-----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, SWaLYj5oOjedKCiQryTlNsSNIpCAk8o6UpKDSggwhYNiD4ks4oryMljtT8PfeHtO vdG58wfhFI1ZhB81Xy5trQ== 0000739944-01-500018.txt : 20020410 0000739944-01-500018.hdr.sgml : 20020410 ACCESSION NUMBER: 0000739944-01-500018 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MEDTOX SCIENTIFIC INC CENTRAL INDEX KEY: 0000739944 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MEDICAL LABORATORIES [8071] IRS NUMBER: 953863205 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-11394 FILM NUMBER: 1787013 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-Q 1 form10q3rdqtr2001.txt FORM 10-Q FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2001 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period to ---------------- ------------------------- 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 incorporated 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 - ------------------------------------------------------------------------------- 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 The number of shares of Common Stock, $.15 par value, outstanding as of November 9, 2001, was 4,254,543. MEDTOX SCIENTIFIC, INC. INDEX Page Part I Financial Information: Item 1: Financial Statements (Unaudited) Consolidated Statements of Operations - Three and Nine Months Ended September 30, 2001 and 2000 ..... 3 Consolidated Balance Sheets - September 30, 2001 and December 31, 2000 .................................... 4 Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2001 and 2000 .......... 5 Notes to Consolidated Financial Statements............ 6 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations ........ 12 Item 3: Quantitative and Qualitative Disclosure About Market Risk ........................................21 Part II Other Information .............................................. 22 Signatures ........................................... 23 Item 1: FINANCIAL STATEMENTS (UNAUDITED) MEDTOX SCIENTIFIC, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands except per share amounts) (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, 2001 2000 2001 2000 -------------- --------------- ----------- ----------- REVENUES: Laboratory services $ 9,446 $ 9,206 $ 28,741 $ 26,951 Product sales 3,135 2,367 8,007 5,614 --------------- --------------- ----------- ----------- 12,581 11,573 36,748 32,565 COST OF REVENUES: Cost of services 6,711 6,164 19,681 17,798 Cost of sales 876 687 2,879 2,059 ------------- --------------- ----------- ------------ 7,587 6,851 22,560 19,857 ------------- --------------- ----------- ------------ GROSS PROFIT 4,994 4,722 14,188 12,708 OPERATING EXPENSES: Selling, general and administrative 3,587 3,735 10,178 9,882 Research and development 323 265 956 820 -------------- -------------- ----------- ------------ 3,910 4,000 11,134 10,702 -------------- -------------- ----------- ------------ INCOME FROM OPERATIONS 1,084 722 3,054 2,006 OTHER INCOME (EXPENSE): Interest expense, net (263) (245) (791) (751) Other expense, net (31) - (75) - -------------- -------------- ------------ ----------- (294) (245) (866) (751) -------------- -------------- ------------ ----------- NET INCOME 790 477 2,188 1,255 ============== ============== ============ =========== BASIC EARNINGS PER COMMON SHARE (1) $ 0.20 $ 0.13 $ 0.56 $ 0.38 ============== ============== ============ =========== DILUTED EARNINGS PER COMMON SHARE (1) $ 0.18 $ 0.12 $ 0.53 $ 0.36 ============== ============= ============ ===========
(1) Earnings per share amounts have been adjusted for the ten percent stock dividend authorized by the Company's Board of Directors on September 26, 2001, payable on November 9, 2001. MEDTOX SCIENTIFIC, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share data) (Unaudited)
September 30, December 31, 2001 2000 ---------------- ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents $ - $ 213 Accounts receivable: Trade, less allowance for doubtful accounts ($929 in 2001 and $1,131 in 2000) 10,256 7,873 Other 196 264 ------------- ------------ Total accounts receivable 10,452 8,137 Inventories 3,431 3,052 Prepaid expenses and other 980 830 ------------- ------------ Total current assets 14,863 12,232 EQUIPMENT AND IMPROVEMENTS, Net 11,931 5,211 GOODWILL, net of accumulated amortization of $4,928 in 2001 and $4,438 in 2000 11,674 12,291 OTHER ASSETS, net of accumulated amortization of $27 in 2001 and $7 in 2000 707 290 ------------- ------------ TOTAL ASSETS $ 39,175 $ 30,024 ============= ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Checks written in excess of bank balances $ 57 $ - Line of credit 3,165 3,724 Accounts payable 2,311 2,819 Accrued expenses 3,693 3,213 Accrued restructuring costs - 160 Current portion of long-term debt 2,241 1,579 Current portion of capital leases 191 221 ------------ ------------- Total current liabilities 11,658 11,716 LONG-TERM DEBT 8,256 2,480 LONG-TERM PORTION OF CAPITAL LEASES 351 418 STOCKHOLDERS' EQUITY: Preferred stock, $1.00 par value; authorized shares, 50,000; none issued and outstanding - - Common stock, $0.15 par value; authorized shares, 14,400,000 in 2001 and 7,400,000 in 2000; issued and outstanding shares, 3,955,238 in 2001 and 3,858,966 in 2000 539 526 Additional paid-in capital 66,771 65,422 Deferred stock-based compensation (522) (472) Accumulated deficit (47,702) (49,890) Treasury stock (176) (176) ------------- -------------- Total stockholders' equity 18,910 15,410 ------------- -------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 39,175 $ 30,024 ============= ==============
MEDTOX SCIENTIFIC, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
Nine Months Ended September 30, 2001 2000 ------------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 2,188 $ 1,255 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 1,800 1,729 Provision for losses on accounts receivable 229 93 Gain on sale of equipment (35) Deferred compensation 139 33 Changes in operating assets and liabilities: Accounts receivable (2,544) (3,125) Inventories (379) (1,287) Prepaid expenses and other current assets (150) 224 Other assets (187) (52) Accounts payable and accrued expenses (26) (1,383) Accrued restructuring costs (160) (309) ------------- -------------- Net cash provided by (used in) operating activities 910 (2,857) CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (7,795) (3,100) Proceeds from sale of equipment 35 Payment for acquisition of business (75) ------------- --------------- Net cash used in investing activities (7,795) (3,140) CASH FLOWS FROM FINANCING ACTIVITIES: Increase in checks written in excess of bank balances 57 368 Net proceeds from sale of common stock 294 4,949 Net proceeds from legal settlement 628 Net payments on revolving credit facility (559) (1,068) Proceeds from long-term debt 7,400 3,653 Principal payments on long-term debt (976) (2,288) Principal payments on capital leases (172) (193) ------------ ---------------- Net cash provided by financing activities 6,672 5,421 ------------- ---------------- DECREASE IN CASH AND CASH EQUIVALENTS (213) (576) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 213 576 ------------- ---------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ - $ - ============= ================ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Non cash activities: Additions to capital leases $ 75 $ 301 Acquisitions: Fair value of assets acquired 252 Cash paid (75) Common stock issued (177) ---------------- $ - ================ Cash paid for: Interest 824 694
MEDTOX SCIENTIFIC, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) September 30, 2001 NOTE A - BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements of MEDTOX Scientific, Inc. (the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of financial condition and results of operations have been included. Operating results for the nine-month period ended September 30, 2001 are not necessarily indicative of the results that may be attained for the entire year. These consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2000. Reclassifications: Certain reclassifications have been made to the 2000 financial statements to conform with the 2001 presentations. New Accounting Standard: In July 2001, the Financial Accounting Standards Board issued Statement on Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets." This statement applies to intangibles and goodwill acquired after June 30, 2001, as well as goodwill and intangibles previously acquired. Under this statement, goodwill as well as other intangibles determined to have an infinite life will no longer be amortized; however, these assets will be reviewed for impairment on a periodic basis. SFAS No. 142 also includes provisions for the reclassification of certain existing recognized intangibles as goodwill, reclassification of certain intangibles out of previously reported goodwill and the identification of reporting units for purposes of assessing potential future impairments of goodwill. SFAS No. 142 is effective for the Company on January 1, 2002. The Company is currently assessing but has not yet determined the impact of SFAS No. 142 on its financial position and results of operations. As of September 30, 2001 the Company had net goodwill and other intangible assets of approximately $11.7 million and $0.5 million, respectively. Amortization expense recorded during the three and nine months ended September 30, 2001 