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 December 31, 2002
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the 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 of (I.R.S.) Employer
Incorporation or Organization) Identification No.)
12920 Automobile Boulevard, Clearwater, Florida 33762
- --------------------------------------------------------------------------------
(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 is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
----- -----
As of December 31, 2002, the Registrant had 4,371,523 shares of common
stock, $.01 par value per share, issued and outstanding.
10Q-1
i.
MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
Index
Page
Part I - Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
December 31, 2002 and March 31, 2002...................... 1
Condensed Consolidated Statements of Earnings -
Three and Nine Months Ended December 31, 2002 and 2001.... 2
Condensed Consolidated Statements of Changes in Stockholders' Equity -
Nine Months Ended December 31, 2002....................... 3
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended December 31, 2002 and 2001.............. 4
Notes to Condensed Consolidated Financial Statements.......... 5 - 12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 13 - 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk.... 17
Item 4. Controls and Procedures....................................... 17
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K.............................. 18
Signatures.................................................... 18
Certifications.......................................................... 19 - 22
1
Item 1. Financial Statements
PART 1 - FINANCIAL INFORMATION
MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
ASSETS
December 31, March 31,
2002 2002
---------------- -----------------
(Unaudited)
Current Assets:
Cash $ 122 $ 410
Accounts Receivable, Net 4,372 3,456
Inventories 3,072 2,212
Prepaids and Other 261 199
Deferred Tax Benefits 1,232 1,232
---------------- -----------------
Total Current Assets 9,059 7,509
Property and Equipment, Net 2,789 2,425
Other Assets, Net 2,842 2,477
Deferred Tax Benefits 2,404 3,104
---------------- -----------------
Total Assets $ 17,094 $ 15,515
================ =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current Maturities of Long-Term Debt $ 1,168 $ 968
Accounts Payable and Accrued Liabilities 3,663 3,267
---------------- -----------------
Total Current Liabilities 4,831 4,235
Long-Term Debt, Less Current Maturities 7,552 10,812
---------------- -----------------
Total Liabilities 12,383 15,047
---------------- -----------------
Stockholders' Equity:
Common Stock 44 43
Preferred Stock 1 0
Capital In Excess of Par Value 11,897 8,806
Accumulated Deficit (6,903) (8,053)
Treasury Stock (328) (328)
---------------- -----------------
Total Stockholders' Equity 4,711 468
---------------- -----------------
Total Liabilities and Stockholders' Equity $ 17,094 $ 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 Nine Months Ended
December 31, December 31,
------------------------------- -------------------------------
2002 2001 2002 2001
-------------- ------------- -------------- -------------
Revenue:
Net Sales $ 7,694 $ 6,192 $ 21,320 $ 18,059
Costs and Expenses:
Cost of Sales 4,573 3,686 12,985 10,661
Selling, General and Administrative 1,822 1,206 4,834 3,862
Depreciation and Amortization 243 227 679 684
-------------- ------------- -------------- -------------
Total Costs and Expenses 6,638 5,119 18,498 15,207
-------------- ------------- -------------- -------------
Operating Profit 1,056 1,073 2,822 2,852
Other Expenses
Interest Expense 219 219 668 700
Amortization of:
Financing Costs 89 0 178 0
Original Issue Discount 62 0 127 0
-------------- ------------- -------------- -------------
Total Other Expenses 370 219 973 700
Income Before Income Taxes 686 854 1,849 2,152
Income Tax Expense 261 320 699 796
-------------- ------------- -------------- -------------
Net Income 425 534 1,150 1,356
Non-Cash Constructive Dividend Related to
Beneficial Conversion Feature of Convertible
Preferred Stock 0 0 347 0
Convertible Preferred Stock Dividends 55 0 113 0
-------------- ------------- -------------- -------------
Net Income Available to Common Stockholders $ 370 $ 534 $ 690 $ 1,356
============== ============= ============== =============
Net Income Per Basic Common Share $ 0.07 $ 0.12 $ 0.15 $ 0.32
============== ============= ============== =============
Net Income Per Diluted Common Share $ 0.06 $ 0.12 $ 0.12 $ 0.30
