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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE
ACT OF 1934
For fiscal year ended MARCH 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For transition period from _______________ to _________________
Commission File Number 0-16594
MEDICAL TECHNOLOGY SYSTEMS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 59-2740462
- ---------------------------------- --------------------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
12920 Automobile Boulevard, Clearwater, Florida 33762
- ------------------------------------------------- --------------------
(Address of Principal Executive Offices) (Zip Code)
(727) 576-6311
------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
- ------------------ -------------------------------------------
NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01
-------------------------------------
(Title of Class)
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. |X| Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
Aggregate market value of voting Common Stock held by non-affiliates was
$12,500,000 as of June 26, 2002.
The number of shares outstanding of the Registrant's Common Stock, $.01 par
value, was 4,361,690 as of June 26, 2002.
Documents Incorporated by Reference
Parts of the Company's definitive proxy statement, which will be filed by the
Company within 120 days after the end of the Company's 2002 fiscal year end, are
incorporated by reference into Part III of this Form.
Total number of pages, including cover page - 41 (excluding exhibits)
i.
MEDICAL TECHNOLOGY SYSTEMS, INC.
CLEARWATER, FLORIDA
INDEX
PART I PAGE
----
Item 1. Business.......................................................1
2. Properties.....................................................4
3. Legal Proceedings..............................................4
4. Submission of Matters to a Vote of Security Holders............4
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.......................................................5
6. Selected Financial Data........................................6
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.....................................7
7A. Quantitative and Qualitative Disclosure about Market Risk.....11
8. Financial Statements and Supplementary Data...................11
9. Changes In and Disagreements With Accountants On Accounting and
Financial Disclosure.........................................11
PART III
Item 10. Directors and Executive Officers of the Registrant............12
11. Executive Compensation........................................12
12. Security Ownership of Certain Beneficial Owners,
Management and Related Stockholder Matters...................12
13. Certain Relationships and Related Transactions................12
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports
on Form 8-K..................................................13
Index to Financial Statements.................................................16
Signatures ...................................................................40
1
PART I
This Annual Report on Form 10-K (the "10-K") contains certain statements
concerning the future that are subject to risks and uncertainties. Additional
written or oral forward-looking statements may be made by the Company from time
to time, in filings with the Securities and Exchange Commission or otherwise.
Such statements include, among other things, information concerning
possible-future results of operations, capital expenditures, the elimination of
losses under certain programs, financing needs or plans relating to products or
services of the Company, assessments of materiality, predictions of future
events, and the effects of pending and possible litigation, as well as
assumptions relating to the foregoing, and those accompanied by the words
"anticipates," "estimates," "expects," "intends," "plans," or similar
expressions. For those statements we claim the protection of the safe harbor for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995.
You should specifically consider the various factors identified in this
10-K, including the matters set forth in "Item 1. Business", "Item 3. Legal
Proceedings", "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Notes to Consolidated Financial
Statements that could cause actual results to differ materially from those
indicated in any forward-looking statements. Other factors that could contribute
to or cause such differences include, but are not limited to, unanticipated
increases in operating costs, labor disputes, capital requirements, increases in
borrowing costs, product demand, pricing, market acceptance, intellectual
property rights and litigation, risks in product and technology development and
other risk factors detailed in the Company's Securities and Exchange Commission
filings.
Readers are cautioned not to place undue reliance on any forward-looking
statements contained in this 10-K, which speak only as of the date hereof. The
Company undertakes no obligation to publicly release the results of any
revisions to these forward-looking statements that may be made to reflect events
or circumstances after the date hereof or to reflect the occurrence of
unexpected events.
ITEM 1. BUSINESS
Introduction
- ------------
Medical Technology Systems, Inc.(TM), a Delaware corporation (the
"Company"), was incorporated in March 1984. The Company is a holding company
that historically operated through a number of separate subsidiaries, including
MTS Packaging Systems, Inc.(TM)("MTS Packaging"), Medical Technology
Laboratories, Inc. ("MTL") and LifeServ Technologies, Inc.(TM)("LifeServ"). The
Company sold the assets of MTL and LifeServ in fiscal 2000.
MTS Packaging primarily manufactures and sells disposable medication punch
cards, packaging equipment and allied ancillary products throughout the United
States. Its customers are predominantly pharmacies that supply nursing homes,
assisted living and correctional facilities with prescription medications for
their patients. MTS Packaging manufactures its proprietary disposable punch
cards and packaging equipment in its own facilities. This manufacturing process
uses integrated machinery for manufacturing the disposable medication punch
cards. The disposable medication punch cards and packaging equipment are
designed to provide a cost effective method for pharmacies to dispense
medications. MTS Packaging's medication dispensing systems and products provide
innovative methods for dispensing medications in disposable packages.
Segments
- --------
The operation of the Company is composed of one operating segment,
medication packaging and dispensing systems. MTS Packaging is the only
subsidiary in this segment and is supported by corporate personnel and services.
Continuing Operations
- ---------------------
Products
--------
MTS Packaging manufactures proprietary medication dispensing systems and
related products for use by medication prescription service providers. These
systems utilize disposable medication punch cards and specialized machines that
automatically or semi-automatically assemble, fill and seal drugs into
medication punch cards representing a weekly or monthly supply of a patient's
medication.
2
MTS Packaging's machinery for dispensing medication in disposable packages
automatically places tablets or capsules (the amount of medication required by a
patient during one month) into a punch card. The use of these cards and machines
provides a cost effective customized package at competitive prices. The punch
card medication dispensing system can provide tamper evident packaging for
products dispensed in the package.
The retail price of MTS Packaging's machinery ranges from $1,100 to
$580,000 depending upon the degree of automation and options requested by a
customer. The punch cards typically retail from approximately $155 to $225 per
1,000 cards and blisters, depending upon the size, design and volume of cards
ordered by a customer. MTS Packaging has placed approximately 1,865 medication
dispensing systems with pharmacy clientele since the inception of the Company.
MTS Packaging also sells prescription labels and ancillary supplies designed to
complement sales of disposable medication punch cards. MTS Packaging had
approximately $915,000 in unshipped orders as of June 20, 2002.
Research and Development
------------------------
The Company expended approximately $87,000 on research and development
activities during the fiscal year ended March 31, 2002. During the current
fiscal year, the Company devoted the majority of its development resources to
products that have been determined to be technologically feasible.
Product Development
-------------------
The Company is presently directing its product development efforts towards
the following projects:
o OnDemand(TM)packaging machines
o Various products for the assisted living, home care
and nutriceutical markets
The Company expended approximately $853,000 on product development during
the fiscal year ended March 31, 2002. The majority of these expenditures were
made for the OnDemand machine project.
Manufacturing Processes
-----------------------
MTS Packaging has developed integrated punch card manufacturing equipment
that will complete the various punch card manufacturing steps in a single-line,
automated process. The Company believes that its advanced automation gives it
certain speed, cost and flexibility advantages over conventional punch card
manufacturers. MTS Packaging's equipment produces finished cards on a single
in-line Flexographic press. This process takes the place of approximately five
different processes using conventional offset printing methods. MTS Packaging
has several machines capable of producing punch cards in this manner. In
addition to the manufacturing of punch cards, MTS Packaging manufactures the
machines that are sold to its customers to fill punch cards with medication. The
majority of these machines are sold to customers; however, from time to time,
customers are provided or rented machines in conjunction with an agreement to
purchase certain quantities of punch cards over a specified period.
MTS Packaging uses automated fabrication equipment to produce its
medication packaging machinery. All essential components of the machines are
designed and manufactured by the Company without reliance on outside vendors.
MTS Packaging is dependent on a number of suppliers for the raw materials
essential in the production of its products. The Company believes that relations
are adequate with its existing vendors. However, there can be no assurance that
such relations will be adequate in the future or that shortages of any of these
raw materials will not arise, causing production delays. MTS Packaging believes
it is necessary to maintain an inventory of materials and finished products that
allows for customer orders to be shipped within the industry standard of 2-3
days. The inability to obtain raw materials on a timely basis and on acceptable
terms may have a material adverse effect on the future financial performance of
the Company.
3
Markets and Customers
---------------------
MTS Packaging's products are sold primarily throughout the United States
through its sales organization and independent sales representatives. MTS
Packaging also participates in trade shows and training seminars. Sales to
countries outside the U.S. represent less than ten percent (10%) of the total
revenue. Ten customers comprise approximately sixty percent (60%) of MTS
Packaging's annual revenue. Sales to PharMerica, Inc., Tampa, Florida and
Omnicare, Inc., Covington, Kentucky each represented approximately 14% of MTS
Packaging's revenue in the fiscal year ended March 31, 2002.
The primary customers for MTS Packaging's proprietary packaging machinery
and the related disposable punch cards, labels and ancillary supplies are
pharmacies that supply prescription medication to nursing homes. These
pharmacies serve from 250 to 34,000 nursing home beds per location and many
serve the sub-acute, assisted living, correctional and home health care markets
as well.
Competition
-----------
The pharmacy customers of MTS Packaging supply prescribed medications to
nursing homes, which are the primary market for MTS Packaging's products. This
market is highly competitive. There are several competitors that have developed
machines that automate the packaging and sealing of solid medications into punch
cards. The Company believes that products developed by the Company's competitors
are not as efficient as the Company's systems because they are not as automated.
The Company's method of dispensing medication replaces more traditional
dispensing methods, such as prescription vials. The principal methods of
competition in supplying medication dispensing systems to prescription service
providers are product innovation, price, customization and product performance.
Many of the Company's competitors have been in business longer and have
substantially greater resources than the Company. There is no assurance that the
Company will be able to compete effectively with competitive methods of
dispensing medication or other punch card systems.
The Company's primary competitors for punch card dispensing systems are
Drug Package, Inc., Useful Products Inc. and RX Systems, Inc. The Company
believes that its automated proprietary packaging machinery distinguishes MTS
Packaging from its competitors' less automated systems. The Company's new
automated packaging machinery can fill and seal over 900 disposable medication
cards per hour. The Company believes that its production rates will meet the
needs of its customers who are consolidating and require higher productivity to
meet their growing market share.
Proprietary Technology
----------------------
The Siegel Family QTIP Trust (the "Trust") is the holder of certain patents
and other proprietary rights for the equipment and processes that MTS Packaging
uses and sells. The Trust is the assignor of all such proprietary and patent
rights used in the Company's business that were invented or developed by Harold
B. Siegel, the founder of the Company. The Trust and the Company are parties to
a license agreement whereby the Company is granted an exclusive and perpetual
license from the Trust to use the know-how and patent rights in the manufacture
and sale of the Company's medication dispensing systems. MTS Packaging is
heavily dependent upon the continued use of the proprietary rights associated
with these patents. The patents begin expiring in 2004 continuing through 2008.
There are numerous patent applications and patent license agreements for
products that have been sold and that have been in development within MTS
Packaging, however, its business is not materially dependent upon the issuing or
its ownership of any one patent that has been submitted to the Patent and
Trademark Office.
There is no assurance that any additional patents will be granted with
respect to the Company's medication dispensing or information systems and
products or that any patent issued, now or in the future, will provide
meaningful protection from competition.
Government Regulation
---------------------
Certain subsidiaries of the Company are subject to various federal, state
and local regulations with respect to their particular businesses. The Company
believes that it currently complies with these regulations.
4
MTS Packaging's products are governed by federal regulations concerning
components of packaging materials that are in contact with food and drugs. The
Company has obtained assurances from its vendors that the packaging materials
used by MTS Packaging are in conformity with such regulations. However, there is
no assurance that significant changes in the regulations applicable to MTS
Packaging's products will not occur in the foreseeable future. Any such changes
could have a material adverse effect on the Company.
The Company cannot predict the extent to which its operations will be
effected under the laws and regulations described above or any new regulations
that may be adopted by regulatory agencies.
Discontinued Operations
- -----------------------
The Company sold two business segments in the fiscal year ending March 31,
2000, both of which were treated as discontinued operations for financial
statement purposes.
LifeServ was a health care information technology company that provided
solutions for medication management and point-of-care electronic documentation
for hospitals and other health care facilities. The assets of LifeServ were sold
in May 1999 in exchange for the assumption of certain liabilities of
approximately $5.0 million.
MTL provided clinical laboratory testing services including analytical
tests of blood tissues and other bodily fluids. The principal assets of MTL were
sold in January 2000 in exchange for $1.0 million and the assumption of
approximately $400,000 in liabilities.
Employees
- ---------
As of June 26, 2002, the Company employed 145 persons full time. None of
the Company's employees are covered by a collective bargaining agreement. The
Company considers its relationship with employees to be good.
