SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[x] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 2002
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from ___________________ to _________________
0-16594
Commission file number ________________________________________________
MEDICAL TECHNOLOGY SYSTEMS, INC.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 59-2740462
- -------------------------------- ----------------------
(State or other jurisdiction of (I.R.S.) Employer
Incorporation or Organization) Identification No.)
12920 Automobile Boulevard, Clearwater, Florida 33762
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(Address of Principal Executive Offices)
727-576-6311
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(Registrant's Telephone Number, Including Area Code)
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(Former Name, Former Address and Former Fiscal Year,
if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ______
Indicate by check mark whether the Registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes X No ______
10Q-1
i.
MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
Index
Page
Part I - Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
June 30, 2002 and March 31, 2002.......................... 1
Condensed Consolidated Statements of Earnings -
Three Months Ended June 30, 2002 and 2001................. 2
Condensed Consolidated Statements of Changes in Stockholders' Equity -
Three Months Ended June 30, 2002.......................... 3
Condensed Consolidated Statements of Cash Flows -
Three Months Ended June 30, 2002 and 2001................. 4
Notes to Condensed Consolidated Financial Statements.......... 5 - 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... 11 - 13
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders........... 14
Item 6. Exhibits and Reports on Form 8-K.............................. 14
Signatures.................................................... 14
MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JUNE 30, 2002
1
Item 1. Financial Statements
PART 1 - FINANCIAL INFORMATION
MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
(Unaudited)
ASSETS
June 30, March 31,
2002 2002
---------------- -----------------
(Unaudited)
Current Assets:
Cash $ 159 $ 410
Accounts Receivable, Net 4,032 3,456
Inventories 2,287 2,212
Prepaids and Other 318 199
Deferred Tax Benefits 1,232 1,232
---------------- -----------------
Total Current Assets 8,028 7,509
Property and Equipment, Net 2,482 2,425
Other Assets, Net 3,463 2,477
Deferred Tax Benefits 2,843 3,104
---------------- -----------------
Total Assets $ 16,816 $ 15,515
================ =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current Maturities of Long-Term Debt $ 1,170 $ 968
Accounts Payable and Accrued Liabilities 4,064 3,267
---------------- -----------------
Total Current Liabilities 5,234 4,235
Long-Term Debt, Less Current Maturities 7,486 10,812
---------------- -----------------
Total Liabilities 12,720 15,047
---------------- -----------------
Stockholders' Equity:
Common Stock 44 43
Preferred Stock 1 -
Capital In Excess of Par Value 11,997 8,806
Accumulated Deficit (7,618) (8,053)
Treasury Stock (328) (328)
---------------- -----------------
Total Stockholders' Equity 4,096 468
---------------- -----------------
Total Liabilities and Stockholders' Equity $ 16,816 $ 15,515
================ =================
The accompanying notes are an integral part of these financial statements.
2
MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(In Thousands; Except Earnings Per Share Amounts)
(Unaudited)
Three Months Ended
June 30,
------------------------------------------
2002 2001
--------------- ----------------
Revenue:
Net Sales $ 6,907 $ 5,876
Costs and Expenses:
Cost of Sales 4,327 3,480
Selling, General and Administrative 1,461 1,297
Research and Development 10 13
Depreciation and Amortization 192 224
Interest, Net 221 240
--------------- ----------------
Total Costs and Expenses 6,211 5,254
--------------- ----------------
Income Before Income Taxes 696 622
Income Tax Expense 261 239
--------------- ----------------
Net Income 435 383
Non-Cash Constructive Dividend Related to Beneficial Conversion
Feature of Convertible Preferred Stock (347) 0
Convertible Preferred Stock Dividends Payable (3) 0
--------------- ----------------
Net Income Available to Common Stockholders $ 85 $ 383
=============== ================
Net Income per Basic and Diluted Common Share $ 0.02 $ 0.09
=============== ================
The accompanying notes are an integral part of these financial statements.