and September 30, 2000 was approximately $0.2 million, $0.7 million, $0.2 million, and $0.7 million, respectively. NOTE B - DEBT In January 1998, the Company entered into a Credit Security Agreement (the Wells Fargo Credit Agreement) with Wells Fargo Business Credit, Inc. The Wells Fargo Credit Agreement, as amended, consists of (i) a term loan of $3.185 million bearing interest at prime + 1.25%; (ii) a revolving line of credit, payable on demand, of not more than $6.0 million or 85% of the Company's eligible trade accounts receivable bearing interest at prime + 1%; and (iii) a capex note of up to $3.5 million for the purchase of capital equipment bearing interest at prime + 1.25% and (iv) availability of letters of credit in amounts not to exceed the lesser of $300,000 (less outstanding letters of credit) or the unborrowed portion of the revolving line of credit (less outstanding letters of credit). NOTE C - SEGMENTS The Company has two reportable segments: Lab Services and Product Sales. The Lab Services segment consists of MEDTOX Laboratories, Inc. Services provided include forensic toxicology, clinical toxicology, heavy metals analyses, courier delivery, and medical surveillance. The Product Sales segment consists of MEDTOX Diagnostics, Inc. Products manufactured include easy to use, inexpensive, on-site drug tests such as PROFILE(R)-II, EZ-SCREEN(R), and VERDICT(R)-II. The Company's reportable segments are strategic business units that offer different products and services. They are managed separately as each business requires different products, services and marketing strategies. In evaluating financial performance, management focuses on net income as a segment's measure of profit or loss. Segment Information (In thousands)
Three Months Ended Nine Months Ended September 30, September 30, 2001 2000 2001 2000 ------------- ---------- ----------- ---------- Laboratory Services: Revenues $ 9,446 $ 9,206 $ 28,741 $ 26,951 Interest expense, net 252 226 755 694 Depreciation and amortization 558 566 1,703 1,671 Segment income (loss) 288 (56) 1,135 648 Segment assets 34,660 27,937 34,660 27,937 Expenditures for segment assets 118 1,045 7,541 2,780 Product Sales: Revenues 3,135 2,367 8,007 5,614 Interest expense, net 11 19 36 57 Depreciation and amortization 35 22 97 58 Segment income 502 533 1,053 607 Segment assets 4,515 3,830 4,515 3,830 Expenditures for segment assets 93 13 254 320 Total: Revenues 12,581 11,573 36,748 32,565 Interest expense, net 263 245 791 751 Depreciation and amortization 593 588 1,800 1,729 Segment income 790 477 2,188 1,255 Segment assets 39,175 31,767 39,175 31,767 Expenditures for segment assets 211 1,058 7,795 3,100
NOTE D - INVENTORIES Inventories consisted of the following: (In thousands) September 30, December 31, 2001 2000 -------------- -------------- Raw materials $ 1,112 $ 910 Work in process 507 322 Finished goods 349 373 Supplies 1,463 1,447 --------------- -------------- $ 3,431 $ 3,052 =============== ============== NOTE E - PURCHASE OF BUILDING 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. 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 of the property to the Company. The purchase price, exclusive of expenses and closing costs, was $6.35 million and was financed by a mortgage loan from Principal Life Insurance Company of Des Moines, Iowa in the amount of $6.2 million. The mortgage loan has a term of ten years and is being repaid based on a 20-year amortization schedule with a balloon payment at the end of the ten year term. The interest rate is fixed at an annual rate of 7.23% for the first five years at which time the rate will be renegotiated by the parties. The facility includes other commercial tenants who have individual leases that range from 4 years to less then 1 year in duration. The current annual rent paid by such third party tenants, excluding their pro-rata share of operating expenses, is approximately $431,000 per year. The following components of the Company's rental activities were reported net in other income (expense) in the Consolidated Statement of Operations: (In thousands) Three Months Ended Nine Months Ended September 30, 2001 September 30, 2001 ------------------- ------------------ Gross rental income $ 407 $ 877 Operating and administrative expenses (270) (566) ------------ ----------- Net rental income before intercompany elimination 137 311 Elimination of intercompany rental income (166) (388) ------------ ------------ Net rental loss $ (29) $ (77) ============ ============ NOTE F - EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per common share: (Dollars in thousands, except per share amounts)
Three Months Ended Nine Months Ended September 30, September 30, 2001 2000 2001 2000 ----------- ------------- ------------ ------------ Net income (A) $ 790 $ 477 $ 2,188 $ 1,255 ============= ============= ============ ============ Weighted average number of basic common shares outstanding (B) 3,937,868 3,560,894 3,899,810 3,321,873 Dilutive effect of stock options and warrants computed based on the treasury stock method using average market price 351,800 256,801 231,169 211,499 ------------- ------------- ------------ ------------ Weighted average number of diluted common shares outstanding (C) 4,289,668 3,817,695 4,130,979 3,533,372 ============= ============= ============ ============ Basic earnings per common share (A/B) $ 0.20 $ 0.13 $ 0.56 $ 0.38 ============= ============= ============ ============ Diluted earnings per common share (A/C) $ 0.18 $ 0.12 $ 0.53 $ 0.36 ============= ============= ============ ============
Options and warrants to purchase 14,795, 766,739, 679,754, and 679,754 shares of common stock were outstanding during the three and nine months ended September 30, 2001 and 2000, respectively, but were not included in the computation of diluted earnings per share as their exercise prices were greater than the average market price of the common shares. Share and per share amounts for all periods presented above have been adjusted for the ten percent stock dividend authorized by the Company's Board of Directors on September 26, 2001, payable on November 9, 2001. NOTE G - CONTINGENCIES In March 2000, the Company was served with a copy of a complaint filed against the Company in the Circuit Court of Cook County, Illinois, by the Plaintiff, The Methodist Medical Center of Illinois. The Plaintiff alleged that the Company interfered with various contractual relationships of the Plaintiff in connection with the referral of certain customers to the Company by other defendants previously sued by the Plaintiff in the same action. The Company had filed a cross claim against the other defendants in the litigation based on such defendants' contractual obligation to indemnify the Company against any damages, costs or expenses (including attorney fees) incurred by the Company, arising out of any claim of contractual interference by the Company in connection with the referral of the customers to the Company by such defendants. The parties have reached an agreement to settle the case, whereby the Company paid $75,000 with a full release of all claims and a dismissal order entered in October 2001. The Company will voluntarily dismiss its indemnity claims against the co-defendants for reimbursement of the $75,000 paid, with the right of refiling the indemnification claim existing for one year. The Company will continue to pursue its right of indemnification for the $75,000 during the next year. In January 1997, the Company filed suit in Federal District Court in Minnesota against Morgan Capital LLC, David Bistricer and Alex Bistricer alleging violation of Section 16(b) of the Securities and Exchange Act of 1934 and seeking recovery of more than $500,000 in short-swing profits. Messrs. David and Alex Bistricer are former directors of the Company. On August 4, 1997, the U.S. District Court dismissed the Company's complaint and on October 29, 1997, the Company filed an appeal of that decision to the United States Court of Appeals for the Eighth Circuit. On July 21, 1998, the Eighth Circuit reversed the District Court dismissal and remanded the case to the District Court. On June 3, 1999 the U.S. District Court found that Morgan Capital had violated Section 16(b) and ordered Morgan Capital to pay the Company damages of $551,000 plus interest. On or about September 30, 2000 the parties entered into a Stipulation and Mutual Release dismissing with prejudice all claims and counterclaims between the parties regarding the transaction other then the Company's Section 16(b) claim against the former stockholder, Morgan Capital. The parties entered into this Stipulation along with an Escrow Agreement requiring Morgan Capital to deposit into escrow 79,750 shares of publicly registered common stock of the Company as collateral to secure payment by Morgan Capital of the judgment to be entered in favor of the Company in the amount of $675,000 plus any post-judgment interest. The Federal District Court entered such judgment in favor of the Company on October 17, 2000. Morgan Capital subsequently appealed the Federal District Court's decision to the Eighth Circuit Court of Appeals. On August 3, 2001 the Eighth Circuit Court of Appeals ruled in favor of the Company, affirming the District Court decision awarding the Company $675,000 plus post judgment interest. Pursuant to the Escrow Agreement, Morgan Capital paid the Company $715,000 in cash to satisfy the