ITEM 2. PROPERTIES
The Company leases a 73,600 square foot plant consisting of office space
and air-conditioned manufacturing and warehousing space near the St.
Petersburg/Clearwater International Airport at 12920 Automobile Boulevard. The
Company's corporate administrative offices and the primary manufacturing
facilities for MTS Packaging Systems, Inc. ("MTS Packaging") are at this
location. The lease expires on June 30, 2005. The Company's current monthly
lease payments are approximately $31,210. The premises are generally suited for
light manufacturing and/or distribution.
MTS Packaging leases approximately 5,200 square feet at approximately
$3,034 per month for office and warehouse space at 21530 Drake Road, Cleveland,
Ohio. The lease expires on March 31, 2004.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in certain claims and legal actions arising in the
ordinary course of business. There can be no assurances that these matters will
be resolved on terms acceptable to the Company. In the opinion of management,
based upon advice of counsel and consideration of all facts available at this
time, the ultimate disposition of these matters are not expected to have a
material adverse effect on the financial position, results of operations or
liquidity of the Company.
Certain creditors of LifeServ, a discontinued operation, have commenced
legal action against the buyer of LifeServ seeking payment of liabilities
assumed by the buyer pursuant to the asset purchase agreement. Several creditors
have named LifeServ as a co-defendant in the legal action. The Company intends
to vigorously defend these actions and seek appropriate remedies from the buyer.
In November 1998, MTL, a discontinued operation, received a refund request
in the amount of $1.8 million from Medicare Program Safeguards ("MPS"). MTL
disputed the refund request in its response to MPS in December 1998. To date,
MTL has not received any further correspondence from MPS regarding this matter.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
5
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Price Range of the Company's Securities
- ---------------------------------------
The Company's Common Stock trades on the over-the-counter market. The table
below sets forth the range of high and low bid information for the Company's
common stock for the periods indicated, as reported by the NASD OTC Bulletin
Board. The first, second and third quarter of fiscal 2001 amounts have been
retroactively adjusted for the 1 for 2.5 reverse stock split that occurred in
December 2000. Over-the-counter market quotations reflect inter-dealer prices,
without retail markup, markdown or commission and may not necessarily represent
actual transactions.
2003 Fiscal Year High Low
----------------------- ----------------- ----------------
First Quarter $ 2.92 $ 2.45
2002 Fiscal Year High Low
----------------------- ----------------- ----------------
First Quarter $ 2.85 $ 1.25
Second Quarter $ 2.55 $ 1.35
Third Quarter $ 2.95 $ 1.55
Fourth Quarter $ 3.00 $ 2.40
2001 Fiscal Year High Low
----------------------- ----------------- ----------------
First Quarter $ 1.58 $ .78
Second Quarter $ 1.73 $ 1.33
Third Quarter $ 1.40 $ .63
Fourth Quarter $ 2.25 $ .63
As of June 20, 2002, there were approximately 3,000 holders of record of
the Company's common stock.
The Company has not declared a dividend on its common stock and does not
currently intend to declare a dividend. Furthermore, the Company is restricted
from paying dividends pursuant to the terms of its secured loan agreements. The
Company intends to reinvest its future earnings, if any, into the operations of
its business.
6
ITEM 6. SELECTED FINANCIAL DATA
The following tables set forth selected financial and operating data regarding
the Company. This information should be read in conjunction with "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and
the Company's Financial Statements and Notes thereto. See "FINANCIAL
STATEMENTS."
YEARS ENDED MARCH 31,
---------------------------------------------------------------------------
(In Thousands, Except Earnings Per Share Amounts)
2002 2001 2000 1999 1998
------------ ------------ ------------ ------------- ------------
Income Statement Data:
Net Sales $ 24,769 $ 21,457 $ 18,221 $ 16,017 $ 13,188
Cost of Sales and Other Expenses 21,561 19,406 17,007 15,684 13,558
------------ ------------ ------------ ------------- ------------
Income (Loss) from Continuing Operations
Before Income Taxes, Discontinued Operations
and Extraordinary Gain 3,208 2,051 1,214 333 (370)
Income Tax Benefit (Expense) (1,234) 5,570 0 (125) 270
(Loss) from Discontinued Operations 0 (227) (2,185) (3,764) (754)
Gain on Forgiveness of Debt of Discontinued
Operations 0 0 1,249 569 0
Gain (Loss) on Disposal of Discontinued Operations 0 0 2,221 (2,500) 0
------------ ------------ ------------ ------------- ------------
Net Income (Loss) $ 1,974 $ 7,394 $ 2,499 $ (5,487) $ (854)
============ ============ ============ ============= ============
Net Earnings (Loss) Per Basic and Diluted Common
Share: (Retroactively adjusted for the 1 for 2.5
reverse stock split in December 2000)
Net Earnings (Loss) Per Basic Common Share:
From Continuing Operations $ 0.46 $ 2.45 $ 0.47 $ 0.08 $ (0.04)
Income (Loss) from Discontinued Operations 0.00 (0.07) 0.50 (2.27) (0.31)
------------ ------------ ------------ ------------- ------------
Net Earnings (Loss) Per Basic Common Share $ 0.46 $ 2.38 $ 0.97 $ (2.19) $ (0.35)
============ ============ ============ ============= ============
Net Earnings (Loss) Per Diluted Common Share:
From Continuing Operations $ 0.44 $ 2.43 $ 0.47 $ 0.08 $ (0.04)
Income (Loss) from Discontinued Operations 0.00 (0.07) 0.50 (2.27) (0.31)
------------ ------------ ------------ ------------- ------------
Net Earnings (Loss) Per Diluted Common Share $ 0.44 $ 2.36 $ 0.97 $ (2.19) $ (0.35)
============ ============ ============ ============= ============
See Note 2 to the audited financial statements.
AT MARCH 31,
---------------------------------------------------------------------------
(In Thousands)
2002 2001 2000 1999 1998
------------ ------------ ------------ ------------- ------------
Balance Sheet Data:
Net Working Capital $ 3,274 $ 1,682 $ 1,702 $ 1,458 $ 1,592
Assets 15,515 14,791 7,866 8,511 11,532
Short-Term Debt 968 963 1,052 874 294
Long-Term Debt 10,812 11,887 13,111 14,915 14,892
Stockholders' Equity (Deficit) 468 (1,598) (9,037) (11,600) (6,113)
See Note 20 to the audited financial statements.
7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
- --------
The Company's core business, MTS Packaging Systems, Inc., experienced
profitable growth in fiscal 2002. Revenue increased by 15.3% and net income
before income taxes increased 56.4%. The Company continued to reinvest
significant portions of its earnings in new capital equipment to meet production
demands resulting from increased revenue and also made a substantial investment
in the development of its new OnDemand(TM) packaging machine as well as
additional disposable products for new markets.
Fiscal Year 2002 Compared to Fiscal Year 2001
- ---------------------------------------------
Results of Operations
- ---------------------
Net Sales
- ---------
Net sales for the fiscal year ended March 31, 2002 increased 15.3% to $24.8
million from $21.5 million the prior fiscal year. Net sales increased in fiscal
2002 primarily as a result of an increase in disposable punch cards sold to
existing customers and increases in the sales of packaging machinery. In
addition, the Company added new customers during the year as a result of it
marketing efforts that were directed towards smaller independent pharmacies
throughout the United States and the United Kingdom. Selling prices for
disposable products increased slightly compared to the prior year.
The Company expects that selling prices may increase throughout the next
fiscal year depending upon competitive factors. The volume of disposable
products, as well as packaging machinery, is expected to increase as the Company
obtains new customers in the U.S., successfully penetrates new markets such as
in the United Kingdom, and sells more products to its existing customer base. In
addition, the Company expects that the completion of a beta site testing of its
new OnDemand machine will result in additional revenue from the sale of OnDemand
machines to existing customers.
Cost of Sales
- -------------
Cost of sales for the fiscal year ended March 31, 2002 increased 15.2% to
$14.4 million from $12.5 million the prior year. Cost of sales as a percentage
of net sales increased slightly to 58.2% from 58.1% for the prior year. The
increase in cost of sales resulted from the costs associated with increased net
sales. The slight increase in the cost of sales percentage resulted primarily
from increases in raw material costs. Increased labor costs were generally
offset by improvements in labor efficiencies.
The Company expects that its raw material costs will increase throughout
the next year. However, depending on competitive factors, the Company
anticipates that its selling prices to customers will be increased in order to
offset the increase in raw material costs. During the last two fiscal years, the
Company made significant investments in new production machinery, which is
anticipated to result in manufacturing efficiencies that will generally offset
increases in labor costs.
Selling, General and Administrative Expenses ("SG&A")
- -----------------------------------------------------
SG&A expenses for the fiscal year ended March 31, 2002 increased 4.0% to
$5.2 million compared to $5.0 million the prior year. The increase resulted
primarily from increases in sales and marketing expenses associated with
increased net sales. In addition, administration expenses increased compared to
the prior year primarily due to expenditures for investor relations, shareholder
communications and investment banking services. The increase in SG&A expenses
were partially offset by an adjustment of $180,000 in the Company reserve for
bad debts. The Company expects SG&A expenses to increase during the next year as
a result of increased sales and marketing efforts as well as the addition of
several administrative personnel to accommodate the increased business activity.
8
Research and Development ("R & D")
- ----------------------------------
Research and development expenses decreased 26.9% to $87,000 from $119,000
the prior year. The decrease in R & D expenditures results from the Company's
emphasis in developing new products (including the OnDemand product) for
existing markets.
Depreciation and Amortization
- -----------------------------
Depreciation and amortization expenses for the fiscal year ended March 31,
2002 increased 14.8% to $926,000 compared to $807,000 the prior year. The
increase results primarily from the depreciation of manufacturing equipment that
was placed in service during the second half of the prior fiscal year and
throughout the fiscal year ended March 31, 2002.
Interest Expense
- ----------------
Interest expense for the fiscal year ended March 31, 2002 decreased 6.3% to
$919,000 from $981,000 the prior year. The decrease in interest expense resulted
from the decrease in long-term debt outstanding that resulted from principal
payments made throughout the year.
Income Tax Expense
- ------------------
Income tax expense for the fiscal year ended March 31, 2002 was $1,234,000
compared to an income tax benefit of $5,570,000 the prior year. Income tax
expense for the fiscal year ended March 31, 2002 represents taxes at the
statutory federal and state rates. During the prior fiscal year, the Company
recorded an income tax benefit of $5,719,000 resulting from the recognition of
tax benefits, primarily net operating loss carryforwards, that had not
previously been recognized.
Fiscal Year 2001 Compared to Fiscal Year 2000
- ---------------------------------------------
Results of Continuing Operations
- --------------------------------
Net Sales
- ---------
Net sales for the fiscal year ended March 31, 2001 increased 18.1% to $21.5
million from $18.2 million the prior fiscal year. Net Sales increased in fiscal
2001 primarily as a result of an increase in the amount of disposable punch
cards sold to new and existing customers. Selling prices remained stable during
the fiscal year ended March 31, 2001. Although the Company's customers continued
to experience downward pressure on reimbursement amounts, the Company believes
that the cost savings that are realized by its customers by utilizing its
medication dispensing systems will allow it to continue to maintain selling
prices at competitive levels.
Cost of Sales
- -------------
Cost of sales for the year ended March 31, 2001 increased 20.2% to $12.5
million from $10.4 million in the prior year. Cost of sales as a percentage of
sales increased to 58.1% from 57.1%. The increase in cost of sales resulted from
the costs associated with the increased net sales. The increase in cost of sales
as a percentage of sales resulted primarily from increases in the direct costs
of raw material and labor. Direct costs are expected to continue to increase.
The Company attempts to make corresponding adjustments to the prices of its
products, however, there can be no assurance that competitive factors will allow
for adjustments in selling prices in the future.
Selling, General and Administrative Expenses ("SG&A")
- -----------------------------------------------------
SG&A expenses for the year ended March 31, 2001 increased 13.6% to $5.0
million compared to $4.4 million the prior year. Sales and marketing costs
increased in Fiscal 2001 to accommodate increases in net sales generated by MTS
Packaging. In addition, the Company incurred increased costs associated with its
investor relations, shareholder communication and investment banking activities.
9
Research and Development ("R & D")
- ----------------------------------
Research and development expenses decreased 42.5% in the year ended March
31, 2001 to $119,000 from $207,000 the prior year. The Company directed more of
its development efforts to the completion of new products during the year ended
March 31, 2001 compared to the prior year in which development efforts were
directed towards the research of these new products.
