-----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, ELCSjy/oX4eP/y2d9Ke3+aIE0OD2kZ0P+TK3wxiImtNEZYMt9+4Rr5yLOLxiTU0Y uBzAsv8ih4g69qco0q3ulw== 0000739944-02-000036.txt : 20021114 0000739944-02-000036.hdr.sgml : 20021114 20021114132511 ACCESSION NUMBER: 0000739944-02-000036 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021114 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: 02823693 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: ENVIRONMENTAL DIAGNOSTICS INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: EDITEK INC DATE OF NAME CHANGE: 19940902 10-Q 1 f10q3rdqtr02.txt 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, 2002 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 ______ N ___X___ The number of shares of Common Stock, $.15 par value, outstanding as of October 31, 2002, was 4,811,720. 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, 2002 and 2001 .......... 3 Consolidated Balance Sheets - September 30, 2002 and December 31, 2001 .................................. 4 Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2002 and 2001 ............... 5 Notes to Consolidated Financial Statements.............. 6 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations .......... 11 Item 3: Quantitative and Qualitative Disclosure About Market Risk ...................................... 22 Item 4: Evaluation of Disclosure Controls and Procedures........ 22 Part II Other Information ............................................... 23 Signatures ...................................................... 24 Certifications................................................... 25 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, 2002 2001 2002 2001 ------------------ ----------------- ----------------- ------------------ REVENUES: Laboratory services $ 10,562 $ 9,446 $ 30,439 $ 28,741 Product sales 3,070 3,135 9,462 8,007 ------------------ ----------------- ----------------- ------------------ 13,632 12,581 39,901 36,748 COST OF REVENUES: Cost of services 7,104 6,711 20,184 19,681 Cost of sales 1,178 876 3,539 2,879 ------------------ ----------------- ----------------- ------------------ 8,282 7,587 23,723 22,560 ------------------ ----------------- ----------------- ------------------ GROSS PROFIT 5,350 4,994 16,178 14,188 OPERATING EXPENSES: Selling, general and administrative 4,137 3,587 12,152 10,178 Research and development 327 323 905 956 ------------------ ----------------- ----------------- ------------------ 4,464 3,910 13,057 11,134 ------------------ ----------------- ----------------- ------------------ INCOME FROM OPERATIONS 886 1,084 3,121 3,054 OTHER INCOME (EXPENSE): Interest expense, net (332) (263) (1,025) (791) Other expense, net (17) (31) (66) (75) ------------------ ----------------- ----------------- ------------------ (349) (294) (1,091) (866) ------------------ ----------------- ----------------- ------------------ INCOME BEFORE INCOME TAX BENEFIT 537 790 2,030 2,188 INCOME TAX BENEFIT 10,783 - 10,783 - ------------------ ----------------- ----------------- ------------------ NET INCOME $ 11,320 $ 790 $ 12,813 $ 2,188 ================== ================= ================= ================== BASIC EARNINGS PER COMMON SHARE (1) $ 2.36 $ 0.18 $ 2.67 $ 0.51 ================== ================= ================= ================== DILUTED EARNINGS PER COMMON SHARE (1) $ 2.27 $ 0.17 $ 2.55 $ 0.48 ================== ================= ================= ================== WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING: Basic (1) 4,804,106 4,331,655 4,793,793 4,289,791 Diluted (1) 4,988,958 4,718,635 5,029,818 4,544,077 (1) Share and per share amounts for the three and nine months ended September 30, 2001 have been restated for the ten percent stock dividend paid on July 5, 2002.