judgment. On November 1, 2001, Morgan Capital filed a petition for a writ of certiorari to the United States Supreme Court, seeking review of the judgment against it. The Company is unable to predict whether the Supreme Court will grant such review. On October 26, 2000, Harry McCoy was replaced as Chairman and President of the Company but continued to receive payments as an employee under an employment agreement with the Company. In May 2001, Mr. McCoy commenced employment at Hamilton Thorne Biosciences, Inc. as its President. The Company and Mr. McCoy disputed the effect of the termination of his employment with the Company. In September 2001, the Company entered into an agreement with Mr. McCoy resolving these issues. The parties agreed to a mutual release of claims. McCoy resigned his position on the Board of Directors and agreed to serve as an ongoing consultant to the Company. In exchange, the Company agreed to provide McCoy with a lump sum payment of $250,000, and an additional amount of $250,000 in restricted common stock. In exchange for McCoy's ongoing consulting relationship, he will receive $35,000 annually over the next five years. The Company also advanced McCoy $102,500 in cash, subject to a five-year promissory note, representing the amount necessary for McCoy to exercise his previously held options to 44,000 shares of the Company's common stock. NOTE H - SUBSEQUENT EVENTS On September 26, 2001, the Company's Board of Directors authorized a ten percent stock dividend on the Company's common stock, which will be paid on November 9, 2001 to stockholders of record on October 26, 2001. In October and November 2001, the Company received approximately $1.05 million from private placement of subordinated debt. The notes require payment of the principal amounts on September 30, 2004. Interest at 10% per annum is paid semi-annually on June 30 and December 31. In connection with the issuance of the subordinated notes, the Company issued warrants to purchase a number of shares of common stock equal to 50% of the face amount of the subordinated notes divided by an exercise price of $9.675 per share. On October 24, 2001, the Company completed the acquisition of Leadtech Corporation, (Leadtech), a private company operating as an independent clinical laboratory devoted primarily to the examination of blood lead concentrations in pediatric patients. For the year ended December 31, 2000, Leadtech had unaudited net revenue of approximately $1.8 million and unaudited earnings before interest, taxes, depreciation and amortization, adjusted for certain shareholder distributions, of $1.0 million. Operations at the Leadtech facility in New Jersey will cease within 90 days from the acquisition date, and all testing will be performed in the MEDTOX laboratory facility in St. Paul, Minnesota. The purchase price of $6.2 million consisted of $2.5 million in cash, the issuance of $2.5 million of the Company's common stock and $1.2 million of seller financing payable over 24 months. The initial cash payment of $2.5 million was funded primarily from proceeds received from private placement of subordinated debt in October 2001, net proceeds from the legal settlement with Morgan Capital LLC, and operating cash flows. Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Cautionary Statement Identifying Important Factors That Could Cause the Company's Actual Results to Differ From Those Projected in Forward Looking Statements In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, readers of this document and any document incorporated by reference herein, are advised that this document and documents incorporated by reference into this document contain both statements of historical facts and forward looking statements. Forward looking statements are subject to certain risks and uncertainties, which could cause actual results to differ materially from those indicated by the forward looking statements. Examples of forward looking statements include, but are not limited to (i) projections of revenues, income or loss, earnings or loss per share, capital expenditures, dividends, capital structure and other financial items, (ii) statements of the plans and objectives of the Company or its management or Board of Directors, including the introduction of new products, or estimates or predictions of actions by customers, suppliers, competitors or regulatory authorities, (iii) statements of future economic performance, and (iv) statements of assumptions underlying other statements and statements about the Company or its business. This document and any documents incorporated by reference herein also identify important factors which could cause actual results to differ materially from those indicated by the forward looking statements. The factors that could affect our actual results include the following: o increased competition, including price competition o general economic and business conditions, both nationally and internationally o changes in business strategy or development plans o technological, evolving industry standards, or other problems that could delay the sale of our products o our inability to obtain appropriate licenses from third parties, protect our trade secrets, operate without infringing upon the proprietary rights of others, or prevent others from infringing on our proprietary rights o our inability to obtain sufficient financing to continue to expand o perations o changes in demand for products and services by our customers o our failure to obtain and retain new customers and alliance partners, or a reduction in tests ordered or specimens submitted by existing customers o adverse results in litigation matters o our inability to attract and retain experienced and qualified personnel o failure to maintain our days sales outstanding levels o losses due to bad debt The cautionary statements made pursuant to the Private Litigation Securities Reform Act of 1995 above and elsewhere by the Company should not be construed as exhaustive or as any admission regarding the adequacy of disclosures made by the Company prior to the effective date of such Act. Forward looking statements are beyond the ability of the Company to control and in many cases the Company cannot predict what factors would cause results to differ materially from those indicated by the forward looking statements. General MEDTOX Scientific, Inc. (formerly EDITEK, Inc.), a Delaware corporation, was organized in September 1986 to succeed the operations of a predecessor California corporation. MEDTOX Scientific, Inc. and its wholly-owned subsidiaries, MEDTOX Laboratories, Inc., MEDTOX Diagnostics, Inc., and New Brighton Business Center LLC are referred to herein as "the Company". The Company is engaged primarily in two distinct, but very much related businesses. The business of manufacturing and distribution of diagnostic devices is carried on by MEDTOX Diagnostics, Inc. from its facility in Burlington, North Carolina and the business of forensic and clinical laboratory services is conducted by MEDTOX Laboratories, Inc. at its facility in St. Paul, Minnesota. The Company has two reportable segments: "Laboratory Services" conducted by the Company's wholly owned subsidiary, MEDTOX Laboratories, Inc. and "Products Sales" conducted by the Company's wholly owned subsidiary MEDTOX Diagnostics, Inc. Laboratory Services include forensic toxicology, clinical toxicology, 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 three and nine months ended September 30, 2001, Laboratory Services revenue accounted for 75% and 78%, respectively, of the Company's revenues, compared with 80% and 83% for the same periods in 2000. Revenue from Product Sales accounted for 25% and 22% of the total revenues of the Company for the three and nine months ended September 30, 2001, respectively, compared with 20% and 17% for the same periods in 2000. Results of Operations The Company achieved record revenues and net income for the three and nine-month periods ended September 30, 2001. Revenues for the third quarter of 2001 increased 9% over the third quarter of 2000, driven by sales of the PROFILE(R)-II Test System and the expanding VERDICT(R)-II product line. Selling, general, and administrative expenses in the third quarter of 2001 decreased as a percentage of sales to 28.5% from 32.3% in the same quarter in 2000, reflecting continued efforts taken to reduce operating costs. The following table sets forth the percentages of total revenues represented by certain items reflected in the Company's Consolidated Statements of Operations:
Three Months Ended Nine Months Ended September 30, September 30, 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------------------- Revenues 100.0% 100.0% 100.0% 100.0% Cost of revenues 60.3 59.2 61.4 61.0 Operating expenses: Selling, general, and administrative 28.5 32.3 27.7 30.3 Research and development 2.6 2.3 2.6 2.5 ---------- ----------- ---------- ---------- 31.1 34.6 30.3 32.8 Other expense 2.3 2.1 2.3 2.3 ---------- ----------- ---------- ---------- Net income 6.3% 4.1% 6.0% 3.9% ========== =========== ========== ==========
