by the deliver to Seller at Closing of 15,152 shares of the common stock of Medtox Scientific, Inc. ("Medtox Common Stock"). C. During the period subsequent to the Closing Date and prior to October 1, 2000, or such later date as the parties mutually agree in writing that Buyer may file the Registration Statement as required by paragraph D of Section 7 of this Agreement, Buyer shall have the right and option to re-purchase from Seller the Medtox Common Stock in consideration for the payment by Buyer to Seller of nine dollars per share (for an aggregate re-purchase price of One Hundred Thirty-Six Thousand Three Hundred Sixty-Eight Dollars ($136,368). Section 5. Assumption of Liabilities. The parties hereto agree that Buyer is assuming absolutely no liabilities of Seller or Selling Shareholder related in any way to the Business or the Business assets or operations. Section 6. Representations, Warranties and Covenants of Seller and Selling Shareholder. Seller and Selling Shareholder jointly and severally represent, warrant and covenant to Buyer that as of the date hereof, the Effective Time and Date of Closing: A. Authorization and Authority. The execution, delivery and performance by Seller of this Agreement and all other agreements contemplated hereby shall have been duly and validly authorized and approved by all necessary actions. Seller has the legal power and authority to enter into and perform this Agreement and all other agreements contemplated hereby. Neither the execution and delivery of this Agreement, nor the consummation of any transactions contemplated hereby or thereby, has constituted or resulted in or will constitute or result in a material default or violation by Sellers of any term or provision in the Certificate of Incorporation, Bylaws, or organizing instruments of Sellers, or any agreement to which Sellers are a party, or any judgment, decree, governmental order, statute, rule or regulation by which they are bound or to which their properties or assets, including the Assets referred to herein, are subject. B. Organization and Standing of Seller. Seller is a corporation duly organized, validly existing and in good standing under the laws of the state of Michigan, and has all necessary corporation powers to own its properties and to carry on its business as now owned and operated by it. All shares of Seller are owned by the Selling Shareholder. C. Laws and Governmental Orders. This Agreement and all other agreements contemplated hereby are and will be valid and binding agreements of Seller and Selling Shareholder, enforceable in accordance with their respective terms. Neither the execution nor delivery by Seller or Selling Shareholder of this Agreement or any other agreements contemplated hereby will violate any applicable state or federal law or regulation. D. Business of Seller. The Customer List attached as Exhibit B contains a complete and accurate listing as maintained by Sellers of all of the customers of the Business as of June 30, 2000, without any representation or warranty as to the current status or activity level of any such customers of the Business. E. Agreements and Commitments. Seller has no material commitments and/or agreements which have not been disclosed to and approved by Buyer with any of the customers of the Business included on Exhibit "B" or which include any special pricing, volume discounts, or similar terms that are not already reflected in the gross sales revenue of the Business as of June 30, 2000. F. Financial Information. Seller's financial information provided to Buyer with respect to the customers identified on Exhibit "B" are true, accurate and complete. G. Commissions. Sellers have not incurred any obligation or liability, contingent or otherwise, for broker's or finder's fees in connection with the transactions contemplated by this Agreement. H. Orderly Transition. Seller and Selling Shareholder shall assist Buyer in every reasonable manner to insure an orderly transition of the operation of the Business. As of the Closing Date, the Sellers shall discontinue all specimen collection operations at the Premises and make arrangements for all incoming telephone calls to the Premises to roll over directly to Buyer's location at 8072, 26th Avenue South, Bloomington MN 55425 ("Buyer's Site"). Sellers shall also prominently post on the Premises that Sellers have discontinued all specimen collection business and refer all such business to Buyer's Site. As of the Closing Date Sellers shall authorize Buyer to mail a notice (in a form reasonably satisfactory to Sellers) to all customers of the Business identified on the Customer List that Sellers have transferred the Business to Buyer. I. Investment Intent. The Sellers acknowledge that the Medtox Common Stock has not been registered under the Securities Act of 1933, as amended (the "Securities Act") or any state securities laws, and is being offered and sold in reliance upon federal and state exemptions from such registration. The Sellers have such knowledge and experience in financial and business matters that the Sellers are capable of evaluating the merits and risks of the Medtox Common Stock in connection with this Agreement. The Sellers have received certain information concerning the Buyer and have had the opportunity to obtain additional information as desired by Sellers in order to evaluate the merits and the risks inherent in holding the Medtox Common Stock. The Sellers are able to bear the economic risk and lack of liquidity inherent in holding the Medtox Common Stock for an indefinite period. The Sellers are acquiring the Medtox Common Stock for investment and not with a view toward or for sale or distribution thereof within the meaning of the Securities Act, or with any present intention of distributing or selling the Medtox Common Stock within the meaning of the Securities Act. The Selling Shareholder acknowledges and agrees that after the Closing the Medtox Common Stock may not be sold, transferred, offered for sale, pledged, hypothecated or otherwise disposed of without registration under the Securities Act and any applicable state securities laws, except pursuant to an exemption from such registration available under the Securities Act or such state securities laws. J. Survival of Warranties. All representations and warranties of Sellers regarding the subject matter hereof, are expressly set forth in this Section 6, and Sellers make no other warranties either express or implied with regard to the Business or the Assets, including, but not limited to, the implied warranties of merchantability or fitness for a particular purpose. No representation, covenant or warranty made by Seller or Selling Shareholder in this Agreement or in any exhibit hereto or agreement contemplated hereby contains or will contain on the Closing Date any untrue statement of a material fact or omit or will fail to state material facts necessary to make any statement made not misleading. All representations and warranties made herein by Seller or Selling Shareholder shall be deemed remade on the Closing Date and the obligation of the Sellers with respect to the completeness and accuracy of such representations and warranties shall survive the Closing and continue thereafter as provided in Section 14 hereof. Section 7. Representations, Warranties and Covenants of Buyer. Buyer represents, warrants and covenants to Seller and Selling Shareholder that as of the Effective Time and the Date of Closing: A. Authorization and Authority. The execution, delivery and performance by Buyer of this Agreement and all other agreements contemplated hereby shall have been duly and validly authorized and approved by all necessary actions. Buyer has the legal power and authority to enter into and perform this Agreement and all other agreements contemplated hereby. Neither the execution and delivery of this Agreement, nor the consummation of any transactions contemplated hereby or thereby, has constituted or resulted in or will constitute or result in a material default or violation by Buyer of any term or provision in the Certificate of Incorporation, Bylaws, or organizing instruments of Buyer, or any agreement to which Buyer is a party, or any judgment, decree, governmental order, statute, rule or regulation by which it is bound or to which its properties or assets are subject. B. Laws and Governmental Orders. This Agreement and all other agreements contemplated hereby are and will be valid and binding agreements of Buyer enforceable in accordance with their respective terms. Neither the execution nor delivery by Buyer of this Agreement or any other agreements contemplated hereby will violate any applicable state or federal law or regulation. C. Commissions. Buyer has not incurred any obligation or liability, contingent or otherwise, for broker's or finder's fees in connection with the transactions contemplated by this Agreement. D. Issuance of Medtox Common Stock. With respect to the Medtox Common Stock; (1) such shares are issuable upon and in payment of the Purchase Price as set forth in this Agreement, when so issued, will be duly authorized, validly issued and fully paid and nonassessable; (2) except as set forth in this Agreement, there are no restrictions on the transfer of such shares other than those imposed by state and federal securities laws applicable to the transactions contemplated by this Agreement; and (3) the offer, sale and issuance by the Buyer of all such shares to be issued on the Closing hereunder will comply with or otherwise be exempt from all federal and state securities laws. E. Registration of Common Stock. Buyer agrees to use its best efforts to file with the Securities and Exchange Commission on or before October 1, 2000, a registration statement for the purpose of registering the Medtox Common Stock constituting the non-cash portion of the Purchase Price under the Securities Act of 1933, as amended, and listing the Selling Shareholder as the selling shareholder for purposes of such registration (the "Registration Statement"). Selling Shareholder shall provide to Buyer all information pertaining to the Selling Shareholder, as selling shareholders, necessary for inclusion in such registration statement. Buyer shall bear the cost of preparation and filing such Registration Statement, provided that Sellers shall each bear the costs of their respective legal counsel, if any, engaged to represent them in connection with such Registration Statement. The Buyer's last 10-K, 10-Q and proxy statement filed with the Securities Exchange Commission are each attached hereto as Exhibit "C". Buyer is a reporting company under the Securities Act of 1933 and is current in all of its reporting requirements. F. Financial Statements. The profit and loss statements and the balance sheets of Buyer for the fiscal year ended December 31, 1999, and the quarter ended March 31, 2000 are attached hereto as Exhibit "C" and incorporated herein by reference. Said financial statements fairly and accurately present the operations of Buyer for the periods covered and the financial position of Buyer without material errors as of the date thereof. G. Survival of Warranties. All representations and warranties of Buyer regarding the subject matter hereof, are expressly set forth in this Section 7, and Buyers make no other warranties either express or implied, including but not limited to, any warranty with regard to the financial condition of Buyer, the Medtox Common Stock or the value thereof. No representation, covenant or warranty made by Buyer in this Agreement or in any exhibit hereto or agreement contemplated hereby contains or will contain on the Closing Date any untrue statement of a material fact or omit or will fail to state material facts necessary to make any statement made not misleading. All representations and warranties made herein by Buyer shall be deemed remade on the Closing Date, and the obligations of Buyer with respect to the completeness and accuracy of such representations and warranties shall survive Closing and continue thereafter as provided in Section 14 hereof. Section 8. Seller's Obligations Before Closing. Seller covenants that from the date of this Agreement until Closing Buyer and its counsel, accountants, and other representatives shall have full access during normal business hours to all properties', books, accounts, records, contracts and documents that relate to both the Business and the customers included on the Customer List of the Business (i.e., Seller is not obligated to provide access to its books and records that do not relate to the Business, or that relate to products or services of Seller that are not part of the Business and that are provided by Seller to customers that are included on the Customer List. Seller shall furnish or cause to be furnished to Buyer and their representatives all data and information concerning the customers of the Business serviced on or off the Premises as may be requested. Seller and Selling Shareholder will assist Buyer in every reasonable manner between the date hereof and the Date of Closing for an orderly transition of the operations of the Business. Section 9. Buyer's Obligations Before Closing. Buyer covenants that from the date of this Agreement until the Date of Closing Buyer and its representatives will hold in strict confidence, and will not use to the detriment of Seller or Selling Shareholder any confidential customer data and information obtained in connection with this transaction or agreement, with respect to the Business of Sellers; and if the transactions contemplated by this Agreement are not consummated. Buyer will return to Seller all data and information that Seller may reasonably request, including all extracts and summaries, prepared by or made available to Buyer in connection with this transaction. All such information disclosed shall be kept confidential by Buyer. Section 10. Conditions Precedent to Buyer's Closing. The obligations of Buyer under this Agreement to be performed at the Date of Closing shall be subject to Seller meeting the following conditions at or prior to the Date of Closing, any of which may be waived by Buyer at its option provided, however, that no such waiver of a condition shall constitute a waiver by Buyer of any of its other rights or remedies, at law or in equity, if Seller shall be in default of any of its representations, warranties, or covenants under this Agreement not specifically so waived: A. Representations, Warranties and Covenants. Each of the representations, warranties and covenants made by Seller and Selling Shareholder in this Agreement shall be true in all material respects. B. Compliance with Agreement. Seller and Selling Shareholder shall have materially performed and complied with all of their obligations under this Agreement and all other agreements contemplated hereby which are to be performed or complied with by Seller or Selling Shareholder prior to or at the Date of Closing. C. Closing Documents. The form and substance of all documents delivered to Buyer on or before the Date of Closing pursuant to this Agreement shall be in form reasonably satisfactory to Buyer and Buyer's counsel. D. Absence of Litigation. No action, suit, or proceeding before any court or any government body or authority not previously disclosed pertaining to the transaction contemplated by this Agreement or its consummation, shall have been instituted on or threatened on or before the Date of Closing. E. Buyer's Inspection Contingency. Buyer's performance hereunder is contingent upon Buyer's inspection and approval of the Customer List and related financial records of Seller. Such documents shall be true, accurate and complete in all material respects and reflect a level of gross sales revenues of at least $30,000 per month, in the aggregate, for the six (6) months up to and including June 30, 2000 (except to the extent that such gross sales revenue will be reduced for periods subsequent to June 30, 2000 as a result of the loss of gross sales revenue from the Multi-Care entities, which reduction Buyer acknowledges and accepts), with revenues from specimen collection provided to the customers identified on the Customer List constituting at least ninety-five percent (95%) of total revenue, and the balance of total revenue derived primarily from breath-alcohol testing services. In the event Buyer, in Buyer's sole discretion, is not completely satisfied with the Customer List and related financial records of Seller, Seller hereby agrees that Buyer shall have the right to terminate this Agreement by serving written notice thereof on Seller or Seller's agent in person or by registered or certified mail on or before the Closing date. F. Failure to Meet Conditions Precedent. In the event that any of the aforementioned conditions are not met prior to or as of the Closing Date, Buyer may, at its sole option, terminate this Agreement, in which case it shall become null, void and of no effect after Buyer provides written notice of such failure to Seller on the Closing Date and Seller's failure to cure the same within ten (10) days following receipt of such written notice from Buyer. Section 11. Conditions Precedent to Seller's Closing. The obligations of Seller and Selling Shareholder under this Agreement to be performed at the Date of Closing shall be subject to the reasonable satisfaction, at the Date of Closing, of the following conditions, any of which-may be waived by Seller at its option: A. Representations, Warranties and Covenants. Each of the representations, warranties and covenants made by Buyer in this Agreement shall be true in all material respects on the Date of Closing. B. Compliance with Agreement. Buyer shall have materially performed and complied with all of its obligations under this Agreement and all other agreements contemplated hereby which are to be performed or complied with prior to or at the Date of Closing. C. Closing Documents. The form and substance of all documents delivered to Seller pursuant to this Agreement shall be in form reasonably satisfactory to Seller and Seller's counsel. D. No Material Changes. During the period from the date hereof to the Date of Closing, there shall not have been any material adverse change in the financial condition or the operations of Buyer. E. Failure to Meet Conditions Precedent. In the event that any of the aforementioned conditions are not met prior to or as of the Closing Date, Seller may, at its sole option, terminate this Agreement, in which case it shall become null, void and of no effect after Seller provides written notice of such failure to Buyer on the Closing Date and Buyer's failure to cure the same within ten (10) days following receipt of such written notice from Seller. Section 12. Date of Closing and Effective Time. The Date of Closing shall be on or before August 3, 2000, or such later date as the parties may agree ("Closing Date"). The Closing shall take place at Buyer's Site, or such other location as the parties may agree. The effective time of the Closing of this Agreement shall be as of midnight on the Closing Date (the "Effective Time"). Section 13. Delivery of Documents at Closing. A. On the Date of Closing, Seller and Selling Shareholder shall deliver or cause to be delivered to Buyer, the following: (1) A copy of any necessary resolutions authorizing the execution, delivery and/or performance of this Agreement and all other agreements contemplated hereby. (2) The Customer List in substantially the form of Exhibit "B". (3) Final approval of the exact form and substance of the letter to be sent out to all customers on the Customer List following the Closing. (4) Simultaneous with such delivery, Seller shall do all things as may be reasonably required to put Buyer into effective possession and control of the conduct of the Business with the customers identified on the Customer List of the Business. Such other instruments and documents as may be required by any provision of this Agreement or reasonably necessary, in the opinion of Buyer or Buyer's counsel, to reflect the performance of this Agreement and all other agreements contemplated hereunder. B. On the Date of Closing, Buyer shall deliver or cause to be delivered to Seller, the following: (1) A copy of any necessary resolutions authorizing the execution, delivery and performance of this Agreement and all other agreements contemplated (2) Such other instruments and documents as may be required by any other provision of this Agreement or reasonably necessary, in the opinion of Seller or Seller's counsel, to reflect the performance of this Agreement and all other agreements contemplated hereby. (3) A certificate or certificates representing 15,152 shares of Medtox Common Stock registered in the name of the Seller. C. All documents and instruments to be delivered on the Date of Closing shall be regarded as having been delivered simultaneously, and no document or instrument shall be regarded as having been delivered until all have been delivered. Section 14. Obligations After Closing. A. Seller's Indemnification. Seller and Selling Shareholder hereby agree to indemnify Buyer and hold it harmless from and against any and all losses, costs, damages, assessments, fines and other expenses, including reasonable attorney's fees and court costs ("Damages") arising out of or resulting from; (1) any liabilities or obligations of Seller or Selling Shareholder not expressly assumed by Buyer; (2) any material breach by Seller or Selling Shareholder of any covenant, warranty or representation contained in this Agreement, the exhibits hereto or any agreement contemplated hereunder; (3) or any material inaccuracy in any document delivered by Seller or Selling Shareholder to Buyer pursuant to the terms of this Agreement; and (4) any or all liabilities of every kind and nature and howsoever originating and existing arising out of any and all of Seller's or Selling Shareholder' business operations prior to or subsequent to the Date of Closing hereunder and not payable by Buyer in accordance with this Agreement, provided however, that Sellers' obligations under this Section 14(A) clauses (2) and (3) shall terminate and have no further effect at any time after the expiration of three (3) years from the Closing Date, provided, however, that the foregoing limitation shall not apply to the Confidentiality and Non-Competition Agreements of Sellers and Dr. Lappe set forth in Section 2 of this Agreement, which shall expire separately four (4) years from the Closing Date. Buyer shall have the right to set off any amounts due hereunder against any amount due Seller or Selling Shareholder as the same may become due. B. Buyer's Indemnification of Seller. Buyer hereby agrees to indemnify Seller and Selling Shareholder and hold them harmless from and against any and all losses, damages costs, assessments, fines and other expenses, including reasonable attorney's fees and court costs ("Damages"), arising out of or resulting from; (1) any material breach by Buyer of any covenant, warranty or representation contained in this Agreement, the exhibits hereto or any agreement contemplated hereunder; (2) any material inaccuracy in any document delivered by Buyer to Seller pursuant to the terms of this Agreement; and (3) from any and all liabilities of every kind and nature and howsoever originating and existing arising out of any and all of Buyer's business operations subsequent to the Date of Closing, provided, however that Buyer's obligations under this Section 14 (B) clauses (2) and (3) shall terminate and have no further force or effect at any time after the expiration of three (3) years from the Closing Date. C. Defense of Indemnification Claims. If any party shall claim indemnification pursuant to the provisions of this Section, the party seeking indemnification shall promptly notify the party from whom indemnification is sought in writing of the basis for such claim or demand, setting forth the nature of the claim or demand in detail. The party against whom indemnification is sought shall have the right to compromise or, if appropriate, defend at its own cost and through counsel of its own choosing, any claim or demand of any third party giving rise to such claim for indemnification. Such notice and opportunity to compromise or, if applicable, to defend shall be conditions precedent to any payment by way of indemnification to the party claiming indemnification pursuant to this Section. In the event the party against whom indemnification is sought undertakes to compromise or defend any such claim or demand, it shall promptly notify the other party in writing of its intention to do so and shall give the other party such security as the party claiming indemnification reasonably may request. The party claiming indemnification shall fully cooperate with the other party and its counsel in the defense or compromise of such claim or demand. The party seeking indemnification shall at all times also have the right to fully participate in the defense at its own expense. If the indemnifying party shall, within a reasonable time after this notice, fail to defend, the party seeking indemnification shall have the right, but not the obligation, to undertake the defense of, and to compromise or settle (exercising reasonable business judgment) the claim or other matter on behalf, for the account, and at the risk, of the indemnifying party. D. Limitations on Indemnification. No party shall be liable for any Damages to a person claiming indemnification under this Section 14 until the amount of such Damages, in the aggregate, exceeds Five Thousand Dollars ($5,000.00). After the foregoing threshold is met, the indemnifying party shall be liable for all Damages, including the threshold amount, provided however, that each party's total indemnification obligation hereunder shall be limited to the amount of the Purchase Price. Section 15. Expenses. Each of the parties shall pay all costs and expenses incurred by it in negotiation and preparing this Agreement and in closing and carrying out the transactions contemplated by this Agreement. Section 16. Miscellaneous A. Further Assurances. The parties agree that after the Date of Closing they will from time to time, upon the reasonable request of the other, execute, acknowledge and deliver in proper form any instruments of conveyance or further assurance necessary or reasonably desirable to meet its obligations, liabilities and agreements contemplated hereunder. B. Entire Agreement. Except as supplemented in a writing signed by the party against whom enforcement is sought, this Agreement and the exhibits and documents referred to herein contain all of the terms and conditions agreed upon by the parties with respect to the subject matter of this Agreement, and no other promises, agreements or understandings, written or oral, regarding the subject matter of this Agreement, shall be of any force or effect. C. Modifications. No change, modification or waiver of any provision of this Agreement shall be valid or binding unless it is in writing, dated subsequent to the date hereof and signed by the parties intended to be bound. No waiver of any breach, term or condition of this Agreement by any party shall constitute a subsequent waiver of the same or any other breach, term or condition. D. Counterparts. This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. E. Notices. All notices, requests, demands or other communications required or permitted by this Agreement shall be in writing, and delivery shall b(degree)deemed to be sufficient if delivered personally or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to Buyer: Medtox Scientific, Inc. 402 West County Road D St. Paul, MN 55112 Attention: James Lockhart, CFO If to Sellers: National Medical Review Offices, Inc. 5900 Wilshire Blvd. 22nd Floor Los Angeles, CA 90036 Attention: President or to such other addresses as may be specified pursuant to notice given by either party in accordance with the provisions of this Subsection. F. Headings. The headings used in this Agreement are for convenience only and shall not be deemed to constitute a part hereof, and shall not be deemed to limit, characterize or in any way affect the provisions of this Agreement. G. Recitals Incorporated. The recitals to this Agreement are incorporated into and constitute an integral part of this Agreement. H. Cross-References. References in this Agreement, or in any document executed pursuant hereto to any Section or-Subsection are, unless otherwise specified, to such Section or Subsection of this Agreement or such document, as the case may be. I. Possession. Ownership and possession of the Business Assets shall be deemed effective on the Effective Time and shall actually be transferred as of the Date of Closing. J. Relationship Between Buyer and Seller. Nothing in this Agreement shall be construed as creating a joint venture between Buyer and Seller or any relationship other than that of buyer and seller, and neither party hereto, nor anyone else, shall have the authority or power by virtue of the provisions of this Agreement to incur any liability or obligation, other than as provided by the specific provisions of this Agreement which would be binding upon the other party hereto. K. Severability. If any term, covenant or condition in this Agreement shall, to any extent, be invalid or unenforceable, the remainder of this Agreement and the covenants contained herein shall not be affected thereby and the residue shall be valid and enforceable to the fullest extent permitted by law. L. Survival of Terms. The agreements, representations and warranties contained in this Agreement shall be deemed to be remade at and the respective obligations of the parties for the completeness and accuracy thereof shall survive the closing. Each party agrees to indemnify the other for and save it harmless against any breach of any warranty or representation made by the indemnifying party under this Agreement in accordance with Section 14 hereof. M. Access to Files. Seller agrees that all files relating to the Business Assets shall become the property of the Buyer; provided that Seller shall have reasonable access to said files at ail reasonable times, including the ability to copy said files for its own use. N. Governing Law. This Agreement shall be governed by and interpreted in accordance with the laws of the State of Minnesota. O. Nondisclosure. If this Agreement is terminated for failure of either the Buyer or Seller to meet any their respective obligations, Buyer and Seller hereby covenant that they will not disclose to any person other than the Buyer or Seller any proprietary information about the other party or any information about the transaction contemplated herein, except as may be necessary to enforce that party's rights under this Agreement. P. Binding Agreement. Except as otherwise provided herein, this Agreement and the terms, conditions and covenants contained herein and transactions contemplated hereunder shall be binding upon and inure to the benefit of the parties hereto and their representative successors, representatives and permitted assigns. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed effective the date and year first above written. SELLER: BUYER: BY:_________________________ BY:_________________________ Its:________________________ Its:________________________ SELLING SHAREHOLDER: ------------------------- MURRAY I. LAPPE, SOLELY AS TO SECTION 2 ------------------------- Exhibit "A" Assets of Business Purchased by Buyer Sellers agrees that on the Date of Closing, they shall deliver to Buyer: A. All of Seller's customer lists, customer records and other data relating to the customers of the Business; and B. All of Sellers inventory of forms and kits used to perform specimen collections services for the customers of the Business's; and C. The breath-alcohol equipment (5 units) used by Sellers in the Business. EX-10.50 6 0006.txt EXHIBIT 10.50 Exhibit 10.50 REGISTRATION RIGHTS AGREEMENT This Registration Rights Agreement is made and entered into as of the 31st day of July, 2000, by and among MEDTOX Scientific, Inc., a Delaware corporation (the "Company"), the Investors listed on Schedule A attached hereto (individually, an "Investor" and collectively, the "Investors"), and Miller, Johnson & Kuehn, Inc. ("MJK"). RECITALS A. The Investors and the Company have entered into that certain Stock Purchase Agreement, dated July 31, 2000 (the "Purchase Agreement"). B. MJK has been retained to act as the exclusive agent for the Company in connection with the offering of the Units. C. It is a condition to the transactions contemplated in the Purchase Agreement that the Company provide the registration and other rights provided herein and the parties hereto desire to provide for such rights on the terms and conditions contained herein. NOW, THEREFORE, in consideration of the premises and covenants contained herein, the parties hereto agree as follows: 1. Defined Terms. Unless otherwise noted, all capitalized terms used herein shall have the meanings afforded them in the Stock Purchase Agreement and the Exhibits attached thereto. 