MEDTOX SCIENTIFIC, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share data) (Unaudited)
September 30, December 31, 2002 2001 --------------- --------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 889 $ 67 Accounts receivable: Trade, less allowance for doubtful accounts ($1,553 in 2002 and $1,069 in 2001) 10,422 8,439 Other 307 181 --------------- --------------- Total accounts receivable 10,729 8,620 Inventories 3,872 3,897 Prepaid expenses and other 1,337 1,617 Deferred tax asset, net 767 - --------------- --------------- Total current assets 17,594 14,201 BUILDING, EQUIPMENT AND IMPROVEMENTS, net 14,112 12,200 GOODWILL 15,197 15,197 DEFERRED TAX ASSET, net 10,016 - OTHER INTANGIBLE ASSETS, net of accumulated amortization of $587 in 2002 and $187 in 2001 1,813 2,213 OTHER ASSETS 345 345 --------------- --------------- TOTAL ASSETS $ 59,077 $ 44,156 =============== =============== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Line of credit $ 5,066 $ 2,914 Accounts payable 3,633 2,914 Accrued expenses 2,910 3,450 Current portion of long-term debt 2,389 2,120 Current portion of capital leases 105 223 --------------- --------------- Total current liabilities 14,103 11,621 LONG-TERM DEBT, net of current portion 8,947 9,749 LONG-TERM PORTION OF CAPITAL LEASES, net of current portion 202 266 STOCKHOLDERS' EQUITY: Preferred stock, $1.00 par value; authorized shares, 50,000; none issued and outstanding - - Common stock, $0.15 par value; authorized shares, 14,400,000; issued and outstanding shares, 4,806,918 in 2002 and 4,746,732 in 2001 721 647 Additional paid-in capital 80,613 75,199 Deferred stock-based compensation (545) (463) Accumulated deficit (44,788) (52,584) Note receivable from related party - (103) Treasury stock (176) (176) --------------- --------------- Total stockholders' equity 35,825 22,520 --------------- --------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 59,077 $ 44,156 =============== ===============
MEDTOX SCIENTIFIC, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
Nine Months Ended September 30, 2002 2001 ---------------- ---------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 12,813 $ 2,188 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 1,858 1,800 Provision for losses on accounts receivable 313 229 Deferred compensation 254 139 Deferred income taxes (10,783) - Changes in operating assets and liabilities: Accounts receivable (2,422) (2,544) Inventories 25 (379) Prepaid expenses and other current assets 280 (150) Other assets (2) (187) Accounts payable and accrued expenses 179 (26) Accrued restructuring costs - (160) ---------------- ---------------- Net cash provided by operating activities 2,515 910 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (3,163) (7,795) CASH FLOWS FROM FINANCING ACTIVITIES: Increase in checks written in excess of bank balances - 57 Proceeds from note receivable from related party 103 - Net proceeds from sale of common stock 136 294 Net proceeds from legal settlement - 628 Net proceeds (payments) on revolving credit facility 2,152 (559) Proceeds from long-term debt 1,128 7,400 Principal payments on long-term debt (1,867) (976) Principal payments on capital leases (182) (172) ---------------- ---------------- Net cash provided by financing activities 1,470 6,672 ---------------- ---------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 822 (213) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 67 213 ---------------- ---------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 889 $ - ================ ================ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Non-cash activities: Additions to capital leases $ - $ 75 Cash paid for: Interest 971 824
MEDTOX SCIENTIFIC, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2002 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, 2002 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, 2001. Reclassifications: Certain reclassifications have been made to the 2001 financial statements to conform with the 2002 presentations. In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Accounting Financial Standards No. 142 (SFAS 142), "Goodwill and Other Intangible Assets." This statement requires that goodwill and intangible assets deemed to have an indefinite life not be amortized. Instead of amortizing goodwill and intangible assets deemed to have an indefinite life, the statement requires a test for impairment to be performed annually, or immediately if conditions indicate that such an impairment could exist. The Company adopted the provisions of SFAS 142 effective January 1, 2002, and as a result, will no longer record goodwill amortization of approximately $0.8 million per year. The Company completed the initial goodwill impairment test during the second quarter of 2002 and determined that there was no impairment of goodwill upon adoption of SFAS No. 142. The Company will perform its annual assessment of goodwill impairment pursuant to SFAS No. 142 in the fourth quarter. At September 30, 2002 and December 31, 2001 the Company had $15.2 million of goodwill which was related to the Laboratory Services segment. The following table provides the comparable effects of the adoption of SFAS No. 142 for the three and nine months ended September 30, 2002 and September 30, 2001. (In thousands, except per share data)
Three months ended Nine months ended September 30, September 30, 2002 2001 2002 2001 ----------------------------------------------------- Reported net income $11,320 $ 790 $12,813 $ 2,188 Add back goodwill amortization - 205 - 617 ------- ------- ------- --------- Adjusted net income $11,320 $ 995 $12,813 $ 2,805 ======= ======= ======= ========= Reported earnings per share - basic $ 2.36 $ 0.18 $ 2.67 $ 0.51 Goodwill amortization - 0.05 - 0.14 ------- ------- ------- --------- Adjusted earnings per share - basic $ 2.36 $ 0.23 $ 2.67 $ 0.65 ======= ======= ======= ========= Reported earnings per share - diluted $ 2.27 $ 0.17 $ 2.55 $ 0.48 Goodwill amortization - 0.04 - 0.14 ------- ------- ------- --------- Adjusted earnings per share - diluted $ 2.27 $ 0.21 $ 2.55 $ 0.62 ======= ======= ======= =========