3
MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
THREE MONTHS ENDED JUNE 30, 2002
(In Thousands)
(Unaudited)
COMMON STOCK
--------------------------------------------------------------------------------------
Number 0.01 Capital in Retained Treasury
of Par Excess of Earnings Stock Total
Shares Value Par Value (Deficit)
----------- ----------- ----------- ------------ ------------ -----------
Balance, March 31, 2002 4,331,161 $ 43 $ 8,806 $ (8,053) $ (328) $ 468
Stock Options and Warrants
Exercised 28,029 1 (1) 0
Warrants Issued 1,564 1,564
Costs Related to Equity Issued (368) (368)
Net Income for Three Months
Ended June 30, 2002 435 435
--------------------------------------------------------------------------------------
Balance, June 30, 2002 4,359,190 $ 44 $ 10,001 $ (7,618) $ (328) $ 2,099
----------- ----------- ------------ ------------ ------------ -----------
PREFERRED STOCK
--------------------------------------------------------------------------------------
Number $.001 Capital in
of Par Excess of Total
Shares Value Par Value
----------- ----------- ------------ -----------
Balance, March 31, 2002 0 $ 0 $ 0 0
Stock Issued 2,000 1 1,999 2,000
Convertible Preferred Stock Dividend (3) (3)
Payable
Non-Cash Constructive Dividend Related
to Beneficial Conversion Feature of
Convertible Preferred Stock (347) (347)
Amortization of Non-Cash Constructive
Dividend to Beneficial Conversion
Feature of Convertible Preferred Stock 347 347
--------------------------------------------------------------------------------------
Balance, June 30, 2002 2,000 $ 1 $ 1,996 1,997
--------------------------------------------------------------------------------------
Total 4,361,190 $ 45 $ 11,997 $ (7,618) $ (328) $ 4,096
=========== =========== ============ ============ ============ ===========
The accompanying notes are an integral part of these financial statements.
4
MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Three Months Ended
June 30,
---------------------------------------
2002 2001
-------------- --------------
Operating Activities
Net Income $ 435 $ 383
-------------- --------------
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Deferred Compensation 0 4
Depreciation and Amortization 192 224
Income Tax Expense 261 239
(Increase) Decrease in:
Accounts Receivable (576) (123)
Inventories 122 107
Prepaids and Other (119) (216)
Increase in:
Accounts Payable and Other Accrued Liabilities 796 48
-------------- --------------
Total Adjustments 676 283
-------------- --------------
Net Cash Provided by Operating Activities 1,111 666
-------------- --------------
Investing Activities
Expended for Property and Equipment (176) (255)
Expended for Product Development (130) (134)
Expended for Patents and Other Assets (24) (6)
-------------- --------------
Net Cash (Used) by Investing Activities (330) (395)
-------------- --------------
Financing Activities
Payments on Notes Payable and Long-Term Debt (11,494) (238)
Net Advances on Revolving Line of Credit 2,892 0
Borrowing on Term Loans and Subordinated Notes 6,700 0
Issuance of Convertible Preferred Stock 2,000 0
Expended for Financing Costs (1,130) 0
Advances (To) Affiliates - Discontinued Operations 0 (83)
-------------- --------------
Net Cash (Used) by Financing Activities (1,032) (321)
-------------- --------------
Net (Decrease) in Cash (251) (50)
Cash at Beginning of Period 410 92
-------------- --------------
Cash at End of Period $ 159 $ 42
============== ==============
Non-cash financing activities: See Notes F and H
The accompanying notes are an integral part of these financial statements.
5
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles in the
USA for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and notes required by generally accepted accounting principles in
the USA for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the three-month
period ended June 30, 2002 are not necessarily indicative of the results that
may be expected for the year ended March 31, 2003. The unaudited condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
annual report on Form 10-K for the year ended March 31, 2002.
The unaudited condensed consolidated financial statements include the
accounts of the Company and its subsidiary, MTS Packaging Systems, Inc. ("MTS
Packaging"). All other subsidiaries of the Company did not have operations
during the three months ended June 30, 2002 and 2001.