Three Months Ended September 30, 2001 Compared to Three Months Ended September 30, 2000 Revenues Revenues increased 9% to $12.6 million for the three months ended September 30, 2001, driven by a $0.8 million, or 32% increase in Product Sales revenues and a $0.2 million, or 3% increase in Laboratory Services revenues. The Product Sales segment achieved higher revenues due to increased sales of substance abuse testing products, partially offset by a slight reduction in sales of contract manufacturing services and 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 $0.8 million to $2.8 million in the third quarter of 2001. 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 18 different configurations to detect from one to five drugs of abuse. In September 2001, the Company entered into new agreements with four additional states for the sale of its VERDICT(R)-II devices, with shipping of the product beginning in October 2001. The Company continues to develop new products for the detection of abused substances, including the PROFILE(R)-ER device. 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 currently sells the PROFILE(R)-ER device through its direct sales force and has signed an agreement with a leading supplier of medical, surgical and laboratory supplies to distribute the PROFILE(R)-ER product line into the hospital market. The Company is also in discussions with other major buying groups and distributors that have expressed interest in the PROFILE(R)-ER device. In addition to the recent development of the PROFILE(R)-ER device, the Company currently anticipates the introduction of a significant enhancement to the existing PROFILE(R)-II device in the fourth quarter of 2001. Product sales from agricultural diagnostic products decreased 59% to $34,000 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. Sales of contract manufacturing services, microbiological and associated products decreased 5% to $324,000 due to decreased revenues from both historical customers and new customers. The slight growth in Laboratory Services revenues was primarily due to a 2% increase in the number of laboratory tests performed. Sample volume from the Company's occupational health, wellness and esoteric testing clients increased 34% compared to the third quarter of 2000. The Company's research and development group continues to improve and add to the over 900 proprietary bio-analytical assays that have been developed. In the past, these tests have largely been marketed to hospitals, clinics and other laboratories. However, more recently, the Company has increased its efforts to apply the assay development skills to the bio-analytical needs of the pharmaceutical market. Despite the overall favorable sales trend within the Laboratory operations, the slowing economy and the impact of the tragic events occurring on September 11, 2001 caused testing volume from existing occupational health and corporate clients to be below expectations. However, this impact has been largely mitigated by the Company's continued success in acquiring new client relationships. The Company believes that the current lower testing volume from existing clients will continue to be offset by successful sales efforts to new clients. Gross profit Consolidated gross margin was 39.7% for the three months ended September 30, 2001 compared to 40.8% for the same period in 2000, reflecting a decline in Laboratory Services gross margin, partially offset by a slight improvement in Product Sales gross margin. Laboratory Services gross margin was 29.0% for the three months ended September 30, 2001, down from 33.0% for the three months ended September 30, 2000. The decline in the gross margin was primarily attributable to higher specimen collection costs and increased employee health insurance costs. Gross margin from Product Sales of 72.0% for the three months ended September 30, 2001 was up slightly from gross margin of 71.0% for the same period of 2000. Selling, general and administrative expenses Selling, general and administrative expenses were $3.6 million, or 28.5% of revenues for the three months ended September 30, 2001, compared to $3.7 million or 32.3% of revenues in the same period of 2000. The decrease in the percentage of revenues and in absolute dollars primarily reflects the continued efforts taken to reduce overall operating costs. Selling, general and administrative expenses were also positively impacted by the settlement in September 2001 of the dispute with Mr. McCoy regarding the effect of the termination of his employment with the Company. At the time of settlement, the Company had an accrual of approximately $450,000 for future payments of compensation pursuant to Mr. McCoy's employment contract. As a result of the agreement between the Company and Mr. McCoy (as discussed in Note G of Notes to Consolidated Financial Statements), the Company agreed to provide Mr. McCoy with a lump sum payment of $250,000. The remaining accrual of approximately $200,000 was reversed. Other expense Other expense consisted primarily of interest expense, which remained relatively stable. Other expense in the three months ended September 30, 2001 also included a loss of $29,000 from the Company's rental activities. Net income In the three months ended September 30, 2001, the Company recorded net income of $0.8 million compared to $0.5 million in the same period of 2000. This improvement was driven by a 9% increase in consolidated revenues and a reduction in selling, general, and administrative expenses. Laboratory Services net income was $0.3 million for the three months ended September 30, 2001 compared to a loss of $56,000 during the same period of 2000. This improvement was primarily driven by the reduction in selling, general, and administrative expenses, reflecting efforts taken to reduce operating costs as well as the $200,000 accrual reversal related to the settlement with Mr. McCoy. Product Sales net income of $0.5 million for the three months ended September 30, 2001 remained consistent with net income in the same period of 2000. Nine Months Ended September 30, 2001 Compared to Nine Months Ended September 30, 2000 Revenues Revenues increased 13% to $36.7 million for the nine months ended September 30, 2001, driven by a $2.4 million, or 43% increase in Product Sales revenues and a $1.8 million, or 7% increase in Laboratory Services revenues. The Product Sales segment achieved higher revenues due to increased sales of substance abuse testing products, partially offset by a slight reduction in sales of contract manufacturing services and 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 $2.7 million to $6.9 million in the first nine months of 2001. 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 18 different configurations to detect from one to five drugs of abuse. In September 2001, the Company entered into new agreements with four additional states for the sale of its VERDICT(R)-II devices, with shipping of the product beginning in October 2001. The Company continues to develop new products for the detection of abused substances, including the PROFILE(R)-ER device. 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 currently sells the PROFILE(R)-ER device through its direct sales force and has signed an agreement with a leading supplier of medical, surgical and laboratory supplies to distribute the PROFILE(R)-ER product line into the hospital market. The Company is also in discussions with other major buying groups and distributors that have expressed interest in the PROFILE(R)-ER device. In addition to the recent development of the PROFILE(R)-ER device, the Company currently anticipates the introduction of a significant enhancement to the existing PROFILE(R)-II device in the fourth quarter of 2001. Product sales from agricultural diagnostic products decreased 27% to $0.3 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. Sales of contract manufacturing services, microbiological and associated products decreased 16% to $0.8 million due to decreased revenues from both historical customers and new customers. The slight growth in Laboratory Services revenues was primarily due to a 10% increase in the number of laboratory tests performed. Sample volume from the Company's occupational health, wellness and esoteric testing clients increased 38% compared to the first nine months of 2000. The Company's research and development group continues to improve and add to the over 900 proprietary bio-analytical assays that have been developed. In the past, these tests have largely been marketed to hospitals, clinics and other laboratories. However, more recently, the Company has increased its efforts to apply the assay development skills to the bio-analytical needs of the pharmaceutical market. Despite the overall favorable sales trend within the Laboratory operations, the slowing economy and the impact of the tragic events occurring on September 11, 2001 caused testing volume from existing occupational health and corporate clients to be below expectations. However, this impact has been largely mitigated by the Company's continued success in acquiring new client relationships. The Company believes that the current lower testing volume from existing clients will continue to be offset by successful sales efforts to new clients. Gross profit Consolidated gross margin was 38.6% for the nine months ended September 30, 2001 compared to 39.0% for the same period in 2000, reflecting a decline in Laboratory Services gross margin, partially offset by a slight improvement in Product Sales gross margin. Laboratory Services gross margin was 31.5% for the nine months ended September 30, 2001, down from 34.0% for the same period in 2000. The decline in the gross margin was primarily attributable to higher