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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For fiscal year ended MARCH 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For transition period from to ___________ 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) (Zip Code)
(727) 576-6311
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to
Section 12(b)of the Act:
Title of Each Class Name of Each Exchange on
Which Registered
--------------------- -------------------------
NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01
(Title of Class)
COMMON STOCK PURCHASE WARRANTS
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [x]Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [x]Yes [ ] No
Aggregate market value of voting Common Stock held by non-affiliates was
$2,300,000 as of June 25, 1998.
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. [x]Yes [ ] No
The number of shares outstanding of the Registrant's Common Stock, $.01 par
value, was 6,129,673 as of June 25, 1998.
Documents Incorporated by Reference
Parts of the Company's definitive proxy statement which will be filed by the
Company within 120 days after the end of the Company's 1998 fiscal year end, are
incorporated by reference into Part III of this Form.
Total number of pages, including cover page - 55 (excluding exhibits)
1
MEDICAL TECHNOLOGY SYSTEMS, INC.
CLEARWATER, FLORIDA
INDEX
PART I PAGE
Item 1. Business................................................... 2-11
2. Properties................................................. 11
3. Legal Proceedings.......................................... 11-13
4. Submission of Matters to a Vote of Security Holders........ 13
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters ....................................................... 14
6. Selected Financial Data........................................ 15
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 16-21
8. Financial Statements and Supplementary Data................. 21
9. Changes In and Disagreements With Accountants On Accounting
and Financial Disclosure.................................. 21
PART III
Item 10. Directors and Executive Officers of the Registrant........ 22
11. Executive Compensation.................................... 22
12. Security Ownership of Certain Beneficial Owners .......... 22
13. Certain Relationships and Related Transactions
and Management............................................ 22
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports
on Form 8-K................................................ 23-24
Index to Financial Statements.......................................... 25
Signatures ............................................................ 52
2
PART I
This Annual Report on Form 10-K (the "10-K") contains certain statements
concerning the future that are subject to risks and uncertainties. Additional
written or oral forward-looking statements may be made by the Company from time
to time, in filings with the Securities and Exchange Commission or otherwise.
Such statements include, among other things, information concerning
possible-future results of operations, capital expenditures, the elimination of
losses under certain programs, financing needs or plans relating to products or
services of the Company, assessments of materiality, predictions of future
events, and the effects of pending and possible litigation, as well as
assumptions relating to the foregoing, and those accompanied by the words
"anticipates," "estimates," "expects," "intends," "plans," or similar
expressions. For those statements we claim the protection of the safe harbor for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995.
You should specifically consider the various factors identified in this
10-K, including the matters set forth in "Item 1. Business", "Item 3. Legal
Proceedings", "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Notes to Consolidated Financial
Statements that could cause actual results to differ materially from those
indicated in any forward-looking statements. Other factors that could contribute
to or cause such differences include, but are not limited to, unanticipated
increases in operating costs, labor disputes, capital requirements, increases in
borrowing costs, product demand, pricing, market acceptance, intellectual
property rights and litigation, risks in product and technology development and
other risk factors detailed in the Company's Securities and Exchange Commission
filings.
Readers are cautioned not to place undue reliance on any forward-looking
statements contained in this 10-K, which speak only as of the date hereof. The
Company undertakes no obligation to publicly release the results of any
revisions to these forward-looking statements that may be made to reflect events
or circumstances after the date hereof or to reflect the occurrence of
unexpected events.
ITEM 1. BUSINESS
Introduction
- ------------
Medical Technology Systems, Inc.(TM), a Delaware corporation (the
"Company"), was incorporated in March 1984. The Company is a holding company
operating through a number of separate subsidiaries, including MTS Packaging
Systems, Inc.(TM) ("MTS Packaging"), Medical Technology Laboratories, Inc.
("MTL") and LifeServ Technologies, Inc.(TM) ("LifeServ"). These subsidiaries
provide a diverse line of proprietary medication dispensing systems, laboratory
services and clinical information systems to the health care industry. The
Company also owned Vangard Labs, Inc. ("Vangard"), a generic drug repackaging
company, which was sold in fiscal 1997.
MTS Packaging primarily manufactures and sells disposable medication punch
cards, packaging equipment and allied ancillary products throughout the United
States. Its customers are predominantly pharmacies that supply nursing homes and
assisted living facilities with prescription medications for their patients. MTS
Packaging manufactures its proprietary disposable punch cards and packaging
equipment in its own facilities. This manufacturing process uses technologically
advanced integrated machinery for manufacturing the disposable medication punch
cards. The disposable medication punch cards and packaging equipment are
designed to provide a cost effective method for pharmacies to dispense
medications. The Company's medication dispensing systems and products provide
innovative methods for dispensing medications in disposable packages.
MTL was formed as a result of the acquisition and combination of Clearwater
Medical Services and Clinical Diagnostic Centers during fiscal year 1992. MTL
conducts analytical services for testing of blood, tissue and other body fluids
for hospitals, physicians and other health care providers in Florida. On March
17, 1995, MTL purchased the rights and interests in certain clinical laboratory
services of Tampa Pathology Laboratory, including the right, title and interest
in the customer accounts associated with Tampa Pathology Laboratory and the
right to service and continue sales of clinical laboratory services to these
customers. The purchase agreement provided for a purchase price of approximately
$1.4 million. In connection with its reorganization, the Company negotiated to
reduce the purchase price to $500,000. See "Item 3. Legal Proceedings."
3
On March 10, 1995, the Company established MTS Sales and Marketing, Inc.
("MTS Sales"). This subsidiary was established to provide administrative support
and sales and marketing services to the other subsidiaries. MTS Sales is
currently an inactive subsidiary.
On June 20, 1997, Medication Management Technologies, Inc. ("MMT") entered
into an Agreement and Plan of Merger with Cygnet Laboratories, Inc., a
California corporation. MMT subsequently filed for relief under Chapter 11 of
the U.S. Bankruptcy code. See "Reorganization Under Chapter 11" and "Item 3.
Legal Proceedings."
On February 24, 1998, the Company formed LifeServ for the purpose of
holding and operating the Company's health care information subsidiaries:
Performance Pharmacy Systems, Inc. ("PPS"), Medication Management Systems, Inc.
("MMS"), MMT, Cart-Ware, Inc. ("Cart-Ware") and Systems Professionals, Inc.
("SPI"). In April 1998, the Company entered into a stock subscription agreement
with LifeServ whereby the Company made a capital contribution of all of the
outstanding capital stock of those subsidiaries to LifeServ.
In April 1998, LifeServ entered into an asset purchase agreement to acquire
the assets of Peritronics Medical, Inc. ("Peritronics"), a subsidiary of
Peritronics Medical, Ltd., a publicly held British Columbia, Canada corporation.
The assets are primarily composed of proprietary software products and
customers. The Company anticipates that the closing of the asset purchase
agreement will take place in August 1998.
Discontinued Operations
- -----------------------
The Company acquired all of the Common Stock of Vangard on June 1, 1992.
Vangard suspended operations in January 1996. Vangard previously packaged and
sold oral solid unit-dose generic drugs to hospitals and nursing home
institutional pharmacies. The Company sold certain assets of Vangard effective
March 31, 1997, to an unrelated third party. The terms of the agreement of sale
provided for the payment to the Company of $3.1 million in cash and the
assumption of certain liabilities by the buyer. The $3.1 million received by the
Company was used to reduce debt. See "Item 3. Legal Proceedings".
On November 3, 1993, the Company signed a joint venture agreement to create
Glasgow Pharmaceutical Corporation ("GPC") for the purpose of marketing and
selling pharmaceutical products to the long-term care industry. GPC is owned 50%
by Vangard and 50% by Creighton Pharmaceuticals Corporation, a wholly-owned
subsidiary of Sandoz Pharmaceuticals Corporation. The GPC joint venture was
created to provide the Company with a competitive price advantage in the
acquisition cost of its pharmaceuticals as well as provide additional product
lines. The principal product of GPC was MedCard, which was a medication punch
card that could be pre-filled with oral solid generic and brand name drugs.
