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 March 31, 1999
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 May 10,
1999, was 2,903,161.
<PAGE>
MEDTOX SCIENTIFIC, INC.
INDEX
Page
Part I Financial Information:
Item 1:
Unaudited Consolidated Balance Sheets - March 31, 1999
and December 31, 1998 ............................... 3
Unaudited Consolidated Statements of Operations - Three
Months Ended March 31, 1999 and 1998....................... 5
Unaudited Consolidated Statements of Cash Flows - Three
Months Ended March 31, 1999 and 1998.................... 6
Notes to Consolidated Financial Statements........... 7
Item 2:
Management's Discussion and Analysis of
Financial Condition and Results of Operations .......... 12
Part II Other Information ..................................... 17
Signatures ........................................... 18
<PAGE>
MEDTOX SCIENTIFIC, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
March 31 December 31
1999 1998
-------------------------------------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 699 $ -
Accounts receivable:
Trade, less allowance for doubtful
accounts ($245-1999; $245-1998) 7,157 5,957
Other 35 30
-------------------------------------
7,192 5,987
Inventories:
Raw materials 442 444
Work in process 230 151
Finished goods 96 80
Supplies 429 432
-------------------------------------
1,197 1,107
Prepaid expenses and other 689 524
-------------------------------------
Total current assets 9,777 7,618
Equipment and improvements:
Furniture and equipment 11,852 11,779
Leasehold improvements 1,287 1,283
-------------------------------------
13,139 13,062
Less accumulated depreciation
and amortization (10,449) (10,087)
-------------------------------------
2,690 2,975
Goodwill, net of accumulated amortization of
$3,277 in 1999 and $3,086 in 1998 13,816 14,007
-------------------------------------
Total assets $ 26,283 $ 24,600
=====================================
</TABLE>
<PAGE>
MEDTOX SCIENTIFIC, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
March 31 December 31
1999 1998
-------------------------------------
<S> <C> <C>
Liabilities and stockholders' equity
Current liabilities
Line of credit $ 3,928 $ 3,095
Checks written in excess of bank balances $ - $ 142
Accounts payable 4,124 3,531
Accrued expenses 1,986 1,724
Current portion of restructuring accrual 1,065 1,079
Current portion of long-term debt 964 1,140
Current portion of capital leases 186 186
-------------------------------------
Total current liabilities 12,253 10,897
Long-term portion of restructuring accrual 48 76
Capital lease obligations 487 516
Long term debt obligations 1,977 1,785
Stockholders' equity
Preferred Stock, $1.00 par value:
Authorized - 1,000,000 shares;
Issued and outstanding - none
none in 1999 and none in 1998 - -
Common Stock, $ .15 par value:
Authorized - 3,750,000 shares;
Issued and outstanding -
2,903,100 shares in 1999 and
2,899,669 shares in 1998 437 435
Additional paid-in capital 59,845 59,815
Accumulated deficit (48,588) (48,748)
Treasury stock (176) (176)
-------------------------------------
Total stockholders' equity 11,518 11,326
-------------------------------------
Total liabilities and stockholders' equity $ 26,283 $ 24,600
=====================================
</TABLE>
<PAGE>
MEDTOX SCIENTIFIC, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
March 31
1999 1998
-----------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C>
Revenues
Laboratory service revenues $ 7,050 $ 6,547
Product sales 785 532
-----------------------------------------
7,835 7,079
Cost of services 4,839 4,391
Cost of sales 407 352
-----------------------------------------
5,246 4,743
-----------------------------------------
Gross profit 2,589 2,336
Operating expenses
Selling, general and administrative 2,020 1,811
Research and development 233 307
Interest and financing costs 176 140
-----------------------------------------
2,429 2,258
-----------------------------------------
Net income (loss) 160 78
=========================================
Income per share-basic and diluted
.06 .03
=========================================
(1) Income per share for the three months ended March 31, 1998 has been restated
to reflect a one-for-twenty reverse stock split in February 1999.
</TABLE>
<PAGE>
MEDTOX SCIENTIFIC, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31 March 31
1999 1998
-------------------------------------
<S> <C> <C>
Operating activities
Net income $ 160 $ 78
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 553 486
Changes in operating assets and liabilities;
Accounts receivable (1,204) (402)
Inventories (90) 49
Prepaid expenses and other (165) (84)
Accounts payable, accrued expenses and other 854 145
Restructuring accrual (42) (70)
-------------------------------------
Net cash used in operating activities 66 202
Investing activities
Purchases of equipment and improvements (77) (521)
Financing activities
Checks in excess of bank balance (142) -
Net proceeds from sale of common stock 2 7
Net proceeds from line of credit and long
term debt 7,727 5,386
Principal payments on capital leases (29) (36)
Principal payments on line of credit and long
term debt (6,848) (4,779)
-------------------------------------
Net cash provided by financing activities 710 578
-------------------------------------
Increase in cash and cash equivalents 699 259
Cash and cash equivalents at beginning of period - 58
-------------------------------------
Cash and cash equivalents at end of period $ 699 $ 317
=====================================
Supplemental noncash activities
During the three months ended March 31, 1999, the Company entered into capital
lease agreements totaling $58,300.