============== ============= ============== =============
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
SIX MONTHS ENDED DECEMBER 31, 2002
(In Thousands)
(Unaudited)
Common Stock Preferred Stock
$.01 Par Value $.001 Par Value Capital Total
-------------------- ----------------- In Excess Accumulated Treasury Stockholder's
Shares Amount Shares Amount of Par Value Deficit Stock Equity
---------- -------- -------- -------- -------------- ------------- ---------- ---------------
Balance, March 31, 2002 4,331,161 $ 43 0 $ 0 $ 8,806 $ (8,053) $ (328) $ 468
Stock Options and Warrants
Exercised 40,362 1 9 10
Warrants Issued 1,564 1,564
Preferred Stock Issued 2,000 1 1,999 2,000
Costs Related to Equity Issued (368) (368)
Convertible Preferred Stock
Dividend (113) (113)
Non-Cash Constructive Dividend
Related to Beneficial Conversion
Feature of Convertible
Preferred Stock (347) (347)
Amortization of Non-Cash
Constructive Dividend related to
Beneficial Conversion Feature
of Convertible Preferred Stock 347 347
Net Income for Nine Months Ended
December 31, 2002 1,150 1,150
---------- -------- -------- -------- -------------- ------------- ---------- ---------------
Balance December 31, 2002 4,371,523 $ 44 2,000 $ 1 $ 11,897 $ (6,903) $ (328) $ 4,711
========== ======== ======== ======== ============= ============= ========== ===============
4
MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Nine Months Ended
December 31,
-------------------------------------
2002 2001
------------- -------------
Operating Activities
Net Income $ 1,150 $ 1,356
------------- -------------
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Obsolete Inventory Written Off 47 0
Deferred Compensation 0 29
Amortization of Original Issue Discount 127 0
Amortization of Deferred Financing Costs 179 0
Depreciation and Amortization 681 684
Income Tax Expense 699 796
(Increase) Decrease in:
Accounts Receivable (916) (335)
Inventories (223) 229
Prepaids and Other (63) (96)
Increase (Decrease) in:
Accounts Payable and Other Accrued Liabilities 396 (364)
------------- -------------
Total Adjustments 927 943
------------- -------------
Net Cash Provided by Operating Activities 2,077 2,299
------------- -------------
Investing Activities
Expended for Property and Equipment (742) (732)
Expended for Product Development (384) (515)
Expended for Patents and Other Assets (52) (27)
------------- -------------
Net Cash Used by Investing Activities (1,178) (1,274)
------------- -------------
Financing Activities
Payments on Notes Payable and Long-Term Debt (12,089) (794)
Net Advances on Revolving Line of Credit 3,445 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
Dividends on Convertible Preferred Stock (113) 0
Advances (To) Affiliates - Discontinued Operations 0 (161)
------------- -------------
Net Cash Used by Financing Activities (1,187) (955)
------------- -------------
Net Increase (Decrease) in Cash (288) 70
Cash at Beginning of Period 410 92
------------- -------------
Cash at End of Period $ 122 $ 162
============= =============
See Note L for supplemental disclosures of other cash flow information.
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 accounting principles generally accepted in the
United States of America (US GAAP) 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 the US GAAP 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- and nine-month
periods ended December 31, 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 and nine months ended December 31, 2002 and 2001.
NOTE B - INVENTORIES
The components of inventory consist of the following:
December 31, March 31,
2002 2002
---------------- ----------------
(In Thousands)
Raw Materials $ 1,562 $ 964
Finished Goods and Work in Progress 1,597 1,288
Less: Inventory Valuation Allowance (87) (40)
---------------- ----------------
$ 3,072 $ 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 available to
common shareholders by the basic and diluted weighted average number of shares
of common stock outstanding. The number of shares of common stock, for purposes
of the basic earnings per share computation, include 566,517 shares that could
result from the exercise of warrants exercisable at $.01 per share by the holder
of the warrants. (See Note F) 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. In December 2002, the CEO
elected to receive cash for all amounts due pursuant to the agreement, and
therefore, the number of shares he may have received has not been included in
the calculation of earnings per share.