Operations of GPC commenced in May 1994 and were suspended in January 1996 along
with the operations of Vangard. The Vangard asset sale agreement did not include
GPC. The Company has no immediate plans to resume operations of GPC. GPC does
not have any material assets or liabilities.
The principal executive offices and manufacturing facilities of the Company
are located at 12920 Automobile Boulevard, Clearwater, Florida 33762 and the
Company's telephone number is (727) 576-6311.
Segments
- --------
The Company is composed of three operating segments:
a. Medication packaging and dispensing systems: MTS Packaging and MTS
Sales are the only subsidiaries in this segment.
b. Health care information systems: LifeServ and its subsidiaries, MMS,
PPS, MMT, Cart-Ware and SPI represent this segment.
c. Clinical laboratory services: MTL is the only subsidiary in this
segment.
4
The following is operating information for these industry segments for the
years ended March 31:
1998 1997 1996
--------------- --------------- ----------------
(In Thousands)
Revenue:
Reportable Segments
Medication Packaging & Dispensing Systems $ 12,338 $ 11,169 $ 10,651
Health Care Information Systems 4,306 1,965 1,249
Clinical Laboratory Services 7,428 6,113 5,152
--------------- --------------- ---------------
Total Consolidated Revenue $ 24,072 $ 19,247 $ 17,052
================ =============== ===============
Depreciation and Amortization:
Reportable Segments
Medication Packaging & Dispensing Systems $ 554 $ 534 $ 647
Health Care Information Systems 255 150 764
Clinical Laboratory Services 258 250 579
--------------- --------------- ----------------
1,067 934 1,990
Corporate 406 447 692
--------------- --------------- ----------------
Total Consolidated Depreciation and Amortization $ 1,473 $ 1,381 $ 2,682
=============== =============== ================
Interest Expense:
Reportable Segments
Medication Packaging & Dispensing Systems $ 1 $ 2 $ 5
Health Care Information Systems 13 20 16
Clinical Laboratory Services 36 5 31
---------------- -------------- ----------------
50 27 52
Unallocated Debts 1,059 582 1,687
---------------- ---------------- ----------------
Total Consolidated Interest Expense $ 1,109 $ 609 $ 1,739
================ ================ ================
Operating Profit (Loss):
Reportable Segments
Medication Packaging & Dispensing Systems $ 2,827 $ 2,512 $ (6,752)
Health Care Information Systems (1,214) (472) (5,798)
Clinical Laboratory Services 460 136 (4,443)
--------------- ---------------- ----------------
2,073 2,176 (16,993)
Corporate and Interest (3,197) (2,161) (7,624)
---------------- ---------------- ----------------
Total Consolidated Operating Profit (Loss) $ (1,124) $ 15 $ (24,617)
================ ================ ================
Identifiable Assets:
Reportable Segments
Medication Packaging & Dispensing Systems $ 5,944 $ 6,006 $ 7,557
Health Care Information Systems 3,871 938 1,355
Clinical Laboratory Services 3,509 2,560 2,551
--------------- ---------------- ----------------
13,324 9,504 11,463
Corporate 2,438 3,039 3,206
--------------- --------------- ----------------
Total Consolidated Identifiable Assets $ 15,762 $ 12,543 $ 14,669
=============== =============== ================
Identifiable Liabilities:
Reportable Segments
Medication Packaging & Dispensing Systems $ 1,029 $ 280 $ 1,508
Health Care Information Systems 3,056 382 691
Clinical Laboratory Services 1,175 780 1963
--------------- --------------- ----------------
5,260 1,442 4,162
Corporate 16,615 16,517 29,053
---------------- ---------------- ----------------
Total Consolidated Liabilities $ 21,875 $ 17,959 $ 33,215
================ ================ ================
Capital Expenditures:
Reportable Segments
Medication Packaging & Dispensing Systems $ 131 $ 123 $ 769
Health Care Information Systems 103 92 5
Clinical Laboratory Services 62 67 2
--------------- --------------- ----------------
296 282 776
Corporate 66 25 21
--------------- --------------- ----------------
Total Consolidated Capital Expenditures $ 362 $ 307 $ 797
================ =============== ================
Impairment of Long-Lived Assets:
Reportable Segments
Medication Packaging & Dispensing Systems $ 0 $ 0 $ 7,319
Health Care Information Systems 0 0 3,029
Clinical Laboratory Services 0 0 4,105
--------------- --------------- ----------------
0 0 14,453
Corporate 0 0 1,968
--------------- --------------- ----------------
Total Consolidated Impairment of Long-Lived Assets $ 0 $ 0 $ 16,421
================ ================ ================
5
Corporate expenses are composed primarily of personnel costs and
administrative expenses, which are incurred on behalf of each reportable
segment. The Company cannot accurately allocate these costs and expenses to each
reportable segment.
Corporate assets are composed primarily of $678,000 of cash, $477,000 of
equipment used by administrative personnel and $1.2 million of intangible
assets.
Corporate liabilities are composed of $1.4 million of short-term accounts
payable and accrued liabilities and $15.2 million in long-term debt.
The geographic sales of the Company are in the United States, and there are
no customers that account for more than 10% of the Company's revenues for all
periods presented.
Products/Services
- -----------------
MTS Packaging manufactures proprietary medication dispensing systems and
related products for use by medication prescription service providers. These
systems utilize disposable medication punch cards and specialized machines that
automatically or semi-automatically assemble, fill and seal drugs into
medication punch cards representing a 30 day supply of a patient's medication.
MTS Packaging's machinery for dispensing medication in disposable packages
automatically places tablets or capsules (the amount of medication required by a
patient during one month) into a blistered punch card. The use of these cards
and machines provides a cost effective customized package at competitive prices.
The punch card medication dispensing system can provide tamper evident packaging
for products dispensed in the package.
The retail price of MTS Packaging's machinery ranges from $1,100 to
$120,000 depending upon the degree of automation and options requested by a
customer. The punch cards typically retail from $155 to $225 per 1,000 cards and
blisters, depending upon the size, design and volume of cards ordered by a
customer. To date, MTS Packaging has placed approximately 1,660 medication
dispensing systems with pharmacy clientele. MTS Packaging also sells
prescription labels and ancillary supplies designed to complement sales of
disposable medication punch cards. MTS Packaging had approximately $530,000 in
unshipped orders as of June 25, 1998.
LifeServ is a health care information technology company that provides
solutions for medication management and point of care electronic documentation
for hospitals and other health care facilities through its subsidiaries, MMS,
PPS, MMT, Cart-Ware and SPI. LifeServ's systems are used to collect, archive and
process patient demographics, medication data and associated patient care
information. The systems are also designed to address the health care provider's
need to more efficiently manage patient care by collecting and assimilating
"outcomes" information and automating a traditionally manual paper process.
6
LifeServ has approximately 248 customers and has recently further expanded its
product offering and customer base, to approximately 468 customers, through
business acquisitions. LifeServ had approximately $1,500,000 in contracts for
shipment and installation of systems at March 31, 1998. The following are
LifeServ's products:
Performance(TM) is a pharmacy software system for use in hospitals and
long-term care facilities. The primary emphasis of this system is to provide the
hospital pharmacist with a comprehensive collection of automated tools for
completing day-to-day activities in an efficient manner. The system performs
important medication management responsibilities and sophisticated drug therapy
monitoring and documentation. The system also provides hospital pharmacists with
the ability to process physicians' medication orders quickly and accurately. The
organization of screens, use of overlapping windows, in-process access to
multiple files and other user friendly techniques make the Performance system an
attractive and functional hospital pharmacy software system. Performance pricing
starts at approximately $30,000, which includes hardware, software, training and
pre-loaded drug files. To date, more than 145 Performance systems have been
installed.
MedServ(R) is a line of automated dispensing cabinets that control the
distribution, administration and documentation of medications and supplies in
hospitals, clinics, long-term care facilities, out-patient surgery centers and
other health care settings. MedServ functions as a floor stock inventory
software system that provides security by restricting access and providing
tighter inventory controls in emergency rooms, operating rooms and nursing units
where floor stock medications, supplies and controlled substances are stored.
MedServ's self-contained units consist of a color touch-screen monitor mounted
on a dispensing cabinet. The MedServ product has not previously been made widely
available to the health care industry. MedServ pricing starts at approximately
$30,000 for a one unit system and a file server. MedServ is currently installed
in approximately 25 hospitals.