Depreciation and Amortization
- -----------------------------
Depreciation and amortization expense decreased 6.3% to $807,000 in fiscal
2001 from $861,000 the prior year. The decrease resulted from older assets
becoming fully depreciated.
Interest Expense
- ----------------
Interest expense for the year ended March 31, 2001 decreased 15.4% to
$981,000 from $1,159,000 the prior year. The decrease resulted from a reduction
in long-term debt outstanding.
Income Tax
- ----------
During previous years, the Company had provided a 100% valuation allowance
on its net deferred tax asset as it was not more likely than not that the
related income tax benefit would be realized in the future. During the quarter
ended December 31, 2000, the Company removed its valuation allowance, thereby
recording an income tax benefit of $5,719,000 as the Company now believes that
it is more likely than not that these income tax benefits will be realized in
the future based in part on (1) the historical profitable operations of its core
business; (2) expectations that its core business will continue to be
profitable; (3) growth opportunities available for its core business; and (4)
the length of time that the net operating loss carryforwards are available to
offset future taxable income. The income tax benefit is comprised primarily of
net operating loss carryforwards that are available to offset future taxable
income. The carryforward losses expire beginning in fiscal year 2011 and ending
in fiscal year 2020.
Results of Discontinued Operations
- ----------------------------------
Loss from Operations of Discontinued Operations
- -----------------------------------------------
The operations of discontinued operations during the year ended March 31,
2001 were confined to the liquidation of certain assets of MTL, primarily
accounts receivable. Since the date of sale, approximately $431,000 of accounts
receivable were collected. The proceeds of the collection of accounts receivable
were used to pay the ongoing cost of collection and to fund settlements with
creditors of MTL. During fiscal 2001, the Company determined that the cost of
collecting the remaining accounts receivable could equal or exceed the amount
collected, and therefore, discontinued its collection efforts and reduced the
carrying value of the accounts receivable to $0.
Certain liabilities of MTL were compromised during fiscal 2001 as a result
of settlements reached with creditors. In addition, the Company determined that
certain liabilities were not payable, and therefore, reduced the carrying value
of them to $0.
Liquidity and Capital Resources
- -------------------------------
The operations of the Company provided $3.1 million in the fiscal year
ended March 31, 2002 compared to $3.4 million the prior year. The decrease
resulted primarily from the fact that accounts receivable increased
approximately $900,000 and accounts payable and accrued liabilities decreased
approximately $300,000 during the year. This increase in accounts receivable is
due to increased sales and an increase in days sales in accounts receivable due
to slower payments from several large customers and slow payments from new
accounts in the United Kingdom.
Investing activities used $1.7 million during the fiscal year ended March
31, 2002 compared to $2.0 million the prior year. The decrease resulted
primarily from the fact that in the prior year the Company made a significant
expenditure for new manufacturing equipment to accommodate the anticipated
increase in net sales that was realized in the current year.
10
Financing activities used $1.0 million during the fiscal year ended March
31, 2002 compared to $1.5 million the prior year. The decrease results primarily
from the fact that the Company made certain principal payments to its lender in
the prior year pursuant to the excess cash flow provisions of its loan
agreement.
The Company had working capital of $3.3 million at March 31, 2002 and had
no source of additional working capital at March 31, 2002 other than that which
is generated from operations.
In June 2002, the Company repaid the entire amount, $11,310,000, of its
bank term loan with the proceeds of a new revolving line of credit, term loans,
a subordinated note and convertible preferred stock. The revolving line of
credit allows for borrowing of up to $5,000,000 based upon advance rates that
are applied to the Company's eligible accounts receivable and inventory.
Interest is payable on the revolving line of credit monthly based on the average
unpaid balance at the prime rate plus 1.0%.
One term loan in the amount of $700,000 is repayable in equal monthly
installments over a five (5) year term, plus interest at the prime rate plus
1.25%. Another term loan in the amount of $2,000,000 is repayable in equal
monthly installments over two (2) years plus interest at the prime rate plus
2.25% and is subject to an excess cash flow payment provision.
The revolving line of credit and the term loans are secured by the
Company's accounts receivable, inventory, machinery and equipment and all other
assets of the Company.
The subordinated note in the amount of $4,000,000 is repayable in five (5)
years with interest only, at 14%, payable monthly until the maturity of the
note. The subordinated note is secured by a second lien on all of the assets of
the Company. In addition, the subordinated note holders were issued 566,517
warrants to purchase common stock exercisable for ten (10) years at $.01 per
share. (Subject to certain antidilution provisions.)
The Company issued 2,000 shares of convertible preferred stock at $1,000
per share. The holders of the convertible preferred stock are entitled to
receive quarterly dividends at the rate of 11% per annum. The dividends are
payable in cash or shares of convertible preferred stock, at the Company's
option, and are cumulative. The preferred stock is convertible into 846,000
shares of the Company's common stock at $2.36 per share. (Subject to certain
antidilution provisions.)
The warrant agreement and the terms of the convertible preferred stock
contain a make-whole provision that obligates the Company to pay certain amounts
to the holders of the warrants and convertible preferred stock if they do not
ultimately receive an amount equal to the price per share of the common stock on
the date they exercise their right to purchase the common shares that underlie
the warrants and the convertible preferred stock. The warrant agreement also
contains a provision that may obligate the Company to pay certain amounts to the
holders of the warrants in the event that there is a change in control of the
voting common stock of the Company, or if there is a sale of the Company or a
public offering of the Company's common stock.
In the event that the Company is required to make payments to the holders
of the warrants and/or preferred stock, it may elect to issue additional
warrants and/or preferred stock in lieu of a cash payment. Although the
make-whole provision and other provisions of the warrant agreement and
convertible preferred stock agreement provide for a maximum of 12,500,000 shares
that may be issued pursuant to those provisions, based upon current conditions,
the Company believes it is unlikely that the maximum number of shares would be
issued.
The Company also issued, to its financial advisors, 125,000 warrants to
purchase common stock as part of a success fee related to the above referenced
financing. The warrants are exercisable for five (5) years at $1.50 per share.
11
The revolving line of credit, the term loans and the subordinated notes
each contain certain financial covenants that, among other things, requires the
maintenance of certain financial ratios, limits the amount of capital
expenditures and requires the Company to obtain the lenders approval for certain
matters.
The Company's short-term and long-term liquidity is primarily dependent on
its ability to generate cash flow from operations. Inventory levels are not
expected to change significantly based upon the Company's current level of
operation. Increases in net sales may result in corresponding increases in
accounts receivable. Cash flow from operations and borrowing availability on the
revolving line of credit is anticipated to support an increase in accounts
receivable.
The Company has several new product development projects underway that are
expected to be funded by cash flow from operations. These projects are monitored
on a regular basis to attempt to ensure that the anticipated costs associated
with them do not exceed the Company's ability to fund them from cash flow from
operations.
The Company believes that the cash generated from operations during the
next fiscal year is expected be sufficient to meet its capital expenditures,
product development, working capital needs and the principal payments required
by its loan agreements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company does not have any material market risk sensitive financial
instruments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this item are contained at the end of
this report.
ITEM 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
NONE
12
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated herein by reference
to the information included in the Company's definitive proxy statement, which
will be filed by the Company within 120 days after the end of the Company's 2002
fiscal year.
ITEM 11: EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference
to the information included in the Company's definitive proxy statement, which
will be filed by the Company within 120 days after the end of the Company's 2002
fiscal year.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by reference
to the information included in the Company's definitive proxy statement, which
will be filed by the Company within 120 days after the end of the Company's 2002
fiscal year.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by reference
to the information included in the Company's definitive proxy statement, which
will be filed by the Company within 120 days after the end of the Company's 2002
fiscal year.
13
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. and 2. The Financial Statements and schedule filed as part of this report are listed separately in the Index
to Financial Statements beginning on page 24 of this report
3. For Exhibits, see Item 14(c) below. Each management contract or compensatory plan or arrangement
required to be filed as an Exhibit hereto is listed in Exhibit Nos. 10.20, 10.21, 10.22, 10.23, 10.24
and 10.25 of Item 14(c) below.
(c) List of Exhibits
**3.1 Articles of Incorporation and Amendments thereto
*3.1(a) Amendment to Articles of Incorporation increasing authorized Common Stock to 25,000,000 from
15,000,000 shares
**3.2 Bylaws of the Company
**4.2 Certificate of Designation of the Powers, Designation Preferences of Rights of the Series A Preferred
Stock.
**10.2 Siegel Family Revocable Trust Agreement
10.2(a) (8) Amendment and Restated Siegel Family Revocable Trust Agreement
10.2(b) (8) Siegel Family Limited Partnership Agreement
**10.3(a) Agreements and Assignments of Patent Rights between Harold B. Siegel and the Siegel Family Revocable
Trust
**10.3(b)
License Agreement between the Company and the Siegel Family Revocable Trust
10.18(7) Addendum to Lease dated September 30, 1993 with Leslie A. Rubin for facilities located at 12920 and
12910 Automobile Boulevard, Clearwater, Florida
10.19(7) Lease effective August 2, 1993 by and between C & C Park Building and Medical Technology Systems,
Inc. for property located at 21540 Drake Road, Strongsville, Ohio
10.22(7) Form of Executive Stock Appreciation Rights and Non-Qualified Stock Option Agreement
10.23(7) Form of Director's Stock Option Agreement
10.24(7) Form of Directors' Consulting Agreement
10.25(7) Form of Director/Officer Indemnification Agreement
10.29(10) Stock Option Plan dated March 4, 1997
10.42(14) Form of Warrant dated May 13, 1998, between Stanley D. Estrin Irrevocable Trust dtd March 16, 1993,
Judith C. Estrin, Trustee and Medical Technology Systems, Inc.
10.43(14) Form of Warrant dated May 13, 1998, between Stanley D. Estrin Irrevocable Trust dtd March 16, 1993,
Judith C. Estrin, Trustee and Medical Technology Systems, Inc.
10.45(14) Form of Warrant dated August 7, 1998, between Sally Siegel and Medical Technology Systems, Inc.
10.46(14) Form of Warrant dated August 7, 1998, between Sally Siegel and Medical Technology Systems, Inc.
10.48(14) Form of Warrant dated August 18, 1998, between Todd and Shelia Siegel and Medical Technology Systems,
Inc.
10.49(14) Form of Warrant dated August 18, 1998, between Todd and Shelia Siegel and Medical Technology Systems,
Inc.
10.52(16) Form of Warrant dated October 16, 1998, between Joan L. Fitterling, as Trustee, or her successor in
Trust of the Joan L. Fitterling Revocable Trust dated August 15, 1995 and Medical Technology Systems,
Inc.
10.53(16) Form of Warrant dated October 16, 1998, between Joan L. Fitterling, as Trustee, or her successor in
Trust of the Joan L. Fitterling Revocable Trust dated August 15, 1995 and Medical Technology Systems,
Inc.
10.53(16) Form of Warrant dated October 16, 1998, between Joan L. Fitterling, as Trustee, or her successor in
Trust of the Joan L. Fitterling Revocable Trust dated August 15, 1995 and Medical Technology Systems,
Inc.
10.59(22) Form of Warrant dated September 24, 1999 between Andrew G. Burch and Medical Technology Systems, Inc.
10.60(22) Form of Warrant dated September 24, 1999 between IFM Venture Group and Medical Technology Systems,
Inc.
10.62(23) Employment Agreement between Medical Technology Systems, Inc. and Todd E. Siegel dated September 1,
1999.
14
10.63(23) Amendment One to Executive Stock Appreciation Rights and Non-Qualified Stock Option Agreement dated
October 28, 2000 between Medical Technology Systems, Inc. and Todd E. Siegel.
10.64(24) Registration Statement regarding the Medical Technology Systems, Inc. 1997 Stock Option Plan dated
February 27, 2001.
10.65(25) Employment Agreement between Medical Technology Systems, Inc. and Michael P. Conroy dated March 2,
2001.
10.66(26) Subordination Agreement between Eureka I, L.P., LaSalle Business Credit, Inc., Medical Technology
Systems, Inc., MTS Packaging Systems, Inc. dated June 26, 2002.
10.67(26) Securities Purchase Agreement between Eureka I, L.P. and Medical Technology Systems, Inc. dated June
26, 2002.
10.66(26) Senior Subordinated Note between Eureka I, L.P. and Medical Technology Systems, Inc. dated June 26,
2002.
10.68(26) Registration Rights Agreement between Eureka I, L.P. and Medical Technology Systems, Inc. dated June
26, 2002.
