-----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, WjJRy2C1JBSQky/9U8udAIqZtcoHxXKNV1OAsF/TiuKMpJO0SuKY7V4fnGyE3Ov5 xy5EGq3NWF9tAPn/UliWQQ== 0000739944-97-000013.txt : 19970814 0000739944-97-000013.hdr.sgml : 19970814 ACCESSION NUMBER: 0000739944-97-000013 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970813 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: MEDTOX SCIENTIFIC INC CENTRAL INDEX KEY: 0000739944 STANDARD INDUSTRIAL CLASSIFICATION: IN VITRO & IN VIVO DIAGNOSTIC SUBSTANCES [2835] IRS NUMBER: 953863205 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-11394 FILM NUMBER: 97657989 BUSINESS ADDRESS: STREET 1: 1238 ANTHONY RD CITY: BURLINGTON STATE: NC ZIP: 27215 BUSINESS PHONE: 9102266311 MAIL ADDRESS: STREET 1: 1238 ANOTHNY ROAD CITY: BURLINGTON STATE: NC ZIP: 27215 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 FORM 10-Q FOR PERIOD ENDED JUNE 30, 1997 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 June 30, 1997 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.) 1238 Anthony Road, Burlington, North Carolina 27215 (Address of principal executive offices) (Zip Code) Registrant's telephone number including area code: (910) 226-6311 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 August 1, 1997 was 55,516,742. MEDTOX SCIENTIFIC, INC. INDEX Page Part I Financial Information: Item 1: Consolidated Balance Sheets - June 30, 1997 (Unaudited) and December 31, 1996 ........................................ 3 Consolidated Statements of Operations - Three Months Ended June 30, 1997 and 1996 and Six Months Ended June 30, 1997 and 1996 (Unaudited)............... 5 Consolidated Statements of Cash Flows - Six Months Ended June 30, 1997 and 1996 (Unaudited) ..................... 6 Notes to Consolidated Financial Statements.................... 7 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations ................11 Part II Other Information .................................................17 Signatures ...................................................18 PART I. FINANCIAL INFORMATION MEDTOX SCIENTIFIC, Inc. CONSOLIDATED BALANCE SHEETS (In thousands, except for number of shares)
June 30 December 31 1997 1996 --------------------------------- (Unaudited) Assets Current assets Cash and cash equivalents $ 19 $ 82 Accounts receivable: Trade, less allowance for doubtful accounts ($362-1997; $358-1996) 5,328 4,476 Other 69 77 --------------------------------- 5,397 4,553 Inventories: Raw materials 531 488 Work in process 170 146 Finished goods 672 656 --------------------------------- 1,373 1,290 Prepaid expenses and other 404 140 --------------------------------- Total current assets 7,193 6,065 Equipment and improvements: Furniture and equipment 9,877 9,200 Leasehold improvements 1,100 929 --------------------------------- 10,977 10,129 Less accumulated depreciation and amortization (8,441) (7,951) --------------------------------- 2,536 2,178 Goodwill, net of accumulated amortization of $1,658 in 1997 and $1,184 in 1996 15,362 15,836 --------------------------------- Total assets $ 25,091 $ 24,079 ================================= See notes to consolidated financial statements.
MEDTOX SCIENTIFIC, Inc. CONSOLIDATED BALANCE SHEETS (Continued) (In thousands, except for number of shares)
June 30 December 31 1997 1996 ---------------------------------- (Unaudited) Liabilities and stockholders' equity Current liabilities Line of credit $ 3,315 $ 1,437 Accounts payable 2,681 2,387 Accrued expenses 1,547 2,074 Current portion of restructuring accrual 782 899 Current portion of long-term debt 2,121 2,790 Current portion of capital lease obligations 71 26 Other current liabilities - 14 ---------------------------------- Total current liabilities 10,517 9,627 Long-term portion of restructuring accrual 604 904 Capital lease obligations 257 - Stockholders' equity Preferred Stock, $1.00 par value: Authorized - 1,000,000 shares; Issued and outstanding - 4 shares in 1997 and 238 in 1996 - - Common Stock, $ .15 par value: Authorized - 60,000,000 shares; Issued and outstanding - 55,512,158 shares in 1997 and 25,555,796 shares in 1996 8,327 3,834 Additional paid-in capital 51,905 56,366 Accumulated deficit (46,343) (46,476) ---------------------------------- 13,889 13,724 Less: Treasury stock (176) (176) ---------------------------------- Total stockholders' equity 13,713 13,548 ---------------------------------- Total liabilities and stockholders' equity $ 25,091 $ 24,079 ================================== See notes to consolidated financial statements.
MEDTOX SCIENTIFIC, Inc. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except share and per share data)
Three Months Ended Six Months Ended June 30 June 30 June 30 June 30 1997 1996 1997 1996 ---------------------------------- --------------------------------- (Unaudited) (Unaudited) (Unaudited) (Unaudited) Revenues Laboratory services $ 6,779 $ 6,735 $ 12,922 $ 11,483 Product sales 707 892 1,367 1,688 ---------------------------------- --------------------------------- 7,486 7,627 14,289 13,171 Cost of sales Laboratory services 4,153 4,228 8,005 7,217 Product sales 445 571 884 1,227 ---------------------------------- --------------------------------- 4,598 4,799 8,889 8,444 ---------------------------------- --------------------------------- Gross profit 2,888 2,828 5,400 4,727 Operating expenses Selling, general and administrative 2,421 2,623 4,580 5,030 Research and development 205 365 411 710 Restructuring costs - - - 858 ---------------------------------- --------------------------------- 2,626 2,988 4,991 6,598 Other income (expenses) Interest and financing costs, net (160) (126) (276) (203) Royalties and fees - 22 - 85 ---------------------------------- --------------------------------- (160) (104) (276) (118) ---------------------------------- --------------------------------- Net income (loss) $ 102 $ (264) $ 133 $ (1,989) ===================================================================== Net income (loss) per share $ 0.00 $ (0.01) $ 0.00 $ (0.09) ================================== ================================= Weighted average number of common shares outstanding 44,814,659 22,006,646 50,207,371 21,282,842 ================================== ================================= See notes to consolidated financial statements.
