-----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, L9rKUfLUySlC0QHeC48ZA3gdcs2xwsl/XMjxK3UgidEVV+XEHNaPZ5g5956D3i/o ziAAkcbsTMC+kErC9L62kw== 0000739944-98-000019.txt : 19981116 0000739944-98-000019.hdr.sgml : 19981116 ACCESSION NUMBER: 0000739944-98-000019 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981112 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: SEC FILE NUMBER: 001-11394 FILM NUMBER: 98745906 BUSINESS ADDRESS: STREET 1: 402 WEST COUNTY ROAD D CITY: ST PAUL STATE: MN ZIP: 55112 BUSINESS PHONE: 6126367466 MAIL ADDRESS: STREET 1: 402 WEST COUNTY ROAD D CITY: ST PAUL STATE: MN ZIP: 55112 FORMER COMPANY: FORMER CONFORMED NAME: EDITEK INC DATE OF NAME CHANGE: 19940902 FORMER COMPANY: FORMER CONFORMED NAME: ENVIRONMENTAL DIAGNOSTICS INC DATE OF NAME CHANGE: 19920703 10-Q 1 FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 1998 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, 1998 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period to Commission file number 1-11394 MEDTOX SCIENTIFIC, INC. (Exact name of registrant as specified in its charter) Delaware 95-3863205 (State or other jurisdiction of (I.R.S. Employer incorporated or organization) Identification No.) 402 West County Road D, St.Paul, Minnesota 55112 - ---------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number including area code: (651) 636-7466 - -------------------------------------------------------------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No The number of shares of Common Stock, $.15 par value, outstanding as of November 5, 1998, was 57,971,184. MEDTOX SCIENTIFIC, INC. INDEX Page Part I Financial Information: Item 1: Consolidated Balance Sheets - September 30, 1998 (Unaudited) and December 31, 1997 .................................. 3 Unaudited Consolidated Statements of Operations - Three Months Ended September 30, 1998 and 1997 and Nine Month Ended September 30, 1998 and 1997................. 5 Unaudited Consolidated Statements of Cash Flows - Nine Months Ended September 30, 1998 and 1997.................... 6 Notes to Consolidated Financial Statements................. 7 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations ............. 10 Part II Other Information ................................... 16 Signatures ......................................... 17 MEDTOX SCIENTIFIC, Inc. CONSOLIDATED BALANCE SHEETS (In thousands, except for number of shares)
September 30 December 31 1998 1997 --------------------------- (Unaudited) Assets Current Assets Cash and Cash Equivalents $ 32 $ 58 Accounts receivable: Trade, less allowance for doubtful accounts (1998--$216; 1997--$514) 6,465 5,443 Other 101 110 ------------------------- 6,566 5,553 Inventories: Raw materials 543 414 Work in process 139 134 Finished goods 395 594 ------------------------- 1,077 1,142 Prepaid expenses and other 656 415 ------------------------- Total current assets 8,331 7,168 Equipment and improvements: Furniture and equipment 11,406 10,669 Leasehold improvements 1,307 1,243 ------------------------- 12,713 11,912 Less accumulated depreciation and amortization (9,675) (8,946) --------------------------- 3,038 2,966 Goodwill, net of accumulated amortization of $2,888 in 1998 and $2,273 in 1997 14,132 14,747 Other assets 65 - ------------------------- Total assets $ 25,566 $ 24,881 ------------------------- ------------------------- See notes to consolidated financial statements.
MEDTOX SCIENTIFIC, Inc. CONSOLIDATED BALANCE SHEETS (Continued) (In thousands, except for number of shares)
September 30 December 31 1998 1997 --------------------------- (Unaudited) Liabilities and stockholders' equity Current liabilities Line of credit $ 3,427 $ 3,572 Accounts Payable 3,775 3,768 Accrued Expenses 1,340 1,326 Current portion of restructuring accrual 283 521 Current portion of long-term debt 2,251 1,451 Current portion of capital leases 154 112 ------------------------- Total current liabilities 11,230 10,750 Long-term portion of restructuring accrual 265 265 Long-term capital lease obligations 312 295 Stockholders' equity Preferred Stock, $1.00 par value: Authorized - 1,000,000 shares; Issued and outstanding - 0 shares in 1998 and 4 in 1997 - - Common Stock, $.15 par value: Authorized - 75,000,000 shares; Issued and outstanding - 57,962,124 shares in 1998 and 56,828,173 shares in 1997 8,694 8,525 Additional paid-in capital 51,522 51,673 Accumulated deficit (46,281) (46,451) ---------------------------- 13,935 13,747 Less: Treasury stock (176) (176) ---------------------------- Total stockholders' equity 13,759 13,571 Total liabilities and stockholders' equity $ 25,566 $ 24,881 -------------------------- -------------------------- See notes to consolidated financial statements.