</TABLE>
<PAGE>
MEDTOX SCIENTIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
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 three-month period ended March 31, 1999 are
not necessarily indicative of the results that may be attained for the entire
year. These consolidated financial statements should be read in conjunction with
the consolidated financial statements in the Company's Annual Report on Form
10-K and the notes thereto included, for the year ended December 31, 1998.
The Company's stockholders approved a one-for-twenty reverse stock split
effective February 23, 1999. All stock options, warrant, share and per share
data included in this report reflect the effect of this reverse split.
Basic earnings per share is computed on the basis of the weighted average number
of common shares outstanding. Diluted earnings per share is computed on the
basis of the weighted average number of common shares outstanding plus the
effect of outstanding stock options using "treasury stock" method.
(In thousands, except share and per share amounts) Three Months Ended March 31
1999 1998
Net Income (A) $160 $78
=== ==
Weighted average number of shares
Of common stock outstanding (B) 2,875,288 2,880,196
========= =========
Dilutive effect of stock options 16,000 0
========== =============
Common stock and common stock
Equivalents (C) 2,891,288 2,880,196
Net income per share:
Basic (A/B) $.06 $.03
---- ----
Diluted (A/C) $.06 $.03
---- ----
<PAGE>
Reclassifications: Certain reclassifications have been made to the 1998
financial statements to conform with 1999 presentation.
Comprehensive Income: Comprehensive income is a measure of all nonowner changes
in stockholders' equity and includes such items as net income, certain foreign
currency translation items, minimum pension liability adjustments, and changes
in the value of available-for-sales securities. For the three months ended March
31, 1999 and 1998, comprehensive income for the Company was equivalent to net
income as reported.
Accounting for Derivatives: In June 1997 the Financial Accounting Standards
Board released SFAS No. 133 "Accounting for Derivatives Instruments and Hedging
Activities", which will be effective for the company beginning January 1, 2000.
SFAS No. 133 establishes new accounting 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.
NOTE B - DEBT
On January 14, 1998, the Company entered into a Credit Security Agreement (the
"Wells Fargo Credit Agreement" f/k/a "Norwest Credit Agreement") with Wells
Fargo Business Credit (Wells Fargo), f/k/a Norwest Business Credit. The Wells
Fargo Credit Agreement consists of (i) a term loan of $2,125,000, (ii) a term
loan of $700,000, (iii) a revolving line of credit based upon the balance of the
Company's trade accounts receivable, 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
Wells Fargo Bank Minnesota, N.A. (the "Base Rate"). The $700,000 term loan has
an interest rate equal to 3.00% above the Base Rate as does the line of credit.
The note for the capital expenditures carries an interest rate equal to 1.25%
above the Base Rate. The Company utilized $4.5 million of the proceeds received
from Wells Fargo to pay off the outstanding loan balance owed to its former
lender.
On November 24, 1998 the Company and Wells Fargo Business Credit amended the
Credit Agreement. The amended Wells Fargo Credit Agreement consists of (i) an
increase in the remaining balance on the term loan to the original amount of
$2,125,000, (ii) an increase in the remaining balance on the $700,000 term loan
to $417,000, and (iii) a note of up to $1,000,000 for the purchase of capital
equipment for 1999. As of March 31, 1999 the $2,125,000 term loan carried a
balance of $1,889,000; the $700,000 term loan carried a balance of $183,000; the
revolving line of credit balance was $3,928,000; and the balance on the capital
equipment note was $327,000.
As of December 31, 1998, the Company was not in compliance with certain
covenants of the Wells Fargo Credit Agreement. However, on April 12, 1999, the
<PAGE>
Company amended the Wells Fargo Credit Agreement (the Third Amendment). The
Third Amendment waived the Company's noncompliance with these covenants at
December 31, 1998, increased the limit on the note for the purchase of capital
equipment from $1,000,000 to $1,400,000 and also modified the terms of the
financial covenants for 1999, including the March 31, 1999 measurement date. As
of March 31, 1999 the Company was in compliance with the covenants of the Wells
Fargo Credit Agreement as modified by the Third Amendment.