MEDTOX SCIENTIFIC, Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Six Months Ended June 30 June 30 1997 1996 ---------------------------------- (Unaudited) (Unaudited) Operating activities Net income (loss) $ 133 $ (1,989) Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization 964 1,054 Provision for losses on accounts receivable 4 68 Provision for obsolete inventory (97) - Restructuring costs - 858 Changes in operating assets and liabilities, net of acquisition: Accounts receivable (848) (1,591) Inventories 14 (34) Prepaid expenses and other (264) 161 Accounts payable, accrued expenses and other (247) (342) Restructuring accruals (417) (506) ---------------------------------- Net cash used in operating activities (758) (2,321) Investing activities Purchases of equipment and improvements (528) (1,047) Cash used for MEDTOX acquisition - (19,287) ---------------------------------- Net cash used in investing activities (528) (20,334) Financing activities Net proceeds from sale of preferred stock - 19,093 Net proceeds (costs) from sale of common stock 32 629 Net proceeds from line of credit, term loans and notes payable 1,878 4,392 Principal payments on capital lease obligations (18) - Principal payments on term loans and notes payable (669) (1,571) ---------------------------------- Net cash provided by financing activities 1,223 22,543 ---------------------------------- Decrease in cash and cash equivalents (63) (112) Cash and cash equivalents at beginning of period 82 258 ---------------------------------- Cash and cash equivalents at end of period $ 19 $ 146 ================================== Supplemental noncash activities During 1997, the Company entered into capital lease obligations of $320,000 to purchase equipment. In January 1996, the Company acquired Medtox Laboratories, Inc. The purchase price was $24 million, which included $19 million cash and the issuance of $5 million in common stock (2,517,306 shares). During 1997, the Company converted 234 shares of preferred stock into 22,001,232 shares of common stock. See notes to consolidated financial statements.
MEDTOX SCIENTIFIC, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 1997 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 of normal recurring accruals) considered necessary for a fair presentation of financial condition and results of operations have been included. Operating results for the six month period ended June 30, 1997 are not necessarily indicative of the results that may be attained for the entire year. For further information, refer to the financial statements and notes thereto included in the Company's Annual Report on Form 10-K, (as amended), for the year ended December 31, 1996. Loss Per Share: Loss per share amounts are based on the weighted average number of shares of common stock outstanding. Reclassifications: Certain reclassifications have been made to the 1996 financial statements to conform with the 1997 presentation. NOTE B -- ACQUISITION OF MEDTOX LABORATORIES, INC. ("MEDTOX") On January 30, 1996, the Company acquired MEDTOX, a toxicology laboratory located in St. Paul, Minnesota. The purchase price was $24 million, which included $19 million cash and the issuance of 2,517,306 shares of common stock. The acquisition was accounted for under the purchase method of accounting wherein the Company recognized approximately $22 million in goodwill. The goodwill is being amortized over a period of 20 years. Utilizing an undiscounted cash flow analysis, the Company concluded that the carrying value of the remaining goodwill associated with the MEDTOX acquisition exceeded the estimated future cash flows. Accordingly, the Company recorded a write-off of $6,016,000 at December 31, 1996. The Company financed the acquisition by issuing $20 million of convertible preferred stock and borrowing $4 million under two $2 million term loans. The Company also entered into a revolving line of credit of up to $7 million for working capital purposes. The consolidated results of operations for the six months ended June 30, 1996 include the results of the MEDTOX operations from January 26, 1996 to June 30, 1996. NOTE C -- ACQUISITION OF BIOMAN PRODUCTS, INC. ("BIOMAN") On June 1, 1995, the Company acquired Bioman, an environmental diagnostics company. The purchase price was $140,000, which included cash and the issuance of 21,489 shares of common stock. The acquisition was accounted for under the purchase method of accounting wherein the Company recognized $117,000 of goodwill, which was being amortized over a period of 20 years. The consolidated results of operations for the six months ended June 30, 1996 included the results of the Bioman operations. In September 1996, the Company sold the former Bioman operations to a company headed by certain of the former employees of the Company and Bioman. NOTE D -- DEBT To help finance the acquisition of MEDTOX, the Company entered into revolving and term loan facilities with Heller Financial, Inc. ("Heller"). The debt financing was for a total of $11,000,000 and consisted of two term loans totaling $4,000,000 and up to $7,000,000 in the form of a revolving line of credit based primarily on the receivables of the Company. The amount of credit available to the Company varies with the accounts receivable and the inventory of the Company. Effective May 1, 1997, the Company and Heller entered into the First Amendment to Loan and Security Agreement and Limited Waiver (the "Amendment Agreement") whereby Heller agreed to waive the then existing non compliance with certain covenants. As part of the Amendment Agreement, the Company and Heller agreed to revise the loan covenants and loan interest rates commencing May 1, 1997. The interest rates on the two term loans of $2,000,000 are 3.0% and 2.5% above the prime rate respectively. The revolving line of credit carries an interest rate equal to 2.0% above the prime rate. As of June 30, 1997, the Company was not in compliance with certain covenants in its Amendment Agreement with Heller. Heller has notified the Company that it does