MEDTOX SCIENTIFIC, Inc. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except share and per share data) (Unaudited)
Three Months Ended Nine Months Ended September 30 September 30 1998 1997 1998 1997 ------------------ ------------------ Revenues Laboratory service revenues $ 6,861 $ 6,528 $ 20,715 $ 19,485 Product sales 748 770 1,879 2,137 --------------------- ---------------------- 7,609 7,298 22,594 21,622 Cost of services 4,787 4,331 13,867 12,648 Cost of sales 443 427 1,208 1,311 --------------------- --------------------- 5,230 4,758 15,075 13,959 -------------------- --------------------- Gross profit 2,379 2,540 7,519 7,663 Operating expenses Selling, general and administrative 2,126 2,140 5,993 6,443 Research and development 283 230 878 641 --------------------- --------------------- 2,409 2,370 6,871 7,084 Operating income (loss) (30) 170 648 579 --------------------- ---------------------- Other expenses Interest and finance costs, net 162 168 479 444 ----------------------- --------------------- Net income (loss) $ (192) $ 2 $ 169 135 ----------------------- --------------------- ----------------------- --------------------- Basic net earnings per common share $ (0.00) $ 0.00 $ 0.00 $ 0.00 ---------------------- --------------------- ---------------------- --------------------- Diluted net earnings per common share $ (0.00) $ 0.00 $ 0.00 $ 0.00 ---------------------- --------------------- ---------------------- --------------------- Weighted average number of common 57,948,835 55,524,219 57,823,256 48,423,741 and common equivalent, shares ----------------------- ---------------------- outstanding (basic & diluted) ----------------------- ---------------------- See notes to consolidated financial statements.
MEDTOX SCIENTIFIC, Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
Nine Months Ended September 30 1998 1997 ---------------- Operating activities Net income $ 169 $ 135 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 1,564 1,454 Write off of goodwill and other assets - - Gain on sale or retirement of equipment (4) - Provision for losses on accounts receivable (74) 39 Provision for obsolete inventory - (97) Changes in operating assets and liabilities, net of acquisition: Accounts receivable (939) (1,326) Inventories 65 112 Prepaid expenses and other (241) (377) Accounts payable, accrued expenses and other 21 445 Restructuring accruals (238) (528) --------------------- Net cash used in operating activities 323 (143) Investing activities Purchases of equipment and improvements (809) (870) --------------------- Net cash provided by (used in) investing activities (809) (870) Financing activities Proceeds from sale of equipment - - Debt finance costs (79) - Net proceeds from sale of preferred stock - - Net proceeds from sale of common stock 19 42 Net change in line of credit (145) 1,966 Principal payments on capital lease obligations (135) (43) Principal payments on term loans and notes payable (2,396) (1,000) Proceeds from term loans and notes payable 3,196 - ---------------------- Net cash provided by financing activities 460 965 Increase in cash and cash equivalents (26) (48) Cash and cash equivalents at beginning of period 58 82 ---------------------- Cash and cash equivalents at end of period $ 32 $ 34 ---------------------- ---------------------- Supplemental noncash activities During 1998, the Company entered into capital lease obligations of $194,000 to purchase equipment. During 1997, the Company entered into capital lease obligations of $435,000 to purchase equipment. 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 September 30, 1998 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, 1998 are not necessarily indicative of the results that may be attained for the entire year. These financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1997. Earnings Per Share: In 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings Per Share." Statement 128 replaced the calculation of primary and fully diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. All earnings per share amounts for all periods have been presented, where appropriate, and restated to conform to Statement 128 requirements. Options and warrants to purchase 5,082,412 shares of common stock at a range of $.4375 to $8.19 were outstanding at September 30, 1998 but were not included in the computation of the diluted earnings per share because the options' and warrants' exercise price was greater than the average market price of the common shares. Reclassifications: Certain reclassifications have been made to the 1997 financial statements to conform with 1998 presentation. Accounting for Derivatives: In June 1998 the Financial Accounting Standards Board released SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities", which will be effective for the company beginning January 1, 2000. SFAS No. 133 establishes new accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. The Company has not yet completed its analysis of the effect, if any, this standard will have on future operating results. Segment Disclosures: In 1997, the Financial Accounting Standards Board