NOTE B - INVENTORIES
The components of inventory consist of the following:
June 30, March 31,
2002 2002
----------------- -----------------
(In Thousands)
Raw Materials $ 1,118 $ 964
Finished Goods and Work in Progress 1,226 1,288
Less: Inventory Valuation Allowance (57) (40)
----------------- -----------------
$ 2,287 $ 2,212
================= =================
Inventories are stated at the lower of cost (first-in, first-out) or
market.
NOTE C - EARNINGS PER SHARE
Net Income per common share is computed by dividing net income 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 and
warrants would represent. In addition, the convertible preferred stock has been
treated as if it had been converted into common stock on the date of issuance.
The CEO of the Company may elect to receive shares of restricted common
stock in lieu of cash compensation according to the terms of his Stock
Appreciation Rights Agreement with the Company. The terms of the Company's prior
loan agreement restricted his ability to make the election to receive shares;
however, the terms of the Company's current loan agreements do not contain such
a restriction. As a result, the Company has included the number of shares that
he could elect to receive in lieu of cash, in its calculation of earnings per
share.
6
The following table sets forth the computation of income per basic and
diluted common share:
Three Months Ended
------------------------------------
June 30, June 30,
2002 2001
---------------- ----------------
Numerator:
Net Income $ 435,000 $ 383,000
Minus:
Constructive Dividend Related to Beneficial Conversion Feature of
the Convertible Preferred Stock (347,000) 0
Convertible Preferred Stock Dividend Payable (3,000) 0
----------------- -----------------
Net Income Available to Common Shareholders $ 85,000 $ 383,000
----------------- -----------------
Denominator:
Weighted Average Shares Outstanding - Basic 4,338,000 4,234,000
Add: Effect of Dilutive Warrants and Options 518,000 186,000
Effect of Conversion of Convertible Preferred Stock
Into Common Stock 46,000 0
Effect of Shares Available for Issuance under SAR Agreement 239,000 0
----------------- -----------------
Weighted Average Shares Outstanding - Diluted 5,141,000 4,420,000
================= =================
Net Income Per Basic and Diluted Common Share $ 0.02 $ 0.09
================= =================
Certain provisions of the warrants and the terms of the convertible
preferred stock issued in June 2002 may result in the issuance of additional
shares at some future date if certain events occur. Since these events have not
yet occurred, and therefore the number of additional shares is not known, no
additional shares have been included in the earnings per share calculation (see
Note H).
NOTE D - 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.
The Company includes the actual cost of freight and handling incurred in
cost of sales. The actual cost of freight and handling for the three months
ended June 30, 2002 and 2001 was $380,000 and $345,000 respectively.
NOTE E - RESEARCH AND DEVELOPMENT AND PRODUCT DEVELOPMENT
The Company expenses product research and development costs as
incurred. The Company incurred approximately $10,000 and $13,000 during the
three months ended June 30, 2002 and 2001 respectively for research and
development costs.
7
All costs incurred subsequent to the completion of research and development
activities associated with the product's hardware components and the software
components achievement of technological feasibility are capitalized until the
product is available for general release to customers. The Company initially
classifies the construction costs of the first units produced for commercial use
as product development costs prior to transferring these costs to inventory. The
Company incurred approximately $130,000 and $134,000 of product development
costs during the three months ended June 30, 2002 and 2001 respectively.
Product development costs (predominantly software related costs) are
generally amortized on a straight-line basis over a five (5) year period.
At March 31, 2002 and June 30, 2002, the Company's capitalized product
development costs included its new OnDemand product, which represented
$1,314,000 and $1,247,000 respectively of the total capitalized product
development costs (see Note L). Manufacturing costs of approximately $441,000
and $285,000 were included in the OnDemand capitalized product development costs
at March 31, 2002 and June 30, 2002 respectively. The first OnDemand machine was
sold in June 2002.