2. Required Registration. Within 30 days of the Closing (the "File Date"), the Company shall file a Registration Statement under the Securities Act of 1933, as amended (the "Securities Act"), on Form S-3 with the Securities and Exchange Commission (the "Commission") covering the resale of the (i) Shares and (ii) shares of Common Stock issuable upon exercise of the Warrants issued by the Company to the Investors and MJK on the date hereof (collectively, the "Registrable Stock"); provided, however, that the Company will not be obligated to file such a registration under the Securities Act: (a) if Form S-3 or a successor form thereto is not available to it for such registration, provided that the Company has used good faith efforts to remain qualified to use Form S-3; or (b) if the Company furnishes to the holders of the Registrable Stock (as defined below) a certificate signed by the Chief Executive Officer of the Company stating that in the good faith judgment of the Company's Board of Directors, (i) the offering would interfere in any material respect with any financing, acquisition, corporate reorganization or other material transaction under consideration by the Company or (ii) there is some other material development relating to the condition (financial or other) of the Company that has not been disclosed to the general public and as to which it is in the Company's best interests not to disclose such development; provided that the aggregate period of delay under this paragraph may not extend, in any twelve-month period, for more than 120 days unless the holders of a majority of the Registrable Stock consent in writing to a longer delay of up to an additional 60 days. 3. Registration - General Provisions. In connection with the registration of the Registrable Stock under the Securities Act, the Company will: (a) subject to Section 2 above, prepare and file with the Commission a registration statement with respect to the Registrable Stock, within 30 days of the Closing date of the Purchase Agreement, and use its commercially reasonable efforts to cause such registration statement to be declared effective by the Commission subject to Section 4 below, use its commercially reasonable efforts keep any such Registration Statement continuously effective, supplemented, amended and current until such time as may be reasonably necessary to effect the sale of such securities, but not to exceed the earlier of the date on which: (i) all Registrable Stock has been sold, or (ii) three years after the date it is declared effective by the Commission; (b) subject to Section 4 below, prepare and file with the Commission such amendments to such Registration Statement and supplements to the prospectus contained therein as may be necessary to keep such Registration Statement effective for the period required by Section 3(a) above; (c) provide one counsel, selected by and acting on behalf of the Investors, with reasonable opportunities to review and comment on, and otherwise participate in, the preparation of such Registration Statement; (d) furnish to the Investors and MJK participating in such registration and to the underwriters of the securities being registered, if any, such reasonable number of copies of the Registration Statement, preliminary prospectus, final prospectus and such other documents as the Investors and underwriters may reasonably request in order to facilitate the public offering of such securities; (e) use its diligent, good faith efforts to register or qualify the securities covered by such Registration Statement under such state securities or blue sky laws of such jurisdictions as the Investors may reasonably request, except that the Company shall not for any purpose be required to execute a general consent to service of process (which shall not include a "Uniform Consent to Service of Process" or other similar consent to service of process which relates only to actions or proceedings arising out of or in connection with the sale of securities, or out of a violation of the laws of the jurisdiction requesting such consent) or to qualify to do business as a foreign corporation in any jurisdiction wherein it is not so qualified; (f) notify the Investors and MJK, promptly after it shall receive notice thereof, of the time when such Registration Statement has been declared effective by the Commission or a supplement to any prospectus forming a part of such Registration Statement has been filed with the Commission; (g) notify the Investors and MJK promptly of any request by the Commission for the amending or supplementing of such Registration Statement or prospectus or for additional information; (h) prepare and file with the Commission, promptly upon the request of the Investors, any amendments or supplements to such Registration Statement or prospectus which, in the opinion of counsel for the Investors and MJK (and concurred in by counsel for the Company), is required under the Securities Act or the rules and regulations promulgated thereunder in connection with the distribution of the Registrable Stock by the Investors; (i) subject to Section 4 below, prepare and promptly file with the Commission and promptly notify the Investors of the filing of such amendment or supplement to such Registration Statement or prospectus as may be necessary to correct any statements or omissions if, at the time when a prospectus relating to such securities is required to be delivered under the Securities Act, any event shall have occurred as the result of which any such prospectus or any other prospectus as then in effect would include an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances in which they were made, not misleading; (j) advise the Investors and MJK, and the Investors' and MJK's counsel, if any, promptly after it shall receive notice or obtain knowledge thereof, of the issuance of any stop order by the Commission suspending the effectiveness of such Registration Statement or the initiation or threatening of any proceeding for that purpose and promptly use its commercially reasonable efforts to prevent the issuance of any stop order or to obtain its withdrawal if such stop order should be issued; (k) not file any amendment or supplement to such Registration Statement or prospectus to which the Investors shall have reasonably objected on the grounds that such amendment or supplement does not comply in all material respects with the requirements of the Securities Act or the rules and regulations promulgated thereunder, after having been furnished with a copy thereof at least five business days prior to the filing thereof, unless in the opinion of counsel for the Company the filing of such amendment or supplement is reasonably necessary to protect the Company from any material liabilities under any applicable federal or state law and such filing will not violate applicable law; and (l) at the request of the Investors and/or MJK, furnish on the effective date of the Registration Statement and, if such registration includes an underwritten public offering, at the closing provided for in the underwriting agreement: (i) opinions, dated such respective dates, of the counsel representing the Company for the purposes of such registration, addressed to the underwriters, if any, and to the Investors making such request, covering such matters as such underwriters or Investors may reasonably request, and (ii) letters, dated such respective dates, from the independent certified public accountants of the Company, addressed to the underwriters, if any, and to the Investors, covering such matters as such underwriters or Investors may reasonably request, in which letter such accountants shall state (without limiting the generality of the foregoing) that they are independent certified public accountants within the meaning of the Securities Act and that in the opinion of such accountants the financial statements and other financial data of the Company included in the Registration Statement or the prospectus or any amendment or supplement thereto comply in all material respects with the applicable accounting requirements of the Securities Act. 4. Suspension of Resales. The holders of the Registrable Stock acknowledge that there may occasionally be times when the Company must suspend the use of the prospectus forming a part of the Registration Statement, in the event that Form S-3 becomes unavailable to the Company, if the offering of the Registrable Stock would interfere with certain material corporate transactions or if there exists certain material non-public information concerning the Company. Accordingly, the Company may suspend sales pursuant to such Registration Statement: (a) if the holders of the Registrable Stock are notified in writing by the Company that Form S-3 is not available for the sale of securities by such holders, for such period of unavailability; and (b) for a period of up to 120 days (unless the holders of at least a majority of the Registrable Stock consent in writing to a longer delay of up to an additional 60 days) if the Company furnishes to the holders of the Registrable Stock a certificate signed by the Chief Executive Officer of the Company stating that in the good faith judgment of the Company's Board of Directors, (i) the offering would interfere in any material respect with any financing, acquisition, corporate reorganization or other material transaction under consideration by the Company or (ii) there is some other material development relating to the condition (financial or other) of the Company that has not been disclosed to the general public and as to which it is in the Company's best interests not to disclose such development; provided that the aggregate period of delay under this subparagraph (b) may not extend, in any twelve-month period, for more than 120 days unless the holders of a majority of the Registrable Stock consent in writing to a longer delay of up to an additional 60 days. The Company will notify the holders of Registrable Stock in any of such events (in each case, a "Black Out Notice"). Each such holder agrees that upon its receipt of a Black Out Notice such holder shall immediately discontinue the sale of any Registrable Stock pursuant to the Registration Statement until such holder has received copies of the supplemented or amended prospectus referred to in Section 3(i) or until such holder is advised in writing that the use of the prospectus may be resumed, and has received copies of any additional or supplemental filings that are incorporated by reference in the prospectus. In addition, the holder agrees that it will either (x) destroy any prospectuses, other than permanent file copies, then in such holder's possession which have been replaced by the Company with more recently dated prospectuses or (y) deliver to the Company all copies, other than permanent file copies, then in such holder's possession of the prospectus covering such Registrable Stock that was current at the time of receipt of the Black Out Notice. The period during which the Company is required to continue the effectiveness of a registration statement under Section 3(a) will be tolled for all periods of time during which resales are suspended under this Section 4. 5. Provision by Investors of Certain Information in Connection with Registration Statement. No Investor or MJK may include any of its Registrable Stock in the Registration Statement pursuant to this Agreement unless and until such Investor and MJK furnishes to the Company in writing, within 20 days after receipt of a request therefor, the information specified in Item 507 or 508 of Regulation S-K, as applicable, of the Securities Act for use in connection with the Registration Statement or prospectus or preliminary prospectus included therein. Each selling Investor and MJK agrees to promptly furnish additional information required to be disclosed in order to make the information previously furnished to the Company by such Investor and MJK not materially misleading. 6. Registration Expense. The Company shall pay all Registration Expenses (as defined below) in connection with the inclusion of the Registrable Stock in any Registration Statement, or application to register or qualify such shares under state securities laws, filed by the Company hereunder, other than as set forth herein. For purposes of this Agreement, the term "Registration Expenses" means the filing fees payable to the Commission, any state agency and the NASD; the fees and expenses of the Company's legal counsel and independent certified public accountants in connection with the preparation and filing of the Registration Statement (and all amendments and supplements thereto) with the Commission; and all expenses relating to the printing of the Registration Statement, prospectuses and various agreements executed in connection with the Registration Statement. The Company will pay the fees and expenses, not to exceed $3,000, of one counsel selected by MJK to represent the Investors in connection with preparation of the Registration Statement. Notwithstanding the foregoing, the Investors will pay the fees and expenses of any other legal counsel the Investors may engage, as well as the Investors' proportionate share of any custodian fees or commission or discounts which may be payable to any underwriter. 7. Penalty Payments. In the event that the Company is determined not to have exercised its commercially reasonable efforts to file a Registration Statement relating to the Registrable Stock with the Commission on or before the File Date, then, the Company shall pay the Investors and MJK the following amounts ("Penalty Payments"): (i) 1% of the purchase price of the Stock (the "Purchase Price") paid by the Investors to the Company if (A) the Company is determined not to have exercised its commercially reasonable efforts to file the Registration Statement with the Commission by the File Date, (ii) an additional 1% of the Purchase Price if the Company is determined not to have exercised its commercially reasonable efforts to cause the Registration Statement to be filed with the Commission within 150 days of the Closing date, and (iii) an additional 3% of the Purchase Price for each 30-day period thereafter in which the Company is determined not to have exercised its commercially reasonable efforts to cause the Registration Statement not to be filed with the Commission. Penalties for failure to file and/or to obtain effectiveness shall be cumulative. The Company shall be liable to the Investor for a full 30-day period, determined in accordance with the above schedule, regardless of by how many days it misses one of the targeted filing or effective dates set forth above. All such Penalty Payments shall be immediately payable by the Company to the Investors and MJK (on a pro rata basis based on the number of shares of Stock purchased by each under the Stock Purchase Agreement) via wire transfer of immediately available funds in the event that it is determined that the Company did not use its commercially reasonable efforts as set forth above. The Company shall be deemed not to have used its commercially reasonable efforts if the Registration Statement is not filed within 150 days of the Closing. 8. Indemnification. With respect to the registration of the resale of the shares of Registrable Stock: (a) to the fullest extent permitted by law, the Company will indemnify and hold harmless each Investor, MJK, the trustees, partners, officers, directors and agents of each Investor, MJK, any underwriter (as defined in the Securities Act) for such Investor, MJK and each person, if any, who controls such Investor, MJK or underwriter within the meaning of the Securities Act or the Securities Exchange Act of 1934, as amended (the "Exchange Act"), against any losses, claims, damages, or liabilities (joint or several) to which they may become subject under the Securities Act, the Exchange Act or other federal or state law, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (collectively a "Violation") by the Company: (i) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, (ii) the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading, or (iii) any violation or alleged violation by the Company of the Securities Act, the Exchange Act, any state securities law or any rule or regulation promulgated under the Securities Act, the Exchange Act or any state securities law in connection with the offering covered by the Registration Statement; and the Company will reimburse each such Investor, trustee, partner, officer, director, agent, underwriter or controlling person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the indemnity agreement contained in this Section 8 shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Company (which consent shall not be unreasonably withheld), nor shall the Company be liable in any such case for any such loss, claim, damage, liability or action to the extent that it arises out of or is based upon a Violation which occurs in reliance upon and in conformity with written information furnished to it expressly for use in connection with such registration by an Investor, trustee, partner, officer, director, agent, underwriter or controlling person of an Investor. (b) to the extent permitted by law, each Investor and MJK will indemnify and hold harmless the Company, each of its directors, each of its officers, each person, if any, who controls the Company within the meaning of the Securities Act, any underwriter and any other Investor selling securities under the Registration Statement or any of such other Investor's, trustees, partners, directors or officers or any person who controls such Investor, against any losses, claims, damages or liabilities (joint or several) to which the Company or any such director, officer, controlling person, underwriter or other such Investor, or trustee, partner, director, officer or controlling person of such other Investor may become subject under the Securities Act, the Exchange Act or other federal or state law, insofar as such losses, claims, damages or liabilities (or actions in respect thereto) arise out of or are based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished by such Investor and stated to be specifically for use in connection with such registration; and each such Investor will reimburse any legal or other expenses reasonably incurred by the Company or any such director, officer, controlling person, underwriter or other Investor, or trustee, partner, officer, director or controlling person of such other Investor in connection with investigating or defending any such loss, claim, damage, liability or action if it is judicially determined that there was such a Violation; provided, however, that the indemnity agreement contained in this Section 8 shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Investor and MJK, which consent shall not be unreasonably withheld; provided further, that in no event shall any indemnity under this Section 8 exceed the gross proceeds from the offering received by such Investor or MJK unless the Violation is the result of fraud on the part of such Investor or MJK. (c) promptly after receipt by an indemnified party under this Section of notice of the commencement of any action (including any governmental action), such indemnified party shall, if a claim in respect thereof is to be made against any indemnifying party under this Section, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an indemnified party shall have the right to retain its own counsel, with the fees and expenses to be paid by the indemnifying party; and provided further, that if there is more than one indemnified party, the indemnifying party shall pay for the fees and expenses of one counsel for any and all indemnified parties to be mutually agreed upon by such indemnified parties, unless representation of an indemnified party by the counsel retained by the other indemnified parties would be inappropriate due to actual or potential differing interests between such indemnified parties. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action, if materially prejudicial to its ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under this Section, but the omission so to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section. (d) if the indemnification provided for in this Section is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any losses, claims, damages or liabilities referred to herein, the indemnifying party, in lieu of indemnifying such indemnified party thereunder, shall to the extent permitted by applicable law, contribute to the amount paid or payable by such indemnified party as a result of such loss, claim, damage or liability in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the indemnified party on the other in connection with the Violation(s) that resulted in such loss, claim, damage or liability, as well as any other relevant equitable considerations. The relative fault of the indemnifying party and of the indemnified party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. No person or entity guilty of fraudulent misrepresentation (within the meaning of Section 11 of the Securities Act) shall be entitled to contribution from any person or entity who shall not have been guilty of such fraudulent misrepresentation. (e) the obligation of the Company, the Investors and MJK under this Section shall survive the completion of any offering for resale of shares of the Registrable Stock in the Registration Statement, and otherwise. 9. Limitation on Subsequent Registration Rights. From and after the date of this Agreement, the Company shall not, without the prior written consent of Investors holding a majority of the Registrable Stock, enter into any agreement, which might cause a reduction in the number of shares includable by the Investors in any registration pursuant to Section 2 above. 10. Successors and Assigns. The terms and conditions of this Agreement will inure to the benefit of and be binding upon and be enforceable by the respective heirs, successors and assigns of the parties hereto; provided, however, that the rights of an Investor hereunder may be assigned only (a) to a partner or retired partner of the assigning Investor, if such assigning Investor is a partnership, (b) to any Affiliate of the assigning Investor, (c) to any family member of, or any trust for the benefit of a family member of the assigning Investor or (d) concurrent with the sale or transfer to such assignee of at least 50,000 shares of Registrable Stock (subject to adjustment for any stock dividend, stock split, subdivision, combination or other recapitalization of the Company) then held by the assigning Investor; provided, however, that the Company is, within a reasonable time after such transfer, furnished with written notice of the name and address of the assignee and the securities with respect to which such registration rights are being assigned and such transferee agrees in writing to be bound by and subject to the terms and conditions of this Agreement. Any Investor or MJK making an assignment in connection with the sale or transfer of only a portion of its shares will retain its rights under this Agreement for the shares not sold or transferred. Nothing in this Agreement, express or implied, is intended to confer upon any party, other than the parties hereto or their permitted successors and assigns, any rights, remedies, obligations or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. Notwithstanding any provision contained elsewhere in this Agreement, upon the transfer of shares by any of the parties hereto, no claims or causes of action arising out of or related to this Agreement existing as of the transfer date will be transferred by such party to any heir, successor, assign or permitted transferee, provided that the transfer of shares will not be deemed a waiver by the transferring party of any such claim or cause of action. 11. Miscellaneous. (a) The Company shall not hereafter enter into any agreement with respect to its securities that is inconsistent with the rights granted to the Investors in this Agreement. (b) Except as otherwise provided herein, the provisions of this Agreement may not be amended, modified or supplemented, and waivers or consents to or departures from the provisions hereof may not be given or made unless the Company has obtained the written consent of the Investors and MJK holding at least a majority of the Registrable Stock. (c) All notices and other communications provided for or permitted hereunder shall be made by hand delivery, telex, facsimile, overnight courier or registered first-class mail: (i) if to an Investor, at the address set forth on Schedule A attached hereto; (ii) if to MJK, at the address set forth in the Stock Purchase Agreement. (iii) if to the Company, at the address set forth in the Purchase Agreement. All such notices and communications shall be deemed to have been duly given: when delivered, if by hand, overnight courier or mail; when the appropriate answer back is received, if by telex; when transmission is confirmed by the sending unit, if by facsimile. (d) This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one an the same agreement. (e) The headings to this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. (f) This Agreement shall be governed by and construed in accordance with the laws of the State of Minnesota without giving effect to the principles of choice or conflict of law thereof. Each of the Company and the Investors irrevocably consent to the exclusive jurisdiction of the United States Federal courts and state courts, located in Hennepin County, Minnesota, in any suit or proceeding relating to, based on or arising under this Agreement and irrevocably agree that all claims in respect of such suit or proceeding may be determined in such courts. The Company irrevocably waives the defense of an inconvenient forum to the maintenance of such suit or proceeding. Service of process on the Company mailed by first class mail shall be deemed in every respect effective service of process upon the Company in any such suit or proceeding. Nothing herein shall affect the right of any Investor to serve process in any manner permitted by law. (g) In the event that any one or more of the provisions contained herein, or the application thereof in any circumstances, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of such provision in every other respect and of the remaining provisions contained herein shall not be in any way impaired thereby, it being intended that all of the rights and privileges of the Investors and the Company shall be enforceable to the fullest extent permitted by law. (h) The remedies provided for in this Agreement shall be cumulative and in addition to all other remedies available, at law or in equity, and nothing herein shall limit a holder's right to pursue actual damages for any failure by the Company to comply with the terms of this Agreement. (i) This Agreement, the documents referenced herein and the exhibits thereto, constitute the entire understanding and agreement of the parties hereto with respect to the subject matter hereof and thereof and supersede all prior and contemporaneous agreements or understandings, inducements or conditions, express or implied, written or oral, between the parties with respect hereto and thereto. The express terms hereof control and supersede any course of performance or usage of the trade inconsistent with any of the terms hereof. IN WITNESS WHEREOF, the parties have executed this Registration Rights Agreement as of the date first written above. COMPANY: MEDTOX SCIENTIFIC, INC. By: --------------------------------------------- Name: Title: MILLER, JOHNSON & KUEHN, INC. By: --------------------------------------------- Name: Title: EX-10.51 7 0007.txt EXHIBIT 10.51 Exhibit 10.51 STOCK PURCHASE AGREEMENT This Agreement is made and entered into as of the 31st day of July, 2000, between MEDTOX Scientific, Inc., a Delaware corporation (the "Company") and each of the persons listed on Schedule 1 to this Agreement (the "Investors"). For good and valuable consideration, the receipt and adequacy of which are hereby acknowledged by the Company and each of the Investors, the Company and the Investors agree as follows: 1. Sale and Purchase of Securities. Subject to the terms and conditions hereof, the Company agrees to sell to each Investor at the Closing (as defined herein), and each Investor severally agrees to purchase from the Company at the Closing, at a purchase price of $10.00 per Unit, that number of Units set forth opposite each Investor's name on Schedule 1 each such Unit consisting of one share of the Company's Common Stock (the "Shares"), together with a five-year warrant in the form attached hereto as Exhibit A (the "Warrant") to purchase that number of the Company's Common Stock (the "Warrant Shares") set forth on Schedule 1 at an exercise price of the higher of (a) the share weighted average closing bid price of the Company's Common Stock for the five trading days immediately prior to the Closing (as defined below) or (b) $12.50 per warrant share. The Shares and the Warrants are referred to herein collectively as the "Securities." 2. Closing. The closing shall take place at the offices of Fredrikson & Byron, 1100 International Centre, 900 Second Avenue South, Minneapolis, MN 55402 on July 31st, 2000 at 10:00 a.m. (the "Closing") and/or at such other place or time as may be mutually acceptable to the Investors and the Company. At the Closing, subject to the satisfaction of the conditions in Section 6 below, the Company will deliver to each Investor a certificate representing the Shares purchased by such Investor, together with a Warrant representing the right to purchase that number of shares of Common Stock of the Company set forth opposite each Investor's name on Schedule 1, against payment of the purchase price therefor by certified check or wire transfer to the Company in the amounts set forth after their respective names in Schedule 1 hereto. 3. Representations and Warranties by the Company. To induce each Investor to enter into this Agreement and to purchase the number of Securities set forth after his or its name on Schedule 1, the Company hereby represents and warrants to each Investor that except as set forth in Exhibit B hereto: 3.1 Organization, Standing, Etc. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, and has the requisite corporate power and authority to own its properties and to carry on its business in all material respects as it is now being conducted. The Company is duly qualified to do business as a foreign corporation and is in good standing in all states or jurisdictions in which the ownership or lease of its property or the conduct of its business requires such qualification and the failure to be so qualified would have a materially adverse effect on the Company's business. 3.2 Authorization and Enforceability. The Company has full legal power, right and authority to enter into this Agreement and the Registration Rights Agreement among the Company and the Investors, the form of which is attached hereto as Exhibit C (the "Registration Rights Agreement") and to issue the Securities. This Agreement, the Registration Rights Agreement and the Securities, have been duly authorized, executed and delivered on behalf of the Company and are the valid and binding obligations of the Company, enforceable in accordance with their respective terms and subject, as to enforcement, to applicable bankruptcy, insolvency, reorganization, moratorium and other laws affecting the rights of creditors generally, to the exercise of judicial discretion as to the availability of equitable remedies such as specific performance in injunction and subject, as to enforcement of the indemnification provisions, to limitations under applicable securities laws. The Securities when delivered pursuant to the terms of this Agreement will be validly issued, fully paid and nonassessable. 3.3 Financial Statements. The financial statements included in the Company's annual reports on Form 10-K for the years ended December 31, 1998 and 1999 and for the quarter ended March 31, 2000: (a) are in accordance with the books and records of the Company, (b) present fairly the financial condition of the Company at the balance sheet dates and the results of its operations for the periods therein specified, and (c) have, in all material respects, been prepared in accordance with generally accepted accounting principles applied on a basis consistent with prior accounting periods. Without limiting the generality of the foregoing, the balance sheet of the Company at December 31, 1999 included in the Company's annual report on Form 10-K for the year ended December 31, 1999 and the balance sheet of the Company at March 31, 2000 included in the Company's Report on Form 10-Q for the quarter ended March 31, 2000, each discloses all of the debts, liabilities and obligations of any nature (whether absolute, accrued or contingent and whether due or to become due) of the Company at December 31, 1999, and March 31, 2000, respectively, which in accordance with generally accepted accounting principles would be required to be disclosed in each such balance sheet. To the Company's knowledge, there are no material liabilities of the Company which are not disclosed on such balance sheet. 3.4 Tax Returns and Audits. All required federal, state and local tax returns and appropriate extension requests of the Company have been filed, and all federal, state and local taxes required to be paid with respect to such returns have been paid or due provision for the payment thereof has been made. The Company is not delinquent in any material respect in the payment of any such tax or in the payment of any assessment or governmental charge. The Company has not received notice of any tax deficiency proposed or assessed against it, and it has not executed any waiver of any statute of limitations on the assessment or collection of any tax. 3.5 Changes, Dividends, Etc. Except for the transactions contemplated by this Agreement, since December 31, 1999 and except as set forth in Exhibit B or the Company's reports filed under federal securities laws, the Company has not: (i) incurred any material debts, obligations or liabilities, absolute, accrued or contingent and whether due or to become due, except current liabilities incurred in the ordinary course of business which (individually or in the aggregate) will not materially and adversely affect the business, properties or prospects of the Company; (ii) paid any material obligation or liability other than, or discharged or satisfied any material liens or encumbrances other than those securing, current liabilities, in each case in the ordinary course of business; (iii) declared or made any payment to or distribution to its shareholders as such, or purchased or redeemed any of its shares of capital stock, or obligated itself to do so; (iv) mortgaged, pledged or subjected to lien, charge, security interest or other encumbrance any of its material assets, tangible or intangible, except in the ordinary course of business; (v) sold, transferred or leased any of its material assets except in the ordinary course of business; (vi) suffered any physical damage, destruction or loss (whether or not covered by insurance) materially and adversely affecting the tangible properties, business or prospects of the Company; (vii) encountered any labor difficulties or labor union organizing activities; (viii) issued or sold any shares of capital stock or other securities or granted any options (other than to employees or directors), warrants, or other purchase rights with respect thereto other than pursuant to this Agreement; (ix) made any acquisition or disposition of any material assets or became involved in any other material transaction, other than for fair value in the ordinary course of business; (x) materially increased the compensation payable, or to become payable, to any of its directors or employees, or made any material cash bonus payment or similar arrangement with any directors or employees or increased the scope or nature of any fringe benefits provided of its employees or directors; or (xi) agreed to do any of the foregoing other than pursuant hereto. Except as set forth in Exhibit B, there has been no material adverse change in the financial condition, operations, results of operations, business or prospects of the Company since December 31, 1999. 3.6 Title to Properties and Encumbrances. The Company has good and marketable title to all of the properties and assets that it purports to own, except for property disposed of in the ordinary course of business since December 31, 1999, which properties and assets are not subject to any mortgage, pledge, lease, lien, charge, security interest, encumbrance or restriction, except (a) those which are shown and described on the December 31, 1999 balance sheet or the notes thereto, (b) liens for taxes and assessments or other governmental charges or levies not at the time due or in respect of which the validity thereof shall currently be contested in good faith by appropriate proceedings, (c) statutory liens that have arisen in the ordinary course of business, or (d) those which do not materially affect the value of or interfere with the use made of such properties and assets. 3.7 Conditions. The plant, offices and equipment of the Company have been kept in good condition and repair in the ordinary course of business. 3.8 Litigation; Governmental Proceedings. There are no legal actions, suits, arbitrations or other legal, administrative or governmental proceedings or investigations pending or, to the knowledge of the Company, threatened against the Company, or its properties or business which would result in any material adverse change in the business, assets, liabilities, financial condition, operations or prospects of the Company nor, to the knowledge of the Company, is there any basis for any such legal actions, suits, arbitrations or proceedings. The Company is not in default with respect to any judgment, order or decree of any court or any governmental agency or instrumentality with respect to which it is a party or is named as an affected person, nor to the best of its knowledge is the Company in default with respect to any other judgment, order or decree. The Company has not been threatened with any action or proceeding under any business, regulatory or zoning ordinance, law or regulation. 3.9 Compliance With Applicable Laws or Other Instruments. To the best of the Company's knowledge, the business and operations of the Company have been and are being conducted in all material respects in accordance with all applicable laws, rules and regulations of all governmental authorities, except to the extent that any failure to so conduct its business would not result in any material adverse change in the business, assets, liabilities, financial condition, operations or prospects of the Company. 3.10 Shares, Warrants and Warrant Shares. The Shares and Warrants, when issued and paid for pursuant to the terms of this Agreement, will be duly authorized, validly issued and outstanding, fully paid and nonassessable and shall be free and clear of all pledges, liens, encumbrances and restrictions, except securities restrictions as set forth in Section 4 hereof. The Warrant Shares have been reserved for issuance and when issued upon exercise of the Warrants, will be duly authorized, validly issued and outstanding, fully paid, nonassessable and free and clear of all pledges, liens, encumbrances and restrictions, except as set forth in Section 4. 