issued Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information." This Statement requires that public business enterprise report financial and descriptive information about its reportable operating segments. This Statement need not be applied to interim financial statements in the initial year of its application, thus the Company has not determined the effect of applying this Statement. NOTE B -- DEBT On January 14, 1998, the Company entered into a Credit and Security Agreement (the "Credit Agreement") with Norwest Business Credit ("Norwest"). The Credit Agreement consists of (i) a term loan of $2,125,000 which matures on January 15, 2001, (ii) a term loan of $700,000 which matures on January 15, 1999, (iii) a revolving line of credit based upon the balance of the Company's trade accounts receivable of up to $6,000,000, and (iv) a note of up to $1,200,000 for the purchase of capital equipment for 1998. The term loan of $2,125,000 carries an interest rate equal to 1.25% above the publicly announced rate of interest by Norwest Bank Minnesota, N.A. (the "Base Rate", 8.25% at September 30, 1998) as does the note for capital expenditures. The $700,000 term loan has an interest rate equal to 3.00% above the Base Rate. The revolving line of credit has an interest rate of 1.00% above the Base Rate. As of September 30, 1998 the $2,125,000 term loan carried a balance of $1,653,000; the $700,000 term loan carried a balance of $233,000; the revolving line of credit balance was $3,427,000; and the balance on the capital equipment note was $365,000. The Company utilized $4.5 million of the proceeds received from Norwest to pay off the outstanding loan balances owed to its former lender. As of September 30, 1998, the Company was not in compliance with certain covenants in its Credit Agreement with Norwest. As a result, all of the companies term debt outstanding has been classified as current. The Company and Norwest are currently renegotiating the terms of the Credit Agreement to address any loan covenant violations and cure the existing default. Management believes that an acceptable resolution will be achieved allowing the company to meet its liquidity requirements through the next twelve months. NOTE C -- 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 complaint denying any infringement and has counterclaimed for a declaratory 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, while not abandoning its legal recourse, has recently entered into settlement discussions with the plaintiff. The Company believes that the probable resolution of this matter 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 former 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 the Defendants' motion to dismiss the Company's complaint, ruling the Defendants' conduct did not constitute a violation of Section 16b. On October 29, 1997, the Company filed an appeal of that decision to the United States Court of Appeals for the Eighth Circuit. On July 24, 1998, the Eighth Circuit United States Court of Appeals reversed the lower court's dismissal of the Company's complaint and remanded the case to the District Court for further proceedings. The Company intends to pursue the litigation. 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 as Environmental Diagnostics, Inc. 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. The Company entered the laboratory testing market when it completed the acquisition of Princeton Diagnostic Laboratories of America, Inc., (PDLA) in 1994. On January 30, 1996 the Company completed the acquisition of MEDTOX. In 1997, the Company changed its name to MEDTOX Scientific, Inc. Since inception, the Company has financed its working capital requirements primarily from the sale of equity. Three Months Ended September 30, 1998 Compared to Three Months Ended September 30, 1997 Total revenues for the three months ended September 30, 1998 were $7,609,000 as compared to $7,298,000 for the three months ended September 30, 1997. Laboratory service revenues were $6,861,000 for the three months ended September 30, 1998 as compared to $6,528,000 for the three months ended September 30, 1997. This increase of 5% in laboratory service revenues was primarily the result of an increase in laboratory samples of 13% which was the result of increased sales volume from current clients as well as new clients. This increase in unit volume was partially offset by lower per unit prices. 