not currently intend to exercise any of its rights or remedies regarding non compliance available to Heller under the Loan Agreement with Heller. NOTE E -- CONTINGENCIES The Company is a defendant to claims of patent infringement asserted on August 20, 1996. It is alleged the Company infringes two patents allegedly owned by the plaintiff relating to forensically acceptable determinations of gestational fetal exposure to drugs and other chemical agents. The Company has answered the compliant denying any infringement and has counterclaimed for a declatory judgment that the patents are invalid, unenforceable, and not infringed. It also has counterclaimed for unfair competition under federal and state law, requesting money damages as well as injunctive relief. The Company intends to vigorously pursue its defense of the claims and to vigorously prosecute its counterclaims. On March 18, 1997, a lawsuit was commenced in New York State Court by a former holder of the Series A Preferred Stock claiming entitlement to additional shares of Common Stock as a result of the Company's previous inability to issue the conversion shares. The conversion shares have been issued to the former Series A Preferred Shareholder. The Company has denied any liability and intends to contest the lawsuit unless a reasonable settlement can be reached. The Company believes that the probable resolution of the above contingencies will not materially affect the financial position or results of operations of the Company. On January 31, 1997, the Company filed suit in Federal District Court in Minnesota against a majority shareholder and two outside directors of the Company alleging violation of Section 16b of the Securities Exchange Act of 1934 and seeking recovery of more than $500,000 in short-swing profits. On August 4, 1997, the U.S. District Court granted Defendants' motion to dismiss the Company's complaint, ruling that the Defendants' conduct did not constitute a violation of Section 16(b). The Company is considering whether to appeal that decision. CAUTIONARY STATEMENT IDENTIFYING IMPORTANT FACTORS THAT COULD CAUSE THE COMPANY'S ACTUAL RESULTS TO DIFFER FROM THOSE PROJECTED IN FORWARD LOOKING STATEMENTS In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, readers of this document and any document incorporated by reference herein, are advised that this document and documents incorporated by reference into this document contain both statements of historical facts and forward looking statements. Forward looking statements are subject to certain risks and uncertainties, which could cause actual results to differ materially from those indicated by the forward looking statements. Examples of forward looking statements include, but are not limited to (i) projections of revenues, income or loss, earnings or loss per share, capital expenditures, dividends, capital structure and other financial items, (ii) statements of the plans and objectives of the Company or its management or Board of Directors, including the introduction of new products, or estimates or predictions of actions by customers, suppliers, competitors or regulatory authorities, (iii) statements of future economic performance, and (iv) statements of assumptions underlying other statements and statements about the Company or its business. This document and any documents incorporated by reference herein also identify important factors which could cause actual results to differ materially from those indicated by the forward looking statements. These risks and uncertainties include price competition, the decisions of customers, the actions of competitors, the effects of government regulation, possible delays in the introduction of new products, customer acceptance of products and services, the possible effects of the MEDTOX acquisition and its related financings and other factors which are described herein and/or in documents incorporated by reference herein. The cautionary statements made pursuant to the Private Litigation Securities Reform Act of 1995 above and elsewhere by the Company should not be construed as exhaustive or as any admission regarding the adequacy of disclosures made by the Company prior to the effective date of such Act. Forward looking statements are beyond the ability of the Company to control and in many cases the Company cannot predict what factors would cause results to differ materially from those indicated by the forward looking statements. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Introduction The Company commenced operations in June 1983 and until 1986 was a development stage company. The Company became engaged in the manufacture and sale of Conventional Biodiagnostic Products as a result of its acquisition of Granite Technological Enterprises, Inc. in 1986. The Company began the manufacture and sale of its EZ-SCREEN(R) diagnostic tests in 1985 and introduced its patented one-step assays, VERDICT(R) and RECON(R), in 1993. Also in 1993, the Company formed DIAGNOSTIX, Inc. to market its agricultural diagnostic products. The Company entered the laboratory testing market when it completed the acquisition of Princeton Diagnostic Laboratories of America, Inc., (PDLA) in 1994. In 1995, the Company acquired the former operations of Bioman through its DIAGNOSTIX, Inc. subsidiary. On January 30, 1996 the Company completed the acquisition of MEDTOX. The results of operations for the six months ended June 30, 1996 include the operations of MEDTOX from January 26, 1996 through the end of the period. Since inception, the Company has financed its working capital requirements primarily from the sale of equity securities. Three Months Ended June 30, 1997 Compared to Three Months Ended June 30, 1996 Total revenues for the three months ended June 30, 1997 were $7,486,000 as compared to $7,627,000 for the three months ended June 30, 1996. The decrease was attributable to a decrease in revenues from product sales. Laboratory service revenues were $6,779,000 for the three months ended June 30, 1997, compared to $6,735,000 for the three months