3.11 Securities Laws. Based in part upon the representations of the Investors, no consent, authorization, approval, permit or order of or filing with any governmental or regulatory authority is required under current laws and regulations in connection with the execution and delivery of this Agreement or the offer, issuance, sale or delivery of the Securities, other than the qualification thereof, if required, under applicable state securities laws, which qualification has been or will be effected as a condition of these sales. The Company has not, directly or through an agent, offered the Securities or any similar securities for sale to, or solicited any offers to acquire such securities from, persons other than the Investors and other accredited investors. Under the circumstances contemplated by this Agreement, the offer, issuance, sale and delivery of the Securities will not, under current laws and regulations, require compliance with the prospectus delivery or registration requirements of the federal Securities Act of 1933, as amended (the "Securities Act"). The Company has for the prior 12 months filed all reports or other documentation that it is required to file by the federal Securities Exchange Act of 1934, as amended (the "1934 Act"), any rules or regulations promulgated thereunder, the applicable rules and regulations of the National Association of Securities Dealers ("NASD"), and the information contained in such reports or other documents, as of their respective filing dates, did not make any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading. 3.12 Patents and Other Intangible Rights. To the best of its knowledge, the Company (a) owns or has the right to use, free and clear of all material liens, claims and restrictions, all patents, trademarks, service marks, trade names, copyrights, licenses and rights with respect to the foregoing, used in the conduct of its business as now conducted without infringing upon or otherwise acting adversely to the right or claimed right of any person under or with respect to any of the foregoing, and, to the extent such right on the part of the Company is non-exclusive, such non-exclusivity has no material adverse effect on the business of the Company as currently conducted, (b) except as disclosed in the Company's reports filed under the Securities Act or the 1934 Act, is not obligated or under any liability whatsoever to make any payments of a material nature by way of royalties, fees or otherwise to any owner of, licensor of, or other claimant to, any patent, trademark, trade name, copyright or other intangible asset, with respect to the use thereof or in connection with the conduct of its business or otherwise, (c) owns or has the unrestricted right to use all trade secrets, including know-how, customer lists, inventions, designs, processes, computer programs and technical data necessary to the development, operation and sale of all products and services sold or proposed to be sold by it, free and clear of any rights, liens or claims of others, and (c) is not using any confidential information or trade secrets of others. 3.13 Capital Stock. At the date hereof, the Company is authorized by its Certificate of Incorporation, as amended, to issue 7,450,000 shares of capital stock, which consists of the following: (a) 7,400,000 shares of common stock, $0.15 par value, of which there are outstanding 2,935,720 shares, and (b) 50,000 shares or serial Preferred Stock, of which no shares are issued or outstanding. All of the outstanding shares of the Company were duly authorized, validly issued and are fully paid and nonassessable and were issued in compliance with applicable securities laws. Other than as disclosed on Exhibit B, there are no outstanding subscriptions, options, warrants, calls, contracts, demands, commitments, convertible securities or other agreements or arrangements of any character or nature whatever, other than this Agreement, under which the Company is obligated to issue any securities of any kind representing an ownership interest in the Company. 3.14 License and Approvals. The Company has all licenses, certificates, permits and other approvals from governmental and regulatory authorities necessary for the conduct of its business as it is currently being conducted and as proposed to be conducted except those which would not have a material adverse effect on the Company if not obtained. 3.15 Defaults. The Company is not in breach, default or violation of, and the execution of this Agreement and the Registration Rights Agreement and the consummation of the transactions herein and therein contemplated will not conflict with or result in any breach of, any of the terms or conditions of, or constitute a default or violation under, (i) the Certificate of Incorporation, as amended, or Bylaws, as amended, of the Company, (ii) any material indenture, agreement or other instrument to which the Company is now a party, or (iii) to the best of the Company's knowledge, any law or any order, rule or regulation applicable to the Company of any court or of any federal or state regulatory body or administrative agency having jurisdiction over the Company or its property. 3.16 Insurance Coverage. There are in full force policies of insurance issued by insurers of recognized responsibility insuring the Company and its properties and business against such losses and risks, and in such amounts, as in the Company's best judgment, after advice from its insurance broker, are acceptable for the nature and extent of such business and its resources. 3.17 No Brokers or Finders. Except for Miller, Johnson & Kuehn, Incorporated (the "Sales Agent"), which is assisting the Company in the transactions contemplated by this Agreement, no person, firm or corporation has or will have, as a result of any act or omission of the Company, any right, interest or valid claim against the Company or any Investor for any commission, fee or other compensation as a finder or broker in connection with the transactions contemplated by this Agreement. The Company will indemnify and hold each of the Investors harmless against any and all liability with respect to any such commission, fee or other compensation which may be payable or determined to be payable in connection with the transactions contemplated by this Agreement. 3.18 Disclosure. The Company has not knowingly withheld from the Investors any material facts relating to the assets, business, operations, financial condition or prospects of the Company. No representation or warranty in this Agreement or in any certificate, schedule or other document furnished or to be furnished to any Investor pursuant hereto or in connection with the transactions contemplated hereby contains or will contain any untrue statement of a material fact or omits or will omit to state any material fact required to be stated herein or therein or necessary to make the statements herein or therein not misleading. 3.19 Company Knowledge. For purposes of this Section 3, when a representation or warranty is qualified by the Company's "knowledge" or "best knowledge," such representation or warranty is based upon the Company's knowledge after due inquiry. 4. Representations of the Investors. Each Investor represents for itself that: 4.1 Investment Intent. The Securities being acquired by such Investor are being purchased for investment for such Investor's own account and not with the view to, or for resale in connection with, any distribution or public offering thereof. Such Investor understands that the Securities have not been registered under the Securities Act or any state securities laws by reason of their contemplated issuance in transactions exempt from the registration requirements of the Securities Act and applicable state securities laws, and that the reliance of the Company and others upon these exemptions is predicated in part upon this representation by each Investors. Such Investor further understands that the Securities may not be transferred or resold without (i) registration under the Securities Act and any applicable state securities laws, or (ii) an exemption from the requirements of the Securities Act and applicable state securities laws. Such Investor understands that an exemption from such registration is presently available pursuant to Rule 144 promulgated under the Securities Act by the Securities and Exchange Commission (the "Commission") but that in any event an Investor may not sell any securities pursuant to Rule 144 prior to the expiration of a one-year period after such Investor has acquired such securities. Such Investor understands that any sales pursuant to Rule 144 can be made only in full compliance with the provisions of Rule 144. 4.2 Location of Principal Office, Qualification as an Accredited Investor, Etc. The state in which such Investor's principal office (or domicile, if such Investor is an individual) is located is the state set forth in such Investor's address on Schedule 1. Unless otherwise indicated on such Investor's signature page to this Agreement, such Investor qualifies as an "accredited investor" for purposes of Regulation D promulgated under the Securities Act for the reasons specified after such investor's name on such signature page. Such Investor acknowledges that the Company has made available to such Investor at a reasonable time prior to the execution of this Agreement the opportunity to ask questions and receive answers concerning the business and affairs of the Company and the terms and conditions of the sale of securities contemplated by this Agreement and to obtain any additional information (which the Company possesses or can acquire without unreasonable effort or expense) as may be necessary to verify the accuracy of information furnished to such Investor. Such Investor (a) is able to bear the loss of its entire investment in the Shares without any material adverse effect on its business, operations or prospects, and (b) has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of the investment to be made by it pursuant to this Agreement. 4.3 Acts and Proceedings. This Agreement has been duly authorized by all necessary action on the part of such Investor, has been duly executed and delivered by such Investor, and is a valid and binding agreement of such Investor. 4.4 No Brokers or Finders. Except for the Sales Agent, which is assisting the Company in the transactions contemplated by this Agreement, no person, firm or corporation has or will have, as a result of any act or omission by such Investor, any right, interest or valid claim against the Company for any commission, fee or other compensation as a finder or broker, or in any similar capacity, in connection with the transactions contemplated by this Agreement. Such Investor will indemnify and hold the Company harmless against any and all liability with respect to any such commission, fee or other compensation which may be payable or determined to be payable as a result of the actions of such Investor in connection with the transactions contemplated by this Agreement. 4.5 Exculpation Among Investors. Such Investor acknowledges that in making his or its decision to invest in the Company, he or it is not relying on any other Investor or upon any person, firm or company, other than the Company and its officers, employees and/or directors. Such Investor agrees that no other Investor, nor the partners, employees, officers or controlling persons of any other Investor shall be liable for any actions taken by such Investor, or omitted to be taken by such Investor, in connection with such investment. 4.6 Legends. It is understood that the certificates evidencing the Shares may bear legends required by applicable federal and state securities laws as well as the following legend: THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THESE SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933 AND APPLICABLE STATE SECURITIES LAWS. ADDITIONALLY, THE TRANSFER OF THESE SECURITIES IS SUBJECT TO THE CONDITIONS SPECIFIED IN THE REGISTRATION RIGHTS AGREEMENT DATED JULY 31st, 2000, AMONG MEDTOX SCIENTIFIC, INC. AND CERTAIN OTHER SIGNATORIES THERETO, AND NO TRANSFER OF THESE SECURITIES SHALL BE VALID OR EFFECTIVE UNTIL SUCH CONDITIONS HAVE BEEN FULFILLED. 5. Conditions of Each Investor's Obligation. The obligation to purchase and pay for the Securities which each Investor has agreed to purchase on the closing date is subject to the fulfillment prior to or on the closing date of the conditions set forth in this Article 5. 5.1 Representations and Warranties. The representations and warranties of the Company under this Agreement shall be true in all material respects as of the closing date with the same effect as though made on and as of the closing date. 5.2 Compliance with Agreement. The Company shall have performed and complied in all material respects with all agreements or conditions required by this Agreement to be performed and complied with prior to or as of the closing date. 5.3 Certificate of Officers. The Company shall have delivered to Miller, Johnson & Kuehn, Incorporated, on behalf of Investors, a certificate, dated the closing date, executed by the Chief Executive Officer and the Chief Financial Officer of the Company and certifying to the satisfaction of the conditions specified in Sections 5.1 and 5.2. 5.4 Opinion of the Company's Counsel. The Company shall have delivered to Miller, Johnson & Kuehn, Incorporated, on behalf of Investors, an opinion of Fredrikson & Byron, counsel for the Company, dated the closing date, to the effect that: (a) The Company is a corporation duly organized and validly existing in good standing under the laws of the state of its incorporation, and has the corporate power and authority to own and hold the properties owned and leased by it and to carry on the business in which it is engaged. The Company has the corporate power and authority to enter into this Agreement, to issue and sell the Securities and to carry out the provisions of this Agreement. (b) This Agreement has been duly authorized, executed and delivered by the Company, and is the legal, valid and binding agreement of the Company and is enforceable against the Company in accordance with its terms, subject, as to the enforcement of remedies, to limitations under applicable bankruptcy, insolvency, moratorium, reorganization, and other laws affecting the rights of creditors generally and to judicial limitations on the enforcement of the remedy of specific performance and other equitable remedies. (c) The Securities being purchased on the closing date have been duly authorized, validly issued and delivered by the Company, are fully paid and nonassessable, and are entitled to the rights, preferences and provisions of the Company's Certificate of Incorporation and the benefits of the provisions of this Agreement applicable thereto. The certificates evidencing the Shares and the Warrants are in due and proper form. (d) All corporate proceedings required by law or by the provisions of this Agreement to be taken by the Board of Directors and shareholders of the Company on or prior to such closing date in connection with the execution and delivery of this Agreement, the offer, issuance and sale of the Securities and the consummation of the transactions contemplated by this Agreement, have been duly and validly taken. (e) The Company is authorized by its Certificate of Incorporation, as amended, to issue 7,450,000 shares of capital stock, which consists of the following: (a) 7,400,000 shares of common stock, $0.15 par value, of which there are outstanding 2,935,720 shares, and (b) 50,000 shares of serial preferred stock of which no shares were issued or outstanding. To the best of such counsel's knowledge, all shares outstanding immediately prior to the closing date have been duly authorized and validly issued. Other than as disclosed on Exhibit B, the Company has no other authorized series or class of capital stock and, to the best of such counsel's knowledge and without any special inquiry into this matter, has no outstanding options, warrants or other rights to acquire securities of the Company. (f) The requisite number of Warrant Shares have been validly authorized and reserved for issuance upon exercise of the Warrants, and when issued upon such exercise in accordance with the terms and conditions of the Warrants, will be authorized, validly issued and outstanding, fully paid and nonassessable. To the best of such counsel's knowledge, no security holder of the Company is entitled to preemptive or similar rights as a result of the execution or delivery of this Agreement or the issuance of the Securities. (g) Assuming (i) the accuracy of the representations made by the Investors in their Acceptances and Section 4 hereof, (ii) that neither the Company, the Sales Agent nor any person acting on behalf of either the Company or the Sales Agent offered or sold the Securities by any form of general solicitation or general advertising within the meaning of Rule 502(c) of Regulation D under the Securities Act; (iii) that any person or entity that purchases securities after the date hereof in a transaction that can be "integrated" with the sales of the Securities will be an accredited investor as of the date of such purchase; and (iv) that, based upon our inquiry and information provided to us by the Company, each person or entity that purchased securities of the Company directly from the Company or its agents and without registration between the date six months prior to the Closing and the date of this Agreement was, as of the date of such purchase, an "accredited investor" as defined in Rule 501 of Regulation D, the sale, issuance and delivery of the Securities to the Investors under the circumstances contemplated by this Agreement are exempt from the registration and prospectus delivery requirements of the Securities Act. (h) Except for matters disclosed in Exhibit B, such counsel has no knowledge of any material litigation, proceeding or governmental investigation pending or threatened against the Company or its properties or business. 5.5 Supporting Documents. The Sales Agent, as representatives for each investor, shall have received the following: (a) A copy of resolutions of the Board of Directors of the Company certified by the Secretary of the Company authorizing and approving the execution, delivery and performance of this Agreement and issuance of the Securities; (b) A certificate of incumbency executed by the Secretary of the Company certifying the names, titles and signatures of the officers authorized to execute this Agreement and further certifying that the Certificate of Incorporation and Bylaws of the Company delivered to legal counsel for the Investors at the time of the execution of this Agreement have been validly adopted and have not been amended or modified; (c) The certificates contemplated by Section 5.3 above; and (d) Such additional supporting documentation and other information with respect to the transactions contemplated hereby as legal counsel for the Investors may reasonably request. 5.6 Qualification Under State Securities Laws. All registrations, qualifications, permits and approvals required under applicable state securities laws for the lawful execution and delivery of this Agreement and the offer, sale, issuance and delivery of the Securities to the Investors at the closing shall have been obtained. 5.7 Proceeding and Documents. All corporate and other proceedings and actions taken in connection with the transactions contemplated hereby and all certificates, opinions, agreements, instruments and documents mentioned herein or incident to any such transaction shall be satisfactory in form and substance to legal counsel for the Investors. 5.8 Registration Rights Agreement. The Company, each Investor and each of the parties listed on the signature page of Exhibit C shall enter into the Registration Rights Agreement dated as of the Closing in the form attached as Exhibit C. 6. Conditions of the Company's Obligations at Closing. The obligations of the Company to each Investor under this Agreement are subject to the fulfillment on or before the Closing of each of the following conditions by that Investor. 6.1 Representations and Warranties. The representations and warranties of the Investor contained in Section 4 shall be true on and as of the Closing with the same effect as though such representations and warranties had been made on and as of the Closing. 6.2 Payment of Purchase Price. The Investors shall have delivered the purchase price as specified in Section 1. 7. Affirmative Covenants of the Company. The Company covenants and agrees as follows: 7.1 Corporate Existence. The Company will maintain its corporate existence in good standing and comply with all applicable laws and regulations of the United States or of any state or political subdivision thereof and of any government authority where failure to so comply would have a material adverse impact on the Company or its business or operations. 7.2 Books of Accounts and Reserves. The Company will keep books of record and account in which full, true and correct entries are made of all of its respective dealings, business and affairs, in accordance with generally accepted accounting principles. The Company will employ certified public accountants that are "independent" within the meaning of the accounting regulations of the Securities and Exchange Commission. 7.3 Application of Proceeds. Unless otherwise approved by the Investors, the net proceeds received by the Company from the sale of the Shares on the closing date shall be used for research and development, expansion of sales, marketing and manufacturing capabilities, and working capital and other general corporate purposes (without allocation of any specific amount to any of the foregoing). 7.4 Filing of Reports. The Company will make timely filings of such reports as are required to be filed by it with the Commission so that Rule 144 under the Securities Act or any successor provision thereto will be available to the security holders of the Company who were otherwise able to take advantage of the provisions of such Rule. 7.5 Patents and Other Intangible Rights. The Company will apply for, or obtain assignments of, or licenses to use, all patents, trademarks, trade names and copyrights which in the opinion of a prudent and experienced businessperson operating in the industry in which the Company is operating are desirable or necessary for the conduct and protection of the business of the Company. 7.6 Insurance. The Company will maintain insurance against such losses and in such amounts as the Company shall deem prudent. 8. Miscellaneous. 8.1 Notices. All notices, requests, consents and other communications required or permitted hereunder shall be in writing and shall be delivered, or mailed first-class postage prepaid, registered or certified mail: (a) if to any holder of any Shares addressed to such holder at its address as shown on the books of the Company, or at such other address as such holder may specify by written notice to the Company, or (b) if to the Company at 402 West County Road D, St. Paul, MN 55112, Attention: Chief Executive Officer; or at such other address as the Company may specify by written notice to the Investors; or (c) if to the Agent at 5500 Wayzata Boulevard, Minneapolis, MN 55416, or at such other address as the Agent may specify by written notice to the Company. and such notices and other communications shall for all purposes of this Agreement be treated as being effective or having been given if delivered personally, or, if sent by mail, when received. 8.2 Survival of Representations and Warranties, Etc. All representations and warranties contained herein shall survive the execution and delivery of this Agreement, any investigation at any time made by the Investors or on their behalf, and the sale and purchase of the Shares and payment therefor. All statements contained in any certificate, instrument or other writing delivered by or on behalf of the Company pursuant to this Agreement (other than legal opinions) at the closing shall constitute representations and warranties by the Company hereunder. 8.3 Parties in Interest. All the terms and provisions of this Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective successors and assigns of the parties hereto, whether so expressed or not, and, in particular, shall inure to the benefit of and be enforceable by the holder or holders from time to time of any of the Shares; provided, however, that a successor or assign of an Investor shall not be regarded as an "Investor." 8.4 Headings. The headings of the articles and sections of this Agreement have been inserted for convenience of reference only and do not constitute a part of this Agreement. 8.5 Choice of Law. The laws of Minnesota shall govern the validity of this Agreement, the construction of its terms and the interpretation of the rights and duties of the parties hereunder. 8.6 Counterparts. This Agreement may be executed at different times by different Investors and in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. This Agreement may be executed and delivered by one or more parties via facsimile transmission. Notwithstanding any other section of this Agreement, the execution of this Agreement on different dates by different Investors shall not be deemed an amendment to this Agreement. (Remainder of page intentionally left blank) IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorized representative and each of the Investors has executed the acceptance form following the signature page. COMPANY: MEDTOX SCIENTIFIC, INC. By: ------------------------------------------ Its: ------------------------------------------ (Signature Page to Stock Purchase Agreement) ACCEPTANCE THE UNDERSIGNED accepts and agrees to the terms and conditions set forth in the Stock Purchase Agreement among MEDTOX Scientific, Inc. and the persons listed on Schedule 1 dated July 31st, 2000 (the "Agreement"). By the execution of this Acceptance, the undersigned makes each of the representations contained in Section 4 of the Agreement. The undersigned further represents that the undersigned qualifies as an "accredited investor" as that terms is defined in Regulation D under the Securities Act of 1933, as amended (the "Act"), because (check one): Accredited individual investors must initial one or both of the following statements: _____ I certify that I am an accredited investor because I had individual income (exclusive of any income attributable to my spouse) of more than $200,000 in each of the most recent two years or joint income with my spouse of more than $300,000 in each of such years and I reasonably expect to have such an income in excess of such amounts for the current year. _____ I certify that I am an accredited investor because I have an individual net worth, or my spouse and I have a combined individual net worth, in excess of $1.0 million. For purposes of this Acceptance "individual net worth" means the excess of total assets at fair market value, including home and personal property, over total liabilities. _____ I certify that I am a director or executive officer of MEDTOX Scientific, Inc. Accredited partnerships, corporations or other entities must initial one or more of the following statements: _____ The undersigned is a bank or savings and loan association as defined in Sections 3(a)(2) and 3(a)(5)(A), respectively, of the Act acting either in its individual or fiduciary capacity. _____ The undersigned is an insurance company as defined in Section 2(13) of the Act. _____ The undersigned is an investment company registered under the Investment Company Act of 1940 or a business development company as defined in Section 2(a)(48) of that Act. _____ The undersigned is a Small Business Investment Company licensed by the U.S. Small Business Administration under Section 301(c) or (d) of the Small Business Investment Act of 1958. _____ The undersigned is an employee benefit plan within the meaning of Title I of the Employee Retirement Income Security Act of 1974 and either (check one or more, as applicable): _____ (a) the investment decision is made by a plan fiduciary, as defined in Section 3(21) of such Act, which is either a bank, savings and loan association, insurance company, or registered investment adviser; or _____ (b) the employee benefit plan has total assets in excess of $5,000,000; or _____ (c) the plan is a self-directed plan with investment decisions made solely by persons who are "Accredited Investors" as defined under the Act. _____ The undersigned is a private business development company as defined in Section 202(a)(22) of the Investment Advisers Act of 1940. _____ The undersigned has total assets in excess of $5,000,000, was not formed for the specific purpose of acquiring the Securities and is one or more of the following (check one or more, as appropriate): _____ (a) an organization described in Section 501(c)(3) of the Internal Revenue Code; or _____ (b) a corporation; or _____ (c) a Massachusetts or similar business trust; or _____ (d) a partnership. _____ The undersigned is a trust with total assets exceeding $5,000,000, which was not formed for the specific purpose of acquiring the Securities and whose purchase is directed by a person who has such knowledge and experience in financial and business matters that he or she is capable of evaluating the merits and risks of the investment in the Securities. The undersigned makes the following additional representation: This Agreement has been duly authorized by all necessary action on the part of the undersigned, has been duly executed by an authorized officer or representative of the undersigned, and is a legal, valid and binding obligation of the undersigned enforceable in accordance with its terms. * * * * * * * * Total dollar amount of investment: $________________________ Number of Units @ $10.00 per Unit: _________________________ (each Unit consisting of one share of Common Stock and a Warrant to purchase the same number of shares of Common Stock, subject to other adjustments as set forth in the Warrant) Dated: [Date] ENTITY INVESTORS INDIVIDUAL INVESTOR - ---------------------------------------- ----------------------------------- Name of Entity Signature By: ____________________________________ ____________________________________ Signature Signature of Joint Holder, if any Its: __________________________________ Title - ----------------------------------------- ---------------------------------- Name Typed or Printed Name Typed or Printed - ----------------------------------------- ----------------------------------- Address to Which Correspondence Address to Which Correspondence should be Directed should be Directed - ----------------------------------------- ----------------------------------- - ----------------------------------------- ----------------------------------- City, State and Zip Code City, State and Zip Code - ----------------------------------------- ----------------------------------- Tax Identification Number Social Security Number EX-10.52 8 0008.txt EXHIBIT 10.52 Exhibit 10.52 PURCHASE AND SALE AGREEMENT by and between PHL-OPCO, LP, a Delaware limited partnership, as Seller, and MEDTOX LABORATORIES, INC., a Delaware corporation, as Purchaser Dated: December 29, 2000 TABLE OF CONTENTS Page 1. Purchase and Sale.............................................1 2. Purchase Price................................................2 3. Deposit; Escrow...............................................3 4. Seller's Initial Deliveries...................................4 5. Purchaser's Investigations....................................5 6. Covenants.....................................................6 7. Subsequent Title Defects......................................8 8. Fire and Other Casualty.......................................9 9. Condemnation.................................................10 10. The Closing..................................................10 11. Prorations...................................................12 12. Remedies.....................................................16 13. Real Estate Commissions......................................17 14. Notice.......................................................17 15. Assignment...................................................19 16. Representations of Seller....................................19 17. Representations of Purchaser.................................22 18. No Representations; "As Is" Purchase.........................22 19. Attorney's Fees and Legal Expenses...........................24 20. Section Headings; Other Terms................................24 21. Interpretation...............................................24 22. Entire Agreement.............................................24 24. Reporting of Foreign Investment..............................25 25. Exhibits.....................................................25 26. Applicable Law...............................................25 27. Confidentiality..............................................25 28. Tax Reduction Proceedings....................................25 29. Counterparts.................................................26 30. Facsimile Signatures.........................................26 31. No Offer.....................................................26 32. Business Day.................................................27 33. Strict Performance...........................................27 34. Non-Solicitation of Employees................................27 Exhibit A LEGAL DESCRIPTION OF THE LAND .........................A-1 Exhibit B FORM OF ESTOPPEL CERTIFICATE ..........................B-1 Exhibit C FORM OF DEED ..........................................C-1 Exhibit D FORM OF GENERAL ASSIGNMENT AND ASSUMPTION .............D-1 Exhibit E FORM OF ASSIGNMENT AND ASSUMPTION OF LEASES AND SECURITY DEPOSITS .....................................E-1 Exhibit F FORM OF TENANT NOTICE .................................F-1 Exhibit G FORM OF CERTIFICATE OF NON-FOREIGN STATUS .............G-1 Exhibit H DESIGNATION AGREEMENT .................................H-1 Exhibit I FORM OF CERTIFICATE CONFIRMING REPRESENTATIONS AND WARRANTIES ............................................I-1 Exhibit J OUTSTANDING TENANT INDUCEMENT COSTS AND BROKERAGE COMMISSIONS PAYABLE BY SELLER..........................J-1 PURCHASE AND SALE AGREEMENT .........THIS PURCHASE AND SALE AGREEMENT (this "Agreement") made as of December 29, 2000, by and between PHL-OPCO, LP, a Delaware limited partnership ("Seller"), and MEDTOX LABORATORIES, INC., a Delaware corporation ("Purchaser"). W I T N E S S E T H: .........WHEREAS, Seller is the fee owner of the Land and the Improvements (each as defined in Section 1 below) known as New Brighton I and II, as more particularly described on Exhibit A hereto; --------- .........WHEREAS, Seller desires to sell its entire right, title and interest in, and Purchaser desires to purchase, the Property (as defined in Section 1 below) upon and subject to the terms and conditions hereinafter set forth; .........NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: .........1........Purchase and Sale. ----------------- .........Seller hereby agrees to sell and convey, subject to the Permitted Encumbrances (as defined in Section 4(a) below), and Purchaser hereby agrees to purchase and pay for, notwithstanding the Permitted Encumbrances, (a) that certain tract of land (the "Land") situated in New Brighton, Ramsey County, Minnesota, as more particularly described on Exhibit A hereto; (b) all buildings, together with all other permanent improvements situated on the Land and all fixtures and other property affixed thereto (collectively, the "Improvements"); (c) all rights and appurtenances pertaining to the Land and the Improvements, including any right, title and interest of Seller (but without warranty whether statutory, express or implied) in and to adjacent streets, alleys or rights-of-way; (d) any furniture, furnishings, equipment, systems, facilities and machinery, and conduits to provide life safety, heat, ventilation, air conditioning, electrical power, lighting, plumbing, security, gas, sewer and water thereto, to the extent owned by Seller and now located on or within the Land and the Improvements and used in connection therewith (collectively, the "Personal Property"); (e) all of Seller's right, title and interest as landlord in the leases for space situated within the Improvements (collectively, the "Space Leases"), all prepaid rents under the Space Leases applicable to the period from and after the Closing (as defined in Section 10 below), and security and other deposits under the Space Leases; (f) all of Seller's interest, to the extent such interest may be lawfully assigned to Purchaser without cost to Seller, in all contracts relating to the improvement, maintenance or operation of, or the provision of services or supplies to, the