E-mar(TM) integrates Performance with MedServ to provide automated
dispensing and to electronically produce medication orders, drug interaction
assessment, nurse charting and other administrative functions. E-mar can assist
in the reduction of medications errors, nursing labor, and pharmacy labor and
provides an electronic medication administration record. E-mar also provides
two-way communication between the pharmacy system and the dispensing cabinet.
The system allows orders to be entered either at the pharmacy or the dispensing
cabinet and to be electronically transmitted to the "other end" for
verification. Traditionally, the nurse would have been provided with a paper
document called a medication administration record (describing a patient's full
drug regimen) on which to manually record the medication information as drugs
are administered. E-mar permits the nurse to record medications administered,
plus patient responses to medications in a repository that can be reviewed by
the physician or pharmacist so that they can assess outcomes and determine
appropriate drug therapy. E-mar has recently been released from testing and is
installed at three hospitals with several more under contract to be installed.
Pricing starts at approximately $46,500 which includes a redundant file server.
Cygnet(R) offers a fully-integrated information system for the
obstetrical clinics of hospitals and doctors' offices. Cygnet creates a
paperless environment for the complete perinatal process. The system archives
all data on optical disk collected from fetal and physiological monitors, as
well as all electronic documentation such as patient charting and nurses' notes.
Such information can be easily retrieved for performing outcomes analysis and
for mandated legal documentation. Eight thousand, eight-hour births can be
archived on a single optical disk recorded by Cygnet. The Cygnet product is
installed in approximately 75 hospitals with an average sales price of
approximately $128,000. Several of the obstetrical clinics in these hospitals
are now completely paperless, using electronic documentation for perinatal
point-of-care rather than paper forms.
The Peritronics software product, like Cygnet, is also an obstetrical
information system. LifeServ currently expects that future software releases
will allow customers of both Peritronics and Cygnet to migrate their systems to
a common version without the loss of current data. The addition of Peritronics
will bring LifeServ total installed obstetrical systems to 295 customers.
LifeServ had approximately $1.5 million in contracts for shipment and
installation at March 31, 1998.
MTL provides clinical laboratory testing services. The analytical tests of
blood, tissues and other bodily fluids that it provides are typical of
diagnostic laboratories and the facilities presently have no particular
specialization in any of its testing procedures and services. MTL performs
in-house over 95% of the testing routinely ordered by physicians for their
patients, which typically includes chemistry, hematology, serology, urinalysis
and bacteriology.
7
Research and Development
- ------------------------
Research and development activities during the past three years have not
been significant and, therefore, have not been separately classified in the
financial statements. The Company has focused on the development of products
that it has been determined are technologically feasible.
Product Development
- -------------------
The Company had several projects underway to develop new products during
its most recent fiscal year.
a. MTS Packaging is presently developing:
- Medication dispensing systems that more fully automate its
customers' operation and increase the productivity of the
pharmacy.
- A dispensing system for the packaging of unit dose medication for
hospitals.
b. LifeServ is presently developing:
- Emergency department software.
- Conversion of Performance to a Windows NT(R) platform.
- Single item dispensing hardware for MedServ.
Manufacturing Processes
- -----------------------
MTS Packaging has developed integrated punch card manufacturing equipment
that will accomplish the various punch card manufacturing steps in a
single-line, automated process. The Company believes that its advanced
automation gives it certain speed, cost and flexibility advantages over
conventional punch card manufacturers. MTS Packaging's equipment produces
finished cards in one eight hour shift. This process takes approximately one
week using conventional methods. MTS Packaging's advanced automation provides a
substantial reduction in time compared to conventional punch card manufacturing
systems. MTS Packaging has two machines capable of producing punch cards in this
manner. In addition to the manufacturing of punch cards, MTS Packaging
manufactures machines that are used by its customers to fill punch cards with
medication. The majority of these machines are sold to customers; however, from
time to time, customers are provided or rented machines in conjunction with an
agreement to purchase certain quantities of punch cards over a specified period.
MTS Packaging uses automated fabrication equipment to produce its
medication packaging machinery. All essential components of the machines are
designed and manufactured by the Company without reliance on outside vendors.
MTS Packaging is dependent on a number of suppliers for the raw materials
essential in the production of its products. The Company believes that relations
are adequate with its existing vendors. However, there can be no assurance that
such relations will be adequate in the future or that shortages of any of these
raw materials will not arise, causing production delays. MTS Packaging believes
it is necessary to maintain an inventory of materials and finished products that
allows for customer orders to be shipped within the industry standard of 2 - 3
days. The inability to obtain raw materials on a timely basis and on acceptable
terms may have a material adverse effect on the future financial performance of
the Company.
LifeServ assembles computer hardware for its MedServ and E-mar product line
and then installs its proprietary software. The MedServ cabinetry is
manufactured by outside vendors that are metal fabricators with experience in
the medical business. Although LifeServ is aware of several vendors that could
manufacture the MedServ product, a change in vendors could create a void in
product availability while a new vendor prepares to meet LifeServ inventory
needs. LifeServ's current vendor for the MedServ cabinetry has three separate
locations capable of manufacturing its product in order to provide adequate
backup if an event occurs that interrupts production flow. The unavailability of
8
MedServ cabinetry could have a material adverse effect on future sales of the
MedServ and E-mar product line. All computer hardware is purchased from outside
vendors but is common to many suppliers. The Company believes its proprietary
software adds substantial value to the product, primarily because of the
Company's extensive knowledge of hospital pharmacy management practices derived
from more than 145 installations of Performance.
LifeServ's Performance and Cygnet products are software systems. All
computer hardware is purchased from outside vendors, but is common to many
suppliers. However, the development and software support services provided for
all LifeServ software products are dependent on attracting and retaining
qualified personnel experienced in computer software design and development.
Computer programmers and other technical personnel are currently in high demand.
The availability of qualified personnel could have a material adverse effect on
the future financial performance of the Company.
MTL primarily relies upon sophisticated diagnostic testing equipment to
evaluate bodily fluid samples. MTL has upgraded its laboratory equipment through
the acquisition of automated analyzers. Each analyzer is capable of performing
36 different tests on up to 160 patients per hour. The testing categories
performed by such machinery include bacteriology, chemistry, hematology,
serology and urinalysis. MTL provides services and as a result, is not dependent
upon a supply of raw materials; however, MTL uses certain disposable supplies to
produce test results. MTL's service revenue is dependent upon referrals by
physicians.
As a result of the Company's financial condition, many of the suppliers of
raw materials and other goods and services to the Company's subsidiaries have
required that purchases be paid for in advance or on a COD basis. As a result,
the Company's ability to obtain raw materials and other goods and services is
substantially dependent upon the Company's cash flow.
Markets and Customers
- ---------------------
MTS Packaging's products are sold throughout the United States, primarily
through its sales organization and independent sales representatives. MTS
Packaging also participates in trade shows and training seminars. MTS Packaging
presently has no customers that account for greater than 10% of its consolidated
sales.
The primary customers for MTS Packaging's proprietary packaging machinery
and the related disposable punch cards, labels and ancillary supplies are
pharmacies that supply prescription medication to nursing homes. Such pharmacies
serve from 250 to 34,000 nursing home beds per location and many serve the
sub-acute, assisted living and the home health care markets as well.
LifeServ has begun selling its MedServ and E-mar product lines, which are a
computerized medication management system, to hospitals throughout the United
States. The Company believes this technology is attractive to hospitals because
it provides the opportunity for the hospital to reduce medication dispensing and
administration errors. Approximately 3,000 of the more than 6,400 acute care and
specialty care hospitals throughout the United States currently have
computerized medication dispensing systems. Most of those 3,000 hospitals use
floor stock systems, such as MedServ, for inventory control in primarily the
emergency room, operating room or in areas where narcotic floor stock was
previously stored. Thus, there is an opportunity within most of those 3,000
hospitals for systems, such as E-mar, that can adequately administer a patient's
regularly scheduled medications. The floor stock systems that have been
installed are primarily justified by reducing inventory shortages and decreasing
"lost billings" rather than reducing or eliminating medication errors. As of
June 25, 1998, LifeServ had 25 MedServ and 3 E-mar installations within the U.S.