At March 31, 1999, the Company had received $575,000 ($400,00 of which was
received during the first quarter of 1999) from private placements of
subordinated debt, with a maturity date of March 31, 2001. The debt carries an
interest rate of 12% and has accompanying warrants to purchase a number of
shares of common stock equal in exercise price to 25% of the notes purchased.
The Company has determined the value of the warrants at the date of the grants
to be $28,500. The value of the warrants has been accounted for as additional
paid-in capital and deducted from the principal of the subordinated notes as
discount on debt issued.
The funds received from the amendment to the Wells Fargo Credit Agreement and
the private placements of subordinated debt were used to fund the working
capital needs of the Company.
NOTE C - SEGMENTS
The Company has two reportable segments: Product Sales and Lab Services.
The Product Sales segment is made up entirely of MEDTOX Diagnostics. Products
manufactured include easy to use, inexpensive, on-site drug tests such as
PROFILE(R)-II, EZ-SCREEN(R), and VERDICT(R). The Lab Services segment includes
MEDTOX Laboratories. Services provided include forensic toxicology, clinical
toxicology, heavy metals analyses, courier delivery, and medical surveillance.
In evaluating financial performance, management focuses on net income as a
segment's measure of profit or loss.
Segment Information
(In thousands) Lab Services Product Sales Total
Three months ended March 31, 1999
Net Sales $ 7,050 $ 785 $ 7,835
Segment Income (Loss) 233 (73) 160
Segment Assets 15,634 10,649 26,283
Three months ended March 31, 1998
Net Sales $ 6,547 $ 532 $ 7,079
Segment Income (Loss) 296 (218) 78
Segment Assets 14,767 10,983 25,750
<PAGE>
NOTE D - CONTINGENCIES
In February, 1999 the Company settled a claim of patent infringement brought
against the Company by United States Drug Testing Laboratories on August 20,
1996. It was alleged that the Company infringes two patents allegedly owned by
United States Drug Testing Laboratories relating to forensically acceptable
determinations of gestational fetal exposure to drugs and other chemical agents.
The Company while denying any infringement has settled with United States Drug
Testing Laboratories and has paid United States Drug Testing Laboratories
$17,500 and issued United States Drug Testing Laboratories 2,500 shares of
common stock valued at $12,500. The Company had previously accrued for this
contingency. Accordingly, the settlement of this matter did not effect results
of operations during the three months ended March 31, 1999.
On January 31, 1997, the Company filed suit in Federal District Court in
Minnesota against Morgan Capital LLC, David Bistricer and Alex Bistricer
alleging violation in Section 16b of the Securities and Exchange Act of 1934 and
seeking recovery of more than $500,000 in short-swing profits. Messrs. David and
Alex Bistricer are former directors of the Company. On August 4, 1997, the U.S.
District Court granted Defendants' motion to dismiss the Company's complaint,
ruling that the Defendants' conduct did not constitute a violation of Section
16(b). On October 29, 1997, the Company filed an appeal of that decision to the
United States Court of Appeals for the Eighth Circuit. On July 21, 1998, the
Eighth Circuit reversed the District Court dismissal and remanded the case to
the District Court. Cross motions to dismiss and for partial summary judgment
are pending.
The Company is a defendant in a lawsuit brought by a previous landlord and
pending in the Circuit Court of Cook County, Illinois. The landlord alleges that
the Company breached the terms of a lease the Company attempted to issue in
connection with an asset acquisition. Discovery is continuing in the case. In
December 1998, the Court granted summary judgment against the Company on the
issue of liability and the matter is set for trial in June 1999 on the issue of
damages.
Under the MEDTOX Laboratories acquisition agreements, the Company may be
contingently liable for certain tax liabilities incurred by the former MEDTOX
Laboratories shareholders. At the present time, the possible liability under
this agreement is not reasonably ascertainable because the agreement, as
written, is ambiguous and its intent is not clear. Under the agreement, the
obligation, if any, on the part of the Company can be deferred under certain
circumstances and at the present time the Company believes this deferral will be
available to the Company for the foreseeable future.
<PAGE>
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.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Introduction
MEDTOX Scientific, Inc. and its subsidiaries, MEDTOX Laboratories, Inc. and
MEDTOX Diagnostics, Inc., are referred to herein as "the Company". MEDTOX
Laboratories, Inc. is a toxicology laboratory which was founded in 1984 and
provides forensic toxicology, clinical toxicology, and heavy metals analyses.