Land or the Improvements (such as trash removal or elevator, HVAC or landscaping maintenance contracts) which have been delivered to Purchaser by Seller according to Section 4(e), but excluding any contract with Seller's managing or leasing agents and excluding any other contracts that Seller is required to terminate by Closing in accordance with Section 6(h) (collectively, the "Service Contracts"); (g) all of Seller's interest, to the extent such interest may be lawfully assigned to Purchaser without cost to Seller, in all unexpired warranties, guaranties and bonds (including manufacturers' warranties on Personal Property and contractors' warranties for tenant finish work) that relate to any of the Improvements or Personal Property (the "Warranties"); (h) all of Seller's interest, to the extent such interest may be lawfully assigned to Purchaser without cost to Seller, in all governmental permits, licenses, certificates and authorizations, including, without limitation, certificates of occupancy, relating to the Land, Improvements or Personal Property (the "Permits"); and (i) all of Seller's interest, to the extent such interest may be lawfully assigned to Purchaser without cost to Seller, in all intangible property, including, without limitation, the name "New Brighton Business Center," relating to the Land, Improvements or Personal Property. .........The matters described in items (a) through (i) above are hereinafter collectively referred to as the "Property." To the extent that any of the personal property described in clause (d) above is owned by tenants or other occupants of space at the Property or owned by any service provider pursuant to any of the Service Contracts or owned by a utility pursuant to one or more Permitted Encumbrances, it shall be excluded from the definition of the term Property and from the term Personal Property as used in this Agreement. .........2........Purchase Price. -------------- .........The total purchase price (the "Purchase Price") to be paid by Purchaser to Seller for the Property is SIX MILLION THREE HUNDRED FIFTY THOUSAND DOLLARS ($6,350,000). The Purchase Price is to be paid by Purchaser as follows: (a) the amount of ONE HUNDRED FIFTY THOUSAND DOLLARS ($150,000) (the "Initial Deposit") upon the execution by Purchaser of this Agreement by check, subject to collection, payable to the order of, or by wire transfer in immediately available funds sent to Chicago Title Insurance Company, 222 South 9th Avenue, Suite 3250, Minneapolis, Minnesota 55402, Attn: John Haley (in such capacity, "Escrow Agent") to be held in escrow pursuant to the terms set forth in Section 3 below; (b) the amount of TWO HUNDRED THOUSAND DOLLARS ($200,000) (the "Additional Deposit"), prior to the expiration of the Inspection Period (as defined in Section 5) if Purchaser does not elect to terminate this Agreement pursuant to Section 5, by cashier's or certified check payable to the order of, or by wire transfer in immediately available funds sent to Escrow Agent to be held in escrow pursuant to the terms set forth in Section 3 below; (c) In the event Purchaser elects to extend the originally-scheduled Closing Date as provided in Section 10 below, the amount of TWO HUNDRED THOUSAND DOLLARS ($200,000) (the "Extension Deposit"), by cashier's or certified check payable to the order of, or wire transfer in immediately available funds sent to Escrow Agent to be held in escrow pursuant to the terms set forth in Section 3 below (the Initial Deposit and, when and if made by Purchaser, the Additional Deposit and the Extension Deposit are collectively referred to in this Agreement as the "Deposit"); (d) the balance of the Purchase Price, as adjusted pursuant to the terms of this Agreement, at the Closing by wire transfer in immediately available funds sent to Escrow Agent. The wire transfer required by this Section 2(d) must be received by Escrow Agent not later than 12:00 noon (Minneapolis time) on the Closing Date (as defined in Section 10 below). If such wire transfer is received later than 12:00 noon (Minneapolis time) on the Closing Date, but is nevertheless received by 5:00 p.m. (Minneapolis time) on the Closing Date, then all prorations made pursuant to Section 11 hereof will remain unchanged but Purchaser will pay to Seller an additional ONE THOUSAND SIX HUNDRED EIGHTY DOLLARS ($1,680) to compensate Seller for the additional day's interest Seller will be obligated to pay its lender and the interest income Seller will not be able to obtain by investing its proceeds on the Closing Date. .........3........Deposit; Escrow. --------------- .........At the Closing, Escrow Agent shall deliver the Deposit to Seller and/or otherwise in accordance with written instructions signed by Seller and the Deposit shall be applied to the Purchase Price. The Deposit shall be held in an interest-bearing account at a bank or trust company selected by Escrow Agent and approved by Seller and all interest earned thereon shall be paid to the party to which the Deposit shall be paid. Escrow Agent makes no representations or warranties as to the yield of the interest-bearing account in which the Deposit is held. In all other cases, if either party makes a demand upon Escrow Agent for delivery of the Deposit, or any portion thereof, then Escrow Agent shall give notice to the non-demanding party of such demand; provided, however, no such notice shall be required with respect to a demand for delivery of the Deposit made by Purchaser upon Escrow Agent in connection with the termination of this Agreement by Purchaser during the Inspection Period in accordance with Section 5. If a notice of objection to the proposed payment is not received by Escrow Agent from the non-demanding party within seven (7) business days after the giving of notice by Escrow Agent, time being of the essence, then Escrow Agent is hereby authorized to deliver the Deposit or the demanded portion to the party which made the demand. If Escrow Agent receives a notice of objection within such seven (7) business day period, or if for any other reason Escrow Agent in good faith elects not to deliver the Deposit or the demanded portion thereof, then Escrow Agent shall continue to hold the Deposit or the demanded portion thereof and thereafter pay the same to the party entitled when Escrow Agent receives (a) a notice from the non-requesting party withdrawing the objection, (b) a notice signed by both parties directing the disposition of the Deposit or the demanded portion thereof or (c) a judgment or order of a court of competent jurisdiction. In the event of any dispute or doubt as to the genuineness of any document or signature, or uncertainty as to Escrow Agent's duties, then Escrow Agent shall have the right to either continue to hold the Deposit or the demanded portion thereof in escrow or to pay the Deposit or the demanded portion thereof into court pursuant to relevant statute. The parties agree jointly to defend, indemnify and hold harmless Escrow Agent against and from any claim, judgment, loss, liability, cost or expense (including, without limitation, reasonable attorneys' fees and disbursements) resulting from any dispute or litigation arising out of or concerning Escrow Agent's duties or services hereunder. Escrow Agent shall not be liable for any error in judgment or for any act done or step taken or omitted in good faith, or for any mistake of fact or law, except for Escrow Agent's own negligence or willful misconduct. The parties acknowledge that Escrow Agent is merely a stakeholder. In the event Escrow Agent shall require the execution and delivery of any additional escrow instructions as a condition to its acting as Escrow Agent, the terms and provisions of this Section 3 shall govern in the event of any conflict. The signing of this Agreement by Escrow Agent is only to evidence Escrow Agent's acceptance of the terms and conditions of this Section 3. .........4........Seller's Initial Deliveries. --------------------------- .........Prior to the execution and delivery of this Agreement by both Seller and Purchaser, Seller has delivered or caused to be delivered to Purchaser the following: (a) a current title insurance commitment or preliminary title report issued by Chicago Title Insurance Company ("Title Company"), including copies of all recorded exceptions to title referred to therein (collectively, the "Title Commitment"), showing the status of title to the Land and Improvements according to the Title Company. Purchaser will review the Title Commitment as part of its investigations hereunder and will have the right to negotiate with Title Company in order to cause Title Company to modify the Title Commitment to reflect only those exceptions to title that are acceptable to Purchaser. If Purchaser does not terminate this Agreement pursuant to Section 5, then the exceptions to title disclosed in the Title Commitment as of the expiration of the Inspection Period (as defined in Section 5), i.e., including any endorsements or supplements to the Title Commitment issued prior to such expiration, and those matters affecting title that are reflected on the Survey (as defined in Section 4(b) below) will be the "Permitted Encumbrances" hereunder, excluding (i) any delinquent taxes or assessments, or (ii) any monetary liens or encumbrances arising by, through or under Seller. At or prior to Closing, Seller will cause any delinquent taxes or assessments and any monetary liens or encumbrances arising by, through or under Seller to be paid off or otherwise removed of record; (b) a copy of the survey of the Land and Improvements obtained by Seller when Seller acquired the same, or any update thereof since obtained by Seller (the "Survey"). As part of its investigations hereunder, Purchaser will have the right, at its expense, to have the Survey updated by the surveyor who prepared the same or by another surveyor selected by Purchaser. If Purchaser elects to obtain any such update, Purchaser will provide copies thereof to Seller and Title Company, any matters affecting title shown thereon will be deemed a part of the Permitted Encumbrances and such update will otherwise be deemed a part of the "Survey" under this Agreement; (c) a list of all movable furniture and equipment included in the Personal Property; (d) copies of all Space Leases in Seller's possession, excluding, however, that certain Space Lease between Phoenix Mutual Life Insurance Company, a predecessor-in-interest to Seller, as landlord, and Medtox Laboratories, Inc., a predecessor-in-interest to Psychiatric Diagnostic Laboratories of America, Inc., now known as Purchaser, as tenant, executed as of March 5, 1992 (as amended from time to time, the "Purchaser's Space Lease"); (e) copies of all written Services Contracts in Seller's possession; (f) a current rent roll for the Property (the "Rent Roll") and copies of the real property tax bills for the last two (2) tax years of the jurisdiction in which the Property is located (or for such shorter period as Seller has owned the Property) and a copy of any notice of valuation received by Seller since the last tax bill; and (g) copies of all environmental assessment reports prepared by third parties concerning the Property, addressed to Seller and in Seller's possession, including the Phase I environmental assessment report concerning the Property that Seller caused to be prepared in connection with Seller's acquisition of the Property. .........5........Purchaser's Investigations. -------------------------- .........Purchaser will have until 5:00 p.m., Minneapolis time, on January 31, 2001 (the "Inspection Period") to investigate the Property and all matters relevant to its acquisition, ownership and operation. If, prior to the expiration of the Inspection Period, Purchaser gives Seller written notice setting forth Purchaser's dissatisfaction with the Property for any reason whatsoever, and states in such notice Purchaser's unequivocal election to terminate this Agreement, then (i) Escrow Agent will promptly return the Deposit to Purchaser, and (ii) Purchaser will, as consideration for the investigation privileges afforded to Purchaser by Seller hereunder, deliver to Seller copies of all studies, inspection reports and similar matters made for Purchaser by third parties engaged by Purchaser to do so during the Inspection Period concerning the Property, whereupon this Agreement will terminate and both parties will be relieved of any further obligations hereunder, except for those obligations which expressly survive any termination hereof. If Purchaser does not give such termination notice prior to the expiration of the Inspection Period, then this Agreement will remain in full force and effect in accordance with its terms and the Deposit will become nonrefundable to Purchaser for any reason whatsoever, except as expressly provided to the contrary in Section 6(e), 7, 8, 9, 12(a) or 16. If Purchaser does not give such termination notice prior to the expiration of the Inspection Period but fails to deliver the Additional Deposit in accordance with Section 2(b) above prior to the expiration of the Inspection Period, then this Agreement will remain in full force and effect as provided above, but Purchaser will be deemed in default and, if Purchaser does not cure such default within one (1) business day after delivery of notice thereof by Seller to Purchaser, Seller may, at Seller's option, terminate this Agreement by notice to Purchaser and Escrow Agent whereupon Seller shall receive the Deposit as liquidated damages and not as a penalty. .........6........Covenants. --------- .........Purchaser covenants and agrees with Seller that prior to the Closing, Purchaser, in the conduct of its due diligence investigation of the Property or otherwise, will not interfere with or hinder the operation of the Property or the other tenants or occupants thereof. Seller and Purchaser each acknowledge that Purchaser is a tenant of the Property under the Purchaser's Space Lease, and that the foregoing covenant shall not apply to Purchaser in its capacity as "tenant" under the Purchaser's Space Lease. Seller covenants and agrees with Purchaser that, from the date hereof until the Closing, Seller will: (a) provide Purchaser and Purchaser's agents and representatives with reasonable access to the Property between 9:00 a.m. and 5:00 p.m. on weekdays, subject to the rights of the Property's tenants or occupants and provided that: (i) Purchaser will notify Seller not less than three (3) business days in advance of entering the Property; (ii) neither Purchaser nor any agent or representative of Purchaser will communicate directly with any tenant of the Property without the approval of and with, at Seller's option, the accompaniment by, Seller or Seller's manager for the Property; (iii) Purchaser will keep the Property free and clear of any mechanic's or materialmen's liens arising out of any such entry, promptly restore any damage caused by Purchaser or its representatives, perform all investigations in a safe and professional manner, not allow any dangerous or hazardous conditions and comply with all applicable laws and governmental regulations; (iv) Seller or any of its representatives or agents may accompany Purchaser and any of its representatives and agents during their visit to the Property; (v) Purchaser will not perform any invasive testing of the Property without Seller's prior written consent; and (vi) prior to Purchaser's or its agent's or representative's entry upon the Property, Purchaser will deliver to Seller evidence of such party's liability insurance coverage by an insurer reasonably acceptable to Seller and with combined single limits of not less than ONE MILLION DOLLARS ($1,000,000) per occurrence. Purchaser agrees to indemnify and hold harmless Seller, and hereby waives and releases Seller, from all liability, claims, loss, liens, costs, expenses and damages, including reasonable attorneys' fees and expenses, arising out of, and will repair any damages resulting to the Property due to, such access or, if requested by Seller, reimburse Seller for all expenses incurred by Seller in repairing such damages if Purchaser does not promptly repair such damages. The foregoing agreement of indemnity, repair and reimbursement shall survive Closing and/or any termination of this Agreement; (b) provide Purchaser and Purchaser's agents and representatives with reasonable access, between 9:00 a.m. and 5:00 p.m. on weekdays, and upon at least one (1) business day's prior notice, to all tenant files and books and records concerning the operation and maintenance of the Property (including, without limitation, the Property's operating income and expenses), to the extent that any of the same are in Seller's possession, at the offices in Denver, Colorado and Bloomington, Minnesota where Seller maintains the same; (c) not enter into (i) any new Space Lease, or (ii) any termination, modification, amendment or renewal of any existing Space Lease, except pursuant to an existing provision of such Space Lease (collectively, a "New Lease"), without Purchaser's prior written approval, which approval will not be unreasonably withheld or delayed. If Seller desires to enter into a New Lease, Seller will deliver written notice to Purchaser requesting Purchaser's approval thereof and providing therewith the most current draft of the proposed New Lease and copies of such information concerning the proposed tenant as Seller may have in its possession. Purchaser will respond to Seller's request for approval of the New Lease transaction within five (5) business days after the delivery of Seller's notice. Unless Purchaser delivers written notice to Seller disapproving the proposed New Lease within such five (5) business days, Purchaser will be deemed to have approved such New Lease transaction for all purposes of this Agreement and Seller may proceed to consummate such New Lease in the form most recently approved (or deemed approved) by Purchaser; (d) not enter into any new Service Contracts which cannot by their express terms be terminated on not more than thirty (30) days' notice and that will survive Closing or otherwise affect the use, operation or enjoyment of the Property after Closing, without Purchaser's prior written consent, which consent will not be unreasonably withheld or delayed, and which consent will be deemed to have been given by Purchaser if Purchaser does not notify Seller to the contrary within five (5) business days after receipt of Seller's request for such consent; (e) except with respect to Purchaser's Space Lease, use commercially reasonable efforts to obtain and deliver to Purchaser a signed estoppel certificate in substantially in the form of Exhibit B attached hereto from each of the tenants under the Space Leases (except that if any Space Lease prescribes a different form of estoppel certificate, Seller will only be required to use commercially reasonable efforts to obtain an estoppel certificate from such tenant in such prescribed form). In the event Seller is unable to obtain and deliver to Purchaser on or before the date which is five (5) business days prior to the Closing Date a Conforming Estoppel (as defined below) from tenants occupying not less than seventy-five percent (75%) of the leasable space within the Property that has been leased under the Space Leases, excluding the leasable space under Purchaser's Space Lease, Purchaser may elect to terminate this Agreement by giving notice to Seller and to receive a refund in full of the Deposit by giving Seller notice of such termination. As used herein, a "Conforming Estoppel" will mean either (1) an estoppel certificate signed by the tenant under a Space Lease and in the form of Exhibit B (or if any Space Lease prescribes a different form of estoppel certificate, then an estoppel certificate for such Space Lease in such prescribed form will also be deemed acceptable), with all blanks filled in with information that conforms to the information set forth in the Rent Roll delivered to Purchaser pursuant to Section 4(f) above and with no additional information added that is inconsistent with the statements set forth in such form or with the information set forth in such Rent Roll; or (2) an estoppel certificate that is otherwise acceptable to Purchaser in its sole and absolute discretion, provided that if Seller delivers a signed estoppel certificate to Purchaser for review and Purchaser does not notify Seller that such estoppel certificate is unacceptable within five (5) business days after delivery thereof, then such estoppel certificate will be deemed accepted by Purchaser; (f) not create or permit the creation of any title exceptions, such as easements or liens encumbering the Property (unless caused by Purchaser), without Purchaser's prior written approval, which shall not be unreasonably withheld or delayed; (g) continue to maintain the Property consistent with industry standards in the marketplace; and (h) at or prior to Closing, terminate (i) any contract with Seller's managing or leasing agents for the Property; and (ii) any contract that would otherwise constitute a Service Contract but as to which Purchaser notifies Seller, by the expiration of the Inspection Period, that Purchaser desires Seller to terminate by Closing, provided that any contract Purchaser so requests Seller to terminate must, in accordance with the terms and provisions thereof, be terminable by Seller without penalty (unless Purchaser agrees to pay such penalty) at or prior to Closing. .........7........Subsequent Title Defects. ------------------------ .........If, subsequent to the expiration of the Inspection Period and prior to Closing, Purchaser becomes aware of the existence of any encumbrances, encroachments, defects in or other matters affecting title, other than the Permitted Encumbrances and other than any delinquent taxes or assessments or any monetary liens or encumbrances arising by, through or under Seller which Seller is obligated to remove prior to Closing pursuant to Section 4(a), that render title to the Property unmarketable and are unacceptable to Purchaser, Purchaser shall as soon as practicable notify Seller in writing of such fact and the reasons therefor ("Purchaser's Title Objections"). Seller shall have the right but not the obligation to eliminate or otherwise cure Purchaser's Title Objections (which shall include causing the Title Company to "insure over" any Purchaser's Title Objections), provided that (i) Seller shall be obligated to cure any liens created by Seller after the date hereof and (ii) if Seller receives notice of any Purchaser's Title Objections, Seller shall notify Purchaser in writing within five (5) business days after its receipt thereof as to whether Seller intends to eliminate or cure Purchaser's Title Objections and if Seller, in its sole discretion, elects to eliminate or cure Purchaser's Title Objections, Seller shall have the right to postpone the Closing for a period of up to thirty (30) days anything else in this Agreement to the contrary notwithstanding. If Seller is unable or unwilling to cure Purchaser's Title Objections, Purchaser (as its sole and exclusive remedy) may terminate this Agreement by notice in writing to Seller on or before five (5) business days following notice from Seller that it is unwilling or unable to cure or modify Purchaser's Title Objections, failing which Purchaser shall accept such title as Seller is able or willing to deliver without any reduction in the Purchase Price, in which event such uncured Purchaser's Title Objections shall be included in the term "Permitted Encumbrances." Upon a termination pursuant to this Section, the parties shall have no further rights or obligations hereunder, except those which expressly survive termination, and the Deposit shall be returned to Purchaser. .........8........Fire and Other Casualty. ----------------------- (a) Notice and Estimate. In the event that the Improvements should be damaged by any casualty prior to Closing, Seller will promptly give Purchaser written notice of such occurrence, and as soon thereafter as practicable, will provide Purchaser with an estimate made by an architect, engineer or contractor selected by Seller and approved by Purchaser (which approval will not be unreasonably withheld or delayed) of the cost and amount of time required to repair such damage. If it is so estimated that it will take longer than until the Closing Date to repair such damage and if neither party terminates this Agreement pursuant to Section 8(c), then Purchaser will be given an opportunity to review and approve any construction contract which Seller proposes to enter into to have such damage repaired and Purchaser will not unreasonably withhold or delay such approval. (b) Minor Damage. If the estimated cost of repairing such damage is less than or equal to ten percent (10%) of the Purchase Price, then Seller will promptly contract for and commence the repairs and complete so much thereof as may be accomplished prior to the Closing Date. In the event such repairs are not completed on or before the Closing Date, Seller will assign to Purchaser so much of the insurance proceeds resulting from such damage as have not then been expended for repairs, Seller will assign to Purchaser, and Purchaser will assume, the rights and obligations under the construction contract pursuant to which such repairs are being completed, and at Closing, the Purchase Price will be reduced both to the extent of any deductible provided for in Seller's casualty policy that has not been expended by Seller as of Closing for repairs and to the extent the insurance proceeds are insufficient to cover the amounts due under the construction contract or amounts estimated to make or complete such repairs. (c) Major Damage. If the estimated cost of such repairs is more than ten percent (10%) of the Purchase Price, then either Seller or Purchaser may elect to terminate this Agreement upon written notice to the other given within ten (10) days after both parties' receipt of the estimate in which event Escrow Agent will return the Deposit to Purchaser and both parties will be relieved of any further obligations hereunder, except for those obligations which expressly survive any termination hereof; however, if neither party elects to so terminate this Agreement, then this Agreement will remain in full force and effect and the parties will proceed in accordance with Section 8(b). .........9........Condemnation. ------------ .........Within seven (7) business days after service on Seller of a suit for condemnation of any part of the Property by an appropriate governmental authority, Seller will notify Purchaser of the pendency of such proceedings. In the event of the condemnation of any portion of the Property or the sale of any portion of the Property in lieu of condemnation, this Agreement shall remain in full force and effect, and in such event Seller at the Closing shall assign to Purchaser any and all claims for the proceeds of such condemnation, and Purchaser shall take title to the remainder of the Property with the assignment of such proceeds and subject to such condemnation and without reduction in the Purchase Price; provided, however, that if such condemnation would result in the taking (but not the forced grant of an easement or right of way for municipal sewerage or utility lines) of at least fifteen percent (15%) of the Land on which Improvements are situated, then Purchaser may terminate this Agreement by notice in writing to Seller sent within ten (10) days following notice in writing by Seller to Purchaser of such condemnation of the Property, in which event the parties shall have no further rights or obligations hereunder (except those which expressly survive termination) and the Deposit shall be returned to Purchaser. If Purchaser does not elect to terminate in writing within said ten (10) day period following such notice by Seller, Purchaser shall be deemed to have waived all rights to terminate pursuant to this Section and this Agreement shall remain in full force and effect. Purchaser shall perform its own due diligence to determine, to Purchaser's satisfaction, whether there is any pending or threatened condemnation or eminent domain proceeding which would affect the Property. .........10.......The Closing. ----------- .........The consummation of the transaction contemplated by this Agreement (the "Closing") shall take place through an escrow with Escrow Agent on or before February 15, 2001 ("Closing Date"), TIME BEING OF THE ESSENCE. Purchaser will have the one-time right to extend the Closing Date by up to ten (10) business days by delivering written notice of Purchaser's exercise of such extension right to Seller and Escrow Agent at least five (5) days prior to the originally-scheduled Closing Date and simultaneously delivering to Escrow Agent, by cashier's or certified check or by wire transfer of immediately available funds, the Extension Deposit, which Extension Deposit will be deemed a part of the Deposit under this Agreement, will apply as a credit against the Purchase Price and will not be refundable to Purchaser for any reason except as expressly provided to the contrary in Sections 6(e), 7, 8, 9, 12(a) and 16. At the Closing, the following shall occur: (a) Seller shall deliver to Purchaser a duly executed and acknowledged Limited Warranty Deed (the "Deed") in substantially the form attached hereto as Exhibit C, and Seller and Purchaser shall each execute and deliver to each other a General Assignment and Assumption in substantially the form attached hereto as Exhibit D. Seller shall include a statement on the Deed that Seller has no knowledge of any "Wells" on the Property within the meaning of Minn. Stat. ss. 103I.005, subdivision 21. (b) Purchaser shall pay the balance of the Purchase Price as provided in Section 2(d) hereof and the parties shall execute settlement statements reflecting the Purchase Price, the Deposit and the prorations, adjustments and closing costs described in Section 11. (c) Seller and Purchaser shall enter into an Assignment and Assumption of Leases and Security Deposits substantially in the form attached hereto as Exhibit E whereby Seller shall deliver as provided in this Agreement and assign to Purchaser Seller's interest as landlord in the (i) the existing Space Leases affecting the Property and (ii) any and all deposits paid to Seller under the Space Leases and not previously applied in accordance with the applicable Space Lease and whereby Purchaser shall assume from and after the Closing all of the obligations of the landlord under the Space Leases including the obligation to account for the security deposits assigned to Purchaser. (d) The parties shall execute a written notice addressed to each tenant under the Space Leases notifying such tenant of the acquisition of the Property by Purchaser in substantially the form attached hereto as Exhibit F. The notices shall be delivered to Escrow Agent with instructions to forward the notices to Purchaser at Closing, whereupon Purchaser shall deliver the notices to the tenants immediately after the Closing. The costs of sending the notices shall be shared equally by Purchaser and Seller. (e) Seller shall deliver to Purchaser each of the executed Space Leases (to the extent such Space Leases are within Seller's possession). (f) The present insurance coverage on the Property shall be terminated at Closing and there shall be no proration. Public utility services shall be transferred or terminated as of the date of Closing. The provisions of this Section shall survive Closing. (g) Pursuant to the terms and conditions of this Agreement, possession of the Property shall be delivered to Purchaser at Closing, subject to the rights of tenants under the Space Leases and the other Permitted Encumbrances. (h) Seller shall deliver to Purchaser all keys to all locks on the Property within Seller's possession (or the possession of its agents). (i) Purchaser shall execute, acknowledge and deliver such state and local transfer or sales tax returns and statements as are required for the transfer of the Property (including the Certificate of Real Estate Value required in order to record the Deed). (j) Seller shall deliver to Purchaser a "non-foreign affidavit" in substantially the form of Exhibit G acknowledging that Seller is not a nonresident alien within the meaning of Section 1445 of the Internal Revenue Code of 1986, as amended. (k) Seller and Purchaser shall each execute and deliver to the other party such disclosures as may be required by applicable law. (l) Seller and Purchaser shall each reasonably cooperate with each other to effect a tax-free exchange of the Property, but only to the extent that such cooperation does not (i) cause such party to incur any liability or otherwise increase such party's risk relating to the transaction contemplated by this Agreement, (ii) cause such party to incur any monetary obligations or to otherwise expend any monies other than those amounts that would be payable notwithstanding a tax-free exchange of the Property and which amounts are otherwise expressly assumed by such party pursuant to this Agreement or (iii) otherwise result in a reduction of such party's rights, remedies and privileges hereunder or under applicable federal, state, local or other law or an increase of such party's obligations or duties hereunder or under any applicable federal, state, local or other law. (m) Each party shall deliver to the other party such documentary and other evidence as may be reasonably required by such other party or the Title Company including, without limitation, such documents evidencing its good standing and the authority of the person or persons who are executing the various documents on its behalf in connection with this Agreement, a Designation Agreement in substantially the form attached hereto as Exhibit H, and a certificate confirming such party's representations and warranties in substantially the form attached hereto as Exhibit I. .........11.......Prorations. ---------- (a) Taxes. General real estate taxes, sewer charges and assessments payable in the then current calendar year relating to the Property shall be prorated as of the Closing. If Closing shall occur before the actual taxes for the then current tax year are known, Purchaser shall assume and pay all such unknown taxes and the apportionment of taxes shall be upon the basis of the taxes for the Property for the immediately preceding year. Such proration shall be a final settlement between Seller and Purchaser, regardless of whether the taxes for the current tax year are thereafter determined to be more or less than the taxes upon which such proration was based. All special taxes or assessments payable on or before the Closing shall be prorated as set forth above, and those payable after the Closing shall be paid by Purchaser. (b) Fixed, Minimum and Base Rents. Subject to Section 11 (h) below, Seller shall be entitled to fixed, minimum and base rents which are due or past due or not yet due but accrued under the terms of the Space Leases, prorated to midnight of the day prior to the Closing, regardless of when such payments are actually made. At Closing, rents received by Seller for the month of Closing will be prorated as provided below, but there shall be no proration at Closing of unpaid or delinquent rents. All payments of fixed, minimum or base rents received by either party for the month of Closing shall be prorated based upon the number of days in that month occurring before the Closing, and the party receiving the payment shall credit (in the case of payment received by Seller before the Closing) or remit (in the case of payment received by Purchaser on or after the Closing) to the other party its proportionate share. (c) Adjustment of Reimbursable Expenses. To the extent tenants under the Space Leases are obligated to reimburse the landlord for operating expenses, common area maintenance charges, taxes or other costs (collectively, "Reimbursable Expenses"), whether through the payment of monthly estimated payments subject to annual reconciliation or otherwise, Seller and Purchaser will adjust between themselves the difference between the Reimbursable Expenses actually incurred by Seller during the portion of the calendar year in which the Closing occurs prior to the Closing ("Seller's Ownership Period") and the estimated payments of Reimbursable Expenses received by Seller from the tenants during Seller's Ownership Period. At the Closing, Seller will deliver to Purchaser a statement (the "Reimbursable Expenses