6
The following table sets forth the computation of income per basic and
diluted common share:
Three Months Ended Nine Months Ended
------------------------------ -------------------------------
December 31, December 31, December 31, December 31,
2002 2001 2002 2001
-------------- ------------- -------------- --------------
Numerator:
Net Income $ 425 $ 534 $ 1,150 $ 1,356
Minus:
Constructive Dividend Related to Beneficial
Conversion Feature of the Convertible
Preferred Stock 0 0 347 0
Convertible Preferred Stock Dividend 55 0 113 0
--------------- -------------- --------------- ---------------
Net Income Available to Common Stockholders 370 534 690 1,356
--------------- -------------- --------------- ---------------
Denominator:
Weighted Average Shares Outstanding - Basic 4,936 4,325 4,744 4,289
Add: Effect of Dilutive Warrants and Options 271 316 371 199
Effect of Conversion of Convertible Preferred
Stock into Common Stock 847 0 579 0
--------------- -------------- --------------- ---------------
Weighted Average Shares Outstanding - Diluted 6,054 4,641 5,694 4,488
=============== ============== =============== ===============
Net Income Per Basic Common Share $ 0.07 $ 0.12 $ 0.15 $ 0.32
=============== ============== =============== ===============
Net Income Per Diluted Common Share $ 0.06 $ 0.12 $ 0.12 $ 0.30
=============== ============== =============== ===============
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).
For the three and nine months ended December 31, 2002, options to purchase
505,000 and 510,000 shares of common stock were not included in the computation
of diluted earnings per share because the options' exercise prices were not less
than the value of the common shares and would be anti-dilutive.
7
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 nine months ended
December 31, 2002 and 2001 was $1,223,000 and $1,046,000 respectively.
NOTE E - RESEARCH AND DEVELOPMENT AND PRODUCT DEVELOPMENT
The Company expenses product research and development costs as incurred.
The Company incurred approximately $119,000 and $60,000 during the nine months
ended December 31, 2002 and 2001 respectively for research and development
costs.
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 capitalized approximately $384,000 and $515,000 of product development
costs during the nine months ended December 31, 2002 and 2001 respectively.
Product development costs are generally amortized on a straight-line basis
over a five (5) year period. Amortization expense related to product development
costs was $130,000 and $56,000 for the nine months ended December 31, 2002 and
2001 respectively.
At March 31, 2002 and December 31, 2002, the Company's capitalized product
development costs included its new OnDemand(TM) product, which represented
$1,314,000 and $1,113,000 respectively of the total capitalized product
development costs (see Note L). Manufacturing costs of approximately $441,000
were included in the OnDemand capitalized product development costs at March 31,
2002. All manufacturing costs of the OnDemand product were included in inventory
at December 31, 2002. The Company expects that approximately $160,000 will be
expended during the fourth quarter to complete the development of new versions
of the OnDemand product.
The first OnDemand machine was sold in June 2002. The second OnDemand
machine was sold in December of 2002. A third OnDemand machine was ordered by a
customer in January 2003, and a deposit of 100% of the ultimate selling price
was received with the order. Once certain performance specifications are met and
the customer formally accepts the machine, the Company will record the revenue
associated with this sale.