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of long-lived assets and the associated asset retirement costs. SFAS No. 143 is effective for the Company on January 1, 2003. The Company is currently in the process of evaluating the impact of the adoption of SFAS No. 143. In September 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. While SFAS 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," it retains many of the fundamental provisions of that statement. The adoption of this standard on January 1, 2002 did not have an effect on the Company's financial position or operating results. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 requires that a liability for costs associated with exit or disposal activities be recognized when the liability is incurred. Existing generally accepted accounting principles provide for the recognition of such costs at the date of management's commitment to an exit plan. In addition, SFAS No. 146 requires that the liability be measured at fair value and be adjusted for changes in estimated cash flows. The provisions of SFAS No. 146 are effective for exit or disposal activities initiated after December 31, 2002. The Company is currently in the process of evaluating the impact of the adoption of SFAS No. 146. NOTE B - SEGMENTS The Company has two reportable segments: Laboratory Services and Product Sales. The Laboratory Services segment consists of MEDTOX Laboratories, Inc. Services provided include forensic toxicology, clinical toxicology, clinical testing for the pharmaceutical industry, pediatric lead testing, heavy metals analyses, courier delivery, and medical surveillance. 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, PROFILE(R)-IIA, PROFILE(R)-ER, EZ-SCREEN(R), and VERDICT(R)-II. The Company's reportable segments are strategic business units that offer different products and services. They are managed separately as each business requires different products, services and marketing strategies. In evaluating financial performance, management focuses on income before income taxes as a segment's measure of profit or loss. Segment Information (In thousands)
Three Months Ended Nine Months Ended September 30, September 30, 2002 2001 2002 2001 ---------------------------- ---------------------------- Laboratory Services: Revenues $ 10,562 $ 9,446 $ 30,439 $ 28,741 Interest expense 312 252 975 755 Depreciation and amortization 565 558 1,714 1,703 Segment income 211 288 541 1,135 Segment assets 42,034 34,660 42,034 34,660 Capital expenditures for segment assets 463 118 1,899 7,541 Product Sales: Revenues $ 3,070 $ 3,135 $ 9,462 $ 8,007 Interest expense 20 11 50 36 Depreciation and amortization 52 35 144 97 Segment income 326 502 1,489 1,053 Segment assets 6,260 4,515 6,260 4,515 Capital expenditures for segment assets 391 93 1,264 254 Other: Deferred tax asset, net $ 10,783 $ - $ 10,783 $ - Company: Revenues $ 13,632 $ 12,581 $ 39,901 $ 36,748 Interest expense 332 263 1,025 791 Depreciation and amortization 617 593 1,858 1,800 Total segment income 537 790 2,030 2,188 Total assets 59,077 39,175 59,077 39,175 Capital expenditures for total assets 854 211 3,163 7,795
The following is a summary of revenues from external customers for each group of services provided within the Laboratory Services segment: (In thousands)
Three Months Ended Nine Months Ended September 30, September 30, 2002 2001 2002 2001 ---------------------------- --------------------------- Workplace drugs of abuse testing $ 6,563 $ 6,289 $ 19,502 $ 19,554 Other specialty testing 3,999 3,157 10,937 9,187 ---------------------------- --------------------------- $ 10,562 $ 9,446 $ 30,439 $ 28,741 ============================ ===========================
The following is a summary of revenues from external customers for each group of products and services provided within the Product Sales segment: (In thousands)
Three Months Ended Nine Months Ended September 30, September 30, 2002 2001 2002 2001 ---------------------------- --------------------------- Substance abuse testing products $ 2,641 $ 2,777 $ 8,186 $ 6,908 Contract manufacturing services 331 324 1,044 846 Agricultural diagnostic products 98 34 232 253 ---------------------------- --------------------------- $ 3,070 $ 3,135 $ 9,462 $ 8,007 ============================ ===========================
NOTE C - INVENTORIES Inventories consisted of the following: (In thousands) September 30, December 31, 2002 2001 ------------- ------------- Raw materials $ 2,019 $ 1,570 Work in process 51 414 Finished goods 514 460 Supplies, including off-site inventory 1,288 1,453 ------------- ------------- $ 3,872 $ 3,897 ============= ============= NOTE D - 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, 2002 2001 (1) 2002 2001 (1) ---------- ---------- ---------- ---------- Net income (A) $ 11,320 $ 790 $ 12,813 $ 2,188 ========== ========== ========== ========== Weighted average number of basic common shares outstanding (B) 4,804,106 4,331,655 4,793,793 4,289,791 Dilutive effect of stock options and warrants computed based on the treasury stock method using average market price 184,852 386,980 236,025 254,286 ---------- ---------- ---------- ---------- Weighted average number of diluted common shares outstanding (C) 4,988,958 4,718,635 5,029,818 4,544,077 ========== ========== ========== ========== Basic earnings per common share (A/B) $ 2.36 $ 0.18 $ 2.67 $ 0.51 ========== ========== ========== ========== Diluted earnings per common share (A/C) $ 2.27 $ 0.17 $ 2.55 $ 0.48 ========== ========== ========== ==========
Options and warrants to purchase 978,359, 915,565, 17,902, and 927,754 shares of common stock were outstanding during the three and nine months ended September 30, 2002 and 2001, 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. (1) Share and per share amounts for the three and nine months ended September 30, 2001 have been restated for the ten percent stock dividend paid on July 5, 2002. NOTE E - INCOME TAX BENEFIT At December 31, 2001, the Company had net operating loss carryforwards (NOL) of approximately $32.0 million, which are available to offset taxable income through 2014. Management previously established a valuation allowance with respect to these tax loss carryforwards and other temporary differences, as management had determined that it was more likely than not that the tax benefits of these tax assets would not be realized. At December 31, 2001, the valuation allowance was $13.9 million. At September 30, 2002, based on a review of various financial factors, including the Company's recent historical performance and projected future results, management determined that it is more likely than not that $10.8 million of the tax benefits of these deferred tax assets would be realized. Accordingly, the valuation allowance was reduced by $10.8 million, resulting in a net deferred tax asset of $10.8 million as of September 30, 2002, and a net income tax benefit of $10.8 million (or $2.16 and $2.14 per diluted share) for the three and nine months ended September 30, 2002, respectively. 