MEDTOX Diagnostics, Inc. develops, manufactures and markets on-site diagnostic
and screening tests which are used to detect substances in humans, foodstuffs,
animals, feed and the environment. The company is continuing to transition these
operating units from being providers of high quality testing services and
devices into a broader service organization by supporting underlying laboratory
analysis and point-of-care devices with logistics management, data management
and overall program management services.
The Company has two reportable segments: laboratory services and product sales.
Laboratory services include forensic toxicology, clinical toxicology, and heavy
metal analyses as well as logistics, data, and overall program management
services. Product sales include a variety of on-site screening products.
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
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, then known as EDITEK, Inc., completed the acquisition of
MEDTOX. In 1997, the Company changed its name to MEDTOX Scientific, Inc.
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998
Laboratory Services
Revenues from Laboratory Services for the three months ended March 31, 1999 were
$7,050,000 as compared to $6,547,000 for the three months ended March 31, 1998.
The increase of $503,000 or 7.7% was primarily attributable to an 8.2% increase
in laboratory samples. This increase in unit volume was partially offset by
lower per unit prices.
The gross margin from the revenues generated from the laboratory services was
31.4% for the three months ended March 31, 1999 as compared to a gross margin of
32.9% for the same period in 1998. The decrease in gross margin is primarily
attributable to lower unit prices.
<PAGE>
Selling, general and administrate expenses for the three months ended March 31,
1999 were $1,739,000, compared to $1,547,000 for the three months ended March
31, 1998. The increase of $192,000 or 12.4% in 1999 was primarily the result of
increased depreciation expenses and one time costs associated with the reverse
stock split.
Research and development expenses incurred during the three months ended March
31, 1999 were $80,000 as compared to $172,000 for the same period in 1998. This
decrease of $92,000 was primarily the result of a decrease in personnel costs.
The Laboratory Services segment for the three months ended March 31, 1999
incurred interest and financing costs of $159,000, compared to costs of $140,000
incurred during the three months ended March 31, 1998 primarily as a result of
higher debt levels.
As a result of the above, the net incomes for the Laboratory Services segment of
the Company for the three months ended March 31, 1999 was $233,000, compared to
the net income of $296,000 for the three months ended March 31, 1998.
Product sales
Revenues from Product Sales for the three months ended March 31, 1999 increased
47.5% to $785,000 as compared to $532,000 for the three months ended March 31,
1998. The increase was attributable to increased sales in all product sales
areas.
Product sales from substance abuse testing products incorporates the
EZ-SCREEN(R) PROFILE(R)-II and VERDICT(R)-II on-site test kits and other
ancillary products for the detection of abused substances. Sales from these
products increased 42.4% to $447,000 for the three months ended March 31, 1999
compared to sales of $314,000 in 1998. The increase in product sales is
primarily due to a strong response to the introduction of the Company's
second-generation test kit, PROFILE(R)-II.
Product sales from agricultural diagnostic products increased 84.5% to $155,000
for the three months ended March 31, 1999 compared to $84,000 in 1998. The
primary reason for the increase of $71,000 was the result of increased purchases
by the USDA for the Company's products. The USDA's needs for the company's
products vary from quarter to quarter and sales to the USDA are expected to
fluctuate accordingly.
Sales of contract manufacturing services, microbiological and associated
products increased 35.1% to $181,000 for the three months ended March 31, 1999
compared to $134,000 in 1998. This increase was due to increased revenues from
both historical customers and new customers added in late 1998.
Revenues generated from products sold to the U.S. Department of Defense were
$2,000 for the three months ended March 31, 1999. The revenues were realized as
<PAGE>
part of the final termination of the Company's contract with the U.S. Department
of Defense. The Company had no such sales during 1998.
Gross margins from Product Sales for the three months ended March 31, 1999 were
48.2% compared to 33.8% for the three months ended March 31, 1998. The increase
in gross margin from product sales was due to higher overall sales of products.
Selling, general and administrative expenses for Products Sales during the three
months ended March 31, 1999 were $281,000, compared to $264,000 for the three
months ended March 31, 1998. The increase of $17,000 or 6.4% was primarily the
result of increased costs associated with the higher volume.
Research and development expenses incurred for Product Sales during the three
months ended March 31, 1999 were $153,000 as compared to $135,000 for the same
period in 1998. The increase of $18,000 or 13.3% was primarily the result of
costs associated with the continued development of the Company's new generation
on-site products.
For the three months ended March 31, 1999, the Product Sales segment incurred
interest and financing costs of $17,000. There were no interest charges incurred
by this segment during the three months ended March 31, 1998. The interest and
finance costs were the result of the funds borrowed by the Company to fund asset
purchases and working capital requirements.