specimen collection costs and increased employee health insurance costs. Gross margin from Product Sales of 64.0% for the nine months ended September 30, 2001 was up slightly from gross margin of 63.3% for the same period of 2000. Selling, general and administrative expenses Selling, general and administrative expenses were $10.2 million, or 27.7% of revenues for the first nine months of 2001, compared to $9.9 million or 30.3% of revenues in the same period of 2000. The decrease in the percentage of revenues primarily reflects efforts taken to reorganize the laboratory operations and reduce overall operating costs. Selling, general and administrative expenses were also positively impacted by the settlement in September 2001 of the dispute with Mr. McCoy regarding the effect of the termination of his employment with the Company. At the time of settlement, the Company had an accrual of approximately $450,000 for future payments of compensation pursuant to Mr. McCoy's employment contract. As a result of the agreement between the Company and Mr. McCoy (as discussed in Note G of Notes to Consolidated Financial Statements), the Company agreed to provide Mr. McCoy with a lump sum payment of $250,000. The remaining accrual of approximately $200,000 was reversed. The increase in the absolute dollar amount of selling, general and administrative expenses was attributable to the higher revenue level in the first nine months of 2001. Other expense Other expense consisted primarily of interest expense, which remained relatively stable. Other expense in the nine months ended September 30, 2001 also included a loss of $77,000 from the Company's rental activities. Net income In the nine months ended September 30, 2001, the Company recorded net income of $2.2 million compared to $1.3 million in the same period of 2000. This improvement was driven by a 13% increase in consolidated revenues and a reduction in selling, general, and administrative expenses as a percentage of revenues. Laboratory Services net income was $1.1 million for the nine months ended September 30, 2001 compared to $0.6 million during the same period of 2000. This improvement was primarily driven by the reduction in selling, general, and administrative expenses, reflecting efforts taken to reduce operating costs as well as the $200,000 accrual reversal related to the settlement with Mr. McCoy. Product Sales net income of $1.1 million in the first nine months of 2001 compared to $0.6 million in the same period of 2000. This improvement was primarily attributable to the growth in sales and an improved gross margin. 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. Net cash provided by operating activities was $0.9 million for the nine months ended September 30, 2001 compared to net cash used in operating activities of $2.9 million in the same period of 2000. The increase in cash used of $3.8 million was primarily due to an improvement in net income of $0.9 million and a reduction in inventory and accounts receivable trends. Inventory levels increased $0.4 million from December 31, 2000 to September 30, 2001 compared to an increase of $1.3 million from December 31, 1999 to September 30, 2000. The increase in inventory levels in the prior year period was attributable to an increase in forecasted sales for the fourth quarter of 2000. Accounts receivable increased $2.5 million from December 31, 2000 to September 30, 2001 compared to an increase of $3.1 million from December 31, 1999 to September 30, 2000, reflecting increased collection efforts in the current year in response to the slowing economy. The change in cash provided by operations was also affected by a reduction in accounts payable in the prior year period. Net cash used in investing activities, consisting of capital expenditures, was $7.8 million for the nine months ended September 30, 2001, up from $3.1 million in the same period of 2000. In March of 2001, the Company purchased the three building, 129,039 square foot complex in St. Paul, Minnesota, where the Company's laboratory segment formerly leased 53,576 square feet. The purchase price, exclusive of expenses and closing costs, was $6.35 million and was financed by a mortgage loan from Principal Life Insurance Company of Des Moines, Iowa in the amount of $6.2 million. The mortgage loan has a term of ten years and is being repaid based on a 20-year amortization schedule with a balloon payment at the end of the ten-year term. The interest rate is fixed at an annual rate of 7.23% for the first five years at which time the rate will be renegotiated by the parties. The facility includes other commercial tenants who have individual leases that range from 4 years to less then 1 year in duration. The current annual rent paid by such third party tenants, excluding their pro-rata share of operating expenses, is approximately $431,000 per year. See Note E of Notes to Consolidated Financial Statements. Net cash provided by financing activities of $6.7 million in the first nine months of 2001 was principally associated with proceeds received under the mortgage loan discussed above and the Company's credit agreement for the purchase of capital equipment. In addition, in September 2001, the Company received net proceeds of $0.6 million as settlement in the Company's lawsuit against Morgan Capital LLC under Section 16(b) of the Securities Exchange Act of 1934. Net cash provided by financing activities of $5.4 million in the first nine months of 2000 primarily represented net proceeds of approximately $4.9 million from the Company's private equity placement during the third quarter of 2000. In January 1998, the Company entered into a Credit Security Agreement (the Wells Fargo Credit Agreement) with Wells Fargo Business Credit, Inc. The Wells Fargo Credit Agreement, as amended, consists of (i) a term loan of $3.185 million bearing interest at prime + 1.25%; (ii) a revolving line of credit, payable on demand, of not more than $6.0 million or 85% of the Company's eligible trade accounts receivable bearing interest at prime + 1%; and (iii) a capex note of up to $3.5 million for the purchase of capital equipment bearing interest at prime + 1.25% and (iv) availability of letters of credit in amounts not to exceed the lesser of $300,000 (less outstanding letters of credit) or the unborrowed portion of the revolving line of credit (less outstanding letters of credit). The Company is relying on expected positive cash flow from operations, the revolving line of credit, and the capex note to fund its future working capital and asset purchases. The amount of credit on the revolving line of credit is based primarily on the receivables of the Company and, as such, varies with the accounts receivable, and to a lesser degree, the inventory of the Company. As of September 30, 2001, the Company had total borrowing capacity of $6.0 million on its line of credit, of which $3.2 million was borrowed, leaving a net availability of $2.8 million as of September 30, 2001. In addition to the Company's present financing sources, in October and November 2001, the Company received approximately $1.05 million from private placement of subordinated debt. The notes require payment of the principal amounts on September 30, 2004. Interest at 10% per annum is paid semi-annually on June 30 and December 31. In connection with the issuance of the subordinated notes, the Company issued warrants to purchase a number of shares of common stock equal to 50% of the face amount of the subordinated notes divided by an exercise price of $9.675 per share. 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 3 QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK. Market risk is the risk that the Company will incur losses due to adverse changes in interest rates or currency exchange rates and prices. The Company's primary market risk exposures are to changes in interest rates. During 2000 and through September 30, 2001, 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 September 30, 2001 and December 31, 2000, at a fixed interest rate of 12% per annum. The Company also had capital leases at various fixed rates. In addition, at September 30, 2001, the Company had a $6.1 million mortgage loan payable to Principal Life Insurance Company at a fixed annual rate of 7.23% for the first five years at which time the rate will be renegotiated by the parties. These financial instruments are subject to interest rate risk and will increase or decrease in value if market interest rates change. The Company had approximately $6.6 million and $7.0 million outstanding on its line of credit and long-term debt issued under the Wells Fargo Credit Agreement as of September 30, 2001 and December 31, 2000, respectively. The debt under the Wells Fargo Credit Agreement is held at variable interest rates. The Company has cash flow exposure on its committed and uncommitted line of credit and long-term debt due to its variable prime rate pricing. At September 30, 2001 and December 31, 2000, a 1% change in the prime rate would not materially increase or decrease interest expense or cash flows. PART II OTHER INFORMATION ITEM 1 LEGAL PROCEEDINGS. See Part I, Note G ITEM 2 CHANGES IN SECURITIES. Inapplicable ITEM 3 DEFAULTS ON SENIOR SECURITIES. Inapplicable ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS. The Annual Meeting of the stockholders of the Company was held on September 26, 2001. The following items were approved by a vote of the stockholders. 