10.69(26) Tag-Along Agreement between Eureka I, L.P., Medical Technology Systems, Inc. and JADE Partners dated
June 26, 2002.
10.70(26) Tag-Along Agreement between Eureka I, L.P., Medical Technology Systems, Inc. and Todd E, Siegel dated
June 26, 2002.
10.71(26) Guarantor Security Agreement between Eureka I, L.P., MTS Packaging Systems, Inc., Medication
Management Technology, Inc., Clearwater Medical Services, Inc., Medical Technology Laboratories,
Inc., Medication Management Systems, Inc., Systems Professionals, Inc., Cart-Ware, Inc., Vangard
Pharmaceutical Packaging, Inc. LifeServ Technologies, Inc., Performance Pharmacy Systems, Inc., and
MTS Sales & Marketing dated June 26, 2002.
10.72(26) Guaranty Agreement between Eureka I, L.P. Medical Technology Systems, Inc. dated June 26, 2002.
10.73(26) Securities Pledge Agreement between Eureka I, L.P., Medical Technology Systems, Inc. and LifeServ
Technologies, Inc. dated June 26, 2002
10.74(26) Security Agreement between Eureka I, L.P., Medical Technology Systems, Inc. date June 26, 2002.
10.75(26) Trademark Security Agreement between Eureka I, L.P. and Medical Technology Systems, Inc. dated June
26, 2002.
10.76(26) Trademark Security Agreement between Eureka I, L.P. and MTS Packaging Systems, Inc. dated June 26,
2002.
10.77(26) Patent Security Agreement between Eureka I, L.P. and MTS Packaging Systems, Inc. dated June 26, 2002.
10.78(26) Patent Security Agreement between Eureka I, L.P. and The Siegel Family Revocable Trust dated June 26,
2002.
10.79(26) Patent Security Agreement between Eureka I, L.P. and Medical Technology Systems, Inc. dated June 26,
2002.
10.80(26) Warrant Agreement between Eureka I, L.P. and Medical Technology Systems, Inc. dated June 26, 2002.
10.81(26) Warrant Agreement between Westminster Securities Corporation and Medical Technology Systems, Inc.
dated June 26, 2002.
10.82(26) Loan and Security Agreement between LaSalle Business Credit, Inc. as Agent, Standard Federal Bank
National Association Inc. as Lender and Medical Technology Systems, Inc. and MTS Packaging Systems,
Inc. dated June 26, 2002.
10.83(26) Term Note A between LaSalle Business Credit, Inc. as Agent, Standard Federal Bank National
Association Inc. as Lender and Medical Technology Systems, Inc. and MTS Packaging Systems, Inc.
dated June 26, 2002.
10.84(26) Term Note B between LaSalle Business Credit, Inc. as Agent, Standard Federal Bank National
Association Inc. as Lender and Medical Technology Systems, Inc. and MTS Packaging Systems, Inc. dated
June 26, 2002
10.85(26) Revolving Credit Note between LaSalle Business Credit, Inc. as Agent, Standard Federal Bank National
Association Inc. as Lender and Medical Technology Systems, Inc. and MTS Packaging Systems, Inc. dated
June 26, 2002
10.86(26) Capex Note between LaSalle Business Credit, Inc. as Agent, Standard Federal Bank National Association
Inc. as Lender and Medical Technology Systems, Inc. and MTS Packaging Systems, Inc. dated June 26,
2002.
10.87(26) Continuing Unconditional Guaranty between LaSalle Business Credit, Inc. as Agent, Standard Federal
Bank National Association Inc. as Lender and Medical Technology Systems, Inc. and MTS Packaging
Systems, Inc. dated June 26, 2002.
15
10.88(26) Securities Pledge Agreement between LaSalle Business Credit, Inc. as Agent, Standard Federal Bank
National Association Inc. as Lender and Medical Technology Systems, Inc. and MTS Packaging Systems,
Inc. dated June 26, 2002.
10.89(26) Guarantor Security Agreement between LaSalle Business Credit, Inc. as Agent, Standard Federal Bank
National Association Inc. as Lender, Medication Management Technologies, Inc., Clearwater Medical
Services, Inc., Medical Technology Laboratories, Inc., Medication Management Systems, Inc., Systems
Professionals, Inc., Cart-Ware, Inc., Vangard Pharmaceutical Packaging, Inc. LifeServ Technologies,
Inc., Performance Pharmacy Systems, Inc., and MTS Sales & Marketing, Inc. dated June 26, 2002.
10.90(26) Trademark Security Agreement between LaSalle Business Credit, Inc. as Agent, Standard Federal Bank
National Association Inc. as Lender and MTS Packaging Systems, Inc. dated June 26, 2002.
10.91(26) Trademark Security Agreement between LaSalle Business Credit, Inc. as Agent, Standard Federal Bank
National Association Inc. as Lender and Medical Technology Systems, Inc. dated June 26,
2002.
10.92(26) Patent Security Agreement between LaSalle Business Credit, Inc. as Agent, Standard Federal Bank
National Association Inc. as Lender and Medical Technology Systems, Inc. dated June 26, 2002.
10.93(26) Patent Security Agreement between LaSalle Business Credit, Inc. as Agent, Standard Federal Bank
National Association Inc. as Lender and The Siegel Family Revocable Trust dated June 26, 2002.
10.94(26) Patent Security Agreement between LaSalle Business Credit, Inc. as Agent, Standard Federal Bank
National Association Inc. as Lender and MTS Packaging Systems, Inc. dated June 26, 2002.
* Incorporated herein by reference to same Exhibit(s), respectively, Registration Statement No.
33-40678 filed with the Commission on May 17, 1991
** Incorporated herein by reference to same Exhibit(s),
respectively, Registration Statement (SEC File No.
33-17852)
(10) Incorporated herein by reference to Form 10-K for the year ended March 31, 1997
(11) Incorporated herein by reference to Form 8-K dated May 2, 1997
(12) Incorporated herein by reference to Form 10-Q dated February 13, 1998 for the quarter ended December
31, 1997
(13) Incorporated herein by reference to Form 10-K for the year ended March 31, 1998
(14) Incorporated herein by reference to Form 10Q filed November 12, 1998 for quarter ending September 30,
1998
(15) Incorporated herein by reference to Form 8K filed on June 9, 1999 for event dated May 25, 1999
(16) Incorporated herein by reference to Form 10-K for year ended March 31, 1999
(17) Incorporated herein by reference to Form 8-K filed July 16, 1999
(18) Incorporated herein by reference to Form 10-Q dated November 12, 1999 for the quarter ending
September 30, 1999
(19) Incorporated herein by reference to Form 8-K filed January 18, 1999
(20) Incorporated herein by reference to Form 10-K for year ending March 31, 2000
(21) Incorporated herein by reference to Form 8-K filed July 17, 2000
(22) Incorporated herein by reference to Form 10-Q filed November 7, 2000 for quarter ending September 30,
2000
(23) Incorporated herein by reference to Form 10-Q filed February 6, 2001 for quarter ending December 31,
2000
(24) Incorporated herein by reference to Form S-8 filed February 27, 2001.
(25) Incorporated herein by reference to Form 10-K for year ending March 31, 2001
(26) Filed herein
16
MEDICAL TECHNOLOGY SYSTEMS, INC.
INDEX TO FINANCIAL STATEMENTS
Page
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS............................17
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of March 31, 2002 and 2001...............18
Consolidated Statements of Operations for the years ended March 31, 2002,
2001 and 2000.........................................................19
Consolidated Statement of Changes in Stockholders' Equity (Deficit) for
the years ended March 31, 2002, 2001 and 2000.........................20
Consolidated Statements of Cash Flows for the years ended
March 31, 2002, 2001 and 2000........................................21
Notes to Consolidated Financial Statements...........................22-39
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON FINANCIAL
STATEMENT SCHEDULE...................................................41
FINANCIAL STATEMENT SCHEDULE
Schedule II - Valuation and Qualifying Accounts........................S-1
All other schedules are omitted since the required information is not
present in amount sufficient to require submission of the schedule or because
the information required is included in the financial statements and notes
thereto.
17
Report of Independent Certified Public Accountants
Board of Directors
Medical Technology Systems, Inc. and Subsidiaries
Clearwater, Florida
We have audited the accompanying consolidated balance sheets of Medical
Technology Systems, Inc. and Subsidiaries as of March 31, 2002 and 2001 and the
related consolidated statements of operations, changes in stockholders' equity
(deficit) and cash flows for each of the three years in the period ended March
31, 2002. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Medical
Technology Systems, Inc. and Subsidiaries as of March 31, 2002 and 2001, and the
consolidated results of operations and cash flows for each of the three years in
the period ended March 31, 2002 in conformity with accounting principles
generally accepted in the United States of America.
GRANT THORNTON LLP
Tampa, Florida
June 11, 2002, except for Note 19
as to which the date is June 26, 2002
18
MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2002 AND 2001
(In Thousands)
ASSETS
2002 2001
--------------- ---------------
Current Assets:
Cash $ 410 $ 92
Accounts Receivable, Net 3,456 2,567
Inventories, Net 2,212 2,311
Prepaids and Other 199 129
Deferred Tax Benefits 1,232 1,085
--------------- ---------------
Total Current Assets 7,509 6,184
Property and Equipment, Net 2,425 2,350
Other Assets, Net 2,477 1,772
Deferred Tax Benefits 3,104 4,485
--------------- ---------------
Total Assets $ 15,515 $ 14,791
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Current Maturities of Long-Term Debt $ 968 $ 963
Accounts Payable and Accrued Liabilities 3,267 3,539
--------------- ---------------
Total Current Liabilities 4,235 4,502
Long-Term Debt, Less Current Maturities 10,812 11,887
--------------- ---------------
Total Liabilities 15,047 16,389
--------------- ---------------
Stockholders' Equity (Deficit):
Common Stock 43 42
Capital In Excess of Par Value 8,806 8,715
Accumulated Deficit (8,053) (10,027)
Treasury Stock (328) (328)
--------------- ---------------
Total Stockholders' Equity (Deficit) 468 (1,598)
--------------- ---------------
Total Liabilities and Stockholders' Equity (Deficit) $ 15,515 $ 14,791
=============== ===============
The accompanying notes are an integral part of these financial statements.
19
MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31, 2002, 2001 AND 2000
(In Thousands; Except Earnings Per Share Amounts)
2002 2001 2000
-------------- -------------- --------------
Net Sales $ 24,769 $ 21,457 $ 18,221
Costs and Expenses:
Cost of Sales 14,418 12,490 10,410
Selling, General and Administrative 5,211 5,009 4,370
Research and Development 87 119 207
Depreciation and Amortization 926 807 861
Interest 919 981 1,159
-------------- -------------- --------------
Total Costs and Expenses 21,561 19,406 17,007
-------------- -------------- --------------
Income from Continuing Operations Before
Income Taxes, Discontinued Operations and
Extraordinary Gain 3,208 2,051 1,214
Income Tax Benefit (Expense) (1,234) 5,570 0
-------------- -------------- --------------
Income from Continuing Operations Before
Discontinued Operations and Extraordinary Gain 1,974 7,621 1,214
Loss from Operations of Discontinued Operations, Net of Tax 0 (227) (2,185)
Gain on Forgiveness of Debt of Discontinued Operations 0 0 1,249
Gain on Disposal of Discontinued Operations 0 0 2,221
-------------- -------------- --------------
Net Income $ 1,974 $ 7,394 $ 2,499
============== ============== ==============
Net Income per Basic Common Share:
Income from Continuing Operations $ 0.46 $ 2.45 $ 0.47
Income (Loss) from Discontinued Operations 0.00 (0.07) 0.50
-------------- -------------- --------------
Net Income per Basic Common Share $ 0.46 $ 2.38 $ 0.97
============== ============== ==============
Net Income per Diluted Common Share:
Income from Continuing Operations $ 0.44 $ 2.43 $ 0.47
Income (Loss) from Discontinued Operations 0.00 (0.07) 0.50
-------------- -------------- --------------
Net Income per Diluted Common Share $ 0.44 $ 2.36 $ 0.97
============== ============== ==============
The accompanying notes are an integral part of these financial statements.