As a result of the above, the Product Sales segment net loss for the three
months ended March 31, 1999 was ($73,000), compared to the net loss of
($218,000) for the three months ended March 31, 1998.
Material Changes in Financial Condition
Laboratory Services
As of March 31, 1999 net accounts and notes receivable for Laboratory Services
were $6,576,000 compared to $5,554,000 at December 31, 1998. This increase of
$1,022,000 or 18.4% was primarily the result of higher sales for the month ended
March 31, 1999 as compared to the month December 31, 1998.
Prepaid expenses and other assets were $614,000 at March 31, 1999 as compared to
$503,000 at December 31, 1998. This increase of $111,000 or 22.1% is primarily
the result of renewal of annual licenses, fees, and maintenance contracts which
will be amortized throughout the year.
At March 31, 1999, Laboratory Services had a total balance of restructuring
accruals of $1,113,000 compared to a balance of $1,155,000 at December 31, 1998.
The decrease of $42,000 is the result of certain payments made during the
quarter ended March 31, 1999.
<PAGE>
At March 31, 1999, Laboratory Services had a total loan balance owed to its
financial lender of $6,016,000 compared to a total balance of $5,264,000 at
December 31, 1998. The increase of $752,000 or 14.3% was the result increased
borrowing during the quarter ended March 31, 1999.
Product Sales
At March 31, 1999, net accounts receivable for Product Sales were $581,000. This
$178,000 increase as compared to $403,000 at December 31, 1998 was primarily due
to higher sales in the quarter ended March 31, 1999 as compared to the quarter
ended December 31, 1998.
Prepaid expenses and other assets were $75,000 at March 31, 1999 as compared to
$21,000 at December 31, 1998. The increase of $54,000 is primarily the result of
the renewal of certain annual expenses which will be amortized throughout the
year.
At March 31, 1999, the Product Sales segment had a total loan balance owed to
its financial lender of $853,000, compared to a total balance of $756,000 owed
at December 31, 1998. The net increase of $97,000, or 12.8%, was the result of
increased borrowing from the Company's line of credit to pay operating expenses.
Liquidity and Capital Resources
Cash received from debt financing has been the primary source of funding for the
working capital requirements of the Company. At March 31, 1999, the Company had
cash and cash equivalents of $699,000 and available borrowings of $632,000. The
Company believes that the aforementioned capital will be sufficient to fund the
Company's planned operations through 1999. While there can be no assurance that
the available capital will be sufficient to fund the future operations of the
Company beyond 1999, the Company believes that consistent profitable earnings,
as well as access to debt and equity, 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 products, services, and research and development contracts. 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 continue to be profitable.
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
<PAGE>
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 is
in the process of completing and testing modifications required to a portion of
its software so that its computer systems function properly with respect to
dates in the year 2000 and beyond. The Company presently believes that these
modifications 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. As 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, the Company is developing contingency plans including
alternate vendors and increased stock levels for all critical items.
The Company anticipates completing the Year 2000 project prior to any adverse
impact on its computer operating system, however, if 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 is developing a
contingency plan for all items not resolved at the end of the first quarter.
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
During the three months ended March 31, 1999 the Company issued warrants to
purchase 20,000 shares of common stock at an exercise price of $5.00 per share.
<PAGE>
The warrants were issued in connection with the private placement of $400,000 of
subordinated notes and were issued on the following dates:
Date Warrants Subordinated Debt
---- -------- -----------------
January 4, 1999 2,500 $ 50,000
January 20, 1999 5,000 $ 100,000
February 6, 1999 10,000 $ 200,000
February 7, 1999 2,500 $ 50,000
------- ---------
Total 20,000 $400,000
The Company has determined the value of the warrants at the date of the grants
to be $28,500. The value of the warrants has been accounted for as additional
paid-in capital and deducted from the principal of the subordinated notes as
discount on debt issued. Sales of the notes and warrants were exempt from
registration under SEC Rules 504 and 505 and Section 4 (1) of the Securities Act
of 1933.
ITEM 3 DEFAULTS ON SENIOR SECURITIES. Inapplicable
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
- ------ -----------------------------------------------------
The Company held a special meeting of stockholders on February 22, 1999 to adopt
and approve an amendment of the Company's Certificate of Incorporation providing
for a one for twenty reverse stock split of outstanding Common Stock of the
Company. The amendment was approved by a vote of 2,309,935 in favor and 162,644
against. The reverse split was effective on February 23, 1999 and the stock
began trading on the new basis February 24, 1999.
ITEM 5 OTHER INFORMATION. Inapplicable
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K. Inapplicable
<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: May 11, 1999
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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