1. The following individuals were elected to serve on the Board of Directors of the Company for three year terms or until their successors are duly elected and qualified: James W. Hansen and Brian P. Johnson. 2. By a vote of 2,942,987 in favor and 290,214 against, the stockholders of the Company approved the amendment to Article FOURTH of the Company's Certificate of Incorporation to increase its number of authorized shares of Common Stock from 7,400,000 to 14,400,000 shares. 57,097 shares were abstained or did not vote. During the quarter ended September 30, 2001, no other matters were submitted to a vote of securities holders. ITEM 5 OTHER INFORMATION. Inapplicable ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K. a. Exhibits: 4.4 Form of 10% Subordinated Notes issued by the Registrant in October and November 2001 to raise an aggregate amount of $1.5 million in subordinate debt, all with a maturity of September 30, 2001. 4.5 Form of Warrant accompanying the 10% Subordinated Notes issued in October and November 2001. b. Reports on Form 8-K: On August 14, 2001, the Company announced that on August 3, 2001, the United States Court of Appeals for the Eighth Circuit ruled in favor of MEDTOX in the Company's lawsuit against Morgan Capital LLC under Section 16 (b) of the Securities Exchange Act of 1934. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Signature Title Date /s/ Richard J. Braun President, Chief Executive Officer, November 14, 2001 - --------------------- Chairman of the Board of Directors Richard J. Braun (Principal Executive Officer) /s/ Kari L. Golembeck Controller (Principal Accounting November 14, 2001 - --------------------- Officer) Kari L. Golembeck EX-4 3 exh44form10q3rdqtr.txt EXHIBIT 4.4 Exhibit 4.4 [FORM OF FACE OF NOTE] No. $_______ MEDTOX SCIENTIFIC, INC. 10% SUBORDINATED NOTE DUE 2004 MEDTOX SCIENTIFIC, INC., a corporation duly organized and existing under the laws of the State of Delaware (herein called the "Company"), for value received, hereby promises to pay to ____________________ or registered assigns, the principal sum of __________ dollars on September 30, 2004, at the principal office of the Company in such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts, and to pay interest, semi-annually on June 30 and December 31 of each year, on said principal sum at said office or agency, in like coin or currency, at the rate per annum specified in the title of this Note, as more fully provided on the reverse hereof. Reference is made to further provisions of this Note set forth on the reverse hereof, including, without limitation, provisions subordinating the payment of principal of and premium, if any, and interest on the Note to the prior payment in full of all Senior Indebtedness, as defined herein. IN WITNESS WHEREOF, MEDTOX SCIENTIFIC, INC. has caused this instrument to be executed in its corporate name by its Chairman or its Chief Executive Officer, attested by the manual or facsimile signature of its Secretary or an Assistant Secretary. MEDTOX SCIENTIFIC, INC. By -------------------------------------------------- Attest: ____________________________________ Dated: __________, 2001 [REVERSE OF NOTE] MEDTOX SCIENTIFIC, INC. 10% SUBORDINATED NOTE DUE 2004 1. Interest. Medtox Scientific, Inc., a Delaware corporation (the "Company"), promises to pay interest on the principal amount of this Note at the rate per annum shown above semi-annually on June 30 and December 31 of each year ("Interest Payment Date"). Interest will accrue from the most recent date to which interest has been paid, unless no interest has been paid, in which case from the date of this Note. The record date for the payment of interest shall be June 15 and December 15 of each year. Interest will be computed on the basis of a 360-day year of twelve 30-day months. 2. Method of Payment. The Company will pay interest (except defaulted interest) to the registered holder of the Note at the close of business on the Record Date. The Company will pay principal and interest in money of the United States that at the time of payment is legal tender for payment of public and private debts. However, the Company may pay principal and any interest by its check payable in such money. It may mail an interest check to a holder's registered address. 3. Paying Agent and Registrar. Initially, the Company will act as Paying Agent and Registrar. The Company may change any Paying Agent, Registrar or co-Registrar without notice. 4. Unsecured Obligation. This Note is a general unsecured obligation of the Company limited to the aggregate principal amount set forth on the face of this Note. 5. No Redemption; No Sinking Fund. This Note may not be redeemed or repaid by the Company prior to its maturity date. This Note will not have the benefit of sinking fund payments. 6.1 Subordination. The Company, for itself and its successors and assigns, agrees and the holder by his acceptance of this Note agrees that the payment of the principal of and interest on this Note is subordinated, to the extent and in the manner hereinafter set forth, to the prior payment in full of all Senior Indebtedness. 6.2 Company not to Make Payments with Respect to Note in Certain Circumstances. (a) Upon the maturity of any Senior Indebtedness by lapse of time, acceleration or otherwise, all principal thereof and interest thereon shall first be paid in full, or such payment duly provided for in cash or in a manner satisfactory to the holder or holders of such Senior Indebtedness, before any payment is made on account of the principal of or interest on this Note or to acquire this Note for cash or property other than capital stock of the Company. (b) Upon the happening of an event of default (or if an event of default would result upon any payment with respect to this Note) with respect to any Senior Indebtedness, as such event of default is defined therein or in the instrument under which it is outstanding, permitting the holders to accelerate the maturity thereof, and, if the default is other than default in payment of the principal of or interest on such Senior Indebtedness, upon written notice thereof given to the Company by the holder or holders of such Senior Indebtedness or their respective or representatives, then, unless and until such event of default shall have been cured or waived or shall have ceased to exist, no payment shall be made by the Company with respect to the principal of or interest on this Note or to acquire this Note for cash or property other than capital stock of the Company. 6.3 Note Subordinated to Prior Payment of all Senior Indebtedness on Dissolution, Liquidation or Reorganization of Company. Upon any distribution of assets of the Company upon any dissolution, winding up, liquidation or reorganization of the Company (whether in bankruptcy, insolvency or receivership proceedings or upon an assignment for the benefit of creditors or otherwise): (a) The holders of all Senior Indebtedness shall first be entitled to receive payment in full of the principal and interest due thereon before the holder of this Note is entitled to receive any payment on account of the principal of or interest (other than payment in shares of stock of the Company as reorganized or readjusted, or securities of the Company or any other corporation provided for by a plan of reorganization or readjustment, which stock and securities are subordinated to the payment of all Senior Indebtedness and securities received in lieu thereof which may at the time be outstanding); and (b) Any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities (other than shares of stock of the Company as reorganized ore readjusted, or securities of the Company or any other corporation provided for by a plan of reorganization or readjustment, which stock and securities are subordinated to the payment of all Senior Indebtedness and securities received in lieu thereof which may at the time be outstanding), to which the holder of this Note would be entitled except for the provisions hereof, shall be paid by the liquidating trustee or agent or other person making such payment or distribution directly to the holders of Senior Indebtedness or their representative or representatives to the extent necessary to make payment in full of all Senior Indebtedness remaining unpaid, after giving effect to any concurrent payment or distribution or provision therefor to the holders of such Senior Indebtedness. (c) In the event that notwithstanding the foregoing provisions of this Note, any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities (other than shares of stock of the Company as reorganized or readjusted, or securities of the Company or any other corporation provided for by a plan of reorganization or adjustment, which stock and securities are subordinated to the payment of all Senior Indebtedness and securities received in lieu thereof which may at the time be outstanding), shall be received by the holder on account of principal of or interest on this Note before all Senior Indebtedness is paid in full, or effective provision made for its payment, such payment or distribution shall be received and held in trust for and shall be paid over to the holders of the Senior Indebtedness remaining unpaid or unprovided for or their representative or representatives, for application to the payment of such Senior Indebtedness until all such Senior Indebtedness shall have been paid in full, after giving effect to any concurrent payment or distribution or provision therefor to the holders of such Senior Indebtedness. 