8
NOTE F - LONG-TERM DEBT
Long-term debt consists of the following:
December 31, 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 December 31, 2002). 3,445 0
Bank Term Loan payable in monthly installments of $83,333 plus interest at
2.25% above the prime rate (7.0% at December 31, 2002) through June 2004. 1,500 0
Bank Term Loan payable in monthly installments of $11,667 plus interest at
1.25% above the prime rate (6.0% at December 31, 2002) through June 2007. 630 0
Subordinated Note - Face amount of $4,000,000, less unamortized original issue
discount of $1,113,000 (see Note H), due June 26, 2007 plus
interest payable monthly at 14%. 2,887 0
Unsecured Note Payable plus interest at 3%, payable in monthly installments
of $2,394 through September 2006. 103 122
Unsecured Note Payable under settlement agreement with State of Florida
Department of Revenue, payable in monthly installments of $3,500 through
April 2006. 136 171
Other Notes and Agreements 19 38
------------- --------------
Total Long -Term Debt 8,720 11,780
Less Current Portion (1,168) (968)
------------- --------------
LONG-TERM DEBT DUE AFTER 1 YEAR $ 7,552 $ 10,812
============= ==============
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.
9
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 relative
value of the warrants, and certain imbedded features of the warrants, were
recorded as part of the stockholders' equity and reduced the carrying amount of
the subordinated note as an original issue discount. The original issue discount
is being amortized over the five (5) year term of the subordinated note.
Amortization expense related to the original issue discount was $127,000 for the
nine months ended December 31, 2002.
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.
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 December 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
2002, the Company received a notification from the financial institution that
the obligation was in default and a demand for payment of approximately $70,000.
At the time the Company provided its guaranty, it received an indemnification
from the majority owner of the buyer for any amounts that it may have to pay
under terms of the guaranty. In the event that the Company is required to repay
the obligation, it intends to seek reimbursement from the owner of the buyer
under the terms of the indemnification.
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.
10
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. Through the period ended December 31, 2002,
all dividends due in the amount of approximately $113,000 were paid in cash or
accrued. 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 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).
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.
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.
In the event 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 the 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).
11
NOTE I - FINANCING COSTS
The Company incurred approximately $1,458,000 of financing costs during the
nine months ended December 31, 2002, including the value of the warrants issued
to the Company's financial advisors 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. Amortization
expense related to the financing costs was $178,000 for the nine months ended
December 31, 2002.
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 December 31, 2002,
no amounts of goodwill are recorded.
NOTE K - RECLASSIFICATIONS
Certain reclassifications were made to the December 31, 2001 financial
statements to conform to the 2002 presentations.
12
NOTE L - OTHER ASSETS
Other assets consist of the following:
December 31, March 31,
2002 2002
--------------- ----------------
(In Thousands)
Product Development $ 1,808 $ 2,202
Less Accumulated Amortization (427) (315)
---------------- -----------------
1,381 1,887
---------------- -----------------
Patents 1,228 1,196
Less Accumulated Amortization (787) (725)
---------------- -----------------
441 471
---------------- -----------------
Financing Costs 1,090 0
Less Accumulated Amortization (178) 0
---------------- -----------------
912 0
---------------- -----------------
Other 210 190
Less Accumulated Amortization (102) (71)
---------------- -----------------
108 119
---------------- -----------------
Total Other Assets Net $ 2,842 $ 2,477
================ =================
During the nine months ended December 31, 2002, the Company reclassified
approximately $682,000 and $89,000 of product development costs from other
assets to inventory and fixed assets, respectively.
13
MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 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",
"believes", "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 December 31, 2002 and 2001
Net sales for the three months ended December 31, 2002 increased 24.2% to
$7.7 million from $6.2 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 sold to new and existing customers. In addition, the Company sold one
OnDemand (TM) machine during the three months ended December 31, 2002. Prices
for disposable products were stable 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 December 31, 2002 increased 24.3%
to $4.6 million from $3.7 million during the same period the prior year. Cost of
sales as a percentage of sales remained constant at 59.7% compared to the same
period the prior year. The increase in cost of sales primarily results from
increased costs associated with higher revenue. Cost of sales as a percentage of
sales remained constant primarily due to manufacturing efficiencies achieved
that offset material cost increases.