20
MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED MARCH 31, 2002, 2001 AND 2000
(In Thousands; Except Share Data)
COMMON STOCK
--------------------------------------------------------------------------------------
Number 0.01 Capital in Retained Treasury
of Par Excess of Earnings Stock Total
Shares Value Par Value (Deficit)
----------- ----------- ----------- ------------ ------------ -----------
Balance, March 31, 1999 6,406,191 $ 64 $ 8,583 $ (19,920) $ (328) $(11,601)
Stock Issued 136,430 1 38 39
Debt Conversion 25 25
Net Income for Year Ended
March 31, 2000 2,499 2,499
--------------------------------------------------------------------------------------
Balance, March 31, 2000 6,542,621 $ 65 $ 8,646 $ (17,421) $ (328) $ (9,038)
Issuance of Stock Options 45 45
Exchange of Preferred Stock
for Common Stock 4,000,000 40 (39) 1
Reverse Stock Split (6,325,593) (63) 63
Net Income for Year Ended
March 31, 2001 7,394 7,394
--------------------------------------------------------------------------------------
Balance March 31, 2001 4,217,028 $ 42 $ 8,715 $ (10,027) $ (328) $ (1,598)
Issuance of Stock Options 49 49
Warrants and Options Exercised 64,133 1 23 24
Stock Issued 50,000 19 19
Net Income for Year Ended
March 31, 2002 1,974 1,974
--------------------------------------------------------------------------------------
Balance March 31, 2002 4,331,161 $ 43 $ 8,806 $ (8,053) $ (328) $ 468
=========== =========== =========== ============ ============ ===========
VOTING PREFERRED STOCK
--------------------------------------------------------------------------------------
Number $0001.
of Par
Shares Value
----------- -----------
Balance, March 31, 2000 6,500,000 $ 1 $ 1
----------- ----------- -----------
Exchange of Preferred Stock
for Common Stock (6,500,000) $ (1) $ (1)
----------- ----------- -----------
Balance, March 31, 2001 0 $ 0 $ 0
----------- ----------- -----------
Balance, March 31, 2002 0 $ 0 $ 0
----------- ----------- -----------
Total Stockholders' (Deficit)
March 31, 2002 $ 468
===========
The accompanying notes are an integral part of these financial statements.
21
MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 2002, 2001 AND 2000
(In Thousands)
2002 2001 2000
-------------- -------------- --------------
Operating Activities
Income from Continuing Operations $ 1,974 $ 7,621 $ 1,214
-------------- -------------- --------------
Adjustments to Reconcile to Net Cash
Provided by Continuing Operations
Issuance of Stock for Services 19 0 24
Deferred Compensation 49 45 0
Depreciation and Amortization 926 807 861
Deferred Income Tax Expense (Benefit) 1,234 (5,570) 0
(Increase) Decrease in:
Accounts Receivable (889) 34 (128)
Inventories 99 (281) (40)
Prepaids and Other (70) (43) (17)
Increase (Decrease) in:
Accounts Payable and Other Accrued Liabilities (275) 763 (108)
-------------- -------------- --------------
Total Adjustments 1,093 (4,245) 592
-------------- -------------- --------------
Net Cash Provided by Operating Activities of Continuing Operations 3,067 3,376 1,806
-------------- -------------- --------------
Investing Activities
Expended for Property and Equipment (809) (1,063) (494)
Expended for Product Development (853) (798) (112)
Expended for Patents and Other Assets (42) (91) (18)
-------------- -------------- --------------
Net Cash Used by Investing Activities of Continuing Operations (1,704) (1,952) (624)
-------------- -------------- --------------
Financing Activities
Payments on Notes Payable and Long-Term Debt (1,096) (1,313) (1,601)
Advances from (to) Affiliates - Discontinued Operations 0 (191) 386
Exercise of Stock Options 24 0 0
Proceeds from Borrowing on Notes Payable and Long-Term Debt 27 0 0
-------------- -------------- --------------
Net Cash Used by Financing Activities of Continuing Operations (1,045) (1,504) (1,215)
-------------- -------------- --------------
Net Increase (Decrease) in Cash - Continuing Operations 318 (80) (33)
Cash at Beginning of Period - Continuing Operations 92 172 205
-------------- -------------- --------------
Cash at End of Period - Continuing Operations $ 410 $ 92 $ 172
============== ============== ==============
See Note 17 for supplemental disclosures of other cash flow information.
The accompanying notes are an integral part of these financial statements.
22
MEDICAL TECHNOLOGY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002 2001 AND 2000
NOTE 1 - BACKGROUND INFORMATION
Medical Technology Systems, Inc.(TM), a Delaware corporation (the
"Company"), was incorporated in March 1984. The Company is a holding company
that historically operated through a number of separate subsidiaries, including
MTS Packaging Systems, Inc.(TM)("MTS Packaging"), Medical Technology
Laboratories, Inc. ("MTL") and LifeServ Technologies, Inc.(TM)("LifeServ").
MTS Packaging primarily manufactures and sells disposable medication punch
cards, packaging equipment and allied ancillary products throughout the United
States. Its customers are predominantly pharmacies that supply nursing homes,
assisted living and correctional facilities with prescription medications for
their patients. MTS Packaging manufactures its proprietary disposable punch
cards and packaging equipment in its own facilities. This manufacturing process
uses integrated machinery for manufacturing the disposable medication punch
cards. The disposable medication punch cards and packaging equipment are
designed to provide a cost effective method for pharmacies to dispense
medications. The Company's medication dispensing systems and products provide
innovative methods for dispensing medications in disposable packages.
The Company sold the assets of MTL and LifeServ in fiscal 2000 and treated
the operations of these subsidiaries as discontinued operations in fiscal 2000
and 2001. The Company's continuing operations have been conducted through one
business segment since fiscal 1999 (see Note 20).
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
- -------------
The consolidated financial statements include the accounts of the Company
and its subsidiaries, MTS Packaging, MTL and LifeServ. The results of operations
of these discontinued segments for 2001 and 2000 have been excluded from the
components of "Income from Continuing Operations" and shown under the caption
"Loss from Operations of Discontinued Operations" in the Statements of
Operations. All significant inter-company accounts and transactions have been
eliminated in consolidation.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period.
Cash
- ----
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or less
to be cash equivalents. There were no cash equivalents for all periods
presented.
Inventories
- -----------
Inventories are stated at the lower of cost or market. Cost is determined
by the first-in, first-out ("FIFO") method. As of March 31, 2002 and 2001, the
Company has established an inventory valuation allowance of $40,000 to account
for the estimated loss in value of inventory due to obsolescence. The Company
will continue to evaluate the inventory and review the valuation allowance if
deemed necessary.
23
Revenue Recognition
- -------------------
The Company recognizes revenue when products are shipped and title
transfers. Revenue includes certain amounts invoiced to customers for freight
and handling charges. Effective with the fiscal year ended March 31, 2002, the
Company excludes the actual cost of freight and handling incurred from net
sales. As a result of this change, the Company has increased its net sales and
its cost of sales for the fiscal year ended March 31, 2001 and 2000 by
$1,304,000 and $1,240,000 respectively.
Property and Equipment
- ----------------------
Property and equipment are recorded at cost. Additions to, and major
improvements of, property and equipment are capitalized. Maintenance and repair
expenditures are charged to expense as incurred. As property and equipment is
sold or retired, the applicable cost and accumulated depreciation is eliminated
from the accounts and any gain or loss recorded. Depreciation and amortization
are calculated using the straight-line method based upon the assets' estimated
useful lives as follows: Years
Property and Equipment.................. 3-7
Leasehold Improvements.................. 5
The Company uses accelerated methods of depreciation for tax purposes.
Research and Development and Product Development Costs
- ------------------------------------------------------
The Company expenses research and development costs as incurred. The
Company incurred approximately $87,000, $119,000 and $207,000 in research and
development costs during fiscal 2002, 2001 and 2000 respectively.
All costs associated with product development from the point of
technological feasibility to its general distribution to customers are
capitalized and subsequently amortized. Annually, the Company re-examines its
amortization policy relating to its product development costs. The Company has
determined that a five-year period is appropriate. Capitalized product
development costs totaled approximately $853,000, $798,000 and $112,000 for the
years ended March 31, 2002, 2001 and 2000 respectively.
Other Assets
- ------------
Other assets are carried at cost less accumulated amortization.
Amortization is being calculated on a straight-line basis over a five to
seventeen year period.
Long-lived assets and certain identifiable intangibles that are held and
used by the Company are reviewed for impairment whenever events or changes in
circumstance indicate that the carrying amount of these assets may not be
recoverable. In performing the review for recoverability, the Company estimates
the future cash flows expected to result from the use of the assets and their
eventual disposition. If the sum of the expected future cash flows (undiscounted
and without interest charges) is less than the carrying amount of the assets, an
impairment loss is recognized. Long-lived assets and certain identifiable
intangibles to be disposed of are to be reported at the lower of the carrying
amount or the fair value less cost to sell, except for assets that are related
to discontinued operations, which are reported at the lower of carrying value or
net realizable value. There were no impairment losses in 2002, 2001 or 2000.
Earnings Per Share
- ------------------
Earnings per share are computed using the basic and diluted calculations on
the face of the statement of operations. Basic earnings per share is calculated
by dividing net income by the weighted average number of shares of common stock
outstanding for the period. Diluted earnings per share is calculated by dividing
net income by the weighted average number of shares of common stock outstanding
for the period, adjusted for the dilutive effect of common stock equivalents,
using the treasury stock method (see Note 15). All earnings per share amounts
have been retroactively adjusted for the 1 for 2.5 reverse stock split in fiscal
2001.
24
Income Taxes
- ------------
Income taxes are provided for under the liability method in accordance with
FASB No. 109, "Accounting for Income Taxes", whereby deferred tax assets are
recognized for deductible temporary differences and operating loss and tax
credit carryforwards and deferred tax liabilities are recognized for taxable
temporary differences. Temporary differences are the differences between the
reported amounts of assets and liabilities and their tax bases. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of enactment. Treasury
Stock
The Company records its treasury stock at cost.
Stock-Based Employee Compensation
- ---------------------------------
The Company accounts for its stock options granted to employees in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, Accounting for Stock Issued to Employees, and related interpretations.
As such, compensation expense would be recorded on the date of granting the
stock options only if the current market price of the underlying stock exceeded
the exercise price. As permitted by SFAS No. 123, Accounting for Stock-Based
Compensation, the Company also provides certain pro forma disclosure provisions
of Statement 123 (see Note 14)
Fair Value of Financial Instruments
- -----------------------------------
The carrying amounts of cash, receivables, accounts payable and accrued
liabilities approximate fair value because of the short-term nature of the
items.
The carrying amount of current and long-term portions of long-term debt
approximates fair value since the interest rates approximate current prevailing
market rates.
Reclassifications
- -----------------
Certain reclassifications were made to the 2001 and 2000 financial
statement amounts to conform to 2002 presentation.
Recent Accounting Pronouncements
- --------------------------------
On July 20, 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) 141, Business Combinations,
and SFAS 142, Goodwill and Intangible Assets. SFAS 141 is effective for all
business combinations completed after June 30, 2001. SFAS 142 is effective for
the fiscal year beginning April 1, 2002; however, certain provisions of that
Statement apply to goodwill and other intangible assets acquired between July 1,
2001 and the effective date of SFAS 142. The Company has not yet analyzed the
effect, if any, of these new standards; accordingly, the Company is unable at
present to state what effect, if any, the adoption of these standards will have
on the Company's financial statements.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. This statement addresses financial accounting
and reporting for the impairment or disposal of long-lived assets and supersedes
FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of. The provisions of the statement are
effective for financial statements for the fiscal year beginning April 1, 2002.
The Company is evaluating the impact of the adoption of this standard and has
not yet determined the effect of adoption on its financial position and results
of operations. NOTE 3 - ACCOUNTS RECEIVABLE
25
The Company maintains an allowance for potential losses on individual and
commercial accounts receivable, which are unsecured. Management performs
periodic collectibility reviews of its accounts receivable that considers aging
and other factors. As a result of these reviews, the Company reduced the bad
debt reserve by approximately $180,000 during the fiscal year ended March 31,
2002.
Accounts Receivable consist of the following:
March 31, March 31,
2002 2001
------------- --------------
(In Thousands)
Accounts Receivable $ 3,557 $ 2,857
Less: Allowance for Doubtful Accounts (101) (290)
------------- --------------
$ 3,456 $ 2,567
============= ==============
All of the Company's accounts receivable are pledged as collateral on bank
notes.
The geographic sales of the Company are primarily in the United States.
There were 2, 2 and 1 customer(s) whose sales exceeded 10% of revenue for 2002,
2001 and 2000 respectively.