6.4 Holder to be Subrogated to Right of Holders of Senior Indebtedness. Subject to payment in full of all Senior Indebtedness, the holder of this Note shall be subrogated to the rights of the holders of Senior Indebtedness to receive payments or distributions of assets of the Company applicable to the Senior Indebtedness until all amounts owing on this Note shall be paid in full, and for the purpose of such subrogation no payments or distributions to the holders of the Senior Indebtedness by or on behalf of the Company or by or on behalf of the holders of this Note which otherwise would have been made to the holder shall, as between the Company and the holder, be deemed to be payment by the Company to or on account of Senior Indebtedness, it being understood that the provisions of this Note are and are intended solely for the purpose of defining the relative rights of the holder, on the one hand, and the holders of Senior Indebtedness on the other hand. 6.5 Obligation of the Company Unconditional. Nothing contained in this Note or elsewhere is intended to or shall impair as between the Company and the holder of this Note, the obligation of the Company, which is absolute and unconditional, to pay to the holder the principal of and interest on this Note as and when the same shall become due and payable in accordance with the terms hereof, or is intended to or shall affect the relative rights of the holder and creditors of the Company other than the holders of the Senior Indebtedness, nor shall anything herein prevent any holder from exercising all remedies otherwise permitted by applicable law upon default under this Note, subject to the rights, if any, of the holders of Senior Indebtedness in respect of cash, property, or securities of the Company received upon the exercise of any such remedy. 6.6 Definition of Senior Indebtedness. "Senior Indebtedness" shall mean (a) the principal of and premium, if any, and interest on indebtedness or any other obligation of the Company, outstanding on the date of execution of this Note (i) for money borrowed by the Company or representing purchase money indebtedness of the Company or evidenced by debentures, notes or other corporate debt securities or similar instruments issued by the Company, or (ii) under any written contract or commitment for the leasing, purchase or other acquisition, possession or use of equipment or facilities related to the operations of the Company or any of its subsidiaries, or (iii) constituting a guarantee of indebtedness of an obligation of others of the types referred to in the preceding clauses (i) and (ii), or (iv) constituting a renewal, extension or refunding of any of the indebtedness or obligations referred to in the preceding clauses (i), (ii) and (iii) unless, in each case, under the express provisions of the instrument creating or evidencing the same, or pursuant to which the same is outstanding, such indebtedness or other obligation or such renewal, extension or refunding thereof is not superior in right of payment to the Note; and (b) any indebtedness or other obligation of the Company of any of the types referred to in the preceding clause (a) created, incurred or assumed on or after the date of execution of this Note which, under the express provisions of the instrument creating or evidencing the same, or pursuant to which the same is outstanding, is superior in right of payment to this Note. 7. Persons Deemed Owners. The registered holder of this Note shall be treated as the owner of it for all purposes. 8. Successor Corporation. When a successor corporation assumes all the obligations of its predecessor under this Note, the predecessor corporation will be released from those obligations. 9.1 Events of Default. An "Event of Default" occurs if: (1) the Company defaults in the payment of interest on this Note when the same becomes due and payable and the default continues for a period of 30 days (whether or not such payment was prohibited by Section 6 hereof); (2) the Company defaults in the payment of the principal of this Note when the same becomes due and payable at maturity or otherwise (whether or not such payment was prohibited by Section 6 hereof); (3) the Company fails to comply with any of its other agreements contained in this Note and such default continues for the period and after the notice specified below; (4) the Company pursuant to or within the meaning of any Bankruptcy Law: (a) commences a voluntary case or proceeding, (b) consents to the entry of an order for relief against it in an involuntary case or proceeding, (c) consents to the appointment of a custodian of it or for all or substantially all of its property, or (d) makes a general assignment for the benefit of its creditors; or (5) a court of competent jurisdiction enters an order or decree under any bankruptcy law that: (a) is for relief against the Company in an involuntary case or proceeding; (b) appoints a custodian of the Company for all or substantially all of its properties, or (c) orders the liquidation of the Company, and in each case the order or decree remains unstayed and in effect for 90 consecutive days. The term "Bankruptcy Law" means Title 11, U.S. Code or any similar federal or state law for the relief of debtors. The term "Custodian" means any receiver, trustee, assignee, liquidator, sequestrator or similar official under any Bankruptcy Law. A Default under clause (3) is not an Event of Default until the holder notifies the Company of the Default and the Company does not cure the Default within 30 days after receipt of the notice. The notice must specify the Default, demand that it be remedied and state that the notice is a "Notice of Default." When a Default is cured, it ceases. 9.2 Acceleration. If an Event of Default (other than an Event of Default specified in Section 9.1 (4) or (5)) occurs and is continuing, the holder may, by notice to the Company, declare all unpaid principal of and accrued interest to the date of acceleration on this Note then outstanding (if not then due and payable) due and payable and the same shall become and be immediately due and payable. If an Event of Default specified in 9.1 (4) or (5) occurs, all unpaid principal of and accrued interest on this Note then outstanding shall ipso facto become and be immediately due and payable without any declaration or other act on the part of the holder. Upon payment of such principal amount and interest, all of the Company's obligations under this Note shall terminate. The holder by notice to the Company may rescind an acceleration and its consequences if (i) all existing Events of Default, other than the non-payment of the principal of the Notes which has become due solely by such declaration of acceleration, have been cured or waived, (ii) to the extent the payment of such interest is lawful, interest on overdue installments of interest and overdue principal which has become due otherwise than by such declaration of acceleration, has been paid, and (iii) the rescission would not conflict with any judgment or decree of a court of competent jurisdiction. 9.3 Other Remedies. If an Event of Default occurs and is continuing, the holder may pursue any available remedy by proceeding at law or in equity to collect the payment of principal of or interest on the Note or to enforce the performance of any provision of the Note. A delay or omission by the holder in exercising any right or remedy shall not constitute a waiver of or acquiescence in the Event of Default. No remedy is exclusive of any other remedy. All available remedies are cumulative. Except as otherwise expressly provided herein, the Company hereby waives presentment, demand for payment, notice of nonpayment, protest, notice of protest, notice of dishonor, and all other notices in connection herewith, as well as filing of suit (if permitted by law) and diligence in collecting this Note, and agrees to pay (if permitted by law) all expenses incurred in collection, including the holder's actual attorneys' fees. 10. No Recourse Against Others. A director, officer, employee or stockholder, as such, of the Company shall not have any liability for any obligations of the Company under this Note or for any claim based on, in respect of or by reason of, such obligations or their creation. The holder by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for the issue of this Note. 11. Abbreviations. Customary abbreviations may be used in the name of a holder or assignee, such as: TEN COM ( = tenants in common), TEN ENT ( = tenants by the entireties), JT TEN ( = joint tenants with right of survivorship and not as tenants in common), CUST ( = Custodian), and U/G/M/A ( = Uniform Gifts to Minors Act). 