NOTE F - LONG-TERM DEBT
Long-term debt consists of the following:
June 30, March 31,
2002 2002
------------- --------------
(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. $ 0 $ 11,449
Revolving Line of Credit due June 26, 2005 plus interest payable at 1%
above the prime rate (5.75% at June 30, 2002). 2,892 0
Bank Term Loan payable in monthly installments of $83,333 plus interest at
2.25% above the prime rate (7.0% at June 30, 2002) through June 2004. 2,000 0
Bank Term Loan payable in monthly installments of $11,667 plus interest at
1.25% above the prime rate (6.0% at June 30, 2002) through June 2007. 700 0
Subordinated Note - Face amount of $4,000,000, less original issue discount of
$1,240,000 (see Note H), due June 26, 2007 plus interest payable
monthly at 14%. 2,760 0
Unsecured Note Payable plus interest at 3%, payable in monthly installments
of $2,394 through September 2006. 115 122
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. 160 171
Other Notes and Agreements 29 38
-------------- ---------------
Total Long -Term Debt 8,656 11,780
Less Current Portion (1,170) (968)
-------------- ---------------
LONG-TERM DEBT DUE AFTER 1 YEAR $ 7,486 $ 10,812
=============== ================
8
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 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.) (See note H.)
The revolving line of credit and bank term loans are collateralized by a
first security interest in all of the assets of the Company.
The bank term loans also contain provisions that require the Company to
make additional principal payments based upon its excess cash flow and also
requires the Company to maintain certain financial ratios and stockholders'
equity levels. In addition, certain provisions limit the amount of capital
expenditures that the company can make each year.
NOTE G - CONTINGENCIES
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 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.
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 H - STOCKHOLDER EQUITY
In June 2002, the Company issued subordinated notes to an investor (see
Note F). As part of the consideration for the notes, the investor received
566,517 warrants to purchase common stock exercisable at $.01 per share for ten
(10) years.
Also in June 2002, 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
847,457 shares of the Company's common stock at $2.36 per share. The terms of
the preferred stock contain a make-whole provision that obligates the Company to
9
pay certain amounts to the holders if they do not ultimately receive an amount
equal to the price per share of the common stock on the date they elect to
convert the preferred stock into common stock. On the date the convertible
preferred stock was issued, the fair market value of the Company's common stock
was $2.77 per share based upon the closing bid on the OTC Bulletin Board. The
difference between the fair market value of the shares and the conversion price
of the convertible preferred stock represented a constructive dividend to the
holders of the preferred stock in the amount of $347,000 (See Note C).
In addition, the make-whole provision and certain antidilution provisions
also represent a contingent beneficial conversion feature of the convertible
preferred stock. The effect of this feature may result in the issuance of
additional shares at some future date; however, since the issuance of these
shares is contingent on future events, the effect of this feature will be
recorded at the time the events occur.
The terms of the warrant and convertible preferred stock agreements contain
certain antidilution provisions.
The warrant agreement also contains 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. 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 there is a change in control of the
voting common stock of the Company, if there is a sale of the Company, or if
there is 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 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 has determined the value of the warrants and the make-whole and
other provisions of the warrants and has recorded this amount as a component of
its stockholders' equity. This amount, $1,240,000 also represents the original
issue discount that will be amortized over the five-year term of the
subordinated note.
The Company also issued, to its financial advisors, 125,000 warrants to
purchase common stock as part of its fees related to the above referenced
financing. The warrants are fully exercisable for five (5) years at $1.50 per
share. The value of these warrants, $324,000, was determined based upon the
value of the Company's common stock on the date the warrants were issued. The
Company recorded the value of the warrants as a component of its financing costs
incurred (see Note I).
NOTE I - FINANCING COSTS
The Company incurred approximately $1,458,000 during the three months ended
June 30, 2002, including the value of the warrants issued to the Company's
financial advisors, in costs related to obtaining certain financing described in
Notes F and H. The financing costs were allocated between the components of the
financing that represented debt and equity. The financing costs that were
allocated to the debt proceeds, $1,090,000, have been recorded as an other asset
and will be amortized over the repayment term of the various loans and notes.