NOTE 4 - INVENTORIES
Inventories consist of the following:
March 31, March 31,
2002 2001
------------- --------------
(In Thousands)
Raw Material $ 964 $ 1,053
Finished Goods and Work in Process 1,288 1,298
Less: Inventory Valuation Allowance (40) (40)
------------- --------------
$ 2,212 $ 2,311
============= ==============
All of the Company's inventories are pledged as collateral on bank notes.
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
March 31, March 31,
2002 2001
------------- --------------
(In Thousands)
Property and Equipment $ 7,953 $ 7,328
Leasehold Improvements 638 453
------------- --------------
8,591 7,781
Less: Accumulated Depreciation and Amortization (6,166) (5,431)
------------- --------------
$ 2,425 $ 2,350
============= ==============
Substantially all of the Company's property and equipment are pledged as
collateral on bank notes.
26
Depreciation of property and equipment and amortization of leasehold
improvements total approximately $732,000, $617,000 and $684,000 for fiscal
years ending March 31, 2002, 2001 and 2000 respectively.
NOTE 6 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities are comprised of the following:
March 31, March 31,
2002 2001
-------------- --------------
(In Thousands)
Accounts Payable/Trade $ 1,833 $ 2,221
Accrued Liabilities:
Salaries, Commissions and Employee Benefits 804 696
Medical Claims 102 107
Interest 0 83
State Taxes 34 50
Royalties 494 382
-------------- --------------
$ 3,267 $ 3,539
============== ==============
NOTE 7 - OTHER ASSETS
Other assets consists of the following:
March 31, March 31,
2002 2001
-------------- --------------
(In Thousands)
Product Development $ 2,202 $ 1,349
Less: Accumulated Amortization (315) (237)
-------------- --------------
$ 1,887 $ 1,112
-------------- --------------
Patents $ 1,196 $ 1,160
Less: Accumulated Amortization (725) (643)
-------------- --------------
$ 471 $ 517
-------------- --------------
Other 190 183
Less: Accumulated Amortization (71) (40)
-------------- --------------
$ 119 $ 143
-------------- --------------
Total Other Assets, Net $ 2,477 $ 1,772
============== ==============
Expenditures for product development in the fiscal year ended March 31,
2002 were primarily dedicated to the development of the Company's new
OnDemand(TM) machine. The Company has capitalized approximately $1,314,000 to
date on the development of the OnDemand machine and estimates that it will
capitalize an additional $500,000 to complete the project.
Substantially all of the Company's intangible assets are pledged as
collateral on bank notes.
27
NOTE 8 - LONG-TERM DEBT
Long-term debt consists of the following:
March 31, March 31,
2002 2001
------------ -------------
(In Thousands)
Bank Term Loan; payable in installments of interest at 7.5% and principal
monthly for ten years ending September 1, 2006, with a lump sum payment of
approximately $7.1 million on that date secured by all tangible and
intangible assets of the Company. $ 11,449 $ 12,406
Unsecured Notes Payable due September 2001 plus interest at 13%. 0 45
Unsecured Note Payable plus interest at 3%, payable in monthly installments
of $2,394 through September 2006. 122 146
Unsecured Note Payable under settlement agreement with State of Florida
Department of Revenue, payable in monthly installments of $3,500 over a
period of four years. 171 219
Other Notes and Agreements 38 34
------------ -------------
Total Long -Term Debt 11,780 12,850
Less Current Portion (968) (963)
------------ -------------
LONG-TERM DEBT DUE AFTER 1 YEAR $ 10,812 $ 11,887
============ =============
The bank notes payable are collateralized by the Company's accounts
receivables, inventory, equipment and intangibles.
The Company made principal payments of approximately $102,000 during fiscal
year ended 2002 pursuant to the excess cash flow payment provisions of its loan
agreement.
During fiscal year ended 2002, the Company exceeded the amount of capital
expenditures allowed in certain covenants of its loan agreement and requested
the lender's consent to an increase in the annual limit on these expenditures
and waive any defaults that may have occurred. In addition, the lender advised
the Company that they believed that certain excess cash flow principal payments
were not made in accordance with the loan agreement. The Company believed that
it consistently calculated the excess cash flow principal payments in accordance
with its interpretation of certain provisions of the loan agreement. As a
result, the Company entered into discussions with the lender to reach a
compromise on the excess cash flow principal payments. Subsequent to March 31,
2002, the Company repaid the entire amount of the bank term loan (see Note 19 -
Subsequent Event).
The following is a schedule by year of the principal payments required on
these notes payable and long-term debts as of March 31, 2002:
(In Thousands)
2003.................................... $ 968
2004 ................................... $ 1,016
2005.................................... $ 1,079
2006.................................... $ 1,158
2007.................................... $ 7,559
Thereafter.............................. $ 0
Interest expense for the years 2002, 2001 and 2000 amounted to $919,000,
$981,000 and $1,159,000 respectively.
28
NOTE 9 - LEASE COMMITMENTS
The following is a schedule by year of future minimum rental payments
required under operating leases, primarily facility leases, that have an initial
or remaining non-cancelable lease term in excess of one year as of March 31,
2002.
(In Thousands)
2003.................................... $ 460
2004.................................... $ 445
2005.................................... $ 402
2006.................................... $ 103
2007.................................... $ 3
Thereafter.............................. $ 0
Rent expense amounted to $393,000, $350,000 and $312,000 for the years
ended March 31, 2002, 2001 and 2000 respectively.
NOTE 10 - 401(K) PROFIT SHARING PLAN
The Company has a 401(K) Profit Sharing Plan. The Plan covers substantially
all of its employees. Contributions are at the employees' discretion and may be
matched by the Company up to certain limits. For the years ended March 31, 2002,
2001 and 2000, the Company contributed $30,000, $16,000 and $19,000
respectively, to the plan.
NOTE 11 - SELF INSURANCE PLAN
The Company has a Medical Health Benefit Self-insurance Plan, which covers
substantially all of its employees. During the year ended March 31, 2002, the
Company was reinsured for claims that exceed $25,000 per participant and an
annual maximum aggregate limit of approximately $342,000. Specific and aggregate
reinsurance limits for fiscal year 2003 were increased to $50,000 and $500,000
respectively. Reinsurance limits for subsequent fiscal years may change. Future
claims experience may effect the reinsurance limits that may available to the
Company in subsequent fiscal years. Although claims incurred during the current
fiscal year for certain individuals relate to serious illnesses, the Company
believes that reinsurance limits currently in effect provide adequate insurance
coverage for these individuals should the serious illness continue or reoccur.
The Company has established a reserve of $102,000 at March 31, 2002 for all
unpaid claims incurred during fiscal year 2002 and an estimate of claims
incurred during fiscal year 2002 that have not been reported as of March 31,
2002.
NOTE 12 - RELATED PARTY TRANSACTIONS
Todd E. Siegel ("Siegel") is the Trustee of the Siegel Family QTIP Trust
(the "Trust"), which is the general partner in JADE Partners, a significant
shareholder of the Company. The Trust has entered into an exclusive Technology
and Patent Licensing Agreement with the Company for certain technologies and
patents on machine and product designs.
Under the terms of the amended agreement, the Company is required to pay to
the Trust royalties of one percent of sales on licensed products. In addition,
the agreement states that there are no minimum royalty payments due and the
agreement would expire if the Company abandons or ceases to use the
technologies. Royalty payments were $62,400, $50,000 and $50,000 in the years
ended March 31, 2002, 2001 and 2000 respectively. Accrued royalty payments due
as of March 31, 2002, 2001 and 2000 total approximately $494,000, $382,000 and
$266,000 respectively.
29
Siegel, through his beneficial interest in the Trust, owns approximately
42% of the outstanding Common Stock of the Company.
NOTE 13 - TAXES
The components of income tax expense (benefit) from continuing operations
is as follows:
Years Ended March 31,
--------------------------------------------------
2002 2001 2000
------------ ------------- -------------
(In Thousands)
Current Income Taxes $ 0 $ 0 $ 0
Deferred Income Taxes 1,234 632 0
Change in Deferred Tax Valuation Allowance 0 (6,202) 0
------------ ------------- ------------
Income Tax Expense (Benefit) $ 1,234 $ (5,570) $ 0
============ ============= ============
Total income tax (benefit) expense for 2002, 2001 and 2000 from continuing
operations resulted in effective tax rates of 38.5%, (271.6%) and 0%
respectively. The reasons for the differences between these effective tax rates
and the U.S. statutory rate of 34.0% - 35.0% on the continuing operations are as
follows:
Years Ended March 31,
---------------------------------------------------
2002 2001 2000
------------- -------------- --------------
(In Thousands)
Tax Expense at U.S. statutory rate $ 1,118 $ 697 $ 413
State Income Tax, Net 116 72 42
Net Operating Loss Carryforward 0 (769) (455)
Net Deferred Tax Asset Recognized 0 (5,570) 0
------------- -------------- -------------
$ 1,234 $ (5,570) $ 0
============= ============== =============
Deferred taxes for continuing operations consist of the following:
March 31, 2002 March 31, 2001
---------------- ----------------
(In Thousands)
Deferred Tax Assets:
Depreciation/Amortization Temporary Difference $ (163) $ (188)
Allowance for Doubtful Accounts 38 108
Inventory Valuation Allowance 15 15
Tax Loss Carry Forward 4,043 5,225
Reserves and Provisions 403 410
---------------- ----------------
Deferred Income Taxes $ 4,336 $ 5,570
================ ================
30
The Company's deferred tax asset at March 31, 2002 is broken down to its
current and long-term portions as follows:
Current $ 1,232,000
Long-Term 3,104,000
----------------
$ 4,336,000
================
Prior to fiscal year ended 2001, the Company had provided a 100% valuation
allowance on its net deferred tax asset as it was not more likely than not that
the related income tax benefit would be realized in the future. During fiscal
year ended 2001, the Company removed its valuation allowance, thereby recording
an income tax benefit of $5,719,000 because the Company believed that it is more
likely than not that these income tax benefits will be realized in the future
based in part on (1) the historical profitable operations of its core business;
(2) expectations that its core business will continue to be profitable; (3)
growth opportunities available for its core business; and (4) the length of time
that the net operating loss carryforwards are available to offset future taxable
income. The income tax benefit is comprised primarily of net operating loss
carryforwards that are available to offset future taxable income. The
carryforward losses expire beginning in fiscal year 2011 and ending in fiscal
year 2020.
In order for the Company to fully utilize the benefits of its net operating
loss carryforwards in the future, its average future annual taxable income
beginning with fiscal year 2003 and ending with fiscal year 2020 would have to
be approximately $600,000. During fiscal year 2002, the Company's taxable
income, exclusive of utilization of net operating losses, was approximately
$2,800,000.
NOTE 14 - STOCKHOLDERS' EQUITY (DEFICIT)
Stockholders' Equity (Deficit) consists of the following:
March 31, March 31, March 31,
2002 2001 2000
---------------- ---------------- -----------------
Voting Preferred Stock:
Par Value $.0001 Per Share
Authorized Shares 7,500,000 7,500,000 7,500,000
Issued Shares 0 0 6,500,000
Outstanding Shares 0 0 6,500,000
Common Stock (Retroactively adjusted for 1 for 2.5 reverse stock split in
fiscal 2001):
Par Value $.01 Per Share
Authorized Shares 25,000,000 25,000,000 25,000,000
Outstanding Shares 4,312,281 4,198,148 2,598,168
Issued Shares 4,331,161 4,217,028 2,617,048
Common Stock
During fiscal year end 2002, the Company issued 50,000 shares of common
stock to an officer and director in lieu of $18,750 of cash compensation that is
payable pursuant to an employment agreement.
31
During fiscal 2001, the Company exchanged 4,000,000 shares of common stock
for 6,500,000 shares of voting preferred stock and also effected a reverse stock
split of 1 share of common stock for 2.5 shares of common stock after the
exchange of common for preferred stock.
During fiscal 2000, the Company issued 20,000 shares of common stock to an
officer and director in lieu of cash compensation of $4,750 and 18,536 shares of
common stock to outside directors in lieu of cash compensation of $18,500 earned
for attendance at meetings of the Board of Directors. In addition, the Company
issued 16,000 shares of common stock to two individuals pursuant to an agreement
to redeem the minority interest held by these individuals in a subsidiary of
LifeServ.
Preferred Stock
JADE Partners ("Partnership") was the holder of 6,500,000 shares of Voting
Preferred Stock. The Siegel Family QTIP Trust, established pursuant to the terms
of the Siegel Family Revocable Trust (the "Trust"), which originally acquired
the shares of Voting Preferred Stock in 1986 for the aggregate par value of the
shares ($650.00), transferred the shares to the Siegel Family Limited
Partnership in 1993. The Siegel Family Limited Partnership transferred the
shares to the Partnership in 1994. The Company's CEO is the trustee of the
Trust, which is the managing general partner of the Partnership, and
accordingly, controls the shares held by the Partnership.