12. Governing Law. This Note shall be deemed to be a contract made under the laws of the State of Minnesota's, and for all purposes shall be construed in accordance with the laws of the State of Minnesota. EX-4 4 exh45form10q3rdqtr.txt EXHIBIT 4.5 Exhibit 4.5 NON-TRANSFERABLE WARRANT TO PURCHASE COMMON STOCK _______ Shares of Common Stock of MEDTOX Scientific, Inc. ___________, 2001 THIS CERTIFIES THAT, ________________ (the "Holder"), is entitled to subscribe for and purchase from MEDTOX Scientific, Inc., a Delaware corporation (the "Company") from September 30, 2002 through September 30, 2004 up to _________ (_______) fully paid and non-assessable shares (the "Shares") of the Company's Common Stock, $.15 par value (the "Common Stock") at a price of $10.75 per share. In addition to the aforedescribed conditions of exercise, this Warrant is subject to the following provisions, terms and conditions: 1. Exercise of Warrant. The purchase rights under this Warrant must be exercised, in whole or in part, by the Holder surrendering this Warrant with the form of subscription attached hereto duly executed by such Holder, to the Company at its principal office, accompanied by payment, in cash or by certified or official bank check payable to the order of the Company, of the purchase price payable in respect of the Common Stock being purchased. If less than all of the Common Stock is purchased, the Company will, upon such exercise, execute and deliver to the Holder hereof a new Warrant (dated the date hereof) evidencing the number of shares of Common Stock not so purchased. As soon as practicable after the exercise of this Warrant and payment of the purchase price, the Company will cause to be issued in the name of and delivered to the Holder hereof, or as such Holder may direct, a certificate or certificates representing the Shares purchased upon such exercise. The Company may require that such certificate or certificates contain on the face thereof a legend substantially as follows: "The securities represented by the within certificate have not been registered under the Securities Act of 1933, as amended, or under the applicable provisions of any State Blue Sky laws, and may not be sold, transferred or otherwise disposed of unless (1) the Company consents in writing to such transfer, or (2) at the time of the proposed transfer, the securities are eligible for public resale under Rule 144 of the General Rules and Regulations of the Securities and Exchange Commission under the Securities Act (or successor rule if Rule 144 is no longer then in effect) and such transfer is made pursuant to Rule 144." 2. Negotiability and Transfer. This Warrant may not be sold, pledged, gifted or otherwise transferred without the express written consent of the Company. 3. Antidilution Adjustments. In case the Company shall at any time hereafter subdivide (i.e., stock split) or combine (i.e., reverse stock split) its outstanding shares of Common Stock, or declare a dividend payable in Common Stock, the exercise price in effect immediately prior to the subdivision, combination or record date for such dividend payable in Common Stock shall forthwith be proportionately increased, in the case of combination, or proportionately decreased, in the case of subdivision or declaration of a dividend payable in Common Stock, and each share of Common Stock purchasable upon exercise of the Warrant shall be changed to the number determined by dividing the then current exercise price by the exercise price as adjusted after such subdivision, combination or dividend payable in Common Stock. No fractional shares of Common Stock are to be issued upon the exercise of the Warrant, but the Company shall pay a cash adjustment in respect of any fraction of a share which would otherwise be issuable in an amount equal to the same fraction of the per share value of Common Stock on the day of exercise as determined in good faith by the Company. In case of any capital reorganization or any reclassification of the shares of Common Stock of the Company, or in the case of any consolidation with or merger of the Company into or with another corporation, or the sale of all or substantially all of its assets to another corporation effected in such manner that the holders of common shares shall be entitled to receive stock, securities or assets with respect to or in exchange for Common Stock, then, as a part of such reorganization, reclassification, consolidation, merger or sale, as the case may be, lawful provision shall be made so that the Holder of the Warrant shall have the right thereafter to receive, upon the exercise hereof, the kind and amount of shares of stock or other securities or property which the holder would have been entitled to receive if, immediately prior to such reorganization, reclassification, consolidation or merger, the Holder had held the number of shares of Common Stock which were then purchasable upon the exercise of the Warrant. In any such case, appropriate adjustment (as determined in good faith by the Board of Directors of the Company) shall be made in the application of the provisions set forth herein with respect to the rights and interest thereafter of the Holder of the Warrant, to the end that the provisions set forth herein (including provisions with respect to adjustments of the exercise price) shall thereafter be applicable, as nearly as reasonably maybe, in relation to any shares of stock or other property thereafter deliverable upon the exercise of the Warrant. When any adjustment is required to be made in the exercise price, initial or adjusted, the Company shall forthwith determine the new exercise price; and (a) Prepare and retain on file a statement describing in reasonable detail the method used in arriving at the new exercise price; and (b) Cause a copy of such statement to be mailed to the Holder of the Warrant as of a date within then (10) days after the date when the circumstances giving rise to the adjustment occurred. 4. No Registration Rights. No Holder of the Warrant shall have any registration rights under the terms of the Warrant with respect to either the Warrant or the securities issuable upon exercise of the Warrant. 5. Limitation of Rights; Notices. The Holder of the Warrant shall have no voting rights or dividend rights with respect to the Shares before exercise and payment therefor. The Company shall mail a notice to the registered Holder of the Warrant, at the Holder's last known post office address appearing on the books of the Company, not less than fifteen (15) days prior to the date on which (a) a record will be taken for the purpose of determining the holders of Common Stock entitled to dividends, or (b) a record will be taken (of in lieu thereof, the transfer books will be closed) for the purpose of determining the holders of Common Stock entitled to notice of and to vote at a meeting of stockholders at which any capital reorganization, reclassification of shares of Common Stock, consolidation, merger, dissolution, liquidation, winding up or sale of substantially all of the Company's assets shall be considered and acted upon. 6. Reservation of Common Stock. A number of shares of Common Stock sufficient to provide for the exercise of the Warrant upon the basis herein set forth shall at all times be reserved for the exercise thereof. 7. Miscellaneous. The representatives, warranties and agreements herein contained shall survive the exercise of the Warrant. References to the "holder of" include the immediate holders of shares purchased on the exercise of the Warrant, and the words "holder" shall include the plural thereof. All shares of Common Stock or other securities issued upon the exercise of the Warrant shall be validly issued, fully paid and nonassessable, and the Company will pay all taxes in respect of the issuer thereof. 8. Acknowledgement of the Warrant Holder. The Holder hereby represents and warrants as follows: (a) to the extent requested, the Holder has provided the Company with complete and accurate information concerning its knowledge, experience and financial condition; (b) as a sophisticated investor, the Holder has such knowledge and experience in financial business matters that it believes it is capable of evaluating the merits and risks of the prospective investment in the Warrant; (c) the Holder recognizes that investment in the Warrant may involve a high degree of risk and immediate substantial dilution, that the purchase of the Warrant maybe a long-term investment, that transferability and resale is restricted and that, in the event of disposition of the underlying capital stock, the undersigned could sustain a loss; (d) in connection with the purchase of the Warrant, the Holder represents and warrants that the Holder intends to acquire the Warrant for the Holder's own account for investment purposes and not with a view to or for resale in connection with any distribution thereof, and agrees that the Holder will not sell or assign the Warrant without registration under all applicable securities law or appropriate exemption therefrom. The undersigned understands and acknowledges that the Warrant has not been registered under the Securities Act of 1933 nor under applicable Blue Sky laws, pursuant to exemption therefrom, which depend upon its investment intention. The undersigned also understands and acknowledges that the underlying capital stock has not been nor will be registered under applicable securities laws and therefore will not be freely transferable and that the shares of capital stock will be marked with an appropriate legend reciting the resale restrictions. IN WITNESS WHEREOF, this Warrant has been duly executed by MEDTOX Scientific, Inc. this ____ day of ____________, 2001. MEDTOX SCIENTIFIC, INC. By ------------------------------------------------------ Its ------------------------------------------------- The Holder hereby acknowledges the terms and conditions of the transfer restrictions herein contained and only executes this Warrant for that purpose. -----END PRIVACY-ENHANCED MESSAGE-----