The financing costs that were allocated to the equity proceeds, $368,000, have
been recorded as a reduction of the equity proceeds.
10
NOTE J - NEW 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, 2002. 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.
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 issued for fiscal years beginning after
December 15, 2001.
The Company's initial analysis of the effect of these new standards
indicates that the adoption of the standards will not have a material impact on
its financial statements. As of March 31, 2001 and 2002 and June 30, 2002, no
amounts of goodwill are recorded.
NOTE K - RECLASSIFICATIONS
Certain reclassifications were made to the June 30, 2001 financial
statements to conform to the 2002 presentations.
NOTE L - OTHER ASSETS
Other assets consist of the following:
June 30, March 31,
2002 2002
---------------- ----------------
Product Development $ 2,135 $ 2,202
Less Accumulated Amortization (334) (315)
----------------- ----------------
1,801 1,887
----------------- ----------------
Patents 1,213 1,196
Less Accumulated Amortization (746) (725)
----------------- ----------------
467 471
----------------- ----------------
Financing Costs 1,090 0
Less Accumulated Amortization (5) 0
----------------- ----------------
1,085 0
----------------- ----------------
Other 197 190
Less Accumulated Amortization (87) (71)
----------------- ----------------
110 119
----------------- ----------------
Total Other Assets Net $ 3,463 $ 2,477
================= ================
11
MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2002
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Form 10-Q contains forward-looking statements within the meaning of
that term in Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. 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. Statements contained herein
that are not historical facts are forward-looking statements made pursuant to
the safe harbor provisions described above. Forward-looking statements may
include, but are not limited to, projections of revenues, income or losses,
capital expenditures, plans for future operations, the elimination of losses
under certain programs, financing needs or plans, compliance with financial
covenants in loan agreements, plans for sale of assets or businesses, 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. In addition, when used in this
discussion, the words "anticipates", "estimates", "expects", "intends", "plans"
and variations thereof and similar expressions are intended to identify
forward-looking statements.
Forward-looking statements are inherently subject to risks and
uncertainties, some of which can be predicted or quantified based on current
expectations. Consequently, future events and actual results could differ
materially from those set forth in, contemplated by, or underlying the
forward-looking statements contained herein. Statements in Quarterly Report,
particularly in "Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Notes to Condensed Consolidated
Financial Statements, describe factors, among others, that could contribute to
or cause such differences. 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. In
particular any comments regarding possible default waivers related to the
Company's loan agreement are forward-looking statements.
Readers are cautioned not to place undue reliance on any forward-looking
statements contained herein, which speak only as of the date hereof. The Company
undertakes no obligation to publicly release the result of any revisions of
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.
RESULTS OF OPERATIONS
Three Months Ended June 30, 2002 and 2001
Net sales for the three months ended June 30, 2002 increased 16.9% to $6.9
million from $5.9 million during the same period the prior year. Net sales
increased primarily as a result of an increase in the amount of disposable punch
cards and machines sold to new and existing customers. In addition, the Company
sold its first OnDemand machine during the three months ended June 30, 2002.
Prices for disposable products were stable during the first quarter of fiscal
2003 compared to the prior year. The Company anticipates that pricing on
disposables will continue to be stable through the balance of the fiscal year.
The volume of disposable cards and machines is currently anticipated to continue
to grow as a result of the addition of new customers in existing and new
markets.
Cost of sales for the three months ended June 30, 2002 increased 22.9% to
$4.3 million from $3.5 million during the same period the prior year. Cost of
sales as a percentage of sales increased to 62.3% from 59.3% during the same
period the prior year. The increase in cost of sales results from increased
costs associated with higher revenue. The increase in the cost of sales
percentage is due in part to the fact that the first OnDemand machine was sold
for an amount that approximated its cost. In addition, during the three months
ended June 30, 2002, the Company incurred higher overhead costs compared to the
same period the prior year. The higher costs related primarily to the addition
of personnel in its factory operations in anticipation of expected growth.