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 operations 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 ability 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, clinical testing for the pharmaceutical industry and heavy metal analyses as well as logistics, data, and overall program management services. Product Sales include sales of a variety of point-of-collection (POC) screening devices for therapeutic drugs and drugs of abuse. For the three and nine months ended September 30, 2002, Laboratory Services revenue accounted for 77.5% and 76.3%, respectively, of the Company's revenues, compared with 75.1% and 78.2% for the same periods in 2001. Revenue from Product Sales accounted for 22.5% and 23.7% of the total revenues of the Company for the three and nine months ended September 30, 2002, respectively, compared with 24.9% and 21.8% for the same periods in 2001. Critical Accounting Policies The Company has identified the policies outlined below as critical to its business operations and an understanding of results of operations. The listing is not intended to be a comprehensive list of all accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by accounting principles generally accepted in the United States, with no need for management's judgment in their application. The impact and any associated risks related to these policies on the Company's business operations is discussed throughout Management's Discussion and Analysis of Financial Condition and Results of Operations where such policies affect reported and expected financial results. For a detailed discussion on the application of these and other accounting policies, see Note 1 in the Notes to the Consolidated Financial Statements in Item 14 on Form 10-K for the year ended December 31, 2001. Note that the preparation of this Form 10-Q requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our financial statements, and the reported amounts of revenue and expenses during the reporting period. There can be no assurance that actual results will not differ from those estimates. The Company's critical accounting policies are as follows: Accounts Receivable: The Company performs ongoing credit evaluations of its customers and adjusts credit limits based upon payment history and the customers' current credit worthiness, as determined by management's review of their current credit information. The Company continuously monitors collections and payments from its customers and maintains a provision for estimated credit losses based upon the Company's historical experience and any specific customer collection issues that have been identified. While such credit losses have historically been within the Company's general expectations and the provisions established, the Company cannot guarantee that it will continue to experience the same credit loss rates that have occurred in the past. The Company's consolidated trade accounts receivable balance as of September 30, 2002 was $10.4 million, net of allowance for doubtful accounts of $1.6 million. Off-Site Supplies Inventory: Off-site supplies represents collection kits and forms located at collections sites throughout the United States used by Laboratory Services' customers to submit specimens for testing services. At September 30, 2002, off-site inventory was $0.7 million. The process for estimating off-site inventory involves significant assumptions and judgments. The estimate is based on the historical average time that a collection site uses the inventory, as well as the amount of inventory expected to be scrapped. Goodwill: The Company continually evaluates whether events and changes in circumstances warrant revised estimates of useful lives or recognition of an impairment loss of unamortized goodwill. The conditions that would trigger an impairment assessment of unamortized goodwill include a significant, sustained negative trend in operating results or cash flows, a decrease in demand for the Company's products or services, a change in the competitive environment, and other industry and economic factors. Until January 1, 2002, the Company measured impairment of unamortized goodwill utilizing the undiscounted cash flow method. The estimated cash flows were then compared to recorded goodwill amounts; if the unamortized balance of the goodwill exceeded the estimated cash flows, the excess of the unamortized balance would have been written off. In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142). The Company adopted SFAS No. 142 on January 1, 2002. According to the provisions of SFAS No. 142, the Company assessed the impact based on a two-step approach to assess goodwill based on applicable reporting units and reassessed any intangible assets, including goodwill, recorded in connection with previous acquisitions. The Company recorded approximately $0.2 million and $0.6 million of goodwill amortization during the three and nine months ended September 30, 2001, respectively, and would have recorded approximately $0.2 million and $0.6 million of goodwill amortization during the same periods of 2002, without the adoption of SFAS No. 142. In lieu of amortization, the Company performed the initial impairment review of goodwill during the second quarter of 2002 and will be required to perform such a review at least annually thereafter. The Company determined that there was no impairment of goodwill upon adoption of SFAS No. 142. As of September 30, 2002, the Company had unamortized goodwill of $15.2 million. As of September 30, 2002, the Company had other identifiable intangible assets of $1.8 million. Amortization expense of other identifiable intangible assets was approximately $134,000, $403,000, $9,000, and $27,000 during the three and nine months ended September 30, 2002 and September 30, 2001 respectively. Accounting for Income Taxes: As part of the process of preparing the consolidated financial statements, the Company is required to estimate income taxes in each of the jurisdictions in which it operates. This