Pricing for MedServ and E-mar products range from $30,000 to over $1,000,000 for
a hospital installation depending on the number of beds and service level
requirements. The Company believes that the market for the LifeServ products is
currently favorable.
The markets for other health care facilities, such as nursing home,
sub-acute care and assisted living facilities, are relatively new. Although the
Company has no specific data for these markets, it believes that the extension
of the health care market from hospitals into nursing homes, sub-acute care,
assisted living facilities and other health care facilities represents a
potential to expand the customer base for LifeServ's products. Although the
Company is optimistic that it will be able to generate additional revenue from
the growing assisted care facilities market, there is no assurance that it can
successfully penetrate such markets.
9
MTL provides clinical laboratory testing services for physicians primarily
in the west central Florida area. MTL also services physicians in Key West.
Service is a key factor in retaining and securing referrals from physicians.
Several of the national laboratories that compete with MTL have consolidated
their operations outside the Tampa Bay area which has benefited MTL.
Approximately 65% of the tests performed by MTL are paid for by Medicare.
In January 1998, Medicare instituted a 4% reduction in their reimbursement
rates. On April 1, 1998, Medicare instituted changes which required physicians
to provide more diagnosis information for the tests they order. The reduction in
reimbursement rates and the additional information which Medicare requires for
reimbursement have resulted in reduced gross margins for MTL as well as delays
in receiving payment for services rendered. There are no contracts between MTL
and the physicians serviced, accordingly at any time, the physician can change
laboratory services.
Competition
- -----------
The pharmacy customers of MTS Packaging supply prescribed medications to
nursing homes, which are the primary market for MTS Packaging's products. This
market is highly competitive. There are several competitors that presently
market other systems using punch cards. The Company believes it is the industry
leader in the automation of packaging and sealing of solid medications into
punch cards. The Company believes that products developed by the Company's
competitors are not as efficient as the Company's systems because they are not
as automated. The Company's method of dispensing medication replaces more
traditional dispensing methods, such as prescription vials. The principal
methods of competition in supplying medication dispensing systems to
prescription service providers are product innovation, price, customization and
product performance. Many of the Company's competitors have been in business
longer and have substantially greater resources than the Company. There is no
assurance that the Company will be able to compete effectively with competitive
methods of dispensing medication or other punch card systems.
The Company's primary competitors for punch card dispensing systems are
Drug Package, Inc., PCI/Trans Aid, Inc. and RX Systems, Inc. The Company
believes that its automated proprietary packaging machinery distinguishes MTS
Packaging from its competitors' manual systems, which are capable of only
filling and sealing 30-45 disposable medication punch cards per hour. The
Company's new automated packaging machinery can fill and seal up to 720
disposable medication cards per hour. The Company believes that its production
rates will meet the needs of its customers who are consolidating and require
higher productivity to meet their growing market share.
LifeServ faces intense competition within the hospital marketplace for its
products, Performance, MedServ, E-mar and Cygnet. For pharmacy management
systems, competitors include dominant hospital information system vendors such
as HBO & Company, SMS Corporation, MEDITECH, Inc. and other major corporations.
Also included are pharmacy management systems providers such as Cerner
Corporation, Mediware Information Systems, Inc. and Health Care Services, Inc.
Among suppliers of automated dispensing systems to hospitals, the Company will
be competing with such major companies as Pyxis Corporation, a subsidiary of
Cardinal Health Inc., Baxter International, Inc., Diebold Incorporated and
others for its new MedServ product line. The Company believes E-mar is defining
a new market and the Company is not aware of any competitors with installed
systems such as E-mar. Although the Company believes it has been first to
market, many companies that have greater financial resources could develop a
similar product. The obstetrical information market segment of the Company's
business is principally divided among Watch Child, a division of Hill-Rom
Company, Inc., Marquette Medical Systems, Inc. and Cygnet. Although the Company
believes it provides superior technological systems, there is no assurance that
it will be able to effectively compete with companies that have greater
financial resources or established market distribution channels.
MTL conducts its business in a very competitive marketplace. There are a
number of clinical laboratories in the Tampa Bay area that compete with the
Company's facility. In addition, hospitals are offering their own diagnostic
clinical laboratory services, which places additional competitive pressure on
the Company. Although the Company believes that MTL provides a high level of
service and quality. There can be no assurance that competitors, governmental
regulators, or reductions in Medicare reimbursement policies will not erode the
business prospects of MTL.
10
Proprietary Technology
- ----------------------
The Siegel Family QTIP Trust (the "Trust") is the holder of certain patents
and other proprietary rights for the equipment and processes that MTS Packaging
uses and sells. The Trust is the assignee of all such proprietary and patent
rights used in the Company's business that were invented or developed by Harold
B. Siegel, the founder of the Company. The Trust and the Company are parties to
a license agreement whereby the Company is granted an exclusive and perpetual
license from the Trust to use the know-how and patent rights in the manufacture
and sale of the Company's medication dispensing systems. MTS Packaging is
heavily dependent upon the continued use of the proprietary rights associated
with these patents. The patents begin expiring in 2001 continuing through 2006.
The license agreements are co-extensive with the patents.
There are numerous patent applications and patent license agreements for
products that have been sold and that have been in development within MTS
Packaging and LifeServ, however, their business' are not materially dependent
upon the issuing or its ownership of any one patent applied for or patent
license agreements.
There is no assurance that any additional patents will be granted with
respect to the Company's medication dispensing or information systems and
products or that any patent issued, now or in the future, will provide
meaningful protection from competition.
MTL does not presently use any proprietary technology. The Company has
completed a program to upgrade to more technologically advanced equipment for
the delivery of diagnostic information to its customers.
Government Regulation
- ---------------------
Certain subsidiaries of the Company are subject to various federal, state
and local regulations with respect to their particular businesses. The Company
believes that it currently complies with these regulations.
MTS Packaging's products are governed by federal regulations concerning
components of packaging materials that are in contact with food. The Company has
obtained assurances from its vendors that the packaging materials used by MTS
Packaging are in conformity with such regulations. However, there is no
assurance that significant changes in the regulations applicable to MTS
Packaging's products will not occur in the foreseeable future. Any such changes
could have a material adverse effect on the Company.
The operations of LifeServ are subject to Food and Drug Administration
(FDA) Guidelines. In accordance with FDA Guidelines, the Cygnet Product is
classified as a Class II medical device and requires the filing of a 510(k)
application with the FDA for approval and compliance. The 510(k) application
serves as a pre-market notification to the FDA of a company's intention to sell
a medical device and seeks consent to do so. The Cygnet product received this
consent in December 1993. Any material changes or modifications to the present
Cygnet product will require the filing of an additional 510(k) application. On
September 10, 1996, the FDA issued a letter of compliance for the Cygnet
product. The Company believes that it will be able to maintain FDA compliance
for its Cygnet product.
The operations of MTL are subject to extensive federal, state, and local
regulation. Specifically, MTL is licensed by the State of Florida Department of
Health and Rehabilitation Services ("HRS") and is certified by the Health Care
Financing Administration ("HCFA"), a federal governmental agency. The Company
believes MTL is currently operated in compliance with HRS and HCFA licensing and
certification requirements.
The operations of MTL are subject to Medicare reimbursement requirements
and restrictions imposed by the Social Security Act as administered by HCFA.
Recent regulatory changes directly affect the way Medicare reimburses for
laboratory services. Medicare only pays for laboratory services if the lab
facility is certified under the Clinical Laboratory Improvement Act of 1988. The
Company's operation of MTL complies with this federal legislation.
Most clinical laboratory procedures are paid from laboratory fee schedules
issued by individual Medicare carriers or intermediaries. Laboratory services
are paid based upon a national fee schedule modified by local economic factors.