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 $310,000 for the three months ended September 30, 1998 compared to sales of $405,000 recorded for the same period in 1997. The Company believes that the decrease in sales of 23% is primarily due to increased competition from products perceived as more user friendly than the Company's traditional products. The Company believes that the introduction of its new generation of on-site test kits will enable the Company to compete successfully in the on-site drug screening market and offer comprehensive drug testing kits and services. The first of these next generation test kits, PROFILE(R)-II, received pre-market clearance from the U. S. Food & Drug Administration on July 31, 1998 and shipping commenced in September 1998. Product sales also include sales of agricultural diagnostic products. Sales of these products were $226,000 for the three months ended September 30, 1998 compared to sales of $182,000 for the three months ended September 30, 1997. The Company believes that the primary reason for the increase of 24% was due to timing differences in orders from the USDA for the Company's products. Sales of contract manufacturing services, microbiological and associated product sales were $212,000 for the three months ended September 30, 1998 compared to $183,000 for the same period in 1997. The increase of 16% was due to increased revenue from contract manufacturing services from both historical customers and revenues from customers added in late 1997. The gross margin from the revenues generated from the laboratory services was 30% for the three months ended September 30, 1998 a decrease as compared to the same period in 1997, when the gross margin was 34% from laboratory services. The decrease in the gross margin was primarily due to increased costs related to implementation of new tests and a decrease in the average sale price per laboratory sample for the three months ended September 30, 1998 as compared to the same period in 1997. The decrease in average realized sale price was partially offset by savings realized from cost reductions. Gross margins from the sales of both manufactured products and products purchased for resale for the three months ended September 30, 1998 were 41% compared to 45% of sales of these products during the three months ended September 30, 1997. The decrease in the gross margin from product sales was primarily due to increased manufacturing costs related to new product development. Selling, general and administration expenses for the three months ended September 30, 1998 were $2,126,000, compared to $2,140,000 for the three months ended September 30, 1997. The decrease of $14,000, or 1%, is primarily the result of reduced sales and marketing expenses due to a restructuring of the sales and marketing group in 1997. Research and development expenses incurred during the three months ended September 30, 1998 were $283,000 as compared to $230,000 for the same period in 1997. The increase of $53,000 or 23% in research and development expenses is primarily the result of increased expenses for the development of the new generation of on-site test kits. The first of which, Profile(R)-II, received pre-market clearance from the U.S. Food & Drug Administration on July 31, 1998 and shipments commenced September 1998. For the three months ended September 30, 1998, the Company incurred net interest and financing costs of $162,000, compared to costs of $168,000 incurred during the three months ended September 30, 1997. This decrease was due to a lower interest rate from new financing for the funds borrowed by the Company to finance certain equipment purchases and provide working capital. As a result of the above, the net loss for the three months ended September 30, 1998 was $192,000, compared to net income of $2,000 for the three months ended September 30, 1997. Nine Months Ended September 30, 1998 Compared to Nine Months Ended September 30, 1997 Total revenues for the nine months ended September 30, 1998 were $22,594,000 as compared to $21,622,000 for the nine months ended September 30, 1997. The increase was attributable to the increase in revenues from laboratory services. Laboratory service revenues were $20,715,000 for the nine months ended September 30, 1998 as compared to $19,485,000 for the nine months ended September 30, 1997. This increase of 6% in laboratory service revenues was primarily the result of an increase in laboratory samples of 15% which was the result of increased sales volume from current clients as well as new clients. This increase in unit volume was partially offset by lower per unit prices. In addition, the Company realized revenues during the nine months ended September 30, 1998 from courier services, for medical institutions, which it began providing in late 1997. 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 $918,000 for the nine months ended September 30, 1998 compared to sales of $1,239,000 recorded for the same period in 1997. The Company believes that the decrease in sales of 26% is primarily due to increased competition from products perceived as more user friendly than the Company's traditional products. The Company believes that the introduction of its new generation of on-site test kits will enable the Company to compete successfully in the on-site drug screening market and offer comprehensive drug testing kits and services. The first of these next generation test kits, PROFILE(R)-II, received pre-market clearance from the U. S. Food & Drug Administration on July 31, 1998 and shipments commenced in September 1998. Product sales also include sales of agricultural diagnostic products. Sales of these products were $376,000 for the nine months ended September 30 1998, compared to sales of $510,000 for the nine months ended September 30, 1997. 