process involves estimating actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities. The Company must then assess the likelihood that deferred tax assets will be recovered from future taxable income and, to the extent management believes that recovery is not likely, the Company must establish a valuation allowance. To the extent the Company increases or decreases the valuation allowance in a period, the Company must include an expense or benefit within the tax provision in the consolidated statement of operations. Significant management judgment is required in determining the provision for income taxes, deferred tax assets and liabilities, and any valuation allowance recorded against net deferred tax assets. As of December 31, 2001, the Company has recorded a full valuation allowance of $13.9 million due to uncertainties related to the Company's ability to utilize the net deferred tax assets, primarily consisting of certain net operating losses (NOL) carried forward, before they expire. At September 30, 2002, based on a review of various financial factors, including the Company's recent historical performance and projected future results, management determined that it is more likely than not that $10.8 million of the tax benefits of these deferred tax assets would be realized. Accordingly, the valuation allowance was reduced by $10.8 million, resulting in a net income tax benefit of $10.8 million for the three and nine months ended September 30, 2002, and a net deferred tax asset of $10.8 million as of September 30, 2002. The $10.8 million tax benefit and related deferred tax asset are reported in the consolidated statements of operations for the three and nine month periods ending September 30, 2002 and consolidated balance sheet as of September 30, 2002. In the future, subsequent revisions to the estimated net realizable value of the net deferred tax asset could cause the provision for income taxes to vary significantly from period to period, although the Company's cash payments would remain unaffected until the benefit of the NOL is completely utilized. Results of Operations Revenues for the third quarter of 2002 increased 8% over the third quarter of 2001, driven by strong specialty laboratory volume as well as continued success in acquiring new laboratory clients. Selling, general, and administrative expenses as a percentage of sales were higher in the third quarter of 2002, reflecting increased sales and marketing efforts and increased spending in client service support for clinical trial services. The Company also recorded a $10.8 million non-cash tax benefit as part of net income for the third quarter of 2002. 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, 2002 2001 2002 2001 - ------------------------------------------------------------------------------------------------- Revenues 100.0% 100.0% 100.0% 100.0% Cost of revenues 60.7 60.3 59.5 61.4 ------ ------ ------ ------ Gross margin 39.3 39.7 40.5 38.6 Operating expenses: Selling, general, and administrative 30.4 28.5 30.4 27.7 Research and development 2.4 2.6 2.3 2.6 ------ ------ ------ ------ 32.8 31.1 32.7 30.3 Other expense, primarily interest 2.6 2.3 2.7 2.3 ------ ------ ------ ------ Income before income tax benefit 3.9 6.3 5.1 6.0 Income tax benefit 79.1 - 27.0 - ------ ------ ------ ------ Net income 83.0% 6.3% 32.1% 6.0% ====== ====== ====== ======
Three Months Ended September 30, 2002 Compared to Three Months Ended September 30, 2001 Revenues Revenues increased 8% to $13.6 million for the three months ended September 30, 2002, driven by a $1.1 million, or 12% increase in Laboratory Services revenues. Product Sales revenues in the third quarter were even with the prior year period, reflecting a slight drop in sales of substance abuse testing products, partially offset by a slight increase in sales of agricultural diagnostic products. The Laboratory Services segment benefited from a 27% increase in specialty laboratory services revenues due to the expansion of clinical testing for the pharmaceutical industry and the October 2001 acquisition of Leadtech Corporation (Leadtech), a pediatric lead-testing laboratory. Specimen volume from the Company's occupational health and corporate clients increased 5%, reflecting the Company's continued success in acquiring new client relationships and gaining market share, despite the continued softness in new business employment. In the Product Sales segment, sales of substance abuse testing products, which incorporates the PROFILE(R)-II, PROFILE(R)-ER, PROFILE-IIA(R) and VERDICT(R)-II on-site test kits and other ancillary products for the detection of abused substances, declined 5% to $2.6 million in the third quarter of 2002. Sales of PROFILE(R)-II devices to existing workplace clients were down from last year and continue to be impacted by the reduction in nationwide hiring. However, continuing success in acquiring new client relationships and gaining market share has helped to mitigate the negative impact of lower volumes from existing clients. Sales of PROFILE(R)-II ER and the Company's new PROFILE(R)-IIA devices continue to grow and have increased more than $780,000 over the same quarter last year. 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 PROFILE(R)-IIA device, introduced in October 2001, screens for five drugs of abuse and uses a unique lateral flow test strip to screen for the five most common adulterants. In the VERDICT(R)-II product line, sales to government clients for probation, parole and rehabilitation were down 24% from the prior year period, primarily due to reductions in state budgets. In 2001, the strong economy created surplus budget dollars with which large government orders were initiated at their fiscal year-end, which is in the Company's third quarter. As the fourth quarter begins and new government budgets are in place, ordering patterns are recovering. Product sales from agricultural diagnostic products increased $64,000 to $98,000 million primarily as a result of increased purchases by the U.S. Department of Agriculture (USDA) for the Company's products. The USDA's needs for the Company's products vary from year-to-year and sales to the USDA are expected to fluctuate accordingly. Sales of contract manufacturing services, microbiological and associated products were $0.3 million in the quarter, up 2% from the prior year period. Gross profit Consolidated gross