Medicare carriers pay laboratory claims on a reasonable fee basis. In the case
of laboratory tests, the recommended fee is the lesser of the fee schedule or
the national caps on the actual billed amounts. Most laboratory tests must be
11
billed on an assigned basis. This means that the provider must accept the
Medicare reimbursement as payment in full for a laboratory test. Medicare
patients are not billed for the additional amount. In addition, Florida has
adopted legislation that limits billing for laboratory services to 120% of the
allowable Medicare reimbursement. Recent changes in Medicare reimbursement
policies have severely impacted MTL's ability to receive timely reimbursement
for tests performed. MTL is currently evaluating these policies and attempting
to make the necessary changes in its internal information systems in order to
improve its ability to adjust to these changes.
The Company cannot predict the extent to which its operations will be
effected under the laws and regulations described above or any new regulations
that may be adopted by regulatory agencies.
Employees
- ---------
As of June 25, 1998, the Company employed 275 persons full time. None of
the Company's employees are covered by a collective bargaining agreement. The
Company considers its relationship with employees to be good.
ITEM 2. PROPERTIES
The Company leases a 67,000 square foot plant consisting of office space
and air-conditioned manufacturing and warehousing space near the Clearwater/St.
Petersburg International Airport at 12920 Automobile Boulevard. The Company's
corporate administrative offices, LifeServ and the manufacturing facilities for
MTS Packaging are at this location. The lease expires on April 15, 1999. The
Company's current monthly lease payments are approximately $19,000. The premises
are generally suited for light manufacturing and/or distribution. Currently the
Company is operating at two-thirds of actual manufacturing capacity.
The Company leases approximately 5,200 square feet at approximately $2,500
per month for office and warehouse space at 21530 Drake Road, Cleveland, Ohio.
The lease expires on March 31, 1999. This space is used by the Ohio Label
business acquired by the Company in 1989. This business is now part of MTS
Packaging.
The Company leases approximately 3,300 square feet of space for MTL located
in Pinellas County, Florida. This lease expires on April 1, 2002, with monthly
rents of approximately $5,000.
The Company subleases approximately 4,000 square feet for LifeServ
located in San Jose, California. The lease expires on December 31, 2000 with
monthly rents of $4,400.
ITEM 3. LEGAL PROCEEDINGS
The Company was not involved in any litigation that, in the opinion of
management, would have a material adverse effect on the Company's financial
position, results of operations or liquidity. As more fully described in the
last paragraph of Note 15 to the consolidated financial statements, the Company
is disputing a proposed assessment by the State of Florida, Department of
Revenue.
Reorganization Under Chapter 11 and Subsequent Operations
- ---------------------------------------------------------
On January 3, 1996, three of the Company's subsidiaries, MTS Packaging, MTL
and MTS Sales, filed voluntary petitions for relief under Chapter 11 in the
Bankruptcy Court. On February 22, 1996, Vangard filed a voluntary petition for
relief under Chapter 11 in the same jurisdiction. On July 10, 1997, MMT filed a
voluntary petition for relief under Chapter 11 in the same jurisdiction.
On September 4, 1996, the Plans of Reorganization for MTS Packaging, MTL
and Vangard were confirmed by the Bankruptcy Court. The case of MTS Sales was
dismissed. On June 12, 1998, the Plan of Reorganization for MMT was confirmed by
the bankruptcy court.
12
Certain liabilities were compromised by creditors as part of the Plans for
Reorganization as follows:
Secured Claims: (Bank) - Each of the companies that filed petitions under
Chapter 11 were co-borrowers on bank notes, lines of credit, accrued interest
and other charges and expenses, in the amount of approximately $28.0 million,
that were combined and restructured into two separate promissory notes.
Plan Note I, in the stated principal amount of approximately $27.0 million,
provided for a portion of the principal amount, $15.0 million, to be due and
payable as follows:
a. Interest at the rate of 7.5% for a period of two years ending
September 1, 1998.
b. Installments of principal and interest at the rate of 7.5% payable
monthly for a period of ten years ending September 1, 2006. At which
time, the then outstanding principal amount is due and payable in
full. The monthly installments of principal and interest are
calculated based on the principal amount amortized in equal monthly
payments over twenty years.
Plan Note II, in the stated principal amount of $1,000,000 provided for
payment of $750,000 on or about the date of confirmation of the Plans of
Reorganization. The Company made the payment of $750,000 on or about September
5, 1996 and in accordance with the terms of Plan Note II, the stated principal
amount was deemed fully satisfied.
Plan Note I further provided that the net proceeds from the sale of Vangard
would be paid to the Bank. In addition, certain other mandatory prepayments of
the stated principal amount were required upon the occurrence of a capital
transaction in which any of the Company's subsidiaries are sold, as well as upon
the receipt of any proceeds resulting from certain causes of action commenced by
the Company. Plan Note I also provided that the full stated principal amount of
approximately $28.0 million would be due and payable upon the occurrence of
specified major events of default.
Effective March 31, 1997, the stated principal amount of Plan Note I was
reduced to $15.0 million. Thereby, permanently removing any contingent amount
due including the additional $12.0 million principal amount, except for the
mandatory prepayments for any capital transactions. As a result of this
modification and the receipt of proceeds from the sale of Vangard during fiscal
1997, the Company realized an extraordinary gain of approximately $10.3 million,
after the mandatory payment from the Vangard sales proceeds of approximately
$3.1 million.
Plan Note I contains certain financial covenants including prohibiting the
Company from exceeding a maximum consolidated intangible deficit, maintaining
various financial ratios and limits the amount of capital expenditures. In
addition, Plan Note I requires the bank's approval of the payment of dividends
and the borrowing of any additional amounts from other parties.
Other Secured Claims: The holder of a secured note payable by MMT in the
amount of approximately $45,000 elected to receive payment over a two-year
period with interest at 7%.
Unsecured Claims - The holders of trade and miscellaneous claims elected to
receive payment of their claims under several options provided for in the Plans
of Reorganization.
The amount of secured and unsecured liabilities that were compromised as
part of the plans of reorganization have been classified as extraordinary gain
in the Company's Consolidated Statement of Operations and Statement of Cash Flow
for the year ended March 31, 1997 except for the MMT unsecured liabilities,
which were compromised as part of the MMT Plan of Reorganization confirmed in
the first quarter of fiscal 1999.
Bank Matters
- ------------
On December 5, 1997, the Company received a notification from its bank that
certain events of default had occurred under Plan Note I. As a result of
discussions between the Company and the bank, Plan Note I was amended on April
16, 1998 to provide for the following:
13
a. The formation of LifeServ as a subsidiary of the Company.
b. The inclusion of LifeServ as a co-borrower.
c. The consent of the bank for the incurrence of additional debt and a
private placement of equity by LifeServ.
d. Release of LifeServ as a co-borrower in the event that LifeServ is
successful in obtaining equity capital.
e. Accelerated repayment of $1,000,000 of the stated principal amount
beginning November 1998 based upon 25% of excess cash flow generated
by the Company.
f. Waiver by the bank of any events of default which may have occurred
prior to April 16, 1998.
g. A limitation in the amount of funding that the Company can provide to
LifeServ.
h. Accelerated repayments of the stated principal amount in the event of
certain capital transactions involving subsidiaries of the Company as
well as recoveries from certain causes of action.
i. Additional payments above the stated principal amount in the event
that capital transactions result in proceeds to the Company in excess
of certain amounts and recoveries from certain causes of action.
Management believes that these additional payments, if any are made,
will be offset by gains recognized on these transactions and
recoveries.
On May 13, 1998, LifeServ obtained a $500,000 loan from an individual. The
terms of the loan provide for repayment in full plus interest at 10% on the
earliest of: the date LifeServ receives the proceeds of a sale of equity or July
31, 1998. In addition, LifeServ and the Company issued warrants to the lender to
purchase shares of their common stock as follows:
LifeServ Warrants
-----------------
200,000 warrants exercisable on the date of the loan through the tenth
anniversary of their issuance at $1.00 per share.
15,000 warrants exercisable on the maturity date of the loan, if the
loan is not repaid on the maturity date, through the tenth anniversary
of their issuance at $1.00 per share.
15,000 warrants exercisable on August 31, 1998, if the loan is not
repaid on August 31, 1998, through the tenth anniversary of their
issuance at $1.00 per share.
15,000 warrants exercisable on September 30, 1998, if the loan is not
repaid on September 30, 1998, through the tenth anniversary of their
issuance at $1.00 per share.
