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.
<PAGE>
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
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<TABLE>
MEDTOX SCIENTIFIC, Inc.
CONSOLIDATED BALANCE SHEETS
(In thousands, except for number of shares)
<CAPTION>
September 30 December 31
1998 1997
---------------------------
(Unaudited)
<S> <C> <C>
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.
</TABLE>
<PAGE>
<TABLE>
MEDTOX SCIENTIFIC, Inc.
CONSOLIDATED BALANCE SHEETS (Continued)
(In thousands, except for number of shares)
<CAPTION>
September 30 December 31
1998 1997
---------------------------
(Unaudited)
<S> <C> <C>
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.
</TABLE>
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<TABLE>
MEDTOX SCIENTIFIC, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1998 1997 1998 1997
------------------ ------------------
<S> <C> <C> <C> <C>
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.
</TABLE>
<PAGE>
<TABLE>
MEDTOX SCIENTIFIC, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<CAPTION>
Nine Months Ended
September 30
1998 1997
----------------
<S> <C> <C>
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.
</TABLE>
<PAGE>
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
<PAGE>
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.
<PAGE>
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
<PAGE>
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.
<PAGE>
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
<PAGE>
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,
<PAGE>
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
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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
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