margin declined slightly to 39.3% of revenues for the three months ended September 30, 2002 compared to 39.7% of revenues for the same period of 2001, reflecting a drop in Product Sales gross margin, partially offset by improvement in Laboratory Services gross margin. Laboratory Services gross margin was 32.7% of revenues for the three months ended September 30, 2002, up from 29.0% of revenues for the same period in 2001. This improvement was primarily attributable to the Company's continued focus on higher margin specialty laboratory testing services. Gross margin from Product Sales declined to 61.6% of revenues for the three months ended September 30, 2002 from 72.0% of revenues in the comparable period of 2001, and was impacted by product mix factors and favorable manufacturing variances in the prior year period. Selling, general and administrative expenses Selling, general and administrative expenses were $4.1 million, or 30.4% of revenues in the third quarter of 2002, compared to $3.6 million or 28.5% of revenues in the third quarter of 2001. The increase was primarily due to increased sales and marketing expenses related to acquiring new business and increased spending in client service support for clinical trial services. Other expense Other expense, consisting primarily of interest expense, increased 19% in the third quarter of 2002, reflecting higher average debt levels, partially offset by lower interest rates. Income before income tax benefit In the three months ended September 30, 2002, the Company recorded income before income tax benefit of $0.5 million, compared to $0.8 million in the same period of 2001. The decline in income was caused primarily by increased selling, general, and administrative expenses, partially offset by an 8% increase in consolidated revenues Laboratory Services income before income tax benefit of $0.2 million for the three months ended September 30, 2002 was down slightly from the $0.3 million recorded in the prior year period. The slight decline was primarily attributable to increased sales and marketing expenses and increased spending in client service support for clinical trial services, as well as higher interest expense, partially offset by increased revenues and an improved gross margin. Product Sales income before income tax benefit was $0.3 million for the three months ended September 30, 2002 compared to $0.5 million for the same period of 2001. This decline was primarily caused by a reduced gross margin. Income tax benefit As of December 31, 2001, the Company had recorded a full valuation allowance of $13.9 million due to uncertainties related to the Company's ability to utilize the net deferred tax assets, primarily consisting of certain net operating losses (NOL) carried forward, before they expire. At September 30, 2002, based on a review of various financial factors, including the Company's recent historical performance and projected future results, management determined that it is more likely than not that $10.8 million of the tax benefits of these deferred tax assets would be realized. Accordingly, the valuation allowance was reduced by $10.8 million, resulting in a net income tax benefit of $10.8 million for the three months ended September 30, 2002, and a net deferred tax asset of $10.8 million as of September 30, 2002. The $10.8 million tax benefit and related deferred tax asset are reported in the consolidated statement of operations for the three month period ending September 30, 2002 and consolidated balance sheet as of September 30, 2002. In the future, subsequent revisions to the estimated net realizable value of the net deferred tax asset could cause the provision for income taxes to vary significantly from period to period, although the Company's cash payments would remain unaffected until the benefit of the NOL is completely utilized. Nine Months Ended September 30, 2002 Compared to Nine Months Ended September 30, 2001 Revenues Revenues increased 9% to $39.9 million for the nine months ended September 30, 2002, driven by a $1.7 million, or 6% increase in Laboratory Services revenues and a $1.5 million, or 18% increase in Product Sales revenues. The growth in Laboratory Services revenues was driven by a 19% increase in revenues from the Company's specialty laboratory services due to the expansion of clinical testing for the pharmaceutical industry and the October 2001 acquisition of Leadtech Corporation (Leadtech), a pediatric lead-testing laboratory. This positive trend was slightly offset by a 1% drop in specimen volume from the Company's occupational health and corporate clients, reflecting the impact of the slowing economy and lower levels of employment hiring. However, this impact has been partially mitigated by the Company's continued success in acquiring new client relationships and gaining market share. 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 PROFILE(R)-II, PROFILE(R)-ER, PROFILE-II(R)A and VERDICT(R)-II on-site test kits and other ancillary products for the detection of abused substances, increased $1.3 million to $8.2 million in the first nine months of 2002. This growth reflected strong sales in the PROFILE-ER(R) and PROFILE-IIA(R) product lines. However, sales of PROFILE(R)-II devices to existing workplace clients were down from last year and continue to be impacted by the reduction in nationwide hiring. In the VERDICT-II(R) product line, sales to government clients for probation, parole and rehabilitation were up 9% over the first nine months of last year, despite the softness in the third quarter due to reductions in state budgets. Sales of contract manufacturing services, microbiological and associated products increased 23% to $1.1 million, reflecting increased revenues from both historical customers and new customers. Product sales from agricultural diagnostic products decreased 8% to $0.2 million primarily as a result of decreased purchases by the U.S. Department of Agriculture (USDA) for the Company's products. The USDA's needs for the Company's products vary from year-to-year and sales to the USDA are expected to fluctuate accordingly. Gross profit Consolidated gross margin improved to 40.5% of revenues for the nine months ended September 30, 2002 compared to 38.6% of revenues for the same period of 2001, reflecting improvement in Laboratory Services gross margin as well as the continuing shift in the Company's business mix