The Company Warrants
--------------------
25,000 warrants exercisable on October 30, 1998, if the loan is not
repaid on October 30, 1998 through the tenth anniversary date of their
issuance at $0.45 per share.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The information required by this item is incorporated by reference to the
Form 10-Q filed by the Company on November 13, 1997.
14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Price Range of the Company's Securities
- ---------------------------------------
The Company's Common Stock trades on the over-the-counter market. The table
below sets forth the range of high and low bid information for the Company's
common stock for the periods indicated, as reported by the NASD OTC Bulletin
Board. Over-the-counter market quotations reflect inter-dealer prices, without
retail markup, markdown or commission and may not necessarily represent actual
transactions.
High Low
---------------- -----------------
1998 Fiscal Year
---------------------
First Quarter $ .63 $ .44
Second Quarter $ .53 $ .44
Third Quarter $ .53 $ .22
Fourth Quarter $ .44 $ .13
1997 Fiscal Year
---------------------
First Quarter $ 1.00 $ .25
Second Quarter $ 1.38 $ .44
Third Quarter $ 1.06 $ .56
Fourth Quarter $ 1.00 $ .53
The Company's warrants to purchase the Company's common stock are
traded through the National Quotation Bureau, LLC. The table below sets forth
the range of high and low bid information for the Company's warrants for the
periods indicated. Over-the-counter market quotations reflect inter-dealer
prices, without retail markup, markdown or commission and may not necessarily
represent actual transactions.
High Low
---------------- -----------------
1998 Fiscal Year
---------------------
First Quarter * *
Second Quarter * *
Third Quarter * *
Fourth Quarter * *
1997 Fiscal Year
---------------------
First Quarter * *
Second Quarter * *
Third Quarter * *
Fourth Quarter * *
* Quotations not available. The last reported bid for the Company's
warrants occurred on January 4, 1996. At that time the bid price was 1/32.
As of June 25, 1998, there were approximately 4,000 holders of record
of the Company's common stock.
Historically, the Company has not paid dividends on its common stock and
has no present intention of paying dividends in the foreseeable future. Payment
of dividends are subject to the prior approval by the Company's secured lender,
SouthTrust Bank.
15
ITEM 6. SELECTED FINANCIAL DATA
The following tables set forth selected financial and operating data
regarding the Company. This information should be read in conjunction with
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" and the Company's Financial Statements and Notes thereto. See
"FINANCIAL STATEMENTS."
YEARS ENDED MARCH 31,
--------------------------------------------------------------------------
(In Thousands, Except Earnings Per Share Amounts)
1998 1997 1996 1995 1994
------------ ------------ ------------- ------------ -------------
Sales $ 24,072 $ 19,247 $ 17,052 $ 14,830 $ 12,301
Cost of Sales and Other Expenses 25,196 19,232 41,669 16,946 9,367
------------ ------------ ------------- ------------ -------------
Before Cumulative Effect of Accounting Change (1,124) 15 (24,617) (2,116) 2,934
Income Tax (Benefit) Expense (270) 0 (1,900) (844) 1,078
Income (Loss) from Discontinued Operations 0 (2,800) (6,634) 16 762
Gain on Forgiveness of Debt of Discontinued
Operations 0 3,500 0 0 0
Estimated Gain (Loss) on Disposal of
Discontinued Operations 0 2,200 (5,229) 0 0
Extraordinary Gain on Debt Forgiveness 0 10,097 0 0 0
Cumulative Effect of Accounting Change
for FASB No. 109 0 0 0 0 543
------------ ------------ ------------- ------------ -------------
Net Income (Loss) $ (854) $ 13,012 $ (34,580) $ (1,256) $ 3,161
============ ============ ============= ============ =============
Net Earnings (Loss) Per Basic and Diluted Share:
From Continuing Operations $ (0.14) $ 0.00 $ (5.60) $ (0.32) $ 0.48
Income (Loss) from Discontinued Operations 0.00 0.51 (2.92) 0.00 0.20
Cumulative Effect of Accounting Change
for FASB No. 109 0.00 0.00 0.00 0.00 0.14
Extraordinary Gain on Debt Forgiveness 0.00 1.76 0.00 0.00 0.00
------------ ------------ ------------- ------------ -------------
Net Earnings (Loss) Per Basic and Diluted Share $ (0.14) $ 2.27 $ (8.52) $ (0.32) $ 0.82
============ ============ ============= ============ =============
Average Common Shares Outstanding - Basic and Diluted 6,062 5,737 4,059 3,974 3,879
============ ============ ============= ============ =============
AT MARCH 31,
--------------------------------------------------------------------------
(In Thousands)
Balance Sheet Data: 1998 1997 1996 1995 1994
------------ ------------ ------------- ------------ ----------
Net Working Capital $ 2,852 $ 3,989 $ 5,406 $ 5,410 $ 1,695
Assets 15,762 12,543 14,669 44,243 33,018
Short-Term Debt 625 310 168 1,165 979
Long-Term Debt 15,613 15,459 350 23,224 10,588
Stockholders' Equity (Deficit) (6,113) (5,416) (18,546) 15,640 16,853
Liabilities Subject To Compromise 826 0 30,457 0 0
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
- --------
During fiscal 1998, the Company continued to focus on the expansion of its
core business as well as develop a professional management team to direct and
implement growth strategies for its health care information businesses. The
health care information businesses have been consolidated under LifeServ to
provide solutions for medication management and point-of-care electronic
documentation for hospital and other health care facilities. The Company has
determined that additional capital will be required to assist LifeServ in its
growth opportunities. As a result, the Company negotiated an amended loan
agreement with its bank which provides LifeServ the opportunity to raise equity
capital to fund its growth and then to be released from its obligations under
the current loan agreement. The Company has retained the services of an
investment banking firm to assist in raising capital.
Results of Operations
- ---------------------
Fiscal Year 1998 Compared to Fiscal Year 1997
Revenue
- -------
Net sales for the fiscal year ended March 31, 1998 increased 25.1% to $24.1
million from $19.2 million the prior fiscal year. Revenue for each business
segment increased in fiscal 1998 compared to 1997 as follows.
Fiscal 1998 Fiscal 1997 % Increase
---------------- ------------------ ----------------
Medication Packaging and Dispensing $12.4 million $11.2 Million 10.7%
Health Care Information Systems $4.3 Million $2.0 Million 115.0%
Clinical Laboratory Services $7.4 Million $6.1 Million 21.3%
Revenue increased in the medication packaging and dispensing system segment
primarily due to a higher number of disposable medication punch cards sold to
pharmacies by MTS Packaging, resulting from concerted sales and marketing
efforts. In addition, pharmacies servicing long-term care facilities are
continuing to consolidate. As a result, many of MTS Packaging's customers are
acquiring other pharmacies and thereby, raising their demand for disposable
supplies. Increases in the number of installations of medication dispensing
systems, pharmacy systems and sales of obstetrical information systems that
LifeServ acquired during fiscal 1998 contributed to increases in revenue for the
health care information system segment. Revenue grew in the Company's clinical
laboratory segment due to increases in the number of tests performed, which
resulted from a higher in the number of physicians serviced by the laboratory.
Cost of Sales and Services
- --------------------------
Cost of sales for the year ended March 31, 1998 increased 22.4% to $13.2
million from $10.8 million in the prior year. Cost of sales as a percentage of
sales decreased to 54.7% from 55.9%. Cost of sales for each business segment as
a percentage of revenues in fiscal 1998 compared to 1997 was as follows:
Fiscal 1998 Fiscal 1997
---------------- ------------------
Medication Packaging and Dispensing 56.4% 55.4%
Health Care Information Systems 38.0% 50.8%
Clinical Laboratory Services 61.5% 58.6%
The incremental profit margin realized from increased revenue in the health
care information segment contributed significantly to the reduction in costs of
sales as a percentage of revenue. The increase in revenue did not require the
addition of any material amount of fixed costs.
17
Increases in raw material and labor costs were the primary reasons for the
increase in cost of sales as a percentage of revenue for the medication
packaging and dispensing segments. Competitive issues precluded the Company from
adjusting the prices charged to customers in order to offset these increases.