ended June 30, 1996. This increase was the result of increased sample volume partially offset by a decreased average selling price per sample. Product sales include the sales generated from substance abuse testing products, which incorporates the EZ-SCREEN and VERDICT on site test kits and other ancillary products for the detection of abused substances. Sales from these products were $397,000 for the three months ended June 30, 1997 compared to sales of $441,000 recorded for the same period in 1996. This decrease of 10% was primarily due to the absence of certain sales generated through the former operations of Bioman. Product sales also include sales of agricultural diagnostic products. Sales of these products were $185,000 for the three months ended June 30, 1997 compared to sales of $372,000 for the three months ended June 30, 1996. For the three months ended June 30, 1996 the Company had sales of $133,000 which were generated through the former operations of Bioman,. Excluding these revenues, sales of agricultural diagnostic products were $239,000 for the three months ended June 30, 1996. As such, the sales of these products for the three months ended June 30, 1997 were, on a pro forma basis, 23% lower than the comparable period in 1996. The primary reason for the decrease was due to decreased purchases by the USDA for the Company's products. The Company believes that this is the result of decreased testing by the USDA for the tests that utilize the Company's products. Sales of contract manufacturing services, microbiological and associated product sales were $125,000 for the three months ended June 30, 1997 compared to $79,000 for the same period in 1996. This increase is the result of increased revenues from contract manufacturing services. In July, 1997, the Company entered into a three year Supply Agreement with Boehringer Mannheim Corporation ("BMC"), whereby the Company will supply to BMC controls for certain products of BMC. The gross margin from the revenues generated from the laboratory services was 39% for the three months ended June 30, 1997 an increase compared to the same period in 1996, when the gross margin was 37%. The improvement in the gross margin was primarily due to the increased efficiencies in the laboratory combined with an increase in the number of tests performed in the laboratory. Gross margins from the sales of both manufactured products and products purchased for resale for the three months ended June 30, 1997 were 37% compared to 36% of sales of these products during the three months ended June 30, 1996. This increase in gross margin from product sales is primarily the result of increased sales of contract manufacturing services. Selling, general and administration expenses for the three months ended June 30, 1997 were $2,421,000, compared to $2,623,000 for the three months ended June 30, 1996. The $202,000 reduction in these expenses in 1997 was primarily the result of the consolidation of certain administrative functions into the MEDTOX facility as well as decreased amortization expense. Research and development expenses incurred during the three months ended June 30, 1997 were $205,000 as compared to $365,000 for the same period in 1996. The reduction of $160,000 in research and development expenses is primarily the result of a reduction of personnel and a refocus of efforts in the research and development function associated with the Company's on-site products. For the three months ended June 30, 1997, the Company incurred net interest and financing costs of $160,000, compared to costs of $126,000 incurred during the three months ended June 30, 1996. This increase was the result of increased borrowings against the line of credit during the three months ended June 30, 1997 as compared to June 30, 1996. For the three months ended June 30, 1997, the Company had no revenues from royalties and fees, compared to $22,000 for the three months ended June 30, 1996. As a result of the above, the net income for the three months ended June 30, 1997 was $102,000, compared to the net loss of $264,000 for the three months ended June 30, 1996. Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996 Total revenues for the six months ended June 30, 1997 were $14,289,000 as compared to $13,171,000 for the six months ended June 30, 1996. The increase was attributable to the increase in revenues from laboratory services. Laboratory service revenues were $12,922,000 for the six months ended June 30, 1997 as compared to $11,483,000 for the six months ended June 30, 1996. This increase of 13% was primarily the result of the timing of the acquisition of MEDTOX whereby the Company realized revenues from MEDTOX for approximately five months during the six months ended June 30, 1996, as compared to the complete six month period ended June 30, 1997. Had the acquisition of MEDTOX been effective January 1, 1996, the Company would have had revenues of $12,683,000 from laboratory services during the six months ended June 30, 1996, as compared to the $12,922,000 realized from the sale of laboratory services during the six months ended June 30, 1997, this would represent a pro forma increase of $239,000 or 2%. Product sales include the sales generated from substance abuse testing products, which incorporates the EZ-SCREEN and VERDICT on site test kits and other ancillary products for the detection of abused substances. Sales from these products were $834,000 for the six months ended June 30, 1997 compared to sales of $765,000 recorded for the same period in 1996. This increase of 9% was primarily the result of sales of the EZ-SCREEN PROFILE(TM) test kits which were introduced in May, 1996. Product sales also include sales of agricultural diagnostic products. Sales of these products were $328,000 for the six months ended June 30 1997, compared to sales of $687,000 for the six months ended June 30, 1996. For the six months ended June 30, 1996, the Company had sales of $279,000 which were generated through the former operations of Bioman. Excluding these revenues, sales of agricultural diagnostic