Statement") showing (i) the actual Reimbursable Expenses incurred by Seller during Seller's Ownership Period (with respect to taxes, only those taxes paid by Seller during Seller's Ownership Period for which estimated payments are being made by the tenants during such period will be included in such statement of actual Reimbursable Expenses; taxes paid during such period but for which estimated payments were collected in a prior period will not be included); (ii) the estimated payments of Reimbursable Expenses for Seller's Ownership Period received by Seller from each tenant (only estimated payments received for Seller's Ownership Period will be included; payments for a prior period or that constitute reconciliation payments for a prior period will not be included), (iii) each tenant's share (pursuant to its Space Lease) of the actual Reimbursable Expenses incurred by Seller during Seller's Ownership Period; (iv) the amount, if any, by which each tenant's estimated payments exceeds its share of actual Reimbursable Expenses for Seller's Ownership Period (an "Overpayment"), or the amount, if any, by which each tenant's share of actual Reimbursable Expenses for Seller's Ownership Period exceeds its estimated payments (an "Underpayment"); and (v) a summary of all Overpayments and Underpayments for all tenants. If the total of all Overpayments exceeds the total of all Underpayments, Purchaser will receive a credit from Seller at Closing for the difference. If the amount of all Underpayments exceeds the amount of all Overpayments, Seller will receive a credit from Purchaser at Closing for the difference. Seller will prepare the Reimbursable Expenses Statement based on the best information available to Seller at that time. However, Seller will have the right, within sixty (60) days after Closing, to prepare and deliver to Purchaser a supplemental Reimbursable Expenses Statement showing any Reimbursable Expenses incurred by Seller, or payments of estimated Reimbursable Expenses made by tenants to Seller, during Seller's Ownership Period that were not known to Seller as of Closing. Within ten (10) days after delivery of such supplemental statement, the parties will adjust in cash any additional amounts due to or from each other. The adjustment of Reimbursable Expenses between Seller and Purchaser provided for in this Section 11(c), including the supplemental statement and adjustment described above, will constitute a final settlement and, notwithstanding the provisions of Section 11 (h) below, Purchaser will be entitled to retain all payments of Reimbursable Expenses received from the tenants under the Space Leases subsequent to Closing. (d) Prepaid Rents and Security Deposits. All prepaid rents and security and other deposits of all tenants under Space Leases paid to Seller and not theretofore applied in accordance with any such Space Lease, with interest thereon to the extent any interest is required to be paid to such tenants, shall be delivered by Seller to Purchaser at the Closing, or Purchaser shall receive a credit therefor at Closing. (e) Tenant Inducement Costs; Brokerage Commissions. Seller shall be responsible for the payment of all Tenant Inducement Costs and Leasing Commissions (as such terms are hereinafter defined) that are required to be paid as a result of any Space Lease, or any amendment to a Space Lease, that was signed by Seller during the period from Seller's acquisition of the Property to the date of this Agreement, including, without limitation, those outstanding Tenant Inducement Costs and Leasing Commissions listed on Exhibit J attached hereto, and including any New Lease approved or deemed approved by Purchaser pursuant to Section 6(c) and entered into between Seller, as landlord, and Qualex, Inc., as tenant, prior to Closing (the "New Qualex Lease"), but excluding (i) any refurbishment allowance or similar Tenant Inducement Cost that may become payable pursuant to the express terms of such a Space Lease or amendment if the tenant thereunder exercises subsequent to the date of this Agreement a renewal, extension, expansion or similar option thereunder; and (ii) any Leasing Commissions that Purchaser obligates itself to pay to its broker or a tenant's broker with respect to any such renewal, extension, expansion or similar option. Except with respect to the New Qualex Lease, Seller shall have no obligation to Purchaser for the payment of any other Tenant Inducement Costs or Leasing Commissions, including, without limitation, any Tenant Inducement Costs or Leasing Commissions payable with respect to any New Lease approved or deemed approved by Purchaser pursuant to Section 6(c). If any Leasing Commission or Tenant Inducement Cost the payment of which is Seller's responsibility, as provided above, has not been paid by Closing, then Purchaser will receive a credit at Closing for the unpaid amount. If before Closing Seller pays any Leasing Commission or Tenant Inducement Cost required to be paid before Closing but the payment of which is Purchaser's responsibility (such as a Leasing Commission due upon execution of a New Lease approved or deemed approved by Purchaser pursuant to Section 6(c)) but excluding the New Qualex Lease, then Seller will receive a credit from Purchaser at Closing for the amount so paid. For the purposes hereof, "Tenant Inducement Costs" shall mean any out-of-pocket payments required under a Space Lease to be paid by the landlord thereunder to or for the benefit of the tenant thereunder which is in the nature of a tenant inducement, including, without limitation, tenant improvement costs (whether paid by the landlord to the tenant as a cash allowance or incurred by the landlord in the performance of such tenant improvements), lease buyout costs, and moving, design and refurbishment allowances. The term "Tenant Inducement Costs" shall not include loss of income resulting from any free rental period, it being agreed that Seller shall bear the loss resulting from any free rental period until the Closing Date and that Purchaser shall bear the loss from and after the Closing. The term "Leasing Commissions" shall mean any brokerage commission, fee or other compensation owing in connection with any Space Lease. (f) Other Items of Expense or Receipt. All other customarily prorated items of expense or receipt shall be prorated between the parties hereto as of the Closing. Except with respect to items prorated at the Closing, Seller shall be responsible for payment of any and all bills or charges incurred on or prior to the Closing for work, services, supplies or materials, and Purchaser shall be responsible for payment of any and all bills or charges incurred after the Closing for work, services, supplies or materials. Unless otherwise provided for in this Agreement, Purchaser shall not purchase, nor shall there be any proration credit given for, any of Seller's receivables arising from the operation of the Property. (g) Adjustments. Prorations shall be accomplished by an adjustment in the ----------- Purchase Price due Seller on the Closing, except as otherwise expressly provided in this Agreement. (h) Collections and Application of Payments after Closing. After the Closing, Purchaser shall bill tenants for all amounts due under Space Leases, including amounts accruing prior to the Closing. Any amounts or charges payable by tenants on or after the Closing with respect to which Seller is entitled to receive a share under this Agreement, which are not paid within sixty (60) days after the due date, and any amount due and owing Seller before the Closing by tenants under the Space Leases which ere unpaid as of the Closing, are collectively herein called "Delinquent Amounts". Notwithstanding the foregoing or any direction from tenants to the contrary, rental and other payments received by Purchaser or Seller from tenants shall be first applied toward the payment of rent and other charges owed to Purchaser for the month in which the payment is received, then toward the payment of rent and other charges owed for the month in which the Closing occurs, in which case such payment shall be prorated to the Closing, then toward any Delinquent Amounts, and any excess monies received shall be applied toward any other amounts due to Purchaser. Purchaser may not waive any Delinquent Amounts nor modify a Space Lease so as to reduce amounts or charges owed under Leases for any period in which Seller is entitled to receive a share of charges or amounts, without first obtaining Seller's written consent. During the first twelve months after the Closing, Seller shall have and reserves the right to pursue any remedy against any tenant owing Delinquent Amounts provided that (i) Seller shall notify Purchaser of its intent to institute any legal proceeding relating thereto not less than thirty (30) days prior to the institution thereof, (ii) Seller shall not institute any legal proceedings for collection of Delinquent Amounts prior to the expiration of ninety (90) days following the Closing, (iii) Seller shall in no event institute any proceeding to evict or dispossess a tenant from the Property and (iv) Seller shall not take any action which would limit Purchaser's rights to pursue any remedy Purchaser may have for a default under any Space Lease. Purchaser may, by written notice to Seller within twenty (20) days of receipt of Seller's notice, restrict Seller from collecting such Delinquent Amounts, but only if Purchaser first pays Seller such Delinquent Amounts in exchange for Seller's assignment to Purchaser of all of Seller's rights and causes of action with respect thereto. With respect to Delinquent Amounts owed by tenants who are no longer tenants of the Property as of the Closing, Seller shall retain all rights relating thereto. (i) Service Contract Charges. Amounts due and payable under any Service Contract assigned to Purchaser shall be prorated as of the Closing, and, at the Closing, Seller or Purchaser, as the case may be, shall pay to the other any amount required as a result of such adjustment, and this covenant shall not merge with the deed delivered hereunder but shall survive the Closing. (j) Closing Costs. Seller will pay for: (i) any recording fees necessary to remove of record any monetary liens or encumbrances required hereunder to be paid by Seller; (ii) one-half of any closing or escrow fees charged by Escrow Agent; and (iii) the fees of Seller's attorneys, if any. Purchaser will pay for: (i) all costs of conducting its investigation of the Property; (ii) the premium for Purchaser's or its lender's title insurance policy; (iii) the cost, if any, charged by the Title Company to make Purchaser's or its lender's title policy "extended coverage" or to delete the "standard exceptions" therefrom and the costs of any special endorsements requested by Purchaser or its lender; (iv) all recording fees in addition to those required to be paid by Seller; (v) one-half of any closing or escrow fees charged by Escrow Agent; (vi) the fees of Purchaser's attorneys, if any; and (vii) any local or state transfer or sales taxes, including the deed tax. Except as aforesaid, any other fees or charges shall be paid by the party who would otherwise be responsible therefor in accordance with the customs and practices in Ramsey County, Minnesota. (k) Survival. Unless otherwise expressly provided herein, this Section 11 shall -------- survive until the first anniversary of the Closing. .........12.......Remedies. -------- (a) Seller's Default. Except if due to Purchaser's default or a termination of this Agreement by Purchaser or Seller pursuant to a right to do so under the provisions hereof, in the event that Seller shall fail to consummate this Agreement for any reason, Purchaser, as its sole and exclusive remedy, may either (i) terminate this Agreement by giving written notice of termination to Seller whereupon Escrow Agent will return the Deposit to Purchaser and both Purchaser and Seller will be relieved of any further obligations or liabilities hereunder, except for those obligations which expressly survive any termination hereof; or (ii) Purchaser may seek specific performance of this Agreement, but Purchaser will not be entitled to damages and hereby waives all claims therefor; provided, however, that if Purchaser is denied the remedy of specific performance by a final and nonappealable judgment, Purchaser will be entitled to seek damages in an amount not to exceed the Cap (as defined in Section 16). Except as expressly provided above, Seller shall not be liable to Purchaser for any further actual, punitive, speculative or consequential damages or any other remedy at law or in equity. In addition, Purchaser shall look solely to Seller's estate and interest in the Property (or the proceeds thereof) for the collection of a judgment or other judicial process requiring the payment of money by Seller in connection with any claim arising under this Agreement, and in no event whatsoever shall Purchaser look for recourse to any of Seller's other assets or the assets of any of Seller's constituent partners, agents or affiliates or any of their respective successors and assigns in connection with any breach or alleged breach of any representation, warranty or covenant hereunder or under any other document or certificate delivered in connection herewith. (b) Purchaser's Default. In the event that Purchaser shall fail to consummate this Agreement for any reason, except Seller's default or the termination of this Agreement by Purchaser or Seller pursuant to a right to do so under the provisions hereof, then Seller, as its sole and exclusive remedy under this Agreement, may terminate this Agreement by notifying Purchaser and Escrow Agent thereof and shall receive the Deposit as liquidated damages and not as a penalty. The parties agree that Seller will suffer damages in the event of Purchaser's default on its obligations. Although the amount of such damages at this time is difficult or impossible to determine, the parties agree that the amount of the Deposit is a reasonable estimate of Seller's loss in the event of Purchaser's default under this Agreement. Thus, Seller shall accept and retain the Deposit as liquidated damages but not as a penalty. Such liquidated damages shall constitute Seller's sole and exclusive remedy for Purchaser's failure to consummate this Agreement. (c) Post-Closing Defaults. Notwithstanding the provisions of Sections 12(a) and (b) above, if after termination of this Agreement or the Closing, as the case may be, a party (the "Defaulting Party") breaches an obligation under this Agreement which is expressly stated to survive the termination of this Agreement or the Closing, as the case may be, the Defaulting Party shall be liable to the other party (the "Non-Defaulting Party") for the actual damages incurred by the Non-Defaulting Party as a direct result of such breach. In no event shall the Non-Defaulting Party be entitled to recover from the Defaulting Party any punitive, consequential or speculative damages. .........13.......Real Estate Commissions. ----------------------- .........Each party hereto represents to the other that it has not authorized any broker or finder to act on its behalf in connection with the sale and purchase hereunder, except C.B. Richard Ellis, Inc. (the "Broker"), and that such party has not dealt with any broker or finder purporting to act on behalf of any other party. Each party hereto agrees to indemnify and hold harmless the other party from and against any and all losses, liens, claims, judgments, liabilities, costs, expenses or damages (including reasonable attorneys' fees and disbursements and court costs) of any kind or character arising out of or resulting from any agreement, arrangement or understanding alleged to have been made or dealing by such party or on its behalf with any broker or finder in connection with this Agreement or the transaction contemplated hereby, other than the Broker. Purchaser shall pay any commission or fee due to the Broker pursuant to a separate agreement. .........14.......Notice. ------ .........Any notice required hereunder shall be given in writing (by a party or by such party's attorney), sent by (a) personal delivery, (b) overnight delivery service with proof of delivery, (c) United States Postal Service, postage prepaid, registered or certified mail, return receipt requested, or (d) telecopy (provided that such telecopy is confirmed by simultaneous sending by one of the other means provided for notice), except as otherwise expressly provided in this Agreement, addressed as follows: .........If to Seller: PHL-OPCO, LP c/o Beta West, Ltd. 1050 Seventeenth Street, Suite 1000 Denver, Colorado 80265 Attention: Stephanie Lawrence Telephone: (303) 893-7087 Telecopy: (303) 893-7001 with a copy to: Otten, Johnson, Robinson, Neff & Ragonetti, P.C. 950 Seventeenth Street, Suite 1600 Denver, Colorado 80202 Attention: John D. Sternberg Telephone: (303) 575-7505 Telecopy: (303) 825-6525 If to Purchaser: Medtox Laboratories, Inc. 402 West County Road D Saint Paul, Minnesota 55112 Attention: James Lockhart, Chief Financial Officer Telephone: (651) 286-6225 Telecopy: (651) 286-6299 with a copy to: Fredrikson & Byron 1100 International Centre 900 2nd Avenue South Minneapolis, Minnesota 55402 Attention: Paul B. Jones Telephone: (612) 347-7000 Telecopy: (612) 347-7077 If to Escrow Agent: Chicago Title Insurance Company 222 South 9th Avenue, Suite 3250 Minneapolis, Minnesota 55402 Attention: John Haley Telephone: (612) 339-5370 Telecopy: (612) 337-0331 Order No. _______________ Any such notice shall be deemed to have been given and received either, in the case of personal delivery, at the time of personal delivery, in the case of delivery service, as of the date of the first attempted delivery at the address and in the manner provided herein, in the case of mailing, three (3) days after depositing with the U.S. Postal Service, or in the case of telecopy, upon transmission; provided, however, that if the last date permitted for notice shall be the business day before the Closing or the Closing, then such notice must be given so that it is actually received on such day. .........15.......Assignment. ---------- .........Purchaser may not assign its interest in this Agreement without obtaining the prior written consent of Seller, provided, however, that Purchaser may assign its interest in this Agreement to any entity which is controlled directly or indirectly by Purchaser so long as Seller is advised of such assignment not less than seven (7) business days prior to the Closing, accompanied by satisfactory evidence of such control. Purchaser hereby agrees that any assignment by Purchaser in contravention of this provision shall be void ab initio and shall not relieve Purchaser of any of its obligations and liabilities hereunder. .........16.......Representations of Seller. ------------------------- .........Seller represents and warrants to Purchaser that, as of the date hereof and on the Closing Date: (a) Seller is a limited partnership duly formed and validly existing under the laws of the State of Delaware. Seller has the full right, power and authority to enter into this Agreement and to perform Seller's obligations hereunder. (b) This Agreement and all other documents executed and delivered by Seller prior to or at Closing in connection therewith (i) have been, or shall be, duly authorized, executed, and delivered by Seller; (ii) are, or shall be, binding obligations of Seller; (iii) do not, and shall not, violate the formation documents of Seller. (c) No filing or petition under the United States Bankruptcy Law or any insolvency laws, or any laws for composition of indebtedness or for the reorganization of debtors has been filed with regard to Seller. (d) Seller has not granted, other than to Purchaser and other than as may be set forth in the Space Leases, any outstanding option, right of first refusal or any other right with respect to the purchase of all or any portion of the Property. (e) To Seller's actual knowledge, except as set forth in any documents delivered to Purchaser (including the Title Commitment), Seller has not received any written notice of any pending or threatened condemnation actions against the Property. (f) To Seller's actual knowledge, the copies of the Space Leases, Service Contracts, and the environmental assessment reports delivered by Seller to Purchaser are true, accurate and complete copies of the documents in Seller's possession that purport to be the Space Leases, Service Contracts and such environmental assessment reports. (g) To Seller's actual knowledge, except as set forth in any documents delivered to Purchaser (including the Title Commitment), Seller has not received written notice of any action, suit, arbitration, unsatisfied order or judgment, governmental investigation or proceeding pending against Seller which, if adversely determined, could individually or in the aggregate materially interfere with the consummation of the transaction contemplated by this Agreement. (h) To Seller's actual knowledge, except as set forth in any documents delivered to Purchaser, Seller does not know of any "Wells" on the Property within the meaning of Minn. Stat.ss. 103I. This representation is intended to satisfy the requirements of that statute. (i) To Seller's actual knowledge, except as set forth in any documents delivered to Purchaser, no "above ground storage tanks" or "underground tanks" (within the meaning of Minn. Stat. ss. 116.46) are located in or about the Property, or have been located under, in or about the Property and have subsequently been removed or filled. (j) Solely for purposes of satisfying the requirements of Minn. Stat.ss. 115.55, there is no "individual sewage treatment system" (within the meaning of that statute) on or serving the Property. (k) To Seller's actual knowledge, (i) the Rent Roll is true and accurate and includes all of the leases currently in effect demising space with the Improvements; and (ii) no one is in occupancy of the Improvements other than those tenants shown on the Rent Roll. For purposes of the foregoing representation, persons holding easements or similar interests pursuant to any of the Permitted Encumbrances will not be deemed "in occupancy" of the Improvements. Further, if any of the estoppel certificates signed by the tenants under the Spaces Leases and delivered to Purchaser prior to Closing pursuant to Section 6(e) above contain any information or statement that is inconsistent with the Rent Roll and if Purchaser waives any right it may have as a result thereof to terminate this Agreement and proceeds to close the transaction contemplated hereby, then for purposes of the foregoing representation the Rent Roll will be deemed modified so as to incorporate any such inconsistent information or statement and to omit any matter that is inconsistent with the information or statement so incorporated. .........As used herein, the expression "to the knowledge of Seller" or "to Seller's actual knowledge," or words of similar import, shall refer exclusively to matters within the current, actual, conscious knowledge of Brian Roach, after inquiry of Seller's property manager of the Property (Rob Loftus of United Properties, LLC), and shall not be construed to impose upon Seller or such person any duty (other than such inquiry of such property manager) to investigate the matter to which such actual knowledge, or the absence thereof, pertains or impose upon such person or Seller's property manager any liability or personal responsibility whatsoever hereunder. Seller represents to Purchaser that Brian Roach is the employee of Seller's asset manager with the primary responsibility for the matters which are the subject of the representations and warranties set forth in this Agreement. .........At Closing, Seller will deliver to Purchaser the certificate described in Section 10(m) pursuant to which Seller will reaffirm the foregoing representations and warranties as of the date of Closing, provided that such certificate may reflect any changes to such representations and warranties of which Seller has become aware prior to Closing. In the event that such certificate indicates any material changes to the foregoing representations and warranties, Seller will not be deemed in default hereunder and Purchaser's sole remedy will be to terminate this Agreement whereupon Escrow Agent will return the Deposit to Purchaser and both parties will be relieved of any further obligations hereunder, except for those obligations which expressly survive any termination hereof. In the event such certificate does indicate any such changes and Purchaser does not elect to terminate this Agreement, the representations and warranties made by Seller to Purchaser pursuant to this Agreement as of the date of Closing will be deemed made subject to any such changes reflected in such certificate. .........The representations and warranties contained in this Section 16 shall survive the Closing for two hundred seventy (270) days after the Closing. No claim for a breach of any representation or warranty of Seller shall be actionable or payable if the breach in question results from or is based on a condition, state of facts or other matter which was known to Purchaser prior to Closing. Except for the representation and warranty set forth in Section 16(j), Seller shall have no liability to Purchaser for a breach of any representation or warranty: (i) unless the valid claims for all such breaches collectively aggregate more than TWENTY-FIVE THOUSAND DOLLARS ($25,000), in which event the full amount of such valid claims shall be actionable, up to the Cap (as hereinafter defined), and (ii) unless written notice containing a description of the specific nature of such breach shall have been given by Purchaser to Seller within two hundred seventy (270) days after the Closing. Any suit by Purchaser for any breach by Seller of any representation, warranty or covenant contained herein must be filed on or before one (1) year after the Closing or shall be forever barred. As used herein, the term "Cap" shall mean the total aggregate amount of THREE HUNDRED FIFTY THOUSAND DOLLARS ($350,000). .........17.......Representations of Purchaser. ---------------------------- .........Purchaser represents and warrants to Seller that, as of the date hereof and on the Closing Date: (a) Purchaser is a corporation duly formed and validly existing under the laws of the State of Delaware. Purchaser has the full right, power and authority to enter into this Agreement and to perform Purchaser's obligations hereunder. (b) This Agreement and all other documents executed and delivered by Purchaser prior to or at Closing in connection therewith (i) have been, or shall be, duly authorized, executed, and delivered by Purchaser; (ii) are, or shall be, binding obligations of Purchaser; (iii) do not, and shall not, violate the formation documents of Purchaser. (c) Purchaser is an experienced investor and Purchaser shall purchase the Property on the basis of its own independent investigation of the Property and shall not rely on any projections provided by Seller or Seller's agents. (d) No filing or petition under the United States Bankruptcy Law or any insolvency laws, or any laws for composition of indebtedness or for the reorganization of debtors has been filed with regard to Purchaser. (e) Purchaser's taxpayer identification number is 52-1130579. (f) Neither Purchaser nor any of its constituent partners, members or shareholders is acquiring the Property or any interest therein with the "plan assets" of any "employee benefit plan" (or its related trust), as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended, or with the assets of any "plan" (or its related trust), as defined in Section 4975(e)(1) of the Internal Revenue Code of 1986, as amended. The representations and warranties contained in this Section 17 shall survive the Closing. .........18.......No Representations; "As Is" Purchase. ------------------------------------ .........Except as expressly set forth herein or called for herein or called for in any of the instruments attached as exhibits hereto, SELLER MAKES NO WARRANTIES OR REPRESENTATIONS of any kind or character, express or implied, with respect to the Property, its physical condition, income to be derived therefrom or expenses to be incurred with respect thereto, or with respect to information or documents previously furnished to Purchaser or furnished to Purchaser pursuant to this Agreement, or with respect to Seller's obligations or any other matter or thing relating to or affecting the same, and there are no oral agreements, warranties or representations collateral to or affecting the Property except as may otherwise be expressly set forth herein. Notwithstanding anything contained herein to the contrary, this Section shall survive the Closing or any termination of this Agreement. .........PURCHASER ACKNOWLEDGES THAT THE CONVEYANCE OF THE PROPERTY IS SPECIFICALLY MADE "AS-IS" AND "WHERE-IS," WITHOUT ANY REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED (EXCEPT ANY EXPRESS REPRESENTATIONS AND WARRANTIES SET FORTH IN THIS AGREEMENT OR THE DEED OR GENERAL ASSIGNMENT AND ASSUMPTION DELIVERED AT CLOSING), INCLUDING IMPLIED WARRANTIES OF FITNESS FOR ANY PARTICULAR PURPOSE OR MERCHANTABILITY OR ANY OTHER WARRANTIES WHATSOEVER. .........PURCHASER ACKNOWLEDGES THAT, EXCEPT AS EXPRESSLY PROVIDED IN THIS AGREEMENT, NEITHER SELLER NOR ANY OF ITS AGENTS HAVE MADE, AND SPECIFICALLY NEGATE AND DISCLAIM, ANY REPRESENTATIONS, WARRANTIES, PROMISES, COVENANTS, AGREEMENTS OR GUARANTIES OF ANY KIND OR CHARACTER WHATSOEVER, WHETHER EXPRESS OR IMPLIED, ORAL OR WRITTEN, OF, AS TO, CONCERNING, OR WITH RESPECT TO, (i) THE VALUE, NATURE, QUALITY OR CONDITION OF THE PROPERTY, INCLUDING, WITHOUT LIMITATION, THE WATER, SOIL AND GEOLOGY, (ii) THE SUITABILITY OF THE PROPERTY FOR ANY AND ALL ACTIVITIES AND USES WHICH MAY BE CONDUCTED THEREON, (iii) THE COMPLIANCE OF OR BY THE PROPERTY WITH ANY LAWS, RULES, ORDINANCES OR REGULATIONS OF ANY APPLICABLE GOVERNMENTAL AUTHORITY, (iv) THE HABITABILITY, MERCHANTABILITY, MARKETABILITY, PROFITABILITY OR FITNESS FOR A PARTICULAR PURPOSE OF THE PROPERTY, OR (v) ANY OTHER MATTER WITH RESPECT TO THE PROPERTY, AND SPECIFICALLY, NEITHER SELLER NOR ANY OF ITS AGENTS HAVE MADE, AND SPECIFICALLY NEGATE AND DISCLAIM, ANY REPRESENTATIONS OR WARRANTIES REGARDING COMPLIANCE OF THE PROPERTY WITH ANY ENVIRONMENTAL PROTECTION, POLLUTION OR LAND USE LAWS, RULES, REGULATIONS, ORDERS OR REQUIREMENTS, INCLUDING THOSE PERTAINING TO SOLID WASTE, AS DEFINED BY THE U.S. ENVIRONMENTAL PROTECTION AGENCY REGULATIONS AT 40 C.F.R., PART 261, OR THE DISPOSAL OR EXISTENCE, IN OR ON THE PROPERTY, OF ANY HAZARDOUS SUBSTANCES, AS DEFINED BY THE COMPREHENSIVE ENVIRONMENTAL RESPONSE COMPENSATION AND LIABILITY ACT OF 1980, AS AMENDED, AND THE REGULATIONS PROMULGATED THEREUNDER. PURCHASER SHALL RELY SOLELY ON ITS OWN INVESTIGATION OF THE PROPERTY AND NOT ON ANY INFORMATION PROVIDED OR TO BE PROVIDED BY SELLER OR ITS AGENTS OR CONTRACTORS, EXCEPT AS EXPRESSLY PROVIDED IN THIS AGREEMENT. SELLER SHALL NOT BE LIABLE OR BOUND IN ANY MANNER BY ANY VERBAL OR WRITTEN STATEMENTS, REPRESENTATIONS OR INFORMATION PERTAINING TO THE PROPERTY OR THE OPERATION THEREOF, FURNISHED BY ANY PARTY PURPORTING TO ACT ON BEHALF OF SELLER. .........PURCHASER, FOR ITSELF AND ITS AGENTS, AFFILIATES, SUCCESSORS AND ASSIGNS, HEREBY WAIVES ITS RIGHT TO RECOVER FROM AND FOREVER RELEASES AND DISCHARGES SELLER, ITS AGENTS, PARTNERS, AFFILIATES, SHAREHOLDERS, OFFICERS, DIRECTORS, AND EMPLOYEES OF EACH OF THEM, AND THEIR SUCCESSORS AND ASSIGNS, FROM ANY AND ALL RIGHTS, CLAIMS AND DEMANDS AT LAW OR IN EQUITY, PROCEEDINGS, LOSSES, LIABILITIES, DAMAGES, PENALTIES, FINES, LIENS, JUDGMENTS, COSTS OR EXPENSES WHATSOEVER, WHETHER DIRECT OR INDIRECT, KNOWN OR UNKNOWN AT THE TIME OF THE AGREEMENT, FORESEEN OR UNFORESEEN, ARISING OUT OF OR RELATING TO, OR IN ANY WAY CONNECTED WITH THE PHYSICAL, ENVIRONMENTAL, ECONOMIC OR LEGAL CONDITION OF THE PROPERTY. .........19.......Attorney's Fees and Legal Expenses. ---------------------------------- .........In the event that either party hereto institutes any action or proceeding in court to enforce or interpret any provision hereof or for damages by reason of any alleged breach of any provision of this Agreement or for any other judicial remedy, the prevailing party shall be entitled to receive from the losing party all reasonable attorneys' fees and disbursements and all court costs in connection with said proceedings. .........20.......Section Headings; Other Terms. ----------------------------- .........The section headings contained in this Agreement are for convenience only and shall in no way enlarge or limit the scope or meaning of the various and several paragraphs hereof. The words "herein," "hereof," "hereto," "hereunder," and others of similar import refer to the Agreement as a whole and not to any particular section, subsection or clause contained in this Agreement. The singular of a term shall include the plural and the plural shall include the singular. The terms "includes" and "including" are not limiting. .........21.......Interpretation. -------------- .........Although this Agreement was drafted by counsel for Seller, such fact shall not result in any provision of this Agreement being construed against Seller by reason of Seller having drafted this Agreement. .........22.......Entire Agreement. ---------------- .........This Agreement embodies the entire agreement between the parties hereto and supersedes any prior understandings or written or oral agreements between the parties concerning the Property. Further, this Agreement cannot be varied, modified, amended, altered or terminated except by the written agreement of the parties. .........23.......Applicability. ------------- .........The terms and provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective permitted successors and assigns, except as expressly set forth herein. .........24.......Reporting of Foreign Investment. ------------------------------- .........Seller and Purchaser agree to comply with any and all reporting requirements applicable to this transaction which are set forth in any law, statute, ordinance, rule, regulation, order or determination of any governmental authority, including The International Investment Survey Act of 1976, The Agricultural Foreign Investment Disclosure Act of 1978, The Foreign Investment in Real Property Tax Act of 1980 and the Tax Reform Act of 1984, and further agree upon request of one party to furnish the other party with evidence of such compliance. .........25.......Exhibits. -------- .........All exhibits and schedules described herein and attached hereto are fully incorporated into this Agreement by this reference for all purposes. .........26.......Applicable Law. -------------- .........This Agreement shall be construed and interpreted in accordance with the internal laws of the State of Minnesota without regard to principles of conflict of law. .........27.......Confidentiality. --------------- .........Seller and Purchaser hereby covenant and agree that, at all times after the date hereof and prior to the Closing, unless consented to in writing by the other party, no press release or other public disclosure concerning this transaction shall be made, and each party agrees to use its best efforts to prevent disclosure of this transaction, other than (a) to agents and affiliates of the parties who are involved in the ordinary course of business with this transaction and prospective investors and lenders, all of which shall be instructed to comply with the nondisclosure provisions hereof; (b) in response to lawful process or subpoena or other valid or enforceable order of a court of competent jurisdiction; and (c) in any filings with governmental authorities required by reason of the transactions provided for herein or if required as a result of Purchaser's status as a publicly held company. Purchaser hereby covenants and agrees that, at all times after the date of execution hereof and prior to the Closing, unless consented to in writing by Seller, Purchaser shall keep in strict confidence, and shall not disclose, the contents of, or Purchaser's analysis of the contents of, any documentation made available to Purchaser by Seller or any of Seller's agents in connection with this transaction, and the content of any appraisal, engineering, environmental or other third party report prepared on behalf of Purchaser, subject to the qualifications set forth in