Changes in Medicare reimbursement policies resulted in decreases in the gross
margin realized by the clinical laboratory services segment.
Selling, General and Administrative Expenses ("SG&A")
- -----------------------------------------------------
SG&A expenses for the year ended March 31, 1998 increased 45.1% to $9.4
million compared to $6.5 million the prior year. SG&A expenses increased for
each business segment in fiscal 1998 compared to 1997 as follows:
Fiscal 1998 Fiscal 1997 % Increase
----------------- ------------------ -----------------
Medication Packaging & Dispensing Systems $2.0 million $1.9 Million 5.3%
Health Care Information Systems $3.6 Million $1.2 Million 200.0%
Clinical Laboratory Services $2.1 Million $2.1 Million 0.0%
Corporate $1.7 Million $1.1 Million 54.6%
The increase resulted primarily from increases in personnel and selling
costs associated with the increase in and anticipation of revenue realized by
each business segment.
Depreciation and Amortization
- -----------------------------
Depreciation and amortization expense increased 6.7% to $1.5 million in
fiscal 1998 from $1.4 million the prior year. The increase resulted from
depreciation and amortization of assets acquired during fiscal 1998.
Interest Expense
- ----------------
Interest expense increased 82.1% to $1.1 million in fiscal 1998 from
$609,000 in the prior year. The increase resulted primarily from the fact that
prior to the confirmation of the Company's Plans of Reorganization during fiscal
1997, interest payments were suspended. Interest was paid during the entire
fiscal 1998 period.
Income Taxes
- ------------
The Company realized an income tax benefit in fiscal 1998 as a result of an
income tax refund related to the amendment of its 1992 income tax return.
Fiscal Year 1997 Compared to Fiscal Year 1996
- ---------------------------------------------
Revenue
- -------
Net sales for the fiscal year ended March 31, 1997 increased 12.9% to $19.2
million from $17.0 million the prior fiscal year. Revenue for each business
segment increased in fiscal year 1997 compared to 1996 as follows:
Fiscal 1997 Fiscal 1996 % Increase
------------------ ------------------ -----------------
Medication Packaging & Dispensing Systems $11.2 million $10.7 Million 4.7%
Health Care Information Systems $2.0 Million $1.2 Million 66.7%
Clinical Laboratory Services $6.1 Million $5.2 Million 17.3%
The increase in revenue for the medication packaging and dispensing system
segment resulted primarily from higher sales of disposable medication punch
cards. The continued focus of marketing efforts on wholesale distribution of
disposables has contributed significantly to the increase in revenue. In
addition, the Company added several national account customers who are
significant long-term care pharmacy providers. The growth in revenue for the
18
health care information systems segment was due primarily to increased
installations of systems which resulted from greater customer acceptance of the
products offered. The increase in revenue for the clinical laboratory segment
resulted primarily from concerted sales and marketing efforts, which have
increased the number of physicians serviced by the laboratory.
Cost of Sales and Services
- --------------------------
Cost of sales for the year ended March 31, 1997 increased 1.0% to $10.8
million from $10.7 million in the prior year. Cost of sales as a percentage of
sales decreased to 55.9% from 62.5%. Cost of sales for each business segment as
a percentage of revenue in fiscal 1997 compared to the prior year was as
follows:
Fiscal 1997 Fiscal 1996
---------------- ------------------
Medication Packaging and Dispensing 55.4% 61.9%
Health Care Information Systems 50.8% 67.2%
Clinical Laboratory Services 58.6% 62.8%
The decrease in Cost of sales as a percentage of revenue for each business
segment resulted primarily from the fact that although revenue for each segment
increased certain fixed costs included in cost of sales did not increase
correspondingly. Although each business segment realized increased costs of raw
materials or supplies used in their respective operations, the costs were more
than offset by additional gross margin realized on increased revenue.
Selling, General and Administrative Expenses ("SG&A")
- -----------------------------------------------------
SG&A expenses for the year ended March 31, 1997 decreased 24.2% to $6.5
million compared to $8.5 million the prior year. The decrease resulted primarily
from reductions in corporate overhead expense of approximately $2.0 million. The
Company implemented cost reduction measures during fiscal 1997 as part of its
overall reorganization efforts including reductions in personnel and other
overhead expenses. The reductions were partially offset by increases in sales
and marketing expenses concomitant with an increase in revenue in the clinical
laboratory segment.
SG&A expenses for each business segment increased (decreased) in fiscal
1997 compared to fiscal 1996 as follows:
Fiscal 1997 Fiscal 1996 % Increase
(Decrease)
----------------- ----------------- ----------------
Medication Packaging and Dispensing $1.9 million $2.0 Million (5.0%)
Health Care Information Systems $1.2 Million $1.6 Million (25.0%)
Clinical Laboratory Services $2.1 Million $1.6 Million 31.3%
Corporate $1.1 Million $3.1 Million (64.5%)
Depreciation and Amortization
- -----------------------------
Depreciation and amortization expense decreased 48.5% to $1.4 million in
fiscal 1997 from $2.7 million the prior year. The Company reduced the estimated
useful lives of its property and equipment in fiscal 1996 to reflect
technological changes, resulting in additional depreciation in 1996 of $589,000.
Furthermore, during 1996, the Company reduced the carrying value of certain
long-lived assets which had been impaired. As a result of these reductions,
depreciation and amortization expense was reduced in fiscal 1997 compared to the
prior year.
19
Interest Expense
- ----------------
Interest expense decreased 65.0% to $609,000 in fiscal 1997 from $1.7
million in the prior year. The decrease resulted primarily from the reduction in
indebtedness which the Company realized as a result of the restructured debt
with its secured lenders, and the suspension of interest payments during the
Chapter 11 proceedings. Interest expense for fiscal 1997 would have been
approximately $1.1 million higher if payments had been required during the
Chapter 11 proceedings.
Income Taxes
- ------------
In 1996, the Company recognized an income tax benefit of $1.9 million from
the use of net operating loss carrybacks. In 1997, no income tax expense or
benefit was recognized as taxes on income from continuing operations,
discontinued operations and extraordinary items were offset by the net operating
loss carryforward. See Note 15 to the financial statements.
Gain on Disposal of Discontinued Operations
- -------------------------------------------
The Company completed the sale of certain assets of Vangard effective March
31, 1997. The Company received $3.1 million for the assets. In addition, the
buyer assumed approximately $700,000 in liabilities. As a result of the sale,
the Company realized a gain of approximately $2.2 million.
Extraordinary Gain on Forgiveness of Debt
- -----------------------------------------
The Company's principal subsidiaries emerged from Chapter 11 during fiscal
1997. The Company's Plans of Reorganization provided for a reduction of the
amounts owed to both secured and unsecured creditors. The reduction, less
certain expenses relating to the reorganization, has been recognized as an
extraordinary gain.
Restructuring Charges
- ---------------------
The Company recognized significant restructuring charges in fiscal 1996. No
further restructuring charges were required in fiscal 1997.
Loss from Discontinued Operations
- ---------------------------------
The Company elected to treat Vangard as a discontinued operation due to
management's decision to dispose of the business. Vangard was managed by a plan
trustee approved by the Bankruptcy Court (see Note 3 to the Consolidated
Financial Statements). The loss incurred by Vangard was $2.8 million in 1997
compared to a loss of $6.6 million in 1996.
Gain on Forgiveness of Debt of Discontinued Operation
- -----------------------------------------------------
The Plan of Reorganization of Vangard provided for a reduction of the
amounts owed to unsecured creditors. In addition, certain post petition loans
made to Vangard were forgiven by its bank. The reductions and the forgiveness of
debt has been recognized as a gain on forgiveness of debt of discontinued
operations.
Year 2000 Compliance
- --------------------
The Company has reviewed its computer information systems to identify
any systems that could be affected by the "Year 2000" issue. Year 2000 problems
typically arise from computer programs using two characters rather than four to
define the applicable year. This could result in system failure or
miscalculations. The Company is presently upgrading its software systems, which
include its application products and other internally-developed software, and
its information systems hardware used in connection with managing the Company's
operations in order to ensure they are Year 2000 compliant. The Company is
currently assessing the cost of the year 2000 upgrades.