14
Selling, general and administration expenses for the three months ended
December 31, 2002 increased 50.0% to $1.8 million from $1.2 million in the same
period during the prior year primarily due to increased personnel costs,
training, research and development expenditures and costs associated with the
Company's operations in the United Kingdom. In addition, during the three months
ended December 31, 2001, the Company reduced its estimated bad debt reserve by
$89,000. The Company reviewed the estimated bad debt reserve during the three
months ended December 31, 2002 and did not make a reduction.
Depreciation and amortization expenses for the three months ended December
31, 2002 increased 7.0% to $243,000 from $227,000 during the same period the
prior year. The increase results primarily from the fact that the Company began
to amortize the capitalized development costs associated with the OnDemand
product during its second quarter ended September 30, 2002.
Other expenses related to the June 2002 refinancing of the Company's
long-term debt were $151,000 during the three months ended December 31, 2002.
These expenses resulted from the amortization of certain costs associated with
the financing ($89,000) as well as the amortization of the original issue
discount associated with the subordinated debt portion of the financing,
($62,000).
Interest expense for the three months ended December 31, 2002 did not
change from $219,000 to $219,000 during the same period the prior year. Although
the Company reduced its total debt as a result of the June 2002 refinancing, the
effective interest rate on the outstanding debt increased as a result of the
financing.
Income tax expense decreased 18.4% to $261,000 during the three months
ended December 31, 2002 compared to $320,000 the prior year. The decrease
results from lower income tax expense associated with lower income.
Nine Months Ended December 31, 2002 and 2001
Net sales for the nine months ended December 31, 2002 increased 17.7% to
$21.3 million from $18.1 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. Prices for
disposable products were stable compared to the prior year. In addition, two (2)
OnDemand machines were sold during the nine months ended December 31, 2002. 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 nine months ended December 31, 2002 increased 21.5%
to $13.0 million from $10.7 million during the same period the prior year. Cost
of sales as a percentage of sales increased to 61.0% from 59.1% during the same
period the prior year. The increase in cost of sales primarily results from
increased costs associated with higher revenue. The increase in the cost of
sales as a percentage of sales results primarily from higher overhead costs
incurred compared to the same period the prior year. The higher costs are
related primarily to the addition of personnel in factory operations in
anticipation of expected growth in revenue, as well as costs associated with
production of the OnDemand machines.
Selling, general and administration expenses for the nine months ended
December 31, 2002 increased 23.1% to $4.8 million from $3.9 million in the same
period during the prior year primarily due to increased personnel costs,
training, research and development expenditures and marketing costs associated
with new products including the OnDemand machine and expenses associated with
the Company's operations in the United Kingdom. In addition, during the nine
months ended December 31, 2001, the Company reduced its estimated bad debt
reserve by $89,000. The Company reviewed the estimated bad debt reserve during
the nine months ended December 31, 2002 and did not make a reduction.
15
Depreciation and amortization expenses for the nine months ended December
31, 2002 decreased slightly to $679,000 from $684,000 during the same period the
prior year. The decrease results primarily from the fact that certain assets are
now fully depreciated when compared to the same period the prior year.
Other expenses related to the June 2002 refinancing of the Company's
long-term debt were $305,000 during the nine months ended December 31, 2002.
These expenses resulted from the amortization of certain costs associated with
the financing ($178,000) as well as the amortization of the original issue
discount associated with the subordinated debt portion of the financing
($127,000).
Interest expense for the nine months ended December 31, 2002 decreased 4.6%
to $668,000 from $700,000 during the same period the prior year. The decrease
results from a reduction in outstanding debt resulting from regular monthly
principal payments made according to the terms of the Company's loan agreements
as well as a reduction in total outstanding debt that resulted from the June
2002 refinancing.
Income tax expense decreased 12.2% to $699,000 during the nine months ended
December 31, 2002 compared to $796,000 the prior year. The decrease results from
lower income tax expense associated with lower income.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended December 31, 2002, the Company had net income
of $1,150,000 compared to net income of $1,356,000 the prior year. Cash provided
by operating activities was $2,077,000 during the nine months ended December 31,
2002 compared to $2,299,000 provided in the prior year. The Company had working
capital of $4,228,000 at December 31, 2002.