products were $408,000 for the six months ended June 30, 1996. As such, the sales of these products for the six months ended June 30, 1997 were, on a pro forma basis, 20% lower than during the comparable period in 1996. The primary reason for the decrease was due to decreased purchases by the USDA for the Company's products. The Company believes that this is the result of decreased testing by the USDA for the tests that utilize the Company's products. Sales of contract manufacturing services, microbiological and associated product sales were $205,000 for the six months ended June 30, 1997 compared to $161,000 for the same period in 1996. This increase was primarily due to increased revenues from contract manufacturing services. Revenues generated from the shipment of products to the U.S. Department of Defense were $75,000 for the six months ended June 30, 1996. The Company had no such sales during the six months ended June 30, 1997. The contract the Company had with the Department of Defense has expired. At this time, the Company does not know if the U.S. Department of Defense intends to purchase any more of the kits the Company has developed. The gross margin from the revenues generated from the laboratory services was 38% for the six months ended June 30, 1997 as compared to a gross margin of 37% for the same period in 1996. During the six months ended June 30, 1997, the Company was able to offset declining average selling prices by reducing costs through the consolidation of laboratory operations in 1996 as well as continued improvements in efficiency of laboratory operations. Gross margins from the sales of both manufactured products and products purchased for resale for the six months ended June 30, 1997 were 35% compared to 27% of sales of these products during the six months ended June 30, 1996. This increase in gross margin from product sales is primarily the result of the increased sales of the EZ-SCREEN PROFILE product and contract manufacturing services, as well as reduced costs as a result of certain restructuring steps taken in 1996. Selling, general and administration expenses for the six months ended June 30, 1997 were $4,580,000, compared to $5,030,000 for the six months ended June 30, 1996. The $450,000 reduction in these expenses in 1997 was primarily the result of the consolidation of certain administrative functions into the MEDTOX facility as well as decreased amortization expense. Research and development expenses incurred during the six months ended June 30, 1997 were $411,000 as compared to $710,000 for the same period in 1996. The reduction of $299,000 in research and development expenses is primarily the result of a reduction of personnel and a refocus of efforts in the research and development function associated with the Company's on-site products. During the six months ended June 30, 1996, the Company determined that it would be beneficial to consolidate the laboratory operations of PDLA into the laboratory operations at MEDTOX. In addition the Company decided to down size certain administrative positions at both PDLA and MEDTOX in order to eliminate duplicative functions. As a result of this restructuring plan, the Company recorded a charge of $858,000 during the six months ended June 30, 1996 to cover certain costs of the restructuring, including $100,000 related to certain severance payments. The Company had no such charge during the six months ended June 30, 1997. For the six months ended June 30, 1997, the Company incurred net interest and financing costs of $276,000, compared to costs of $203,000 incurred during the six months ended June 30, 1996. This increase was the result of the funds borrowed by the Company to complete the financing for the acquisition of MEDTOX. For the six months ended June 30, 1997, the Company had no revenues from royalties and fees, compared to $85,000 for the six months ended June 30, 1996. This decrease was primarily due to the absence of royalties from AML as the agreement with AML has expired. As a result of the above, the net income for the six months ended June 30, 1997 was $133,000, compared to the net loss of $1,989,000 for the six months ended June 30, 1996. Management believes the acquisition of MEDTOX and the restructuring of the laboratory operations will continue to improve the operating results of the Company. Management expects net sales to grow through both the addition of new accounts, as well as the introduction of new laboratory testing services and on-site products. Material Changes in Financial Condition As of June 30, 1997, accounts receivable were $5,397,000 compared to $4,553,000 at December 31, 1996. The increase of $844,000 is primarily the result of higher sales in the quarter ended June 30, 1997 as compared to the quarter ended December 31, 1996. Prepaid expenses and other assets were $404,000 at June 30, 1997 as compared to $140,000 at December 31, 1996. The increase of $264,000 is primarily the result of the renewal of annual maintenance contracts, annual licenses and fees and an increase in prepaid supplies. The balance of equipment and improvements at June 30, 1997 was $10,977,000 as compared to a balance of $10,129,000 at December 31, 1996. The increase of $848,000 was the result of purchases of equipment and capital improvements for the laboratory operation to improve efficiencies and reduce operating costs. As of June 30, 1997, accounts payable totaled $2,681,000 compared to $2,387,000 at December 31, 1996. The increase of $294,000, or 12%, is primarily the result of increased purchases of kits, forms and other supplies as a result of increased business for the laboratory testing services consistent with the seasonality of the business. Accrued expenses were $1,547,000 at June 30, 1997, as compared to $2,074,000 at December 31, 1996. The decrease of $527,000, or 34%, was the result of payments made during the first six months of 1997 for expenses accrued at December 31, 1996. At June 30, 1997, the Company had a total balance of leases payable of $328,000 compared to a balance of $26,000 