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 $585,000 for the nine months ended September 30, 1998 compared to $388,000 for the same period in 1997. This increase was primarily due to increased revenues from contract manufacturing services from both historical customers and revenues from customers added in late 1997. The gross margin from the revenues generated from the laboratory services was 33% for the nine months ended September 30, 1998 as compared to a gross margin of 35% for the same period in 1997. The decrease in the gross margin was primarily due to increased costs related to new test implementation and a decrease in the average realized sale price per laboratory sample. The decrease in average realized sale price was partially offset by savings realized from cost reductions. Gross margins from the sales of both manufactured products and products purchased for resale for the nine months ended September 30, 1998 were 36% compared to 39% of sales of these products during the nine months ended September 30, 1997. The decrease in the gross margin from product sales was due to lower overall sales of products during the nine months ended September 30, 1998 as compared to the same period in 1997 and increased manufacturing costs related to new product development. Selling, general and administration expenses for the nine months ended September 30, 1998 were $5,993,000 compared to $6,443,000 for the nine months ended September 30, 1997. The $450,000 or 7% reduction in these expenses in 1998 was primarily the result of reduced sales and marketing expenses due to a restructuring of the sales and marketing group in 1997. Research and development expenses incurred during the nine months ended September 30, 1998 were $878,000 as compared to $641,000 for the same period in 1997. The increase of $237,000 or 37% in research and development expenses is primarily the result of increased expenses for the development of additional laboratory based tests as well as increased expenses for the development of the new generation of on-site test kits. For the nine months ended September 30, 1998, the Company incurred net interest costs of $479,000, compared to costs of $444,000 incurred during the nine months ended September 30, 1997. This increase was the result of the funds borrowed by the Company to finance certain equipment purchases and provide working capital. As a result of the above, the net income for the nine months ended September 30, 1998 was $169,000, compared to net income of $135,000 for the nine months ended September 30, 1997. Management expects net sales to grow through both the addition of new accounts and the introduction of new laboratory testing services and on-site products, particularly the new Profile(R)-II on-site product for the detection of multiple substances of abuse. In addition, the Company believes that the laboratory business is subject to seasonality consistent with hiring practices of its clients. This seasonality results in higher sales in the second quarter with lower sales in July and December. Material Changes in Financial Condition As of September 30, 1998, cash and cash equivalents were $32,000 compared to $58,000 at December 31, 1997. As of September 30, 1998, accounts receivable were $6,566,000 compared to $5,553,000 at December 31, 1997. The increase of $1,013,000, or 18%, is primarily the result of higher sales in the quarter ended September 30, 1998 as compared to the quarter ended December 31, 1997. Prepaid expenses and other assets were $656,000 at September 30, 1998 as compared to $415,000 at December 31, 1997. The increase of $241,000, or 58%, is primarily the result of an increase in certain annual expenses, which are being amortized throughout the year. At September 30, 1998, the Company had a total balance of restructuring accruals of $548,000 compared to a balance of $786,000 at December 31, 1997. This decrease of 30% is the result of certain payments made during the nine months ended September 30, 1998. At September 30, 1998, the Company had a total loan balance owed to its financial lender of $5,678,000, compared to a total balance of $5,016,000 owed at December 31, 1997. The net increase of $662,000, or 13%, was the result of increased borrowings by the Company to provide working capital and to pay for purchases of certain assets which will enable future volume increases to be handled with improved 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 September 30, 1998, the Company had cash and cash equivalents of $32,000 and available borrowings of $50,200. As of September 30, 1998, the Company was not in compliance with certain covenants in its Credit Agreement with Norwest. As a result, all of the companies term debt outstanding has been classified as current. The Company and Norwest are currently renegotiating the terms of the Credit Agreement to address any loan covenant violations and cure the existing default. Management believes that an acceptable resolution will be achieved allowing the company to meet its liquidity requirements through the next twelve months. The Company believes that consistent profitable earnings, as well as continued access to capital, will be the primary basis for funding the operations