subsections (a), (b), and (c) in the preceding sentence. .........28.......Tax Reduction Proceedings. ------------------------- .........Seller may file and/or prosecute an application for the reduction of the assessed valuation of the Property or any portion thereof for real estate taxes payable in 2001 (the "Apportionment Tax Year"). Seller shall have the right to withdraw, settle or otherwise compromise any protest or reduction proceeding affecting real estate taxes assessed against the Property (i) for the Apportionment Tax Year provided Purchaser shall have consented with respect thereto, which consent shall not be unreasonably withheld or delayed and (ii) for all or any part of any tax year prior to the Apportionment Tax Year without the prior written consent of Purchaser. The amount of any tax refunds (net of attorneys' fees and other costs of obtaining such tax refunds) with respect to any portion of the Property for the Apportionment Tax Year shall be apportioned between Seller and Purchaser as of the Closing. If, in lieu of a tax refund, a tax credit is received with respect to any portion of the Property for the Apportionment Tax Year, then (x) within thirty (30) days after receipt by Seller or Purchaser, as the case may be, of evidence of the actual amount of such tax credit (net of attorneys' fees and other costs of obtaining such tax credit), the tax credit apportionment shall be readjusted between Seller and Purchaser, and (y) upon realization by Purchaser of a tax savings on account of such credit (that is, at the time the tax savings is actually realized, for example, when the taxes are paid to which the credit relates), Purchaser shall pay to Seller an amount equal to the savings realized (as apportioned). All refunds, credits and other benefits applicable to any tax year (or portion thereof) prior to the Apportionment Tax Year shall belong solely to Seller (and Purchaser shall have no interest therein) and, if the same shall be paid to Seller within thirty (30) days following receipt thereof and, if not timely paid, with interest thereon from the thirtieth (30th) day following such receipt until paid to Seller at a rate equal to the rate of interest announced by Citibank, N.A. from time to time as its base rate plus three percent (3%). The provisions of this Section 28 shall survive the Closing. .........29.......Counterparts. ------------ .........This Agreement may be executed in counterparts, all such executed counterparts shall constitute the same agreement, and the signature of any party to any counterpart shall be deemed a signature to, and may be appended to, any other counterpart. .........30.......Facsimile Signatures. -------------------- .........In order to expedite the transaction contemplated herein, telecopied signatures may be used in place of original signatures on this Agreement. Seller and Purchaser intend to be bound by the signatures on the telecopied document, and are aware that the other party will rely on the telecopied signatures, and hereby waive any defenses to the enforcement of the terms of this Agreement based upon the form of signature. If telecopied signatures are delivered, Seller and Purchaser will each forward original counterpart signatures to the other promptly after delivery of the telecopied signatures as set forth herein. .........31.......No Offer. -------- .........The submission of this Agreement to Purchaser shall and does not constitute an option or offer to sell the Property to Purchaser, it being intended that this Agreement shall not be enforceable unless and until such time as each of Purchaser, Seller and Escrow Agent shall have fully executed this Agreement and a copy of such fully executed Agreement shall have been given to each of Purchaser, Seller and Escrow Agent. .........32.......Business Day. ------------ .........As used herein, the term "business day" shall mean all days, excluding Saturdays, Sundays and all days observed by either the State of New York or the Federal Government as legal holidays. In the event that any date for performance falls on a day other than a business day, then performance shall be postponed until the next business day. .........33.......Strict Performance. ------------------ .........It is specifically agreed that "time is of the essence" as to all matters provided for in this Agreement. .........34.......Non-Solicitation of Employees. ----------------------------- (a) For a period of one (1) year after the Closing, Purchaser shall not, and shall use its best efforts to cause each business or entity with which it is or shall employ or associate in any capacity, not to solicit for employment, employ or engage any person who is then, or who was at any time during the period of this Agreement, employed or engaged by BetaWest, Ltd. ("BetaWest"), including but not limited to the employee(s) set forth in Section 16 hereof, or any affiliate of BetaWest, except such BetaWest employees which are employed exclusively on-site at the Property and not at BetaWest's corporate offices in Denver, Colorado or elsewhere. (b) Purchaser acknowledges and agrees that the covenants and obligations contained in this Section 34 relate to special, unique, extraordinary and sensitive matters and are reasonable and necessary to protect the legitimate interests of Seller, BetaWest and their respective affiliates, and that a breach of any of the terms of such covenants and obligations will cause Seller and BetaWest irreparable injury for which adequate remedies at law are not available. Therefore, Purchaser agrees that, before any trial of the merits, Seller and BetaWest shall be entitled to an injunction, restraining order or other equitable relief from any court of competent jurisdiction restraining Purchaser from any such breach. (c) The representations and covenants set forth in this Section 34 shall survive the Closing. .........IN WITNESS WHEREOF, this Agreement is executed in multiple originals by Seller and Purchaser. SELLER: PHL-OPCO, LP, a Delaware limited partnership By: PHL-GP, LLC, a Delaware limited liability company, its general partner By: PHL-HOLDCO, LLC, a Delaware liability company, its managing member Date: January 5, 2001...... By: /s/ Laura L. Hahn --------------- -------------------------------------- .................. Name: Laura L. Hahn --------------------------------------- .................. Title: Authorized Agent ----------------------------------- PURCHASER: MEDTOX LABORATORIES, INC., a Delaware corporation Date: 01/02, 2001......... By: /s/ James Lockhart ------------ -------------------------------------- .................. Name: James Lockhart ------------------------------------- .................. Title: CFO ------------------------------------- ESCROW TERMS PURSUANT TO SECTION 3 HEREOF ACCEPTED AND AGREED: CHICAGO TITLE INSURANCE COMPANY By: /s/ illegible... ----------------------- Date: January 9, 2001 Exhibit A LEGAL DESCRIPTION OF THE LAND New Brighton I: That part of the North 489.9 feet of the South 846.84 feet of Section 32, Township 30 North, Range 23 West of the 4th Principal Meridian, lying westerly of the westerly right-of-way line of U.S. Interstate Highway No. 35W as described in Final Certificate Document No. 1695522, and lying easterly of the easterly right-of-way line of Minnesota Transfer Railway Co., said property being a part of Lot 2, Auditor's Subdivision No. 26, Ramsey County, Minnesota. Together with the easements created by Declaration of Easements and Partial Releases of Mortgages dated as of December 1, 1983, recorded January 12, 1984, as Document No. 2206885. New Brighton II: PARCEL 1: That part of the North 253.16 feet of the South 1100.0 feet of Section 32, Township 30 North, Range 23 West of the 4th Principal Meridian, lying Westerly of the Westerly Right of Way line of U.S. Interstate Highway No. 35W as described in Final Certificate Document No. 1695522, and lying Easterly of the Easterly Right of Way line of Minnesota Transfer Railway Co. Said property being a part of Lot 2, Auditor's Subdivision No. 26, Ramsey County, Minnesota. PARCEL 2: That part of Lot 2, Auditor's Subdivision No. 26, Ramsey County, Minnesota lying Westerly and Southerly of the following described line: Beginning at a point on the South line of Section 32, Township 30 North, Range 23 West, distant 677.15 feet West of the Southeast corner of said Section 32; thence run Northeasterly at an angle of 82 degrees 22 minutes 53 seconds with said South Section line 1233.54 feet; thence run Northwesterly at right angles 500 feet and terminating, except the Southerly 1100 feet of said Section 32, and except the Easterly 168 feet thereof; subject to United States Pipe Line Tract, said tract being 33 feet in width the centerline of which is described as follows: Beginning at a point on the Easterly line of said Section 32, 867.2 feet Southerly of the Northeast corner of the Southeast Quarter of said Section 32; thence South 57 degrees 31 minutes West, 1147.7 feet, more or less, to a point on the Easterly right of way line, Minnesota Transfer Railway and there terminating, said point being 1118.0 feet due North of the South line of said Section 32. EX-10.53 9 0009.txt EXHIBIT 10.53 Exhibit 10.53 Record and return to: Principal Life Insurance Company 801 Grand Avenue Des Moines, IA 50392-1360 Attn: David L. Graves MORTGAGE AND SECURITY AGREEMENT THE NOTE SECURED BY THIS MORTGAGE CONTAINS AN ADJUSTABLE INTEREST RATE 752834 A. THIS MORTGAGE AND SECURITY AGREEMENT (as the same may from time to time hereafter be modified, supplemented or amended, this "Mortgage") is made as of March 16, 2001, by and between NEW BRIGHTON BUSINESS CENTER LLC, a Delaware limited liability company, having its principal place of business and post office address at c/o Medtox Scientific, Inc., 402 West County Road D., St. Paul, Minnesota 55112, Attention: Chief Financial Officer, as "Borrower" ("Borrower" to be construed as "Borrowers" if the context so requires), and Principal Life Insurance Company, an Iowa corporation, having a principal place of business and post office address c/o Principal Capital Management, LLC at 801 Grand Avenue, Des Moines, Iowa 50392-1450, as "Lender". WITNESSETH: B. Borrower is justly indebted to Lender for money borrowed (the "Loan") in the original principal sum of Six Million Two Hundred Thousand and 00/100 Dollars ($6,200,000.00) (the "Loan Amount") evidenced by Borrower's secured promissory note of even date herewith, made payable and delivered to Lender (as may be modified, amended, supplemented, extended or consolidated in writing and any note(s) issued in exchange therefor or replacement thereof) (the "Note"), in which Note Borrower promises to pay to Lender the Loan Amount together with all accrued and unpaid interest thereon, interest accrued at the Default Rate (if any), Late Charges (if any), the Make Whole Premium (if any), and all other obligations and liabilities due or to become due to Lender pursuant to the Loan Documents and all other amounts, sums and expenses paid by or payable to Lender pursuant to the Loan Documents and the Environmental Indemnity (collectively the "Indebtedness") until the Indebtedness has been paid, but in any event, the unpaid balance (if any) remaining due on the Note shall be due and payable on April 1, 2011 or such earlier date resulting from the acceleration of the Indebtedness by Lender (the "Maturity Date"). Capitalized terms used herein and not otherwise defined shall have those meanings given to them in the other Loan Documents. C. NOW, THEREFORE, to secure the payment of the Indebtedness in accordance with the terms and conditions of the Loan Documents, and all extensions, modifications and renewals thereof and the performance of the covenants and agreements contained therein, and also to secure the payment of any and all other Indebtedness, direct or contingent, that may now or hereafter become owing from Borrower to Lender in connection with the Loan Documents, and in consideration of the Loan Amount in hand paid, receipt of which is hereby acknowledged, Borrower does by these presents Mortgage unto Lender, its successors and assigns forever, that certain real estate and all of Borrower's estate, right, title and interest therein, located in the county of Ramsey, state of Minnesota, more particularly described in Exhibit A attached hereto and made a part hereof (the "Land"), which Land, together with the following described property, rights and interests, is collectively referred to herein as the "Premises". D. Together with Borrower's interest as lessor in and to all Leases and all Rents, which are pledged primarily and on a parity with the Land and not secondarily. E. Together with all and singular the tenements, hereditaments, easements, appurtenances, passages, waters, water courses, riparian rights, sewer rights, rights in trade names, licenses, permits and contracts, and all other rights, liberties and privileges of any kind or character in any way now or hereafter appertaining to the Land, including but not limited to, homestead and any other claim at law or in equity as well as any after-acquired title, franchise or license and the reversion and reversions and remainder and remainders thereof. F. Together with the right in the case of foreclosure hereunder of the encumbered property for Lender to take and use the name by which the buildings and all other improvements situated on the Premises are commonly known and the right to manage and operate the said buildings under any such name and variants thereof. G. Together with all right, title and interest of Borrower in any and all buildings and improvements of every kind and description now or hereafter erected or placed on the said Land and all materials intended for construction, reconstruction, alteration and repairs of such buildings and improvements now or hereafter erected thereon, all of which materials shall be deemed to be included within the Premises immediately upon the delivery thereof to the Premises, and all fixtures now or hereafter owned by Borrower and attached to or contained in and used in connection with the Premises including, but not limited to, all machinery, motors, elevators, fittings, radiators, awnings, shades, screens, and all plumbing, heating, lighting, ventilating, refrigerating, incinerating, air-conditioning and sprinkler equipment and fixtures and appurtenances thereto; and all items of furniture, furnishings, equipment and personal property owned by Borrower used or useful in the operation of the Premises; and all renewals or replacements of all of the aforesaid property owned by Borrower or articles in substitution therefor, whether or not the same are or shall be attached to said buildings or improvements in any manner (collectively, the "Improvements"); it being mutually agreed, intended and declared that all the aforesaid property owned by Borrower and placed by it on the Land or used in connection with the operation or maintenance of the Premises shall, so far as permitted by law, be deemed to form a part and parcel of the Land and for the purpose of this Mortgage to be Land and covered by this Mortgage, and as to any of the property aforesaid which does not form a part and parcel of the Land or does not constitute a "fixture" (as such term is defined in the Uniform Commercial Code) this Mortgage is hereby deemed to be, as well, a security agreement under the Uniform Commercial Code for the purpose of creating hereby a security interest in such property which Borrower hereby grants to Lender as secured party. H. Together with all right, title and interest of Borrower, now or hereafter acquired, in and to any and all strips and gores of land adjacent to and used in connection with the Premises and all right, title and interest of Borrower, now owned or hereafter acquired, in, to, over and under the ways, streets, sidewalks and alleys adjoining the Premises. I. Together with all funds now or hereafter held by Lender under any escrow security agreement or under any of the terms hereof, including but not limited to funds held under the provisions of paragraph 5 hereof, insurance proceeds from all insurance policies required to be maintained by Borrower under the Loan Documents, and all awards, decrees, proceeds, settlements or claims for damage now or hereafter made to or for the benefit of Borrower by reason of any damage to, destruction of or taking of the Premises or any part thereof, whether the same shall be made by reason of the exercise of the right of eminent domain or by condemnation or otherwise (a "Taking"). J. TO HAVE AND TO HOLD the same unto the Lender, its successors and assigns forever, for the purposes and uses herein expressed. K. Borrower represents that it is the absolute owner in fee simple of the Premises described in Exhibit A, which Premises are free and clear of any liens or encumbrances except as set out in Exhibit B attached hereto, and except for taxes which are not yet due or delinquent. Borrower shall forever warrant and defend the title to the Premises against all claims and demands of all persons whomsoever and will on demand execute any additional instrument which may be required to give Lender a valid first lien on all of the Premises, subject to the "Permitted Encumbrances" set forth in Exhibit B. L. Borrower further represents that (i) the Premises is not subject to any casualty damage; (ii) Borrower has not received any written notice of any eminent domain or condemnation proceeding affecting the Premises; and (iii) to the best of Borrower's knowledge, following due and diligent inquiry, there are no actions, suits or proceedings pending, completed or threatened against or affecting Borrower or any person or entity owning an interest (directly or indirectly) in Borrower ("Interest Owner(s)") or any property of Borrower or any Interest Owner in any court or before any arbitrator of any kind or before or by any governmental authority (whether local, state, federal or foreign) that, individually or in the aggregate, could reasonably be expected by Lender to be materially adverse to the transaction contemplated hereby. BORROWER COVENANTS AND AGREES AS FOLLOWS: 1. Borrower shall (a) pay each item of Indebtedness secured by this Mortgage when due according to the terms of the Loan Documents; (b) pay a Late Charge on any payment of principal, interest, Make Whole Premium or Indebtedness which is not paid on or before the due date thereof to cover the expense involved in handling such late payment; (c) pay on or before the due date thereof any Indebtedness permitted to be incurred by Borrower pursuant to the Loan Documents and any other claims which could become a lien on the Premises (unless otherwise specifically addressed in paragraph 1(e) hereof), and upon request of Lender exhibit satisfactory evidence of the discharge thereof; (d) complete within a reasonable time, the construction of any Improvements now or at any time in process of construction upon the Land; (e) manage, operate and maintain the Premises and keep the Premises, including but not limited to, the Improvements, in good condition and repair and free from mechanics' liens or other liens or claims for liens, provided however, that Borrower may in good faith, with reasonable diligence and upon written Notice to Lender within ten (10) days after Borrower has knowledge of such lien or claim, contest the validity or amount of any such lien or claim and defer payment and discharge thereof during the pendency of such contest in the manner provided by law, provided that (i) such contest may be made without the payment thereof; (ii) such contest shall prevent the sale or forfeiture of the Premises or any part thereof, or any interest therein, to satisfy such lien or claim; (iii) Borrower shall have obtained a bond over such lien or claim from a bonding company acceptable to Lender which has the effect of removing such lien or collection of the claim or lien so contested; and (iv) Borrower shall pay all costs and expenses incidental to such contest; and further provided, that in the event of a ruling or adjudication adverse to Borrower, Borrower shall promptly pay such claim or lien, shall indemnify and hold Lender and the Premises harmless from any loss for damage arising from such contest and shall take whatever action necessary to prevent sale, forfeiture or any other loss or damage to the Premises or to the Lender; (f) comply, and use commercially reasonable efforts to cause each lessee or other user of the Premises to comply, with all requirements of law and ordinance, and all rules and regulations, now or hereafter enacted, by authorities having jurisdiction of the Premises and the use thereof, including but not limited to all covenants, conditions and restrictions of record pertaining to the Premises, the Improvements, and the use thereof (collectively, "Legal Requirements"); (g) subject to the provisions of paragraph 6 hereof, promptly repair, restore or rebuild any Improvements now or hereafter a part of the Premises which may become damaged or be destroyed by any cause whatsoever, so that upon completion of the repair, restoration and rebuilding of such Improvements there will be no liens of any nature arising out of the construction and the Premises will be of substantially the same character and quality as it was prior to the damage or destruction; (h) if other than a natural person, do all things necessary to preserve and keep in full force and effect its existence, franchises, rights and privileges under the laws of the state of its formation and, if other than its state of formation, the state where the Premises is located; (i) do all things necessary to preserve and keep in full force and effect Lender's title insurance coverage insuring the lien of this Mortgage as a first and prior lien, subject only to the Permitted Encumbrances stated in Exhibit B and any other exceptions after the date of this Mortgage approved in writing by Lender, including without limitation, delivering to Lender not less than 30 days prior to the effective date of any rate adjustment, modification or extension of the Note or any other Loan Document, any new policy or endorsement which may be required to assure Lender of such continuing coverage; and (j) execute any and all documents which may be required to perfect the security interest granted by this Mortgage. 2. Borrower shall not: (a) make any alteration or addition exceeding $50,000.00 (other than normal repair and maintenance) to (i) the roof or any structural component of any Improvements on the Premises, or (ii) the building operating systems, including but not limited to the mechanical, electrical, heating, cooling or ventilation systems (other than replacement with equal or better quality and capacity), without the prior written consent of Lender, except such as are required by applicable Legal Requirements; (b) remove or demolish any material Improvements, or any portion thereof, which at any time constitutes a part of the Premises; (c) cause or permit any change to be made in the general use of the Premises without Lender's prior written consent; (d) initiate any or acquiesce to a zoning reclassification or material change in zoning without Lender's prior written consent. Borrower shall use all reasonable efforts to contest any such zoning reclassification or change; (e) make or permit any use of the Premises that could with the passage of time result in the creation of any right of use, or any claim of adverse possession or easement on, to or against any part of the Premises in favor of any person or entity or the public; (f) allow any of the following to occur (unless a Permitted Transfer): (i) a Transfer of all or any portion of the Premises or any interest in the Premises; (ii) a Transfer of any ownership interest in Borrower or any entity which owns, directly or indirectly, an interest in Borrower at any level of the ownership structure; or (iii) in addition to (i) and (ii) above, if the Borrower is a trust or if a trust owns an interest, directly or indirectly, in any entity which owns an interest in Borrower at any level of the ownership structure, the addition, deletion or substitution of a trustee of such trust. If any of such events occur, it shall be null and void and shall constitute an Event of Default under the Loan Documents. It is understood and agreed that the Indebtedness evidenced by the Note is personal to Borrower and in accepting the same Lender has relied upon what it perceived as the willingness and ability of Borrower to perform its obligations under the Loan Documents and the Environmental Indemnity and as lessor under the Leases of the Premises. Furthermore, Lender may consent to a Transfer and expressly waive Borrower's covenants contained in this paragraph 2(f), in writing to Borrower; however any such consent and waiver shall not constitute any consent or waiver of such covenants as to any Transfer other than that for which the consent and waiver was expressly granted. Furthermore, Lender's willingness to consent to any Transfer and waive Borrower's covenants contained in this paragraph 2(f), implies no standard of reasonableness in determining whether or not such consent shall be granted and the same may be based upon what Lender solely deems to be in its best interest. For purposes of the Loan Documents, the following terms shall have the respective meanings set forth below: "Transfer" or "Transferred" shall mean with respect to the Premises, an interest in the Premises, or an ownership interest or interest therein: (i) a sale, assignment, transfer, conveyance or other disposition (whether voluntary, involuntary or by operation of law); (ii) the creation, sufferance or granting of any lien, encumbrance, security interest or collateral assignment (whether voluntarily, involuntarily or by operation of law), other than the lien hereof, the leases of the Premises assigned to Lender, the Permitted Encumbrances and those liens which Borrower is contesting in accordance with the provisions of paragraph 1(e); (iii) the issuance or other creation of ownership interests in an entity; (iv) the reconstitution or conversion from one entity to another type of entity; or (v) a merger, consolidation, reorganization or any other business combination. "Permitted Transfer" shall mean: (i) a minor (as determined by Lender) conveyance of an interest in the Premises by Borrower, such as a utility easement, and for which Lender has given its prior written consent and imposed such conditions as Lender deems advisable and appropriate; (ii) a sale, assignment, transfer or conveyance of all or any portion of the Premises or an interest in the Premises for which Borrower has complied with all of the Property Transfer Requirements; (iii) any of the following Transfers for which Borrower has complied with all of the Ownership Transfer Requirements as applicable and Lender has given its prior written consent (and in connection with such consent, Lender may impose any conditions it wishes in its sole discretion); (A) a sale, assignment, transfer, or conveyance of an ownership interest or interest therein; (B) the issuance or other creation of ownership interests in an entity; (C) the reconstitution or conversion from one entity to another type of entity; or (D) a merger, consolidation, reorganization or any other business combination; or (iv) transfers of shares in Medtox Scientific, Inc. "Property Transfer Requirements" are all of the following: 1. Prior review and approval of the proposed purchaser or other transferee and the subject transaction by Lender, at Lender's sole discretion. Review of the proposed purchaser or other transferee and the subject transaction shall encompass various factors, including, but not limited to, the proposed purchaser's or other transferee's creditworthiness, financial strength, and real estate management and leasing expertise as well as the proposed transaction's effect on the Premises, the Borrower, and other security for the Loan; 2. Payment to Lender of an assumption fee equal to the greater of: (a) one percent (1%) of the principal balance of the Note; or (b) $15,000.00; provided, however, that Lender will require $15,000.00 of such fee to be paid at the beginning of Lender's review process, and such sum shall be nonrefundable and earned upon receipt by Lender whether or not the transaction is ultimately completed or Lender ultimately approves the proposed purchaser or other transferee; 3. Receipt, at Borrower's expense, of either (at Lender's discretion) a new ALTA standard loan policy or an endorsement updating the Lender's existing loan policy in the full amount of the Loan, in form and by an issuer satisfactory to Lender, and which insures this Mortgage to be a first and prior lien subject only to those exceptions which were previously approved by Lender and provides coverage against usury and mechanic's liens; 4. Receipt by Lender of copies of all relevant information and documentation relating to or required by Lender in connection with the proposed transfer including but not limited to (a) the organizational documents of the proposed transferee and an opinion of counsel satisfactory to Lender as to its due formation, valid existence and authority to enter into and carry out the proposed transaction; (b) the deeds or other instruments of transfer and documents relating to the assignment and assumption of Leases; (c) evidence of compliance with the insurance requirements contained in the Loan Documents; and (d) compliance with such other closing requirements as are customarily imposed by Lender in connection with such transactions; 5. Execution, delivery, acknowledgment and recordation, as applicable, of new, revised and/or replacement assumption agreements, loan modification agreements, indemnification agreements, escrow security agreements, security instruments, financing statements, UCCs, new or revised letters of credit and/or guarantees in form and substance satisfactory to Lender; 6. Payment of outside counsel fees and costs, other applicable professional's fees and costs, taxes, recording fees and the like, and any other fees and costs incurred; and 7. Receipt by Lender of 60 days advance written notice of the proposed Transfer in question. "Ownership Transfer Requirements" are all of the Property Transfer Requirements which Lender deems appropriate in its discretion, as well as a reasonable processing fee to be determined by Lender; provided, however, that (i) with respect to item 2 of the Property Transfer Requirements, the 1% component of the fee shall be prorated (subject, however, to the $15,000 minimum) based on Lender's calculation of the effective percentage interest in Borrower transferred, and (ii) item 3 of the Property Transfer Requirements shall be required, at Lender's discretion, only in the event of (A) a merger, consolidation, reorganization or any other business combination, or (B) a reconstitution or conversion from one entity to another type of entity. 3. (a) Except as provided in Section 5, Borrower shall pay or cause to be paid when due and before any penalty attaches or interest accrues all general taxes, special taxes, assessments (including assessments for benefits from public works or improvements whenever begun or completed), utility charges, water charges, sewer service charges, common area maintenance charges, if any, vault or space charges and all other like charges against or affecting the Premises or against any property or equipment located on the Premises, or which might become a lien on the Premises, and shall, within 10 days following Lender's request, furnish to Lender a duplicate receipt of such payment. If any such tax, assessment or charge may legally be paid in installments, Borrower may, at its option, pay such tax, assessment or charge in installments. (b) If Borrower desires to contest any tax, assessment or charge relating to the Premises, Borrower may do so by paying the same in full, under protest, in the manner provided by law; provided, however, that (i) if contest of any tax, assessment or charge may be made without the payment thereof, and (ii) such contest shall have the effect of preventing the collection of the tax, assessment or charge so contested and the sale or forfeiture of the Premises or any part thereof or any interest therein to satisfy the same, then Borrower may in its discretion and upon the giving of written notice to Lender of its intended action and upon the furnishing to Lender of such security or bond as Lender may require, contest any such tax, assessment or charge in good faith and in the manner provided by law. All costs and expenses incidental to such contest shall be paid by Borrower. In the event of a ruling or adjudication adverse to Borrower, Borrower shall promptly pay such tax, assessment or charge. Borrower shall indemnify and save harmless the Lender and the Premises from any loss or damage arising from any such contest and shall, if necessary to prevent sale, forfeiture or any other loss or damage to the Premises or to Lender, pay such tax, assessment or charge or take whatever action is necessary to prevent any sale, forfeiture or loss. 4. (a) Borrower shall at all times keep in force (i) property insurance insuring all Improvements which now are or hereafter become a part of the Premises for perils covered by a causes of loss-special form insurance policy with an ordinance or law coverage endorsement containing both replacement cost and agreed amount endorsements or options; (ii) commercial general liability insurance naming Lender as an additional insured protecting Borrower and Lender against liability for bodily injury or property damage occurring in, on or adjacent to the Premises in commercially reasonable amounts; (iii) boiler and machinery insurance if the property has a boiler or is an office building; (iv) rental value insurance for the perils specified herein for one hundred percent (100%) of the Rents (including operating expenses, real estate taxes, assessments and insurance costs which are lessee's liability) for a period of twelve (12) months; (v) builders risk insurance during all periods of construction; and (vi) insurance against all other hazards as may be reasonably required by Lender, including, without limitation, insurance against loss or damage by flood and earthquake. (b) All insurance shall be in form, content and amounts approved by Lender and written by an insurance company or companies rated A, class size X or better in the most current issue of Best's Insurance Reports and which is licensed to do business in the state in which the Premises are located and domiciled in the United States or a governmental agency or instrumentality approved by Lender. The policies for such insurance shall have attached thereto standard mortgagee clauses in favor of and permitting Lender to collect any and all proceeds payable thereunder and shall include a 30 day (except for nonpayment of premium, in which case, a 10 day) notice of cancellation clause in favor of Lender. All policies or certificates of insurance shall be delivered to and held by Lender as further security for the payment of the Note and any other obligations arising under the Loan Documents, with evidence of renewal coverage delivered to Lender at least 30 days before the expiration date of any policy. Borrower shall not carry separate insurance, concurrent in kind or form and contributing in the event of loss, with any insurance required in the Loan Documents. 