at December 31, 1996. The increase in the balance of the leases payable was the result of the purchase of certain equipment to improve operating efficiencies in the laboratory. June 30, 1997, the Company had a total balance of restructuring accruals of $1,386,000 compared to a balance of $1,803,000 at December 31, 1996. The decrease in the balance of the restructuring accruals of $417,000, or 23%, was the result of payments made during the six months ended June 30, 1997. At June 30, 1997, the Company had a total loan balance owed to its financial lender of $5,436,000, compared to a total balance of $4,227,000 owed at December 31, 1996. The net increase of $1,209,000, or 29%, was the result of increased borrowings by the Company from its line of credit to pay certain accrued expenses and restructuring accruals as well as purchases of certain assets to improve operating efficiencies. Liquidity and Capital Resources Since its inception, the working capital requirements of the Company have been funded primarily by cash received from equity investments in the Company and more recently debt financing. At June 30, 1997, the Company had cash and cash equivalents of $19,000. The Company is currently marginally profitable and, as such, is relying on a continued positive cash flow from operations and its line of credit to fund its 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. The revolving line of credit carries an interest rate equal to 2.0% above the prime rate. As of June 30, 1997, the Company had total availability of $3,512,000 on the line of credit of which $3,315,000 was borrowed, leaving a net availability of $197,000 as of June 30, 1997. In the short term, the Company believes that the aforementioned capital will be sufficient to fund the Company's planned operations through 1997, although there can be no assurance that the available capital will be sufficient to fund the future operations of the Company beyond 1997. The Company believes that consistent profitable earnings, as well as access to capital, will be the primary basis for funding the operations of the Company for the long term. The Company believes that the acquisition of MEDTOX, the subsequent consolidation of the laboratory operations from PDLA into MEDTOX, and other synergy that will be realized from the acquisition of MEDTOX will enable the Company to generate positive cash flow. The Company continues to follow a plan which includes (i) continuing to aggressively monitor and control costs, (ii) increasing revenue from sales of the Company's products, services, and research and development contracts, as well as (iii) continue to selectively pursue synergistic acquisitions to increase the Company's critical mass. 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. ITEM 2 CHANGES IN SECURITIES. Inapplicable ITEM 3 DEFAULTS ON SENIOR SECURITIES. Inapplicable ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS. None ITEM 5 OTHER INFORMATION ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibit 10.41, Amendment to the Loan and Security Agreement and Limited Waiver Between the Company and Heller dated May 1, 1997. There was no Report on Form 8-K during the three months ended June 30, 1997. 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. Date: August 12, 1997 MEDTOX SCIENTIFIC, INC. By: /s/ Richard J. Braun Richard J. Braun, Chief Executive Officer By: /s/ Peter J. Heath Peter J. Heath, Vice President of Finance and Chief Financial Officer EX-10 2 EXHIBIT 10.41 Exhibit 10.41 FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT AND LIMITED WAIVER This First Amendment to Loan and Security Agreement and Limited Waiver ("Amendment") is dated as of May 1, 1997, and entered into by and between HELLER FINANCIAL, INC. ("Lender") and MEDTOX SCIENTIFIC, INC. (formerly known as EDITEK, Inc.), MEDTOX LABORATORIES, INC. (formerly known as Psychiatric Diagnostic Laboratories of America, Inc.) and MEDTOX DIAGNOSTICS, INC. (formerly known as diAGnostix, Inc.) (collectively, "Borrowers"). WHEREAS, Lender and Borrowers have entered into a Loan and Security Agreement, (the "Agreement") dated January 30, 1996; and WHEREAS, the shareholders of Borrowers have approved a change in the name of each Borrower and the Lender and Borrowers desire to amend the Agreement to acknowledge said name changes; and WHEREAS, certain Events of Default are in existence under subsection 8.1(C) of the Agreement as a result of Borrowers' breach of (i) the Tangible Net Worth covenant contained in subsection 6.1 for the all quarters in Fiscal Year 1996 and for the quarter ended March 31, 1997; (ii) the Minimum EBIDTA covenant contained in subsection 6.2 for all the monthly periods in Fiscal Year 1996 and for the twelve (12) month period ended March 31, 1997; (iii) the Ratio of Indebtedness to Tangible Net Worth covenant contained in subsection 6.3 for all quarters in Fiscal Year 1996 and for the quarter ended March 31, 1997; (iv) the Capital Expenditure Limits covenant contained in subsection 6.4 for Fiscal Year 1996; (v) the Fixed Charge Coverage covenant contained in subsection 6.5 for all monthly periods in Fiscal Year 1996 and for the twelve (12) month period ended March 31, 1997; and (vi) the Interest Coverage covenant contained in subsection 6.6 for all month periods in Fiscal Year 1996 and the twelve (12) month period ended March 31, 1997 (collectively, the "Existing Events of Default"). WHEREAS, Borrowers have requested that Lender waive the Existing Events of Default; and WHEREAS, Lender has agreed to waive the existing Events of Default and amend the Agreement in certain respects, subject to the terms and conditions set forth herein. NOW THEREFORE, in consideration of the mutual conditions and agreements set forth in the Agreement and this Amendment, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties, intending to be legally bound, hereby agree as follows: ARTICLE I. DEFINITIONS Section 1.01. Definitions. Capitalized terms used in this Amendment, to the extent not otherwise defined herein, shall have the same meanings as in the