The Voting Preferred Stock had two votes per share on all matters submitted
to a vote of other holders of Common Stock. In addition to preferential voting
rights, the Voting Preferred Stock was entitled to receive upon dissolution or
liquidation of the Company, the first $10,000 of proceeds distributed to
stockholders of the Company upon such events. Thereafter, the Voting Preferred
Stock was entitled to no additional amounts upon dissolution or liquidation of
the Company. The Voting Preferred Stock had no dividend rights, redemption
provisions, sinking fund provisions or conversion, preemptive or exchange
rights. The Voting Preferred Stock was not subject to further calls or
assessments by the Company.
In December 2000, the Siegel Family Limited Partnership exchanged 6,500,000
shares of voting preferred stock for 4,000,000 shares of common stock of the
Company. The exchange of preferred for common shares was approved by the common
shareholders of the Company.
Stock Options
The Company has adopted only the disclosure provisions of Financial
Accounting Standard No. 123, "Accounting for Stock-Based Compensation," as it
relates to employment awards. It applies APB Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations in accounting for its
plans and does not recognize compensation expense based upon the fair value at
the grant date for awards under these plans consistent with the methodology
prescribed by SFAS 123, the Company's net income and earnings per share would be
reduced to the proforma amounts indicated below (retroactively adjusted for the
1 for 2.5 reverse stock split in fiscal 2001):
2002 2001 2000
------------ ------------ ------------
Net Income As Reported $ 1,974 $ 7,394 $ 2,499
ProForma $ 1,579 $ 7,376 $ 2,470
Earnings Per Common Share Basic As Reported $ .46 $ 2.38 $ 0.97
Basic ProForma $ .37 $ 2.37 $ 0.96
Earnings Per Common Share Diluted As Reported $ .44 $ 2.36 $ 0.97
Diluted ProForma $ .35 $ 2.36 $ 0.96
32
The fair value of each option grant is estimated on the date of grant using
the Binominal options-pricing model with the following weighted-average
assumptions used for grants in 2002, 2001 and 2000 respectively, no dividend
yield for all years, expected volatility of 148, 133 and 130 percent; risk-free
interest rates of 3.7, 6.1 and 6.3 percent, and 3.0 year expected lives for all
years.
Activity related to options is as follows (Retroactively adjusted for 1 for
2.5 reverse stock split in fiscal 2001):
Number of Shares Weighted Average Exercise
Price per Share
---------------------- -------------------------
Outstanding at March 31, 1999 630,973 $3.13
Granted in Fiscal 2000
Officers and Directors 4,800 $2.50
Employees 0 $0
Options Expired (199,266) $2.63
---------------------- -------------------------
Outstanding at March 31, 2000 436,507 $3.35
Granted in Fiscal 2001:
Officers and Directors 120,000 $1.88
Employees 0 0
Options Expired (53,301) $2.84
---------------------- -------------------------
Outstanding at March 31, 2001 503,206 $3.05
Granted in Fiscal 2002
Officers and Directors 591,000 $1.51
Employees 376,500 $1.59
Options Exercised (9,000) $1.50
Options Expired (11,900) $4.20
---------------------- -------------------------
Outstanding at March 31, 2002 1,449,806 $2.04
====================== =========================
Outstanding Shares
Range of Number Weighted Average Weighted Average
Remaining Contractual
Exercise Prices Life
Outstanding (Years) Exercise Price
------------------------ ------------------- ---------------------- --------------------
$0.48 - $2.35 1,018,500 8.9 $1.56
$2.50 - $5.00 420,658 3.4 $2.65
$15.00 - $25.00 10,648 2.0 $18.93
Exercisable Shares
Weighted Average
Range of Remaining Contractual
Exercise Prices Number Life Weighted Average
Outstanding (Years) Exercise Price
------------------------ ------------------- ---------------------- --------------------
$0.48 - $2.35 522,664 8.9 $1.54
$2.50 - $5.00 406,158 3.3 $2.65
$15.00 - $25.00 10,648 2.0 $18.93
33
The options outstanding at March 31, 2002 expire on various dates
commencing in June 2002 and ending in March 2012.
The weighted average grant date fair value of options during fiscal year
2002, 2001 and 2000 was $1.25, $.52 and $.33 respectively.
At March 31, 2001 and 2000, exercisable options totaled 423,206 and
367,766 at weighted average exercise prices of $3.29 and $3.51 respectively.
Warrants
- --------
Activity related to warrants is as follows (Retroactively adjusted for
fiscal 2001 1 for 2.5 reverse stock split in fiscal 2001):
Number of Shares Weighted Average
Price Per Share
-------------------- ------------------
Outstanding at March 31, 1999 and 2000 628,600 $15.38
Granted in Fiscal 2001 105,000 $1.05
Warrants Expired (528,000) $17.52
-------------------- ------------------
Outstanding at March 31, 2001 205,600 $1.37
Granted in Fiscal 2002 0 $ 0
Warrants Expired 0 $ 0
Warrants Exercised (76,000) $ .97
-------------------- ------------------
Outstanding at March 31, 2002 129,600 $1.60
==================== ==================
The warrants expire on various dates commencing September 2002 ending
August 2009. All warrants are 100% vested at March 31, 2002.
The weighted average grant date fair value of warrants during fiscal year
2001 and 2000 was $.90 and $.10 respectively.
During fiscal year 2001, the Company entered into a financial advisory
agreement with National Securities Corporation ("NSC"). The terms of the
agreement provided for the issuance of 105,000 warrants to NSC as part of the
compensation for their services. The warrants were exercisable at an average
price of $1.00 and expire in 2006. Compensation expense related to these
warrants totaled $49,000 and $45,000 for the years ended March 31, 2002 and 2001
respectively. In addition, NSC may receive an additional 125,000 warrants
exercisable at $1.50 based upon the successful completion of certain financing
transactions. During fiscal year 2002, NSC exercised their rights to acquire
45,133 shares of common stock pursuant to the cashless exercise rights provision
contained in the warrant agreement representing 66,000 shares. The warrants were
exercisable at prices ranging from $.85 to $1.50. In addition, certain holders
of warrants elected to exercise their rights to acquire 10,000 shares of common
stock. The warrants were exercisable at prices ranging from $1.13 to $1.50.
The Company entered into a stock appreciation rights agreement with its
Chief Executive Officer in 1995. The agreement, which is for a term of 10 years,
calls for additional compensation payable annually equal to 3.25% of the total
of the incremental increase in the value of the Company's outstanding stock.
Additional compensation expense for the years ended March 31, 2002, 2001 and
2000 totaled $143,000, $131,000 and $27,000 respectively.
34
NOTE 15 - EARNINGS PER SHARE
Income from continuing operations per common share is computed by dividing
income from continuing operations by the basic and diluted weighted average
number of shares of common stock outstanding. For diluted weighted average
shares outstanding, the Company used the treasury stock method to calculate the
Common Stock equivalents that the stock options would represent. The number of
shares outstanding have been retroactively adjusted for the 1 share for 2.5
shares reverse stock split that occurred in December 2000.
The following table sets forth the computation of income from continuing
operations per basic and diluted common share:
Year Ended March Year Ended March Year Ended March
31, 2002 31, 2001 31, 2000
----------------- ---------------- ----------------
Numerator:
Income from Continuing Operations $ 1,974,000 $ 7,621,000 $ 1,214,000
=============== =============== ===============
Denominator:
Weighted average shares outstanding - Basic 4,299,000 3,112,000 2,579,000
Add: Effect of dilutive warrants 218,000 18,000 0
--------------- ---------------- ---------------
Weighted average shares outstanding - Diluted 4,517,000 3,130,000 2,579,000
=============== =============== ===============
Income from Continuing Operations Per Common Share
- Basic $ .46 $ 2.45 $ .47
=============== =============== ===============
Income from Continuing Operations per Common Share
- Diluted $ .44 $ 2.43 $ .47
=============== =============== ===============
The effect of 440,806 and 239,806 options and warrants were not included in
the calculation of net income per diluted common share for 2002 and 2001
respectively, as the effect would have been anti-dilutive. The effect of all
options and warrants (see Note 14) for 2000 were not included in the calculation
of income from continuing operations per diluted common share as the effect
would have been anti-dilutive.
NOTE 16 - CONTINGENCIES
The Company sold the assets of subsidiaries LifeServ and MTL during fiscal
2000. The buyers assumed certain liabilities of these subsidiaries including a
certain long-term obligation totaling approximately $120,000, as of March 31,
2002, payable to a financial institution and secured by equipment at a customer
site and a contract receivable. The Company was a guarantor of the obligation at
the time the obligation originated and continues as a guarantor.
In November 1998, MTL, a discontinued operation, received a refund request
in the amount of $1.8 million from Medicare Program Safeguards ("MPS"). MTL
disputed the refund request in its response to MPS in December 1998. To date,
MTL has not received any further correspondence from MPS regarding this matter.
Certain creditors of LifeServ, a discontinued operation, have commenced
legal actions against LifeServ seeking payment of liabilities assumed by the
buyers of LifeServ. The Company intends to vigorously defend these actions and
seek appropriate remedies from the buyers.
35
The Company is involved in certain claims and legal actions arising in the
ordinary course of business including the matters referred to above. There can
be no assurances that these matters will be resolved on terms acceptable to the
Company. In the opinion of management, based upon advice of counsel and
consideration of all facts available at this time, the ultimate disposition of
these matters are not expected to have a material adverse effect on the
financial position, results of operations or liquidity of the Company.
NOTE 17 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
2002 2001 2000
---------- ---------- ----------
Supplemental Disclosure of Cash flow Information:
Cash Paid for Interest $ 1,001 $ 989 $ 1,159
Cash Paid for Income Taxes 0 0 0
Supplemental Cash Flow Information for Discontinued Operations:
Operating Activities:
Net Cash Provided by Discontinued Operations 0 230 400
Investing Activities:
Net Cash Provided by Investing Activities of Discontinued Operations 0 0 90
Financing Activities:
Net Cash Used by Financing Activities of Discontinued Operations
0 (305) (475)
---------- ---------- ----------
Net Increase (Decrease) in Cash - Discontinued Operations 0 (75) 15
Cash at Beginning of Period - Discontinued Operations 0 76 61
---------- ---------- ----------
Cash at End of Period - Discontinued Operations $ 0 $ 1 $ 76
========== =========== ==========
Continuing Operations
---------------------
During fiscal year 2000, the Company recorded a prior year equity
transaction that was deemed insignificant pertaining to the forgiveness of
$25,000 of debt to a former officer of the Company in exchange for a reduction
in the exercise price of options previously granted to him from $4.00 and $1.63
per option to $1.00 per option. The new exercise price was greater than the
market price of the Company's common stock at that time. In addition, the
Company issued common stock in exchange for an accrued liability reduction of
$15,000 and transferred approximately $90,000 of other assets to fixed assets.
36
NOTE 18 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The information set forth below represents unaudited selected quarterly
financial data for the fiscal years ended March 31, 2002 and 2001.