5. (a) Borrower shall deposit with and pay to Lender, on the Closing Date and/or on each payment date specified in the Note, sums calculated by Lender for payment of the following as they become due and payable: (i) the estimated taxes and assessments assessed or levied against the Premises, and (ii) the estimated premiums for insurance required by the Loan Documents, excluding commercial general liability insurance. Lender shall use such deposits to pay the taxes, assessments and premiums when the same become due. Borrower shall procure and deliver to Lender, in advance, statements for such charges. If the total payments made by Borrower under this paragraph exceed the amount of payments actually made by Lender for taxes, assessments and insurance premiums, such excess shall be credited by Lender on subsequent deposits to be made by Borrower. If, however, the deposits are insufficient to pay the taxes, assessments and insurance premiums when the same shall be due and payable, Borrower will pay to Lender any amount necessary to make up the deficiency, five (5) business days before the date when payment of such taxes, assessments and insurance premiums shall be due. If at any time Borrower shall tender to Lender, in accordance with the provisions of the Note secured by this Mortgage, full payment of the entire Indebtedness represented thereby, Lender shall, in computing the amount of such Indebtedness, credit to the account of Borrower any balance remaining in the funds accumulated and held by Lender under the provisions of this paragraph. If there is an Event of Default resulting in a public sale of the Premises, or if Lender otherwise acquires the Premises after an Event of Default, Lender shall apply, at the time of commencement of such proceedings, or at the time the Premises is otherwise acquired, the balance then remaining in the funds accumulated under this paragraph as a credit toward any delinquent or accrued taxes and then in such priority as Lender elects to the other Indebtedness. (b) Any funds held under this paragraph shall not constitute any deposit or account of the Borrower or moneys to which the Borrower is entitled upon demand, or upon the mere passage of time. Lender shall not be required to segregate such deposits and may hold such deposits in its general account or any other account and may commingle such deposits with any other moneys of Lender or moneys which Lender is holding on behalf of any other person or entity. 6. In the event of any damage to or destruction of the Premises, or any part thereof: (a) Borrower will immediately notify Lender thereof in the manner provided in this Mortgage for the giving of notices. Lender shall have the right (which may be waived by Lender in writing) to settle and adjust any claim under such insurance policies required to be maintained by Borrower. In all circumstances, the proceeds thereof shall be paid to Lender and Lender is authorized to collect and to give receipts therefor. Borrower agrees and acknowledges that such proceeds shall be held by Lender without any allowance of interest and that in any bankruptcy proceeding of Borrower, all such proceeds shall be deemed to be "Cash Collateral" as that term is defined in Section 363 of the Bankruptcy Code. Provided that no Event of Default exists, Borrower shall have the right to participate in any settlement or adjustment; provided, however, that any settlement or adjustment shall be subject to the written approval of Lender, not to be unreasonably withheld. (b) Such proceeds, after deducting therefrom any expenses incurred by Lender in the collection thereof (including but not limited to reasonable attorneys' fees and costs), shall be applied by Lender to pay the Indebtedness secured hereby including, but not limited to the Make Whole Premium, whether or not then due and payable, provided, however, that if no Event of Default exists at the time of such application, no Make Whole Premium shall be due. Notwithstanding anything hereinabove to the contrary, (i) in the event the casualty occurs more than six (6) months prior to the Maturity Date and no Event of Default exists, Lender shall apply such proceeds as follows: (A) If the aggregate amount of such proceeds is less than $50,000, Lender shall pay such proceeds directly to Borrower, to be held in trust for Lender and applied to the cost of rebuilding and restoring the Premises. (B) If the aggregate amount of such proceeds equals or exceeds $50,000 Lender shall disburse such amounts of the proceeds as Lender reasonably deems necessary for the repair or replacement of the Premises, subject to the conditions set forth in paragraph 6(c) below. (ii) in the event (x) an Event of Default exists, or (y) the casualty occurs during the last six (6) months prior to the Maturity Date and Lender determines that the repair and restoration of such casualty cannot be completed prior to the Maturity Date, or (z) the conditions set forth in paragraph 6(c) are not met, then Lender, in its sole and absolute discretion may either: (A) declare the entire Indebtedness to be immediately due and payable and apply all such proceeds to pay the Indebtedness in such priority as Lender elects, provided, however, that if no Event of Default exists at the time of such application, no Make Whole Premium shall be due; or (B) disburse such proceeds as Lender reasonably deems necessary for the repair or replacement of the Premises subject to those conditions set forth in paragraph 6(c) which Lender in its sole and absolute discretion may require. (c) (i) In the event that Borrower is to be reimbursed out of the insurance proceeds or out of any award or payment received with respect to a Taking, Lender shall from time to time make available such proceeds, subject to the following conditions: (a) there continues to exist no Event of Default; (b) the delivery to Lender of satisfactory evidence of the estimated cost of completion of such repair and restoration work and any architect's certificates, waivers of lien, contractor's sworn statements, and other evidence of cost and of payment and of the continued priority of the lien hereof over any potential liens of mechanics and materialmen (including, without limitation, title policy endorsements) as Lender may require and approve; (c) the time required to complete the repair and restoration work and for the income from the Premises to return to the level it was prior to the loss will not exceed the coverage period of the rental value insurance required hereunder; (d) the annual net operating income from all approved executed Leases, having at least two years remaining prior to the expiration of their term, with no uncured defaults, shall equal or exceed 1.35 times the annual debt service on the Note, and Medtox Laboratories confirms in writing to Lender that it will occupy the Premises after the restoration is completed, its lease is in full force and effect, and no defaults have occurred and are continuing thereunder; (e) Lender approves the plans and specifications of such work before such work is commenced if the estimated cost of rebuilding and restoration exceeds 25% of the Indebtedness or involves any structural changes or modifications. If said plans and specifications substantially comply with those previously approved by Lender, Lender's approval shall not be unreasonably withheld; (f) if the amount of any insurance proceeds, award or other payment is insufficient to cover the cost of restoring and rebuilding the Premises, Borrower shall pay such cost in excess of such proceeds, award or other payment before being entitled to reimbursement out of such funds; (g) Borrower pays to Lender a non-refundable processing fee equal to the greater of $5,000.00 or .25% of the amount of such proceeds within sixty (60) days of the occurrence of any such damage or destruction and before Lender disburses any proceeds; and (h) such other conditions to such disbursements, in Lender's discretion, as would be customarily required by a construction lender doing business in the area where the Premises is located or which are otherwise required by any rating agency rating a securitization transaction with respect to the Loan. (ii) No payment made by Lender prior to the final completion of the repair or restoration work shall, together with all payments theretofore made, exceed 90% of the cost of such work performed to the time of payment, and at all times the undisbursed balance of said proceeds shall be at least sufficient to pay for the cost of completion of such work free and clear of all liens. Any proceeds remaining after payment of the cost of rebuilding and restoration shall, at the option of Lender, either be (a) applied in reduction of the Indebtedness secured hereby, provided, however, that if no Event of Default exists at the time of such application, no Make Whole Premium shall be due, or (b) paid to Borrower. (iii) Repair and restoration of the Premises shall be commenced promptly after the occurrence of the loss and shall be prosecuted to completion diligently, and the Premises shall be so restored and rebuilt to substantially the same character and quality as prior to such damage and destruction and shall comply with all building codes and zoning requirements. (d) Should such damage or destruction occur after foreclosure or sale proceedings have been instituted, the proceeds of any such insurance policy or policies, if not applied in rebuilding or restoration of the Improvements, shall be used to pay (i) the Indebtedness then due and owing in the event of a non-judicial sale in such priority as Lender elects, or (ii) the amount due in accordance with any decree of foreclosure or deficiency judgment that may be entered in connection with such proceedings, and the balance, if any, shall be paid to the owner of the equity of redemption if he shall then be entitled to the same, or otherwise as any court having jurisdiction may direct. 7. In the event of the commencement of a Taking affecting the Premises: (a) Borrower shall notify Lender thereof in the manner provided in this Mortgage for the giving of notices. Lender may participate in such proceeding, and Borrower shall deliver to Lender all documents requested by it to permit such participation. (b) Borrower shall cause the proceeds of any award or other payment made relating to a Taking, to be paid directly to Lender. Lender, in its sole and absolute discretion: (i) may apply all such proceeds to pay the Indebtedness in such priority as Lender elects, provided however, that if no Event of Default exists at the time of such application no Make Whole Premium shall be due; or (ii) subject to and in accordance with the provisions set forth in paragraph 6(c) above, may disburse such amounts of the proceeds as Lender reasonably deems necessary for the repair or replacement of the Premises. 8. If by the laws of the United States of America or of any state or governmental subdivision having jurisdiction over Borrower or of the Premises or of the Loan evidenced by the Loan Documents or any amendments or modifications thereof, any tax or fee is due or becomes due or is imposed upon Lender in respect of the issuance of the Note hereby secured or the making, recording and registration of this Mortgage or otherwise in connection with the Loan Documents, the Environmental Indemnity or the Loan, except for Lender's income or franchise tax, Borrower covenants and agrees to pay such tax or fee in the manner required by such law, and to hold harmless and indemnify Lender, its successors and assigns, against any liability incurred by reason of the imposition of any such tax or fee. 9. (a) Upon the occurrence of any Event of Default, Lender may, but need not, make any payment or perform any act herein required of Borrower, in any form and manner deemed expedient and may, but need not, make full or partial payments of principal or interest on prior encumbrances, if any, and purchase, discharge, compromise or settle any tax lien or other prior lien or title or claim thereof, or redeem from any tax sale or forfeiture affecting said Premises, or contest any tax or assessment. All moneys paid for any of the purposes herein authorized and all reasonable expenses paid or incurred in connection therewith, including but not limited to, reasonable attorneys' fees and costs and reasonable attorneys' fees and costs on appeal, and any other money advanced by Lender to protect the Premises and the lien hereof, shall be so much additional Indebtedness secured hereby and shall become immediately due and payable without notice and with interest thereon at the Default Rate from the date of expenditure or advance until paid. (b) In making any payment hereby authorized relating to taxes or assessments or for the purchase, discharge, compromise or settlement of any prior lien, Lender may make such payment according to any bill, statement or estimate secured from the appropriate public office without inquiry into the accuracy thereof or into the validity of any tax, assessment, sale, forfeiture, tax lien or title or claim thereof or without inquiry as to the validity or amount of any claim for lien which may be asserted. 10. If one or more of the following events (herein called "Event(s) of Default") shall have occurred: (a) failure to pay when due any principal, interest, Make Whole Premium or other Indebtedness, utilities, taxes or assessments or insurance premiums required pursuant to the Loan Documents or the Environmental Indemnity, and such failure shall have continued for 10 days, provided, however, that if (i) the default provided for in this subparagraph 10(a) is due solely to the negligence of Borrower's bank, (ii) the amount necessary to make the payment in question was in the bank account from which the payment was to be made, (iii) Borrower had properly authorized and instructed its bank to make such payment, and (iv) payment is made within two business days of written Notice from Lender, then there shall be no Event of Default and no Late Charges shall be assessed on said payment; but further provided that in the event two such Notices are given over the term of the Mortgage, thereafter an Event of Default shall occur and Late Charges shall be assessed both without notice by Lender to Borrower; or (b) Borrower, Interest Owner or any guarantor voluntarily brings or acquiesces to any of the following: (A) any action for dissolution, act of dissolution or dissolution or the like of Borrower, Interest Owner or any guarantor under the Federal Bankruptcy Code as now or hereafter constituted; (B) the filing of a petition or answer proposing the adjudication of Borrower, Interest Owner or any guarantor as a bankrupt or its reorganization or arrangement, or any composition, readjustment, liquidation, dissolution or similar relief with respect to it pursuant to any present or future federal or state bankruptcy or similar law; or (C) the appointment by order of a court of competent jurisdiction of a receiver, trustee or liquidator of the Premises or any part thereof or of Borrower, Interest Owner or any guarantor or of substantially all of the assets of Borrower, Interest Owner or any guarantor; or (c) one or more of the items set forth in paragraph 10(b) above occur which were either not (i) voluntarily brought by Borrower, Interest Owner or any guarantor or (ii) acquiesced in by Borrower, Interest Owner or any guarantor, and which are not discharged or dismissed within 90 days after the action, filing or appointment, as the case may be; or With respect to the matters in (b) and (c) above for an Interest Owner only, no Event of Default shall occur until an interested party or Interest Owner asserts a claim or right against Borrower or the Premises which in any manner may affect Lender's rights, remedies, or interests granted under the Loan Documents (whether or not such assertion is successful). (d) with respect to the matters not described in the other subparagraphs of this paragraph 10, failure to duly observe or perform any covenant, condition or agreement of the Borrower or any guarantor contained in this Mortgage, the Note or the Assignment of Leases from Borrower to Lender or in any other instrument or agreement which evidences or secures the Loan (the "Loan Documents"), or in the Environmental Indemnity, and such failure shall have continued for 30 days after Notice specifying such failure is given by Lender to Borrower; or If any failure to observe or perform under (d) above shall be of such nature that it cannot be cured or remedied within 30 days, Borrower shall be entitled to a reasonable period of time to cure or remedy such failure (not to exceed 90 days following the giving of Notice), provided Borrower commences the cure or remedy thereof within the 30 day period following the giving of Notice and thereafter proceeds with diligence, as determined by Lender, to complete such cure or remedy. (e) the failure of Borrower to duly observe or perform any of the covenants, conditions and agreements of the Borrower contained in paragraph 2(f) of this Mortgage; or (f) any representation made by or on behalf of Borrower, Interest Owner or any guarantor regarding the Premises, the making or delivery of any of the Loan Documents or the Environmental Indemnity or in any material written information provided by or on behalf of Borrower, Interest Owner or any guarantor in connection with the Loan shall prove to be untrue or inaccurate in any material respect; or (g) the failure of Borrower to give Notice to Lender within 60 days after the death of any individual who is personally liable for any obligation under the Loan Documents or the Environmental Indemnity, as Borrower, indemnitor or guarantor, whether or not such individual had executed the Note or this Mortgage; or (h) subject to the provisions of paragraph 2(f), the failure of Borrower to provide Lender with an assumption agreement in form and substance and executed by a person(s) or entity(ies) acceptable to Lender in its sole discretion to assume the obligations of any deceased individual who is personally liable for any obligation under the Loan Documents or the Environmental Indemnity, as Borrower, indemnitor or guarantor, whether or not such individual had executed the Note or this Mortgage, and such failure shall have continued for 60 days after the death of such individual then, in each and every such case, the whole of said principal sum hereby secured shall, at the option of the Lender and without further notice to Borrower, become immediately due and payable together with accrued interest thereon, a Make Whole Premium calculated in accordance with the provisions of the Loan Documents and all other Indebtedness, and whether or not Lender has exercised said option, interest shall accrue on the entire principal balance and any interest or Make Whole Premium or other Indebtedness then due, at the Default Rate until fully paid or if Lender has not exercised said option, for the duration of any Event of Default. 11. Borrower agrees that if Lender accelerates the whole or any part of the principal sum hereby secured, or applies any proceeds pursuant to the provisions hereof, Borrower waives any right to prepay the principal sum hereby secured in whole or in part without premium and agrees to pay, as yield maintenance protection and not as a penalty, a "Make Whole Premium". However, in the event any proceeds from a casualty or Taking of the Premises are applied to reduce the principal balance under the Note, no Make Whole Premium shall be due so long as no Event of Default exists at the time of such application. The Make Whole Premium shall be the greater of one percent (1%) of the principal amount to be prepaid or a premium calculated as follows: (a) Determine the "Reinvestment Yield." The Reinvestment Yield will be equal to the yield on the applicable* U.S. Treasury Issue ("Primary Issue")** published one week prior to the date of prepayment and converted to an equivalent monthly compounded nominal yield. **In the event there is no market activity involving the Primary Issue at the time of prepayment, Lender shall choose a comparable Treasury Bond, Note or Bill ("Secondary Issue") which Lender reasonably deems to be similar to the Primary Issue's characteristics (i.e., rate, remaining time to maturity, yield). (b) Calculate the "Present Value of the Mortgage." The Present Value of the Mortgage is the present value of the payments to be made in accordance with the Note (all installment payments and any remaining payment due on the Call Date, or if the Call Date has already passed, on the Maturity Date) discounted at the Reinvestment Yield for the number of months remaining from the date of prepayment to the Call Date, or if the Call Date has already passed, to the Maturity Date. In the event of a partial prepayment as a result of the aforementioned application of proceeds, the Present Value of the Mortgage shall be calculated in accordance with the preceding sentence multiplied by the fraction which results from dividing the amount of the prepaid proceeds by the principal balance immediately prior to prepayment. (c) Subtract the amount of the prepaid proceeds from the Present Value of the Mortgage as of the date of prepayment. Any resulting positive differential shall be the premium. As set forth above, the U.S. Treasury Issue applicable for each prepayment period is as follows: Prepayment Period U.S. Treasury Issue To March 1, 2006 * March 1, 2006 to March 1, 2011 * **At this time there is not a U.S. Treasury Issue for this prepayment period. At the time of prepayment, Lender shall select in its sole and absolute discretion a U.S. Treasury Issue with similar remaining time to the end of the applicable prepayment period. 12. Upon the occurrence of any Event of Default, in addition to any other rights or remedies provided in the Loan Documents, at law, in equity or otherwise, Lender shall have the right to foreclose the lien hereof, and to the extent permitted herein and by applicable law to sell the Premises by sale independent of the foreclosure proceedings. In any suit to foreclose the lien hereof, and in any sale of the Premises, there shall be allowed and included as additional Indebtedness payable by Borrower to Lender and secured hereby all expenditures and expenses which may be paid or incurred by or on behalf of Lender for attorneys' fees and costs, including attorneys' fees and costs on appeal, appraisers' fees, expenditures for documentary and expert evidence, stenographer's charges, publication and advertising costs, survey costs, environmental audits and costs (which may be estimated as to items to be expended after the entry of any decree) of procuring all such abstracts of title, title searches and examinations, title insurance policies, torrens certificates and similar data and assurances with respect to title as Lender deems reasonably necessary either to prosecute such suit or to consummate such sale or to evidence to bidders at any sale the true condition of the title to or the value of the Premises. 13. The proceeds of any foreclosure sale, or other sale of the Premises in accordance with the terms hereof or as permitted by law, shall be distributed and applied in the following order of priority: first, to the payment of all costs and expenses incident to the foreclosure and/or sale proceedings, including all items as are mentioned in any preceding or succeeding paragraph hereof; second, to the payment of all other items which under the terms hereof constitute secured Indebtedness in addition to that evidenced by the Note, with interest thereon as herein provided; third, to the payment of all principal, accrued interest remaining unpaid on the Note and Make Whole Premium; fourth, any surplus to the Borrower or Borrower's successors or assigns, as their rights may appear. 14. Following the occurrence of an Event of Default, unless the same has been specifically waived in writing, Borrower shall forthwith upon demand of Lender surrender to Lender possession of the Premises, and Lender shall be entitled to take actual possession of the Premises or any part thereof personally or by its agents or attorneys, and Lender in its discretion may, with or without force and with or without process of law, enter upon and take and maintain possession of all or any part of the Premises together with all documents, books, records, papers and accounts of the Borrower or the then owner of the Premises relating thereto, and may exclude Borrower, its agents or assigns wholly therefrom, and may as attorney-in-fact or agent of the Borrower, or in its own name as Lender and under the powers herein granted: (a) hold, operate, maintain, repair, rebuild, replace, alter, improve, manage or control the Premises as it deems judicious, insure and reinsure the same and any risks related to Lender's possession, operation and management thereof and receive all Rents, either personally or by its agents, and with full power to use such measures, legal or equitable, as in its discretion it deems proper or necessary to enforce the payment or security of the Rents, including actions for the recovery of Rent, actions in forcible detainer and actions in distress for Rents, hereby granting full power and authority to exercise each and every of the rights, privileges and powers herein granted at any and all times hereafter, without notice to Borrower; and (b) conduct leasing activity pursuant to the provisions of the Assignment of Leases. Lender shall not be obligated to perform or discharge, nor does it hereby undertake to perform or discharge, any obligation, duty or liability under any Lease. Should Lender incur any liability, loss or damage under any Leases, or under or by reason of the Assignment of Leases, or in the defense of any claims or demands whatsoever which may be asserted against Lender by reason of any alleged obligations or undertakings on its part to perform or discharge any of the terms, covenants or agreements in any Lease, the amount thereof, including costs, expenses and reasonable attorneys' fees and costs, including reasonable attorneys' fees and costs on appeal, shall be added to the Indebtedness and secured hereby. 15. Lender in the exercise of the rights and powers conferred upon it shall have the full power to use and apply the Rents, less costs and expenses of collection to the payment of or on account of the items listed in (a) - (c) below, at the election of Lender and in such order as Lender may determine unless otherwise specifically provided in the Assignment. The manner of the application of Rents, the reasonableness of the costs and charges to which such Rents are applied and the item or items which shall be credited thereby shall be within the sole and unlimited discretion of Lender unless otherwise specifically provided in the Assignment. (a) to the payment of (i) the expenses of operating and maintaining the Premises, including, but not limited to the cost of management, leasing (which shall include reasonable compensation to Lender and its agent or agents if management and/or leasing is delegated to an agent or agents), repairing, rebuilding, replacing, altering and improving the Premises, (ii) premiums on insurance as hereinabove authorized, (iii) taxes and special assessments now due or which may hereafter become due on the Premises and (iv) expenses of placing the Premises in such condition as will, in the sole judgment of Lender, make it readily rentable; (b) to the payment of any principal, interest or any other Indebtedness secured hereby or any deficiency which may result from any foreclosure sale; (c) to the payment of established claims for damages, if any, reasonable attorneys' fees and costs and reasonable attorneys' fees and costs on appeal. To the extent that the costs and expenses in (a) - (c) above exceed the amounts collected, the excess shall be added to the Indebtedness and secured hereby. 16. Upon the occurrence of any Event of Default, unless the same has been specifically waived in writing, Lender may apply to any court having jurisdiction for the appointment of a receiver of the Premises. Such appointment may be made either before or after sale, without notice, without regard to the solvency or insolvency of Borrower at the time of application for such receiver and without regard to the then value of the Premises or the adequacy of Lender's security. Lender may be appointed as such receiver. The receiver shall have power to collect the Rents during the pendency of any foreclosure proceedings and, in case of a sale, during the full statutory period of redemption, if any, as well as during any further times when Borrower, except for the intervention of such receiver, would be entitled to collect such Rents. In addition, the receiver shall have all other powers which shall be necessary or are usual in such cases for the protection, possession, control, management and operation of the Premises during the whole of said period. The court from time to time may authorize the receiver to apply the net income in its possession at Lender's election and in such order as Lender may determine in payment in full or in part of those items listed in paragraph 15. 17. (a) Borrower agrees that all reasonable costs, charges and expenses, including but not limited to, reasonable attorneys' fees and costs, incurred or expended by Lender arising out of or in connection with any action, proceeding or hearing, legal, equitable or quasi-legal, including the preparation therefor and any appeal therefrom, in any way affecting or pertaining to the Loan Documents, the Environmental Indemnity or the Premises, shall be promptly paid by Borrower. All such sums not promptly paid by Borrower shall be added to the Indebtedness secured hereby and shall bear interest at the Default Rate from the date of such advance and shall be due and payable on demand. (b) Borrower hereby agrees that upon the occurrence of an Event of Default and the acceleration of the principal sum secured hereby pursuant to this Mortgage, to the full extent that such rights can be lawfully waived, Borrower hereby waives and agrees not to insist upon, plead, or in any manner take advantage of, any notice of acceleration, any stay, extension, exemption, homestead, marshaling or moratorium law or any law providing for the valuation or appraisement of all or any part of the Premises prior to any sale or sales thereof under any provision of this Mortgage or before or after any decree, judgment or order of any court or confirmation thereof, or claim or exercise any right to redeem all or any part of the Premises so sold and hereby expressly waives to the full extent permitted by applicable law on behalf of itself and each and every person or entity acquiring any right, title or interest in or to all or any part of the Premises, all benefit and advantage of any such laws which would otherwise be available to Borrower or any such person or entity, and agrees that neither Borrower nor any such person or entity will invoke or utilize any such law to otherwise hinder, delay or impede the exercise of any remedy granted or delegated to Lender herein but will permit the exercise of such remedy as though any such laws had not been enacted. Borrower hereby further expressly waives to the full extent permitted by applicable law on behalf of itself and each and every person or entity acquiring any right, title or interest in or to all or any part of the Premises any and all rights of redemption from any sale or any order or decree of foreclosure obtained pursuant to provisions of this Mortgage. 18. Borrower hereby assigns to Lender directly and absolutely, and not merely collaterally, the interest of Borrower as lessor under the Leases of the Premises, and the Rents payable under any Lease and/or with respect to the use of the Premises, or portion thereof, including any oil, gas or mineral lease, or any installments of money payable pursuant to any agreement or any sale of the Premises or any part thereof, subject only to a license, if any, granted by Lender to Borrower with respect thereto prior to the occurrence of an Event of Default. Borrower has executed and delivered the Assignment of Leases which grants to Lender specific rights and remedies in respect of said Leases and governs the collection of Rents thereunder and from the use of the Premises, and such rights and remedies so granted shall be cumulative of those granted herein. The collection of such Rents and the application thereof as aforesaid shall not cure or waive any Event of Default or notice of default hereunder or invalidate any act done pursuant to such notice, except to the extent any such Event of Default is fully cured. Failure or discontinuance of Lender at any time, or from time to time, to collect any such moneys shall not impair in any manner the subsequent enforcement by Lender of the right, power and authority herein conferred on Lender. Nothing contained herein, including the exercise of any right, power or authority herein granted to Lender, shall be, or be construed to be, an affirmation by Lender of any tenancy, Lease or option, or an assumption of liability under, or the subordination of the lien or charge of this Mortgage to any such tenancy, Lease or option. Borrower hereby agrees that, in the event Lender exercises its rights as provided for in this paragraph or in the Assignment of Leases, Borrower waives any right to compensation for the use of Borrower's furniture, furnishings or equipment in the Premises for the period such assignment of rents or receivership is in effect, it being understood that the Rents derived from the use of any such items shall be applied to Borrower's obligations hereunder as above provided. 19. All rights and remedies granted to Lender in the Loan Documents shall be in addition to and not in limitation of any rights and remedies to which it is entitled in equity, at law or by statute, and the invalidity of any right or remedy herein provided by reason of its conflict with applicable law or statute shall not affect any other valid right or remedy afforded to Lender. No waiver of any default or Event of Default under any of the Loan Documents shall at any time thereafter be held to be a waiver of any rights of the Lender hereunder, nor shall any waiver of a prior Event of Default or default operate to waive any subsequent Event of Default or default. All remedies provided for in the Loan Documents are cumulative and may, at the election of Lender, be exercised alternatively, successively, or concurrently. No act of Lender shall be construed as an election to proceed under any one provision herein to the exclusion of any other provision or to proceed against one portion of the Premises to the exclusion of any other portion. Time is of the essence under this Mortgage and the Loan Documents. 20. By accepting payment of any sum secured hereby after its due date, Lender does not waive its right either to require prompt payment when due of all other sums or installments so secured or to declare a default for failure to pay such other sums or installments. 21. The usury provisions of paragraph 6 of the Note and the limitation of recourse liability provisions of paragraph 9 of the Note are fully incorporated herein by reference as if the same were specifically stated here. 22. In the event one or more provisions of the Loan Documents shall be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision hereof, and the Loan Documents shall be construed as if any such provision had never been contained herein. 23. If the payment of the Indebtedness secured hereby or of any part thereof shall be extended or varied, or if any part of the security be released, all persons now or at any time hereafter liable therefor, or interested in said Premises, shall be held to assent to such extension, variation or release, and their liability and the lien and all provisions hereof shall continue in full force, the right of recourse against all such persons being expressly reserved by Lender notwithstanding such variation or release. 24. Upon payment in full of the principal sum, interest and other Indebtedness secured by the Loan Documents, these presents shall be null and void, and Lender shall release this Mortgage and the lien hereof by proper instrument executed in recordable form. 25. (a) Borrower hereby grants to Lender and its respective agents, attorneys, employees, consultants, contractors and assigns an irrevocable license and authorization to enter upon and inspect the Premises and all facilities located thereon at reasonable times. Lender shall make reasonable efforts to ensure that the operations of the tenants are not disrupted. (b) In connection with any sale or conveyance of this Mortgage, Borrower grants to Lender and its respective agents, attorneys, employees, consultants, contractors and assigns an irrevocable license and authorization to conduct, at Lender's expense, a Phase I environmental audit of the Premises. (c) In the event there has been an Event of Default or in the event Lender has formed a reasonable belief, based on its inspection of the Premises or other factors known to it, that Hazardous Materials may be present on the Premises, then Borrower grants to Lender and its respective agents, attorneys, employees, consultants, contractors and assigns an irrevocable license and authorization to conduct, at Borrower's expense, environmental tests of the Premises, including without limitation, a Phase I environmental audit, subsurface testing, soil and ground water testing, and other tests which may physically invade the Premises or facilities (the "Tests"). The scope of the Tests shall be such as Lender, in its sole ----- discretion, determines is necessary to (i) investigate the condition of the Premises, (ii) protect the security interests created under this Mortgage, or (iii) determine compliance with Environmental Laws, the provisions of the Loan Documents and the Environmental Indemnity and other matters relating thereto. Notwithstanding anything contained hereinabove to the contrary, except in the event there has been an Event of Default, Lender shall provide prior written notice prior to conducting any tests in the Premises. (d) The foregoing licenses and authorizations are intended to be a means of protection of Lender's security interest in the Premises and not as participation in the management of the Premises. 