Agreement, as amended hereby. ARTICLE II. AMENDMENTS The Agreement is hereby amended as follows: Section 2.01. Amendment to Subsection 1.1 "Certain Defined Terms". Subsection 1.1 is hereby amended by adding, in proper alphabetical order, the following new definitions: "Diagnostics" means MEDTOX Diagnostics, Inc. (f/k/a diAGnostix, Inc.), a Delaware corporation, and its successors and permitted assigns. "Medtox" means MEDTOX Scientific, Inc. (f/k/a EDITEK, Inc.), a Delaware corporation, and its successors and permitted assigns. "MLI" means MEDTOX Laboratories, Inc. (f/k/a Psychiatric Diagnostic Laboratories of America, Inc.), a Delaware corporation, and its successors and permitted assigns. Section 2.01. Amendment to Subsection 2.1(C) "Eligible Collateral". Subsection 2.1(C) is hereby amended by adding the following paragraph (18) to the end of said subsection: (18) Accounts due from Substance Abuse Management, Inc. ("SAMI") to the extent that such Accounts exceed in the aggregate, at any date of determination, an amount equal to the lesser of (i) twelve percent (12%) of the aggregate of Accounts of all Borrowers at said date or (ii) $590,000. Section 2.02. Amendment to Subsection 2.2(A) "Rate of Interest". Subsection 2.2 is hereby amended and restated as follows: (A) Rate of Interest. The Loans and all other Obligations shall bear interest from the date such Loans are made or such other Obligations become due to the date paid at a rate per annum equal to two percent (2.00%) plus the Base Rate with respect to the Revolving Loan, (ii) two and one-half percent (2.50%) plus the Base Rate with respect to Term Loan A and (iii) three percent (3.00%) plus the Base Rate with respect to Term Loan B (the "Interest Rate"). After the occurrence and during the continuance of an Event of Default, the Loans and all other Obligations shall, at Lender's option, bear interest at a rate per annum equal to three percent (3.00%) plus the Interest Rate (the "Default Rate"). Section 2.03. Amendment to Subsection 5.1(F) "Borrowing Base Certificate, Registers and Journals". Subsection 5.1(F) is hereby amended and restated as follows: (F) Borrowing Base Certificates, Registers and Journals. On the Closing Date and within five (5) Business Days after the last day of each month and from time to time upon the request of Lender, each Borrower shall deliver to Lender: (1) a Borrowing Base Certificate updated since the date of the prior Borrowing Base Certificate, together with a report of the outstanding balance of the Revolving Loan owing by such Borrower and the amount of all intercompany advances owing by and to such Borrower; (2) an invoice register or sales journal describing all sales of such Borrower since the date of the prior invoice register, in form and substance satisfactory to Lender, and, if Lender so requests, copies of invoices evidencing such sales and proofs of delivery relating thereto; (3) a cash receipts journal describing all cash receipts of such Borrower since the date of the prior cash receipts journal; (4) an aged trial balance of all its then existing Accounts; and (5) an aged trial balance of all its then existing accounts payable; and (6) a detailed inventory listing and cover summary report. All such reports shall be in form and substance satisfactory to Lender. Notwithstanding the foregoing, effective May 1, 1997, and until further notice from Lender, Borrowers shall deliver the Borrowing Base Certificate referred to in clause (1) above to Lender on each Business Day and the items referred to in clauses (2), (3), (4), (5) and (6) above to Lender within five (5) Business Days after the last day of each month. Section 2.04. Amendment to Subsection 6.1 "Tangible Net Worth". Subsection 6.1 is hereby amended and restated as follows: 6.1 Tangible Net Worth. Borrowers shall at all times maintain a consolidated Tangible Net Worth of at least the amounts set forth below at the end of each quarter of a Fiscal Year set forth below. Fiscal Quarter Amount March 31, 1996 $ 500,000 June 30, 1996 $1,000,000 September 30, 1996 $1,500,000 December 31, 1996 $2,000,000 March 31, 1997 $2,500,000 June 30, 1997 $ 180,000 September 30, 1997 $ 550,000 December 31, 1997 $ 970,000 March 31, 1998 $1,300,000 June 30, 1998 $1,700,000 September 30, 1998 $2,150,000 December 31, 1998 and as of the $2,650,000 last day of each fiscal quarter thereafter Section 2.05. Amendment to Subsection 6.2 "Minimum EBITDA". Subsection 6.2 is hereby amended and restated as set forth below: 6.2 Minimum EBITDA. Borrowers shall at all times maintain a consolidated EBITDA less Registration Payments paid or accrued of at least the amounts set forth below for the periods set forth below. Medtox & Period Diagnostics MLI Consolidated 2 months ended February 29, 1996 $100,000 $ 50,000 $ 150,000 3 months ended March 31, 1996 $100,000 $ 100,000 $ 200,000 4 months ended April 30, 1996 $100,000 $ 400,000 $ 500,000 5 months ended May 31, 1996 $100,000 $ 800,000 $ 900,000 6 months ended June 30, 1996 $200,000 $ 1,000,000 $ 1,200,000 7 months ended July 31, 1996 $200,000 $ 1,400,000 $ 1,600,000 8 months ended August 31, 1996 $200,000 $ 1,800,000 $ 2,000,000 9 months ended September 30, 1996 $200,000 $ 2,100,000 $ 2,300,000 10 months ended October 31, 1996 $300,000 $ 2,400,000 $ 2,700,000 11 months ended November 30, 1996 $300,000 $ 2,800,000 $ 3,100,000 12 months ended December 31, 1996 $300,000 $ 3,100,000 $ 3,400,000 12 months ended March 31, 1997 $350,000 $ 3,100,000 $ 3,450,000 6 months ended June 30, 1997 $ 1,350,000 9 months ended September 30, 1997 $ 2,000,000 12 months ended December 31, 1997 $ 2,700,000 12 months ended March 31, 1998 $ 3,100,000 12 months ended June 30, 1998 $ 3,400,000 12 months ended September 30, 1998 $ 3,750,000 12 months ended December 31, 1998 and for the 12 months $ 3,800,000 ended on the last day of each fiscal quarter thereafter Section 2.06. Amendment to Subsection 6.3 "Ratio of Indebtedness to Tangible Net Worth". Subsection 6.3 is hereby amended and restated as follows: 6.3 Ratio of Indebtedness to Tangible Net Worth. The