12
Selling, general and administration expenses for the three months ended
June 30, 2002 increased 15.4% to $1.5 million from $1.3 million in the same
period during the prior year primarily due to increased personnel costs,
marketing expenditures and costs associated with the Company's operations in the
United Kingdom.
Research and development expenses for three months ended June 30, 2002
decreased 23.1% to $10,000 from $13,000 during the same period the prior year.
The decrease resulted primarily from the fact that the Company directed more of
its development resources to the completion of new products as opposed to the
research of new products.
Depreciation and amortization expenses for the three months ended June 30,
2002 decreased 14.3% to $192,000 from $224,000 during the same period the prior
year. The decrease is a result of the fact that certain assets became fully
depreciated since June 30, 2001.
Interest expense for the three months ended June 30, 2002 decreased 7.9% to
$221,000 from $240,000 during the same period the prior year. The decrease
results from a reduction in existing debt resulting from regular monthly
principal payments made according to the terms of the Company's loan agreements.
Income tax expense increased 9.2% to $261,000 during the three months ended
June 30, 2002 compared to $239,000 the prior year. The increase results from
income tax expense associated with higher income.
LIQUIDITY AND CAPITAL RESOURCES
During the first three months ended June 30, 2002, the Company had net
income of $435,000 compared to net income of $383,000 the prior year. Cash
provided by operations was $1,111,000 during the three months ended June 30,
2002 compared to $666,000 provided in the prior year. The Company had working
capital of $2,794,000 at June 30, 2002.
The increase in cash provided by operating activities during the three
months ended June 30, 2002 compared to the same period the prior year was
primarily due to increases in accounts payable that resulted from slower
payments related to changes in credit terms provided by certain vendors.
Investing activities used $330,000 during the three months ended June 30,
2002 compared to $395,000 the prior year. The decrease results primarily from a
reduction in expenditures for improvements to the Company's facilities.
Financing activities used $1,032,000 during the three months ended June 30,
2002 compared to $361,000 the prior year. In June 2002, the Company repaid the
entire amount, $11,310,000, of its bank term loan with cash on hand, 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.
13
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, if there is a sale of the Company, or if
there is 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 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 this
fiscal year is expected to be sufficient to meet its capital expenditures,
product development, working capital needs and the principal payments required
by its loan agreements.
14
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security-Holders.
None
Item 6. Exhibits and Reports on Form 8-K
A. Reports on Form 8K
None
B. Exhibit 99.1
Certification Pursuant to 18 U.S.C.ss.1350
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MEDICAL TECHNOLOGY SYSTEMS, INC.
Date: August 14, 2002 By: /s/ Michael P. Conroy
- ---------------------- -------------------------------------------
Michael P. Conroy
Vice President & Chief Financial Officer
By: /s/ Mark J. Connolly
-------------------------------------------
Mark J. Connolly
Principal Accounting Officer and Controller
15
Exhibit 99.1
Certification Pursuant to 18 U.S.C.ss.1350
In connection with the filing with the United States Securities and
Exchange Commission of Medical Technology Systems, Inc.'s (the "Company")
Quarterly Report on Form 10-Q for the period ended June 30, 2002 (the "Report"),
the undersigned, the Chief Executive Officer and the Chief Financial Officer of
the Company, hereby certify (i) in our capacities as officers of the Company,
(ii) to each of our own respective actual knowledge, and (iii) solely for the
purpose of compliance with 18 U.S.C. ss.1350, that:
(1) the Report fully complies with the requirements ofss.13(a) or 15(d) of
the Securities Exchange Act of 1934, as amended; and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
The above certification is given as of the date of the Report and is
limited to the periods covered by the Report. The above certification is made
severally and not jointly.
IN WITNESS WHEREOF, the undersigned have executed this Certificate on
August 14, 2002.
MEDICAL TECHNOLOGY SYSTEMS, INC.
By: /s/ Todd E. Siegel
----------------------------------
Todd E. Siegel
Chief Executive Officer
By: /s/ Michael P. Conroy
----------------------------------
Michael P. Conroy
Chief Financial Officer