26. Within 15 days after any written request by either party to this Mortgage, the requested party shall certify, by a written statement duly acknowledged, the amount of principal, interest and other Indebtedness then owing on the Note, the terms of payment, Maturity Date and the date to which interest has been paid. Borrower shall further certify whether any defaults, offsets or defenses exist against the Indebtedness secured hereby. Borrower shall also furnish to Lender, within 30 days of its request therefor, tenant estoppel letters from such tenants of the Premises as Lender may require; which Lender shall not request more than one (1) time per annum nor more than one (1) time prior to the date of the Securitization Transaction. 27. (a) Borrower shall furnish to Lender within 90 days after the end of each fiscal year of Borrower, a detailed and analytical financial report prepared in accordance with generally accepted accounting principles consistently applied, certified in a manner and otherwise in form reasonably acceptable to Lender covering the full and complete operation of the Premises, including without limitation: (i) income and expense statements, and (ii) a report of the leasing status of the Premises as of the end of such year, identifying the lessee, square footage leased, rental amount, base rental increases, rental concessions and/or rental deferments, if any, an commencement and expiration dates under each Lease of the Premises, and (iii) a budget and an aged accounts receivable report. Such reports shall be prepared by an accountant who may be an employee of Borrower, or of an affiliate of Borrower, acceptable to Lender. In addition to the reports referred to herein, Borrower shall promptly supply any additional information or records relating to the Premises or its operation as Lender may from time to time reasonably request. Notwithstanding anything hereinabove to the contrary, Lender agrees to accept the financial reports referenced herein, prepared by the Chief Financial Officer of Borrower's parent company, Medtox Scientific, Inc., or such other designee acceptable to Lender. (b) Borrower shall submit to Lender, within 90 days following the end of each fiscal year, annual balance sheets and income statements for Borrower. 28. Each notice, consent, request, report or other communication under this Mortgage or any other Loan Document (each a "Notice") which any party hereto may desire or be required to give to the other ------ shall be deemed to be an adequate and sufficient notice if given in writing and service is made by either (i) registered or certified mail, postage prepaid, in which case notice shall be deemed to have been received three (3) business days following deposit to U.S. mail; or (ii) nationally recognized overnight air courier, next day delivery, prepaid, in which case such notice shall be deemed to have been received one (1) business day following delivery to such nationally recognized overnight air courier. All Notices shall be addressed to Borrower at its address given on the first page hereof or to Lender at c/o Principal Capital Management, LLC, 801 Grand Avenue, Des Moines, Iowa 50392-1450, Attn: Commercial Real Estate Servicing, Loan No. 752834, or to such other place as either party may by written notice to the other hereafter designate as a place for service of notice. 29. This Mortgage and all provisions hereof shall inure to the benefit of the heirs, successors and assigns of Lender and shall bind the heirs and permitted successors and assigns of Borrower. 30. Borrower has had the opportunity to fully negotiate the terms hereof and modify the draftsmanship of this Mortgage. Therefore, the terms of this Mortgage shall be construed and interpreted without any presumption, inference, or rule requiring construction or interpretation of any provision of this Mortgage against the interest of the party causing this Mortgage or any portion of it to be drafted. Borrower is entering into this Mortgage freely and voluntarily without any duress, economic or otherwise. 31. This Mortgage shall be governed by, and construed in accordance with the laws of the state of Minnesota, without regard to its conflicts of law principles. 32. As used herein, the term "Default Rate" means a rate equal to the lesser of (i) four percent (4%) per annum above the then applicable interest rate payable under the Note or (ii) the maximum rate allowed by applicable law. 33. BORROWER AND LENDER EACH KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE, TO THE EXTENT PERMITTED BY LAW, TRIAL BY JURY IN ANY ACTIONS BROUGHT BY BORROWER OR LENDER IN CONNECTION WITH THIS MORTGAGE, ANY OF THE LOAN DOCUMENTS, THE INDEBTEDNESS SECURED HEREBY, OR ANY OTHER STATEMENTS OR ACTIONS OF LENDER. 34. This Mortgage and the Indebtedness secured hereby is for the sole purpose of conducting or acquiring a lawful business, professional or commercial activity or for the acquisition or management of real or personal property as a commercial investment, and all proceeds of such Indebtedness shall be used for said business or commercial investment purpose. Such proceeds will not be used for the purchase of any security within the meaning of the Securities Exchange Act of 1934, as amended, or any regulation issued pursuant thereto, including without limitation, Regulations U, T and X of the Board of Governors of the Federal Reserve System. This is not a purchase money mortgage where a seller is providing financing to a buyer for the payment of all or any portion of the purchase price, and the Premises secured hereby is not a residence or homestead or used for mining, grazing, agriculture, timber or farming purposes. 35. Unless Lender shall otherwise direct in writing, Borrower shall appear in and defend all actions or proceedings purporting to affect the security hereunder, or any right or power of the Lender. The Lender shall have the right to appear in such actions or proceedings. Borrower shall save Lender harmless from all costs and expenses, including but not limited to, reasonable attorneys' fees and costs, and costs of a title search, continuation of abstract and preparation of survey incurred by reason of any action, suit, proceeding, hearing, motion or application before any court or administrative body in and to which Lender may be or become a party by reason hereof. Such proceedings shall include but not be limited to condemnation, bankruptcy, probate and administration proceedings, as well as any other action, suit, proceeding, right, motion or application wherein proof of claim is by law required to be filed or in which it becomes necessary to defend or uphold the terms of this Mortgage or the Loan Documents or otherwise purporting to affect the security hereof or the rights or powers of Lender. All money paid or expended by Lender in that regard, together with interest thereon from date of such payment at the Default Rate shall be additional Indebtedness secured hereby and shall be immediately due and payable by Borrower without notice. 36. Upon the occurrence of an Event of Default, unless the same has been specifically waived in writing, all Rents collected or received by Borrower shall be accepted and held for Lender in trust and shall not be commingled with the funds and property of Borrower, but shall be promptly paid over to Lender. 37. If more than one, all obligations and agreements of Borrower and of any general partner of Borrower are joint and several. 38. This Mortgage may be executed in counterparts, each of which shall be deemed an original; and such counterparts when taken together shall constitute but one agreement. 39. Borrower has delivered to Lender an irrevocable letter of credit in the amount of $300,000.00 having an expiration date not earlier than 1 year after its issue date, to be held by Lender as additional security for the Loan; Borrower shall deliver to Lender not later than 30 days prior to the expiration date of said letter of credit and any renewal or replacement letter of credit, a renewal or replacement irrevocable bank letter of credit identical in terms and amount, issued by a United States bank acceptable to Lender. Except as hereinafter provided and so long as no Event of Default has occurred under the Loan Documents, the Letter of Credit shall be released at which time Medtox Scientific, Inc. has achieved audited net income after taxes in excess of $1,000,000.00 for two consecutive fiscal years as determined by Lender. Upon the occurrence of an Event of Default under the Loan Documents, Lender may, with respect to the letter of credit or any renewal or replacement thereof, exercise all enforcement rights and remedies granted to Lender under the Loan Documents and in addition to all other rights and remedies granted to Lender under the Loan Documents, Lender may, at its option, draw upon the letter of credit and any renewal or replacement letter of credit and the proceeds of such letter of credit shall constitute additional security for the Loan. Lender may, at its option, use such funds to (1) cure or partially cure any Event of Default; (2) prepay the principal amount of the Loan or any part thereof; (3) pay any interest accrued under the terms of the Note; (4) pay any other Indebtedness; (5) pay the Make Whole Premium, if any, due and payable; or (6) hold such funds in a non-interest-bearing account as additional security for the Loan, all in such order as Lender may determine. In the event the funds or any portion thereof are applied to prepay the principal amount of the Loan or any part thereof, Borrower waives any right to prepay the principal amount in whole or in part without premium, and agrees to pay, as liquidated damages and not as a penalty, a Make Whole Premium on any principal amount prepaid. The Make Whole Premium on any principal amount prepaid shall be calculated in accordance with the provisions of the Loan Documents. The letter of credit and any renewal or replacement letter of credit shall be returned to Borrower and Borrower's obligation to deliver such letter of credit shall expire, upon payment in full of all sums due to Lender under the Loan Documents. Notwithstanding anything contained herein to the contrary, Lender will accept $300,000 to be deposited with and held by Lender pursuant to an escrow security agreement between Borrower and Lender under terms acceptable to Lender in lieu of the above-referenced letter of credit. 40. From the date of its recording, this Mortgage shall be effective as a financing statement filed as a fixture financing with respect to all goods constituting part of the Premises (as more particularly described in the granting clause of this Mortgage) which are or are to become fixtures related to the Land described herein. For this purpose, the following information is set forth: (a) Name and Address of Debtor: Medtox Scientific, Inc. 402 West County Road St. Paul, Minnesota 55112 Attention: Chief Financial Officer (b) Name and Address of Secured Party: Principal Life Insurance Company c/o Principal Capital Management, LLC 801 Grand Avenue Des Moines, Iowa 50392-1450 (c) This document covers goods which are or are to become fixtures. (d) The name of the record owner of the Premises is the Debtor described above. (e) Borrowers tax identification number is 41-1997061. 41. The maximum principal amount of indebtedness secured by this Mortgage at any one time, excluding advances made by Lender in protection of the Premises or the lien of this Mortgage and other indeterminate amounts shall be $12,400,000.00. (Signatures on next page) IN WITNESS WHEREOF, Borrower has caused this Mortgage to be duly executed and delivered as of the date first above written. NEW BRIGHTON BUSINESS CENTER LLC, a Delaware limited liability company By ____________________________________ Name: Title: STATE OF __________________ ) ) ss. COUNTY OF ________________ ) The foregoing instrument was acknowledged before me this ______ day of ______________________, ________________ by ______________________________, the ____________________ of _______________________________________, a ____________________________________________ organized under the laws of the state of ____________________, on behalf of said _____________________________. ----------------------------------- Notary Public EX-10.54 10 0010.txt EXHIBIT 10.54 Exhibit 10.54 SECURED PROMISSORY NOTE 752834 $6,200,000.00 March 16, 2001 1. FOR VALUE RECEIVED, NEW BRIGHTON BUSINESS CENTER LLC, a Delaware limited liability company, as "Borrower" ("Borrower" to be construed as "Borrowers" if the context so requires), hereby promises to pay to the order of PRINCIPAL LIFE INSURANCE COMPANY, an Iowa corporation (as "Lender"), having a principal place of business and post office address at c/o Principal Capital Management, LLC, 801 Grand Avenue, Des Moines, Iowa 50392-1450, or at such other place as Lender may designate, the principal sum of Six Million Two Hundred Thousand and 00/100 Dollars ($6,200,000.00) (the "Loan Amount") or so much thereof as shall from time to time have been advanced, together with interest on the unpaid balance of said sum from March 16, 2001 (the "Closing Date"), at the rate of Seven and Twenty-three one hundredths percent (7.23%) per annum. A payment of interest from the Closing Date to and including March 31, 2001 shall be paid on the Closing Date calculated by multiplying the actual number of days elapsed in the period for which interest is being calculated by a daily rate based on the foregoing annual interest rate and a 360-day year. Thereafter, interest shall be computed on the unpaid balance on the basis of a 360-day year composed of twelve 30-day months. Beginning on May 1, 2001, principal and interest shall be due and payable in installments of Forty Eight Thousand Nine Hundred Twenty-eight Dollars and 21/100 ($48,928.21), with an installment in a like amount due and payable on the same day of each month thereafter continuing to and including April 1, 2006. Lender shall have the right to declare this Note to be due and payable in full on the Call Date or to adjust the per annum interest rate on the Rate Adjustment Date to an interest rate established by Lender ("Adjusted Interest Rate") as herein provided. In the event Lender elects to declare this Note to be due and payable, this Note shall become due and payable, in full, without a Make Whole Premium on April 1, 2006 ("Call Date"). In the event Lender elects to adjust the interest rate, then on March 1, 2006 ("Rate Adjustment Date") the per annum interest rate shall be adjusted to the Adjusted Interest Rate and commencing on April 1, 2006, monthly installments of principal and interest shall be due and payable in an amount determined by amortizing the then principal balance of this Note over a 15-year term at the Adjusted Interest Rate, and a like amount shall be due and payable on the same day of each month thereafter, until said principal and interest shall be paid, except that all remaining principal and interest shall be due and payable on April 1, 2011 or such earlier date resulting from acceleration of the Indebtedness by Lender ("Maturity Date"). Each installment shall be credited first upon interest then accrued and the remainder upon principal, and interest shall cease to accrue upon principal so credited. All principal and interest shall be paid in lawful money of the United States of America, by automated clearing house transfer through such bank or financial institution as shall be approved in writing by Lender, shall be made to an account designated by Lender, and shall be initiated by Lender or shall be made in such other manner as Lender may direct from time to time. Lender shall notify Borrower in writing ("Lender's Election Notice") on or before February 1, 2006 of Lender's election to adjust the interest rate or of Lender's intention to declare this Note to be due and payable in full. In the event Lender elects to adjust the interest rate, Lender's Election Notice will contain the number of basis points ("Spread") and the United States Treasury Issue ("Treasury Issue") that Lender anticipates it will use to establish the Adjusted Interest Rate. The Spread shall be determined by Lender in its sole discretion based on Lender's evaluation of: (i) the then current financial performance and projected risk of the Premises, which shall encompass various factors, including but not limited to contract debt service coverage, loan-to-value ratio, economic debt service coverage, occupancy, frequency of tenant rollover, financial strength and stability of tenants; (ii) the then current financial status of Borrower, which shall include but not be limited to creditworthiness, financial strength, percentage of liabilities to liquid assets, and annual net income; and (iii) the remaining term and current outstanding balance of the Note. At any time and from time to time before the Adjusted Interest Rate is established, provided at least seven (7) days have elapsed since the previous Lender's Election Notice, Lender may establish a new Spread which Lender anticipates it will use to establish the Adjusted Interest Rate and notify Borrower of the same. Within thirty (30) days of the initial Lender's Election Notice, the Adjusted Interest Rate must be established by mutual written agreement of Lender and Borrower. The Adjusted Interest Rate may only be established by mutual written agreement of Lender and Borrower and simultaneous payment by Borrower of Fifteen Thousand and 00/100 Dollars ($15,000.00) ("Rate Adjustment Fee"). In the event: (i) Lender notifies Borrower of its intention to declare this Note to be due and payable in full, (ii) Lender and Borrower are unable for any reason to mutually agree in writing on the Adjusted Interest Rate within thirty days after the initial Lender's Election Notice; or (iii) Borrower fails to pay the Rate Adjustment Fee to Lender when due, this Note shall become due and payable in full, on the Call Date, without a Make Whole Premium, and all principal, interest accrued or to accrue to the date of prepayment at the rate in effect at the time of the initial Lender's Election Notice, and all other Indebtedness shall become immediately due and payable in full. Notwithstanding any other provision herein, Lender shall not be obligated to adjust the interest rate if any default exists under this Note or the Loan Documents. In the event Borrower accepts the Adjusted Interest Rate, Borrower is required to provide Lender the following: (i) a new ALTA standard loan title policy for the Loan or an endorsement updating said title policy in the full amount of the Loan in form and by an issuer satisfactory to Lender at the time of the rate adjustment unless (x) the outstanding balance of the Loan at the time of the Call Date is less than $20,000,000.00, (y) no liens or encumbrances exist against the Premises except as previously approved by Lender in the Mortgage, and (z) no mortgages or deeds of trust exist against the Premises except for the Mortgage. Borrower further agrees that the policy shall insure Lender's Mortgage, at the Adjusted Interest Rate to be a first and prior lien subject only to those exceptions which were previously approved by Lender and provide coverage against mechanic's liens; (ii) an amendment to the Note in form and substance satisfactory to Lender executed by Borrower evidencing the Adjusted Interest Rate and a representation that the Premises is free and clear of any liens, privileges, mortgages or encumbrances except as expressly permitted in the Mortgage; (iii) a usury opinion or endorsement to the title policy acceptable to Lender if Lender reasonably believes that the Adjusted Interest Rate is or may be usurious; and (iv) a title search acceptable to Lender and reimbursement for Lender's costs incurred in obtaining the same. 2. No privilege is reserved by Borrower to prepay any principal of this Note prior to the Maturity Date, except on or after the date hereof, privilege is reserved, after giving thirty (30) days' prior written notice to Lender, to prepay in full, but not in part, all principal and interest to the date of payment, along with all sums, amounts, advances, or charges due under any instrument or agreement by which this Note is secured, upon the payment of a "Make Whole Premium." The Make Whole Premium shall be the greater of one percent (1%) of the principal amount to be prepaid or a premium calculated as provided in subparagraphs (a) through (c) below: (a) Determine the "Reinvestment Yield." The Reinvestment Yield will be equal to the yield on the applicable* U.S. Treasury Issue ("Primary Issue")** published one week prior to the date of prepayment and converted to an equivalent monthly compounded nominal yield. **In the event there is no market activity involving the Primary Issue at the time of prepayment, Lender shall choose a comparable Treasury Bond, Note or Bill ("Secondary Issue") which Lender reasonably deems to be similar to the Primary Issue's characteristics (i.e., rate, remaining time to maturity, yield). (b) Calculate the "Present Value of the Mortgage." The Present Value of the Mortgage is the present value of the payments to be made in accordance with this Note (all installment payments and any remaining payment due on the Call Date, or if the Call Date has already passed, on the Maturity Date) discounted at the Reinvestment Yield for the number of months remaining from the date of prepayment to the Call Date, or if the Call Date has already passed, to the Maturity Date. (c) Subtract the amount of the prepaid proceeds from the Present Value of the Mortgage as of the date of prepayment. Any resulting positive differential shall be the premium. As set forth above, the U.S. Treasury Issue applicable for each prepayment period is as follows: Prepayment Period U.S. Treasury Issue To March 1, 2006 * March 1, 2006 to March 1, 2011 * *At this time there is not a U.S. Treasury Issue for this prepayment period. At the time of prepayment, Lender shall select in its sole and absolute discretion a U.S. Treasury Issue with similar remaining time to the end of the applicable prepayment period. 3. Borrower agrees that if Lender accelerates the whole or any part of the principal sum evidenced hereby, or applies any proceeds pursuant to the provisions of the Loan Documents, Borrower waives any right to prepay said principal sum in whole or in part without premium and agrees to pay, as yield maintenance protection and not as a penalty, the Make Whole Premium. 4. If any payment of principal, interest, Make Whole Premium, or other Indebtedness is not made when due, damages will be incurred by Lender, including additional expense in handling overdue payments, the amount of which is difficult and impractical to ascertain. Borrower therefore agrees to pay, upon demand, the sum of four cents ($.04) for each one dollar ($1.00) of each said payment which becomes overdue ("Late Charge") as a reasonable estimate of the amount of said damages, subject, however, to the limitations contained in paragraph 6 hereof. 5. If any Event of Default has occurred and is continuing under the Loan Documents, the entire principal balance of the Loan, interest then accrued, and Make Whole Premium, and all other Indebtedness whether or not otherwise then due, shall at the option of Lender, become immediately due and payable without demand or notice, and whether or not Lender has exercised said option, interest shall accrue on the entire principal balance, interest then accrued, Make Whole Premium and any other Indebtedness then due, at a rate equal to the Default Rate until fully paid. 6. Notwithstanding anything herein or in any of the other Loan Documents to the contrary, no provision contained herein or therein which purports to obligate Borrower to pay any amount of interest or any fees, costs or expenses which are in excess of the maximum permitted by applicable law, shall be effective to the extent it calls for the payment of any interest or other amount in excess of such maximum. All agreements between Borrower and Lender, whether now existing or hereafter arising and whether written or oral, are hereby limited so that in no contingency, whether by reason of demand for payment or acceleration of the maturity hereof or otherwise, shall the interest contracted for, charged or received by Lender exceed the maximum amount permissible under applicable law. If, from any circumstance whatsoever, interest would otherwise be payable to Lender in excess of the maximum lawful amount, the interest payable to Lender shall be reduced to the maximum amount permitted under applicable law; and if from any circumstance Lender shall ever receive anything of value deemed interest by applicable law in excess of the maximum lawful amount, an amount equal to any excessive interest shall, at the option of Lender, be refunded to Borrower or be applied to the reduction of the principal hereof and not to the payment of interest or, if such excessive interest exceeds the unpaid balance of principal hereof such excess shall be refunded to Borrower. This paragraph shall control all agreements between Borrower and Lender. 7. Borrower and any endorsers or guarantors waive presentment, protest and demand, notice of protest, demand and dishonor and nonpayment, and agree the Maturity Date of this Note or any installment may be extended without affecting any liability hereunder, and further promise to pay all reasonable costs and expenses, including but not limited to, attorney's fees incurred by Lender in connection with any default or in any proceeding to interpret and/or enforce any provision of the Loan Documents. No release of Borrower from liability hereunder shall release any other maker, endorser or guarantor hereof. 8. This Note is secured by the Loan Documents creating among other things legal and valid encumbrances on and an assignment of all of Borrower's interest in any Leases of the Premises located in the county of Ramsey, state of Minnesota. Capitalized terms used herein and not otherwise defined shall have those meanings given to them in the Loan Documents. In no event shall such documents be construed inconsistently with the terms of this Note, and in the event of any discrepancy between any such documents and this Note, the terms hereof shall govern. The proceeds of this Note are to be used for business, commercial, investment or other similar purposes, and no portion thereof will be used for any personal, family or household use. This Note shall be governed by and construed in accordance with the laws of the State where the Premises is located, without regard to its conflict of law principles. 9. Notwithstanding any provision to the contrary in this Note or the Loan Documents and except as otherwise provided for below, the liability of Borrower and any general partner of Borrower under the Loan Documents shall be limited to the interest of Borrower and any general partner of Borrower in the Premises and the Rents. In the event of foreclosure of the liens evidenced by the Loan Documents, no judgment for any deficiency upon the Indebtedness evidenced by the Loan Documents shall be sought or obtained by Lender against Borrower or any general partner of Borrower. Nothing herein shall in any manner limit or impair (i) the lien or enforcement of the Loan Documents pursuant to the terms thereof or (ii) the obligations of any indemnitor or guarantor, if any. Notwithstanding any provision hereinabove to the contrary, Borrower and any general partner of Borrower shall be personally liable to Lender for: (a) any loss or damage to Lender arising from (i) the sale or forfeiture of the Premises resulting from Borrower's failure to pay any of the taxes, assessments or charges specified in the Loan Documents or (ii) Borrower's failure to insure the Premises in compliance with the provisions of the Loan Documents; (b) any event or circumstance for which Borrower indemnifies Lender under the Environmental Indemnity; (c) nonpayment of taxes, assessments, insurance premiums and utilities for the Premises and any penalty or late charge associated with nonpayment thereof; (d) failure to manage, operate, and maintain the Premises in a commercially reasonable manner for similar property types in the surrounding geographic area; (e) any sums expended by Lender in fulfilling the obligations of Borrower as lessor under any Lease of the Premises prior to a sale of the Premises pursuant to foreclosure or power of sale, a bona fide sale (permitted by the terms of paragraph 2(f) of the Mortgage or consented to in writing by Lender) to an unrelated third party or upon conveyance to Lender of the Premises by a deed acceptable to Lender in form and content (each of which shall be referred to as a "Sale" for purposes of this paragraph) or expended by Lender after a Sale of the Premises for obligations of Borrower which arose prior to a Sale of the Premises; Borrower's personal liability for items specified in (c), (d) and (e) above shall be limited to the amount of rents, issues, proceeds and profits from the Premises ("Rents and Profits") received by Borrower for the twenty-four (24) months preceding an Event of Default and thereafter; but less any such Rents and Profits applied to (A) payment of principal, interest and other charges when due under the Loan Documents, or (B) payment of expenses for the operation, maintenance, taxes, assessments, utility charges and insurance of the Premises including sufficient reserves for the same or replacements or renewals thereof ("Operation Expense(s)") provided that (x) Borrower has furnished Lender with evidence satisfactory to Lender of the Operation Expenses and payment thereof, and (y) any payments to parties related to Borrower shall be considered an Operation Expense only to the extent that the amount expended for the Operation Expense does not exceed the market rate for such Operation Expense. (f) any rents or other income regardless of type or source of payment or other considerations in lieu thereof (including, but not limited to, common area maintenance charges, lease termination payments, refunds of any type, prepayment of rents, settlements of litigation, or settlements of past due rents) from the Premises which Borrower has received or will receive after an Event of Default under the Loan Documents which are not applied to (A) payment of principal, interest and other charges when due under the Loan Documents or (B) payment of Operation Expenses provided that (x) Borrower has furnished Lender with evidence satisfactory to Lender of the Operation Expenses and payment thereof, and (y) any payments to parties related to Borrower shall be considered an Operation Expense only to the extent that the amount expended for the Operation Expense does not exceed the market rate for such Operation Expense; (g) any security deposits of tenants, together with any interest on such security deposits required by law or the leases, not turned over to Lender upon conveyance of the Premises to Lender pursuant to foreclosure or power of sale or by a deed acceptable to Lender in form and content; (h) misapplication or misappropriation of tax reserve accounts, tenant improvement reserve accounts, security deposits, prepaid rents or other similar sums paid to or held by Borrower or any other entity or person in connection with the operation of the Premises; (i) any insurance or condemnation proceeds or other similar funds or payments applied by Borrower in a manner other than as expressly provided in the Loan Documents; and (j) any loss or damage to Lender arising from any fraud or willful misrepresentation by or on behalf of Borrower, Interest Owner or any guarantor regarding the Premises, the making or delivery of any of the Loan Documents or in any materials or information provided by or on behalf of Borrower, Interest Owner or any guarantor in connection with the Loan. Notwithstanding anything contained in paragraphs 9(a)(i) and 9(c) hereinabove as it relates solely to taxes, assessments and insurance premiums, to the extent Lender is impounding for taxes, assessments and insurance premiums in accordance with the Loan Documents and Borrower has fully complied with all terms and conditions of the Loan Documents relating to impounding for the same, then Borrower shall not be personally liable for Lender's failure to apply any of said impound amounts held by Lender in accordance with the Loan Documents. Notwithstanding anything to the contrary in the Loan Documents, the limitation on liability contained in the first paragraph of this paragraph 9 SHALL BECOME NULL AND VOID and shall be of no further force and effect in the event: (w) of any breach or violation of paragraph 2(f) (due on sale or encumbrance) of the Mortgage, other than (i) the filing of a nonmaterial mechanic's lien affecting the Premises or a mechanic's lien affecting the Premises for which Borrower has complied with the provisions of paragraph 1(e) of the Mortgage, or (ii) the granting of any utility or other nonmaterial easement or servitude burdening the Premises, or (iii) any transfer or encumbrance of a nonmaterial economic interest in the Premises not otherwise set forth in (i) or (ii); or (x) of any filing by Borrower of a petition in bankruptcy or insolvency or a petition or answer seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under the Bankruptcy laws of the United States or under any other applicable federal, state or other statute or law. 10. If more than one, all obligations and agreements of Borrower and of any general partners of Borrower are joint and several. 11. This Note may not be changed or terminated orally, but only by an agreement in writing and signed by the party against whom enforcement of any waiver, change, modification or discharge is sought. All of the rights, privileges and obligations hereunder shall inure to the benefit of the heirs, successors and assigns of Lender and shall bind the heirs and permitted successors and assigns of Borrower. 12. If any provision of this Note shall, for any reason, be held to be invalid or unenforceable, such invalidity or unenforceability shall not affect any other provision hereof, but this Note shall be construed as if such invalid or unenforceable provision had never been contained herein. 13. This Note may be executed in counterparts, each of which shall be deemed an original; and such counterparts when taken together shall constitute but one agreement. (Signatures on next page) NEW BRIGHTON BUSINESS CENTER LLC, a Delaware limited liability company By ______________________________ Name: Title: EX-23 11 0011.txt EXHIBIT 23 Exhibit 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements No. 333-44942 on Form S-3/A dated September 6, 2000, No. 333-28783 on Form S-3 dated October 8, 1997, No. 333-24371 on Form S-8 dated April 2, 1997, No. 333-18547 on Form S-3 dated February 14, 1997, No. 333-827 on Form S-3 dated May 15, 1996, No. 33-89646 on Form S-8 dated February 21, 1995, No. 33-91840 on Form S-3 dated July 21, 1995, No. 33-86744 on Form S-3 dated December 13, 1994, No. 33-78590 on Form S-3 dated June 20, 1994, No. 33-74078 on Form S-3 dated February 2, 1994, No. 33-71490 on Form S-8 dated November 11, 1993, No. 33-71596 on Form S-8 dated November 11, 1993, No. 33-49474 on Form S-8 dated July 10, 1992, No. 33-48566 on Form S-3 dated June 25, 1992, No. 333-45057 on Form S-3 dated February 4, 1988, No. 33-15025 on Form S-8 dated June 29, 1987, No. 33-10393 on Form S-8 dated December 16, 1986 of our report dated February 23, 2001 (March 16, 2001 as to Note 15), with respect to the consolidated financial statements and schedule of MEDTOX Scientific, Inc. (formerly EDITEK, Inc.) as of and for the year ended December 31, 2000 included in this Annual Report on Form 10-K for the year ended December 31, 2000. /s/ Deloitte & Touche LLP Minneapolis, Minnesota March 28, 2001 -----END PRIVACY-ENHANCED MESSAGE-----