of the Company for the long term. The Company continues to follow a plan, which includes (i) continuing to aggressively monitor and control costs and (ii) increasing revenue from sales of the Company's services and products. There can however be no assurance that costs can be controlled, revenues can be increased, additional financing obtained, or that the Company will continue to be profitable. Impact Of Year 2000 The "Year 2000" issue arises from the fact that many computer systems rely on a two-digit date code to identify the year (e.g. 98 to represent 1998) and thus may not be able to differentiate between the year 2000 and the year 1900. If not corrected, systems processing date-dependent information may fail or create erroneous results, causing disruptions of operations, including, but not limited to, a temporary inability to process transactions, report results, send invoices, or engage in similar normal business activity. The Company has completed its assessment of its internal computer systems and has determined that modification to some portion of its software is required so that its computer systems function properly with respect to dates in the year 2000 and beyond. The Company presently believes that with modification to existing software and conversion to new software, the Year 2000 issue will not pose significant operational problems for its computer systems. The Company has initiated formal communication with all of its significant suppliers to determine the extent to which the company is vulnerable to those third parties ability to resolve their own Year 2000 issues. There can be no guarantee that the systems of other companies on which the Company relies will be timely converted or that a failure to convert or a conversion that is incompatible with the Company's system would not have an adverse effect on the Company's systems. Supplier response is not yet complete and the Company is continuing to work to conclude this area of its Year 2000 assessment. The Company anticipates completing the Year 2000 project prior to any adverse impact on its computer operating system, however, should such modifications and conversions are not made, or completed timely, the Year 2000 issue could have a material impact on the operations of the Company. The Company continues to assess its readiness relative to Year 2000 issues and will develop a contingency plan for all items not resolved at the end of the first quarter of fiscal 1999. The cost of the Year 2000 project is not expected to be material. Changes required to internally supported software are minor compared to the modifications performed in the normal course of business and the Company plans to use internal resources and delay other projects to complete these Year 2000 modifications. Updates to externally supported software are covered under existing service contracts or are not anticipated to have costs material in nature. The assessment of the impact, cost, and completion of the Year 2000 project is based on management's best estimates. Actual results could differ materially from those anticipated by factors including, but not limited to, the continued availability of certain resources, third party modification plans, and the ability to locate and correct all relevant computer codes. ITEM 2 CHANGES IN SECURITIES. Inapplicable ITEM 3 DEFAULTS ON SENIOR SECURITIES. Inapplicable ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS. - ------ ----------------------------------------------------- The Annual Meeting (the "1997 Annual Meeting") of the stockholders of the Company was held on September 11, 1998. The following individuals were elected to serve on the Board of Directors of the Company for the ensuing year and until their respective successors are duly elected and qualified: Harry G. McCoy, Samuel C. Powell, Richard J. Braun, James W. Hansen, Miles E. Efron. Also by a vote of 43,755,303 in favor and 5,226,682 against, at the 1997 Annual Meeting, the stockholders of the Company approved the amendment to Article FOURTH of the Company's Certificate of Incorporation to increase its number of authorized common stock from 60,000,000 shares to 75,000,000 shares. 236,801 shares were abstained or did not vote. During the quarter ended September 30, 1998, no other matters were submitted to a vote of securities holders. ITEM 5 OTHER INFORMATION. Inapplicable ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K. Report on Form 8-K dated September 21, 1998 reporting the declaration of a dividend distribution of one Preferred Share Purchase Right on each outstanding share of the Registrant's common stock, payable to stockholders of record on September 30, 1998. 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: November 12, 1998 MEDTOX SCIENTIFIC, INC. By: /s/ Harry G. McCoy Harry G. McCoy, Chairman and President By: /s/ Richard J. Braun Richard J. Braun, Chief Executive Officer and Treasurer EX-27 2 EXHIBIT 27 (FDS)
5 1,000 9-MOS DEC-31-1998 SEP-30-1998 32 0 6782 216 1077 8331 12713 9675 25566 11230 0 0 0 8694 5065 25566 22594 22594 15075 21946 0 0 479 169 0 169 0 0 0 169 .00 .00
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