Fiscal Year Ended March 31, 2002
------------------------------------------------------------------
For The Three Months Ended
------------------------------------------------------------------
(In Thousands, Except Earnings Per Share Amounts)
June 30, September 30, December 31, March 31,
2001 2001 2001 2002
------------- ------------- ------------- -------------
Income Statement Data:
Net Sales $ 5,876 $ 5,991 $ 6,192 $ 6,710
Gross Profit 2,396 2,496 2,506 2,953
Income Before Income Taxes 662 676 854 1,016
Income Tax Expense 239 237 320 438
------------- ------------- ------------- -------------
Net Income $ 383 $ 439 $ 534 $ 618
============= ============= ============= =============
Net Earnings Per Basic Common Share $ 0.09 $ 0.10 $ 0.12 $ 0.15
============= ============= ============= =============
Net Earnings Per Diluted Common Share $ 0.09 $ 0.10 $ 0.12 $ 0.13
============= ============= ============= =============
Fiscal Year Ended March 31, 2001
-------------------------------------------------------------------------
For The Three Months Ended
-------------------------------------------------------------------------
(In Thousands, Except Earnings Per Share Amounts)
June 30, September 30, December 31, March 31,
2000 2000 2000 2001
------------- -------------- -------------- -------------
Income Statement Data:
Net Sales $ 4,983 $ 5,189 $ 5,395 $ 5,890
Gross Profit 1,986 2,131 2,488 2,362
Income from Continuing Operations Before Income
Taxes and Discontinued Operations 374 467 652 558
Income Tax Benefit (Expense) 0 0 5,719 (149)
Income (Loss) from Discontinued Operations 29 (7) (212) (37)
------------- -------------- -------------- -------------
Net Income $ 403 $ 460 $ 6,159 $ 372
============= ============== ============== =============
Net Earnings (Loss) Per Basic and Diluted Common
Share: (Retroactively adjusted for the 1 for 2.5
reverse stock split in December 2000)
From Continuing Operations $ 0.14 $ 0.18 $ 2.11 $ 0.10
Income (Loss) from Discontinued Operations 0.01 0.00 (0.07) (0.01)
------------- -------------- -------------- -------------
Net Earnings Per Basic and Diluted Common Share $ 0.15 $ 0.18 $ 2.04 $ 0.09
============= ============== ============== =============
37
NOTE 19 - SUBSEQUENT EVENT (Unaudited)
In June 2002, the Company repaid the entire amount, $11,310,000, of its
bank term loan with the proceeds of a new revolving line of credit, term loans,
a subordinated note and convertible preferred stock. The revolving line of
credit allows for borrowing of up to $5,000,000 based upon advance rates that
are applied to the Company's eligible accounts receivable and inventory.
Interest is payable on the revolving line of credit monthly based on the average
unpaid balance at the prime rate plus 1.0%.
One term loan in the amount of $700,000 is repayable in equal monthly
installments over a five (5) year term, plus interest at the prime rate plus
1.25%. Another term loan in the amount of $2,000,000 is repayable in equal
monthly installments over two (2) years plus interest at the prime rate plus
2.25% and is subject to an excess cash flow payment provision.
The revolving line of credit and the term loans are secured by the
Company's accounts receivable, inventory, machinery and equipment and all other
assets of the Company.
The subordinated note in the amount of $4,000,000 is repayable in five (5)
years with interest only, at 14%, payable monthly until the maturity of the
note. The subordinated note is secured by a second lien on all of the assets of
the Company. In addition, the subordinated note holders were issued 566,517
warrants to purchase common stock exercisable for ten (10) years at $.01 per
share. (Subject to certain antidilution provisions.)
The Company issued 2,000 shares of convertible preferred stock at $1,000
per share. The holders of the convertible preferred stock are entitled to
receive quarterly dividends at the rate of 11% per annum. The dividends are
payable in cash or shares of convertible preferred stock, at the Company's
option, and are cumulative. The preferred stock is convertible into 846,000
shares of the Company's common stock at $2.36 per share. (Subject to certain
antidilution provisions.)
The warrant agreement and the terms of the convertible preferred stock
contain a make-whole provision that obligates the Company to pay certain amounts
to the holders of the warrants and convertible preferred stock if they do not
ultimately receive an amount equal to the price per share of the common stock on
the date they exercise their right to purchase the common shares that underlie
the warrants and the convertible preferred stock. The warrant agreement also
contains a provision that may obligate the Company to pay certain amounts to the
holders of the warrants in the event that there is a change in control of the
voting common stock of the Company, or if there is a sale of the Company or a
public offering of the Company's common stock.
In the event that the Company is required to make payments to the holders
of the warrants and/or preferred stock, it may elect to issue additional
warrants and/or preferred stock in lieu of a cash payment. Although the
make-whole provision and other provisions of the warrant agreement and
convertible preferred stock agreement provide for a maximum of 12,500,000 shares
that may be issued pursuant to those provisions, based upon current conditions,
the Company believes it is unlikely that the maximum number of shares would be
issued.
The Company also issued, to its financial advisors, 125,000 warrants to
purchase common stock as part of a success fee related to the above referenced
financing. The warrants are exercisable for five (5) years at $1.50 per share.
The revolving line of credit, the term loans and the subordinated notes
each contain certain financial covenants that, among other things, requires the
maintenance of certain financial ratios, limits the amount of capital
expenditures and requires the Company to obtain the lenders approval for certain
matters.
38
If the Company had repaid the entire amount of its bank term loan at March
31, 2002, the balance sheet as of that date would have been as follows:
(Unaudited)
Proforma Balance Sheet
March 31, 2002
(In Thousands)
Assets
Current Assets
Cash $ 0
Accounts Receivable, Net 3,456
Inventories 2,212
Prepaids and Other 199
Deferred Tax Benefits 1,232
----------------
Total Current Assets 7,099
Property and Equipment, Net 2,425
Other Assets, Net 2,477
Deferred Tax Benefits 3,104
----------------
Total Assets $ 15,105
================
Liabilities And Stockholders' Equity
Current Liabilities:
Current Maturities of Long-Term Debt $ 1,235
Accounts Payable and Accrued Liabilities 3,307
----------------
Total Current Liabilities 4,542
Revolving Line of Credit 3,374
Long-Term Debt, Less Current Maturities 3,176
----------------
Total Liabilities 11,092
----------------
Stockholders' Equity:
Convertible Preferred Stock 2,000
Common Stock 43
Warrants* 1,545
Capital In Excess of Par Value 8,806
Accumulated Deficit (8,053)
Treasury Stock (328)
----------------
Total Stockholders' Equity 4,013
----------------
Total Liabilities and Stockholders' Equity $ 15,105
=================
*The Company has estimated the value of the warrants issued to the holder of the
subordinated notes. The ultimate valuation of these warrants may change the
respective values of the subordinated notes and the warrants.
NOTE 20 - DISCONTINUED OPERATIONS
In May 1999, the Company sold LifeServ, its Health Care Information Systems
business segment. The Asset Acquisition Agreement provided, among other things,
for the buyer to receive substantially all the assets of LifeServ in
consideration of the assumption of certain stated liabilities of approximately
$5 million. Revenue from the operations of LifeServ during fiscal 2001, 2000 and
1999 were $0, $454,000 and $5.2 million respectively. The operations of LifeServ
during fiscal 2000 resulted in a loss of approximately $524,000 and a gain on
disposal of $1.8 million.
39
In January 2000, the Company sold the principal assets of MTL. MTL received
$1,000,000 for the assets that were comprised of equipment, goodwill and certain
accounts receivable. In addition, the buyer assumed approximately $400,000 in
liabilities of MTL. Revenue from the operations of MTL during fiscal 2001, 2000
and 1999 were $0, $7.9 million and $14.0 million respectively. The operations of
MTL during fiscal 2000 resulted in a loss of $2,225,000 of which $500,000 was
estimated and recorded in fiscal 1999. In addition, a gain on disposal of
$399,000 was realized in fiscal 2000 and a gain on debt forgiveness of
$1,249,000 was realized as a result of settlements that were reached with
several creditors of MTL. In fiscal 1999, the Company estimated that the
disposal of MTL would result in a loss of $2,500,000 and recorded a charge in
that amount. During the second quarter of fiscal 2000, a buyer for MTL was
identified and the business was sold during the fourth quarter of fiscal 2000.
The length of time that elapsed between the date that the buyer was identified
and the date the sale concluded resulted in a loss from operations of the
business in fiscal 2000 that was greater than the loss from operations that was
estimated in fiscal 1999. However, the terms of the sale of the business were
more favorable than the Company estimated in fiscal 1999.
Certain accounts receivable of MTL were not sold in January 2000. The
operations of MTL during fiscal 2001 were confined to the collection of these
accounts receivable. The Company estimated the realizable value of the accounts
receivable at the end of fiscal 2000 to be $1,000,000. Since the date of sale,
approximately $431,000 of accounts receivable were collected. The proceeds of
the collection of accounts receivable were used to pay the ongoing cost of
collection and to fund settlements with creditors of MTL. During fiscal 2001,
the Company determined that the cost of collecting the remaining accounts
receivable could equal or exceed the amount collected, and therefore,
discontinued its collection efforts and reduced the carrying value of the
accounts receivable to $0.
The carrying value of the net assets of discontinued operations at March
31, 2001 was comprised of the following.
LifeServ MTL Total
Discontinued
Operations
------------- ------------- -------------
2001 2001 2001
------------- ------------- -------------
Current Assets $ 0 $ 1 $ 1
Other Assets 0 0 0
------------- ------------- -------------
Total Assets $ 0 $ 1 $ 1
------------- ------------- -------------
Current Liabilities $ 0 $ 642 $ 642
Long-Term Liabilities 0 0 0
------------- ------------- -------------
Total Liabilities $ 0 $ 642 $ 642
------------- ------------- -------------
Net Assets (Liabilities) of Discontinued Operations $ 0 $ (641) $ (641)
============= ============= =============
The liabilities of MTL at March 31, 2001 were comprised of trade accounts
payable, accrued state taxes and approximately $140,000 of other liabilities
that have been guaranteed by the Company.
Certain liabilities of MTL were compromised during fiscal 2001 as a result
of settlements reached with creditors. In addition, the Company determined that
certain liabilities were not payable, and therefore, reduced the carrying value
of them to 0.
As a result of payments made in fiscal year 2002, the remaining liabilities
of discontinued operations were reduced to approximately $475,000 at March 31,
2002. For balance sheet presentation purposes, the net liabilities of
discontinued operations at March 31, 2002 and 2001 have been included in
accounts payable and accrued liabilities since these liabilities, if satisfied,
will be paid by the continuing operation of the Company.
40
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Form 10-K to be signed
on its behalf by the undersigned, thereunto duly authorized.
Dated: July 1, 2002 MEDICAL TECHNOLOGY SYSTEMS, INC.
By: /s/ Todd E. Siegel
______________________________________
Todd E. Siegel, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
- ------------------------ ---------------------- --------------
/s/ Todd E. Siegel Chairman of the Board of Directors, July 1, 2002
----------------------- President and Chief Executive Officer
Todd E. Siegel
/s/ David W. Kazarian Director July 1, 2002
-----------------------
David W. Kazarian
/s/ Michael P. Conroy Director, Chief Financial Officer July 1, 2002
----------------------- and Vice President
Michael P. Conroy
/s/ John Stanton Director and Vice Chairman of the July 1, 2002
- ------------------------ Board of Directors
John Stanton
/s/ Michael Stevenson Chief Operating Officer July 1, 2002
- ------------------------
Michael Stevenson
/s/ Mark J. Connolly Principal Accounting Officer July 1, 2002
- ----------------------- and Controller
Mark J. Connolly
41
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
Board of Directors
Medical Technology Systems, Inc.
In connection with our audit of the consolidated financial statements of
Medical Technology Systems, Inc. and Subsidiaries referred to in our report
dated June 11, 2002, which is included in the Company's Annual Report on SEC
Form 10-K as of and for the year ended March 31, 2002, we have also audited
Schedule II for the years ended March 31, 2002, 2001 and 2000. In our opinion,
this schedule presents fairly in all material respects, the information required
to be set forth herein.
GRANT THORNTON LLP
Tampa, Florida
June 11, 2002
S-1
SCHEDULE II
MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended March 31, 2000, 2001 AND 2002
Column A Column B Column C Column D Column E
- ----------------------------------------- -------------- -------------- -------------- --------------
Balance at Charged to Accounts Balance at
Begining of Costs and Written Off, End of
Year Expenses Net Year
-------------- -------------- -------------- --------------
(1) Deferred Tax Valuation Allowance:
Year Ended March 31, 2000 $ 5,805 $ (397) $ 0 $ 6,202
Year Ended March 31, 2001 $ 6,202 $ 6,202 $ 0 $ 0
Year Ended March 31, 2002 $ 0 $ 0 $ 0 $ 0
(1) Inventory Valuation Allowance:
Year Ended March 31, 2000 $ 140 $ 100 $ 0 $ 40
Year Ended March 31, 2001 $ 40 $ 0 $ 0 $ 40
Year Ended March 31, 2002 $ 40 $ 0 $ 0 $ 40
(1) Self Insured Medical Claims
Valuation Allowance:
Year Ended March 31, 2000 $ 100 $ 297 $ 325 $ 72
Year Ended March 31, 2001 $ 72 $ 210 $ 175 $ 107
Year Ended March 31, 2002 $ 107 $ 324 $ 329 $ 102
(1) Allowance for Doubtful Accounts
Year Ended March 31, 2000 $ 211 $ 67 $ 4 $ 274
Year Ended March 31, 2001 $ 274 $ 120 $ 104 $ 290
Year Ended March 31, 2002 $ 290 $ (180) $ 9 $ 101
(1) Amounts reflect continuing operations only.