toward Product Sales at significantly higher margins. This improvement was partially offset by a slight drop in Product Sales gross margin. Laboratory Services gross margin was 33.7% of revenues for the nine months ended September 30, 2002, up from 31.5% of revenues for the same period in 2001. This improvement was primarily attributable to the Company's continued focus on higher margin specialty laboratory testing services. Gross margin from Product Sales declined slightly to 62.6% of revenues for the first nine months of 2002 from 64.0% of revenues in the comparable period of 2001, and was impacted by product mix factors and favorable manufacturing variances in the third quarter of 2001. Selling, general and administrative expenses Selling, general and administrative expenses were $12.2 million, or 30.4% of revenues in the first nine months of 2002, compared to $10.2 million or 27.7% of revenues in same period of 2001. The increase was primarily due to increased sales and marketing expenses related to acquiring new business and increased spending in client service support for clinical trial services. Research and development expenses Research and development expenses decreased 5% in the first nine months of 2002, reflecting a slight planned reduction in spending for the development of new products for on-site and other ancillary products in the Product Sales segment. Other expense Other expense, consisting primarily of interest expense, increased 26% in the first nine months of 2002, reflecting higher average debt levels, partially offset by lower interest rates. Income before income tax benefit In the nine months ended September 30, 2002, the Company recorded income before income tax benefit of $2.0 million, compared to $2.2 million in the same period of 2001. The decline in income was caused primarily by increased selling, general, and administrative expenses, partially offset by a 9% increase in consolidated revenues and an improved gross margin. Laboratory Services income before income tax benefit was $0.5 million for the nine months ended September 30, 2002 compared to $1.1 million in the same period of 2001. The decline in income was primarily attributable to increased sales and marketing expenses as well as higher interest expense, partially offset by increased revenues and an improved gross margin. Product Sales income before income tax benefit was $1.5 million for the nine months ended September 30, 2002 compared to $1.1 million in the same period of 2001. This improvement was primarily driven by the growth in sales. Income tax benefit As of December 31, 2001, the Company had recorded a full valuation allowance of $13.9 million due to uncertainties related to the Company's ability to utilize the net deferred tax assets, primarily consisting of certain net operating losses (NOL) carried forward, before they expire. At September 30, 2002, based on a review of various financial factors, including the Company's recent historical performance and projected future results, management determined that it is more likely than not that $10.8 million of the tax benefits of these deferred tax assets would be realized. Accordingly, the valuation allowance was reduced by $10.8 million, resulting in a net income tax benefit of $10.8 million for the nine months ended September 30, 2002, and a net deferred tax asset of $10.8 million as of September 30, 2002. The $10.8 million tax benefit and related deferred tax asset are reported in the consolidated statement of operations for the nine month period ending September 30, 2002 and consolidated balance sheet as of September 30, 2002. In the future, subsequent revisions to the estimated net realizable value of the net deferred tax asset could cause the provision for income taxes to vary significantly from period to period, although the Company's cash payments would remain unaffected until the benefit of the NOL is completely utilized. Liquidity and Capital Resources The working capital requirements of the Company have been funded primarily by cash received from bank and debt financing and the sale of equity securities. Net cash provided by operating activities was $2.5 million for the nine months ended September 30, 2002 compared to $0.9 million in the same period of 2001. Net cash used in investing activities, consisting of capital expenditures, was $3.2 million for the nine months ended September 30, 2002 compared to $7.8 million in the same period of 2001. 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. Net cash provided by financing activities of $1.5 million for the nine months ended September 30, 2002 primarily represented net proceeds from the revolving credit facility. 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 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 + 0.75%; (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 + 0.50%; and (iii) a capex note of up to $3.5 million for the purchase of capital equipment bearing interest at prime + 0.75% and (iv) availability of letters of credit in amounts not to exceed the lesser of $300,000 (less outstanding letters of credit) or the unborrowed portion of the revolving line of credit (less outstanding letters of credit). The Wells Fargo Credit Agreement requires the Company to comply with certain covenants and maintain certain quarterly financial ratios as to minimum debt service coverage and maximum debt to book net worth. It also sets minimum quarterly net income and book net worth levels, which restrict the payment of dividends. As of September 30, 2002, the Company was in compliance with the financial covenants of the Wells Fargo Credit Agreement. The Company is relying on expected positive cash flow from operations, its line of credit and 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 level of accounts receivable. As of September 30, 2002, the Company had total borrowing capacity of $6.0 million on its line of credit, of which $5.1 million was borrowed, leaving a net availability of $0.9 million as of September 30, 2002. In the short term, the Company believes that the aforementioned capital will be sufficient to fund the Company's planned operations for the next twelve months. While there can be no assurance that the available capital will be sufficient to fund the future operations of the Company beyond the next twelve months, 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 historically not been material to the Company's operations. In the future, the Company may not be able to increase the prices of laboratory testing by an amount sufficient to cover the cost of inflation, although the Company is responding to these concerns by refocusing the laboratory operations towards higher margin testing (including clinical and pharmaceutical trials) as well as emphasizing the marketing, sales and operations of the Product Sales business. 