The decrease in cash provided by operating activities during the nine
months ended December 31, 2002 compared to the same period the prior year was
primarily due to an increase in accounts receivable resulting from the high
level sales in the month of December 2002.
Investing activities used $1,178,000 during the nine months ended December
31, 2002 compared to $1,274,000 the prior year. The decrease results primarily
from a reduction in expenditures for capitalized development costs related to
the OnDemand machine.
Financing activities used $1,187,000 during the nine months ended December
31, 2002 compared to $955,000 the prior year. The increase results primarily
from the costs associated with the refinance of the Company's long-term debt in
June 2002.
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.
16
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 847,457
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 may change
significantly if the Company is successful in selling its OnDemand machine.
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 and inventory.
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.
17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
While we had no holdings of derivative financial or commodity investments
at December 31, 2002, we are exposed to financial market risks, including
changes in interest rates. Although certain of our borrowings bear a fixed
interest rate, our borrowings under our revolving line of credit and certain
term loans bear interest at a variable rate based upon the prime rate.
ITEM 4. CONTROLS AND PROCEDURES
A. Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are designed to ensure that
information required to be disclosed in the reports filed or
submitted under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the
SEC's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to
ensure that information required to be disclosed in the reports
filed under the Exchange Act is accumulated and communicated to
management, including the Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure. Within the 90 days prior to the
filing of this report, the Company carried out an evaluation,
under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14(c) and 15d-14(c)). Based
upon and as of the date of that evaluation, Chief Executive
Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective to ensure that
information required to be disclosed in the reports the Company
files and submits under the Exchange Act is recorded, processed
summarized and reported as and when required.
B. Changes in Internal Controls
There were no significant changes in the Company's internal
controls or other factors that could significantly affect those
controls subsequent to the date of the Company's most recent
evaluation including any corrective actions with regard to
significant deficiencies and material weaknesses.
18
PART II - OTHER INFORMATION
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
C. Exhibit 99.2
Certification Pursuant to 18 U.S.C. ss.1350
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MEDICAL TECHNOLOGY SYSTEMS, INC.
Date: February 13, 2003 By: /s/ Michael P. Conroy
------------------ -------------------------------------------
Michael P. Conroy
Vice President & Chief Financial Officer
Date: February 13, 2003 By: /s/ Mark J. Connolly
-------------------- -------------------------------------------
Mark J. Connolly
Principal Accounting Officer and Controller
19
CERTIFICATIONS
I, Todd E. Siegel, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Medical Technology
Systems, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: February 13, 2003 By: /s/ Todd E. Siegel
----------------- -------------------------------------
Todd E. Siegel
President & Chief Executive Officer
20
I, Michael P. Conroy, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Medical Technology
Systems, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: February 13, 2003 By: /s/ Michael P. Conroy
------------------ -----------------------------------------
Michael P. Conroy
Vice President & Chief Financial Officer
21
Exhibit 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Medical Technology Systems, Inc. (the
"Company") on Form 10-Q for the period ended December 31, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Form 10-Q"), I, Todd
E. Siegel, President and Chief Executive Officer of the Company, certify,
pursuant to 18 U.S.C. ss.1350, as adopted pursuant to ss.906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Form 10-Q fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or
78o(d)); and
(2) The information contained in the Form 10-Q fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
Dated: February 13, 2003
/s/ Todd E. Siegel
- -----------------------------------------
Todd E. Siegel
President and Chief Executive Officer
22
Exhibit 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Medical Technology Systems, Inc. (the
"Company") on Form 10-Q for the period ended December 31, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Form 10-Q"), I,
Michael P. Conroy, Vice President and Chief Financial Officer of the Company,
certify, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to ss.906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Form 10-Q fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or
78o(d)); and
(2) The information contained in the Form 10-Q fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
Dated: February 13, 2003
/s/ Michael P. Conroy
- -------------------------------------------
Michael P. Conroy
Vice President & Chief Financial Officer