ratio of (a) Borrowers' consolidated Indebtedness to (b) Borrowers' consolidated Tangible Net Worth shall be no greater than the ratio set forth below at the end of each quarter of a Fiscal Year set forth below. Fiscal Quarter Ratio March 31, 1996 7.5:1 June 30, 1996 7.5:1 September 30, 1996 7.5:1 December 31, 1996 7.5:1 March 31, 1997 7.5:1 June 30, 1997 28.3:1 September 30, 1997 8.3:1 December 31, 1997 4.5:1 March 31, 1998 3.0:1 June 30, 1998 3.0:1 September 30, 1998 3.0:1 December 31, 1998 3.0:1 and as of the last day of each fiscal quarter thereafter Section 2.07. Amendment to Subsection 6.5 "Fixed Charge Coverage". Subsection 6.5 is hereby amended and restated as follows: 6.5 Fixed Charge Coverage. Borrowers shall not permit their consolidated Fixed Charge Coverage for any period set forth below to be less than the amount set forth below for such period. Period Amount 3 months ended March 31, 1996 0.8 6 months ended June 30, 1996 1.0 9 months ended September 30, 1996 1.3 12 months ended December 31, 1996 1.3 12 months ended March 31, 1997 1.3 6 months ended June 30, 1997 0.4 9 months ended September 30, 1997 0.8 12 months ended December 31, 1997 0.8 12 months ended March 31, 1998 1.0 12 months ended June 30, 1998 1.2 12 months ended September 30, 1998 1.3 12 months ended December 31, 1998 1.4 and for the 12 months ended on the last day of each fiscal quarter thereafter Section 2.08. Amendment to Subsection 6.6 "Interest Coverage". Subsection 6.6 is hereby amended and restated as follows: 6.6 Interest Coverage. Borrowers shall not permit their consolidated Interest Coverage for any period set forth below to be less than the amount set forth below for such period. Period Amount 3 months ended March 31, 1996 3.0 6 months ended June 30, 1996 3.4 9 months ended September 30, 1996 4.6 12 months ended December 31, 1996 5.6 12 months ended March 31, 1997 6.0 6 months ended June 30, 1997 1.8 9 months ended September 30, 1997 3.2 12 months ended December 31, 1997 3.8 12 months ended March 31, 1998 4.6 12 months ended June 30, 1998 5.0 12 months ended September 30, 1998 5.4 12 months ended December 31, 1998 6.0 and for the 12 months ended on the last day of each fiscal quarter thereafter ARTICLE III. NAMES Notwithstanding anything contained in the Agreement to the contrary, whenever (i) the defined term "diAGnostix" appears therein, it shall be substituted with the amended defined term "Diagnostics", (ii) the defined term "Editek" appears therein, it shall be substituted with the amended defined term "Medtox" and (iii) the defined term "PDLA" appears therein, it shall be substituted with the amended defined term "MLI". ARTICLE IV. WAIVER Lender hereby waives the Existing Events of Default. This is a limited waiver and shall not be deemed to constitute a waiver of any other existing Event of Default or any future breach of the Agreement or any of the other Loan Documents (including, without limitation, a breach of the covenants causing the Existing Events of Default for any periods other than those specified herein). ARTICLE V. MISCELLANEOUS Section 5.01. Conditions. The effectiveness of this Amendment is subject to the satisfaction of the following conditions precedent (unless specifically waived in writing by Lender): (a) there shall have occurred no material adverse change in the business, operations, financial conditions, profits or prospects, or in the Collateral of Borrowers; (b) Borrowers shall have executed and delivered such other documents and instruments as Lender may require; (c) all corporate proceedings taken in connection with the transactions contemplated by this Amendment and all documents, instruments and other legal matters incident thereto shall be satisfactory to Lender and its legal counsel; and (d) Borrowers shall have paid Lender an amendment fee in the amount of $10,000 and a documentation fee in the amount of $500. Section 5.02 Ratification. The terms and provisions set forth in this Amendment shall modify and supersede all inconsistent terms and provisions set forth in the Agreement and, except as expressly modified and superseded by this Amendment, the terms and provisions of the Agreement, are ratified and confirmed and shall continue in full force and effect. Section 5.03 Corporate Action The execution, delivery and performance of this Amendment have been authorized by all requisite corporate action on the part of each Borrower and will not violate the Articles of Incorporation or Bylaws of any Borrower. Section 5.04 Severability. Any provision of this Amendment held by a court of competent jurisdiction to be invalid or unenforceable shall not impair or invalidate the remainder of this Amendment and the effect thereof shall be confined to the provision so held to be invalid or unenforceable. Section 5.05 Successors and Assigns. This Amendment is binding upon and shall inure to the benefit of Lender and Borrowers and their respective successors and assigns. Section 5.06 Counterparts. This Amendment may be executed in one or more counterparts, each of which when so executed shall be deemed to be an original, but all of which when taken together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties have executed this Amendment on the date first above written. HELLER FINANCIAL, INC., as Lender By:____________________________ Title:__________________________ MEDTOX SCIENTIFIC, INC., (f/k/a EDITEK, Inc..), as a Borrower By:_____________________________ Title:___________________________ [Signatures continue on following page.] MEDTOX LABORATORIES, INC., (f/k/a Psychiatric Diagnostic Laboratories of America, Inc.), as a Borrower By:______________________________ Title:____________________________ MEDTOX DIAGNOSTICS, INC., (f/k/a Diagnostix, Inc.), as a Borrower By:_______________________________ Title:_____________________________ EX-27 3 EXHIBIT 27 (FDS)
5 1,000 6-MOS DEC-31-1997 JUN-30-1997 19 0 5759 362 1373 7193 10977 8441 25091 10517 0 0 0 8327 5386 25091 14289 14289 8889 13880 0 0 276 133 0 133 0 0 0 133 .00 .00
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