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. Impact of New Accounting Standards In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of long-lived assets and the associated asset retirement costs. SFAS No. 143 is effective for the Company on January 1, 2003. The Company is currently in the process of evaluating the impact of the adoption of SFAS No. 143. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 requires that a liability for costs associated with exit or disposal activities be recognized when the liability is incurred. Existing generally accepted accounting principles provide for the recognition of such costs at the date of management's commitment to an exit plan. In addition, SFAS No. 146 requires that the liability be measured at fair value and be adjusted for changes in estimated cash flows. The provisions of SFAS No. 146 are effective for exit or disposal activities initiated after December 31, 2002. The Company is currently in the process of evaluating the impact of the adoption of SFAS No. 146. 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 2001 and through September 30, 2002, 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. As of September 30, 2002 and December 31, 2001, the Company had $1.05 million and $100,000 of subordinated notes outstanding at fixed interest rates of 10% and 8.5%, respectively. In addition, at September 30, 2002 and December 31, 2001, the Company had a $6.0 million and $6.1 million mortgage loan payable to Principal Life insurance Company, respectively, at a fixed annual rate of 7.23% for the first five years at which time the rate will be renegotiated by the parties. 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 $8.7 million and $6.6 million outstanding on its line of credit and long-term debt issued under the Wells Fargo Credit Agreement as of September 30, 2002 and December 31, 2001, respectively. The debt under the Wells Fargo Credit Agreement is held at variable interest rates. The Company has cash flow exposure on its line of credit and long-term debt due to its variable prime rate pricing. At September 30, 2002 and December 31, 2001, a 1% change in the prime rate would not materially increase or decrease interest expense or cash flows. Item 4 EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. (a) Evaluation of disclosure controls and procedures. Under the supervision and with the participation of our management, including the Company's Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-14(c) under the Exchange Act) as of a date (the "Evaluation Date") within 90 days prior to the filing date of this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures are effective in timely alerting them to the material information relating to us (or our consolidated subsidiaries) required to be included in our periodic SEC filings. (b) Changes in internal controls. There were no significant changes made in our internal controls during the period covered by this report or, to our knowledge, in other factors that could significantly affect these controls subsequent to the date of their evaluation. PART II OTHER INFORMATION ITEM 1 LEGAL PROCEEDINGS. Inapplicable ITEM 2 CHANGES IN SECURITIES. Inapplicable ITEM 3 DEFAULTS ON SENIOR SECURITIES. Inapplicable ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS. Inapplicable ITEM 5 OTHER INFORMATION. Inapplicable ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K. a. Exhibits: 99.1 Certification of Chief Executive Officer pursuant to 18 U.S.C Section 1350 99.2 Certification of Chief Financial Officer pursuant to 18 U.S.C Section 1350 b. Reports on Form 8-K: On July 23, 2002, the Company filed a Form 8-K announcing record revenues and net income for the second quarter ended June 30, 2002. 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, 2002 - -------------------- and Chairman of the Board of Directors Richard J. Braun (Principal Executive Officer) /s/ Kevin J. Wiersma Vice President, Chief Operating Officer November 14, 2002 - -------------------- and Chief Financial Officer (Principal Kevin J. Wiersma Financial Officer) /s/ James D. Hanzlik Director of Finance/Controller November 14, 2002 - -------------------- (Principal Accounting Officer) James D. Hanzlik CERTIFICATIONS Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Richard J. Braun, certify that: 1. I have reviewed this quarterly report on Form 10-Q of MEDTOX Scientific, Inc.: 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Dated: November 14, 2002 By: /s/ Richard J. Braun ----------------------- Richard J. Braun Chief Executive Officer Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Kevin J. Wiersma, certify that: 1. I have reviewed this quarterly report on Form 10-Q of MEDTOX Scientific, Inc.: 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Dated: November 14, 2002 By: /s/ Kevin J. Wiersma ----------------------- Kevin J. Wiersma Chief Financial Officer EX-99 2 exhibit99-1.txt EX 99.1 EXHIBIT 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of MEDTOX Scientific, Inc. (the "Company") on Form 10-Q for the quarter ended September 30, 2002 as filed with the Securities and Exchange Commission (the "Report"), I, Richard J. Braun, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to ss.906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: November 14, 2002 By: /s/ Richard J. Braun ----------------------- Richard J. Braun Chief Executive Officer EX-99 3 exhibit99-2.txt EX 99.2 EXHIBIT 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of MEDTOX Scientific, Inc. (the "Company") on Form 10-Q for the quarter ended September 30, 2002 as filed with the Securities and Exchange Commission (the "Report"), I, Kevin J. Wiersma, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to ss.906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: November 14, 2002 By: /s/ Kevin J. Wiersma ----------------------- Kevin J. Wiersma Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----