20
The health care information system products that the Company offers for
sale through LifeServ have been tested for year 2000 compliance, except for the
Performance software system which is currently undergoing an upgrade that is
expected to be completed in fiscal 1999. The Company believes that all of its
products except Performance are year 2000 compliant.
The Company has not assessed fully the impact of the Year 2000 compliance
issue on the entities with whom the Company interacts, such as distributors,
suppliers, manufacturers and customers. The Company also has not verified
whether its non-information systems equipment is Year 2000 compliant.
Liquidity and Capital Resources
- -------------------------------
The Company had a net loss of $854,000 in fiscal 1998 compared to net
income of $13.0 million the prior year. Cash provided from continuing operations
was $305,000 in fiscal 1998 compared to $1.6 million the prior year. Cash
provided from continuing operations resulted primarily from positive cash flow
from operations and income tax refunds.
Investing activities used $1.1 million in fiscal 1998 compared to $584,000
in fiscal 1997. The increase resulted from the fact that the Company resumed
several development projects during fiscal 1998 which had been suspended during
the prior year. In addition, the Company elected to upgrade certain equipment
used in its manufacturing operation.
Financing activities provided $524,000 in fiscal 1998. The Company entered
into a sale and leaseback transaction with a financial institution in fiscal
1998 which provided funding for a long-term contract with one customer where the
Company is the lessor. There are no assurances that the Company will be able to
obtain additional loans to fund similar arrangements.
The Company had working capital of approximately $2.8 million at March 31,
1998 and had no source of additional working capital other than that which is
generated from operations.
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 revenue have generally resulted in corresponding
increases in accounts receivable. Cash flow from operations may not be
sufficient to support a substantial increase in accounts receivable.
Throughout fiscal 1998, the Company dedicated a limited amount of resources
to complete development of E-mar, which was completed in March 1998, and
approximately seven punch card packaging and dispensing systems. The continued
development of these projects is dependent upon the Company's ability to
generate sufficient cash flow from operations. In order for the Company to
maximize its market opportunities for these projects, it may require additional
capital. There is no assurance that sufficient capital will be available to the
Company to complete its planned product development. The Company's inability to
continue development of these projects may have a material impact on its ability
to remain competitive and could have a material impact on its future operation.
On June 12, 1998, the Plan of Reorganization for MMT was confirmed by the
bankruptcy court. As a result, the Company will recognize a gain of
approximately $600,000 in the first quarter of fiscal 1999.
In April 1998, the Company entered into an amended loan agreement with its
bank. The amended loan agreement provides, among other things, that the Company
maintain certain minimum working capital amounts, prohibits the Company from
exceeding a maximum consolidated deficit of $6.5 million and limits the amount
of capital expenditures.
The Company believes that cash generated from operations will be sufficient
to meet its capital expenditures and working capital needs. The Company has
retained the services of an investment banking firm to assist LifeServ in
raising capital, however, there are no assurances that additional capital will
be available. The amended loan agreement referred to above, among other things,
limited to $200,000 the amount of working capital which the Company could
provide to its LifeServ subsidiary from its other subsidiaries. As a result of
this limitation, LifeServ will rely solely on cash flow from operations and
additional debt and equity which they are permitted to obtain in accordance with
the amended loan agreement. There are no assurances that LifeServ will generate
sufficient cash flow from operations to fund its operations or be successful in
raising equity capital. Management believes that the results of operation of
LifeServ will not adversely effect the overall liquidity of the Company.
21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this item are contained at the end of
this report.
SFAS No. 130, Reporting Comprehensive Income, is effective for fiscal years
beginning after December 15, 1997. This Statements establishes standards for the
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. The new rule requires that the Company
(a) classify items of other comprehensive income by their nature in a financial
statement and (b)display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
section of the balance sheet. The Company plans to adopt SFAS No. 130 in fiscal
1999 and expects no material impact to the Company's financial statement
presentation.
The American Institute of Certified Public Accounts has issued Statement of
Position (SOP) No. 97-2, "Software Revenue Recognition" which is effective for
fiscal years beginning after December 15, 1997. SOP 97-2 establishes certain
criteria which must be satisfied prior to the recognition of revenue for
licensing, selling, leasing or otherwise marketing computer software. Although
the Company plans to adopt SOP 97-2 in fiscal 1999, management has not yet
determined the potential effect that SOP 97-2 will have on the Company's
financial statements.
ITEM 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NONE
22
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated herein by reference
to the information included in the Company's definitive proxy statement which
will be filed by the Company within 120 days after the end of the Company's 1998
fiscal year.
ITEM 11: EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference
to the information included in the Company's definitive proxy statement which
will be filed by the Company within 120 days after the end of the Company's 1998
fiscal year.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by reference
to the information included in the Company's definitive proxy statement which
will be filed by the Company within 120 days after the end of the Company's 1998
fiscal year.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by reference
to the information included in the Company's definitive proxy statement which
will be filed by the Company within 120 days after the end of the Company's 1998
fiscal year.
23
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. and 2. The Financial Statements and schedule filed as part of this report are listed separately in the
Index to Financial Statements beginning on page 24 of this report
3. For Exhibits, see Item 14(c) below. Each management
contract or compensatory plan or arrangement required to be
filed as an Exhibit hereto is listed in Exhibit Nos. 10.20,
10.21, 10.22, 10.23, 10.24 and 10.25 of Item 14(c) below.
(b) No reports on Form 8-K have been filed by the Company
during the last quarter of the year ended March 31, 1998
(c) List of Exhibits
2.1(9) Agreement and Plan of Merger between Medication Management Technologies, Inc. and Cygnet
Technologies, Inc. dated April 24, 1997
2.2(9) Sale Agreement Vangard Labs, Inc. and NCS Healthcare, Inc. dated April 17, 1997
2.3(9) Asset Acquisition Agreement effective April 30, 1998 among the Company, LifeServ Technologies,
Peritronics Medical, Ltd. and 562577 B.C., Ltd.
2.4(9) Medication Management Technologies, Inc. Plan of Reorganization
2.5(9) MTS Packaging Systems, Inc. Plan of Reorganization
2.6(9) Medical Technology Laboratories, Inc. Plan of Reorganization
2.7(9) MTS Sales and Marketing, Inc. Plan of Reorganization
2.8(9) Vangard Labs, Inc. Plan of Reorganization
**3.1 Articles of Incorporation and Amendments thereto
*3.1(a) Amendment to Articles of Incorporation increasing authorized Common Stock to 25,000,000 from
15,000,000 shares
**3.2 Bylaws of the Company
*4.1 Form of Warrant from July 1992 Offering
**4.1(a) Form of Initial Offering Warrant from January 1988 Offering
**4.2 Designation of Rights, Preferences and Limitations of Voting Preferred Stock
**10.1 Business Lease between Leslie A. Rubin, Limited, as Lessor and the Company as Lessee dated March
1987
**10.2 Siegel Family Revocable Trust Agreement
10.2(a) (8) Amendment and Restated Siegel Family Revocable Trust Agreement
10.2(b) (8) Siegel Family Limited Partnership Agreement
**10.3(a) Agreements and Assignments of Patent Rights between Harold B. Siegel and the Siegel Family
Revocable Trust
**10.3(b) License Agreement between the Company and the Siegel Family Revocable Trust
**10.3(c) Assignment of Trade Names, Licenses, and Accounts Receivable from DRG Consultants, Inc. to the Company
**10.4 Agreement for Sale of Stock between Lawrence E. Steinberg and the Company dated April 27, 1987
**10.5 Warrant Agreement between Lawrence E. Steinberg and the Company dated April 27, 1987
**10.6 Warrant Agreement between Overseas Group and the Company dated May 8, 1987
**10.7 Option Agreement between the Siegel Family Revocable Trust and Lawrence E. Steinberg dated December 18, 1987
***10.8 Pilot Project and Option Agreement between Sandoz and the Company
****10.9 Documents relating to the acquisition of the business of Ohio Label & Packaging Inc.dated November 3, 1989
*10.10 Agreement among Company, Trust and Harold B. Siegel regarding modification to royalty
arrangements and issuance of Common Stock and retirement of preferred stock dated September 2, 1990
10.11(1) Acquisition and financing documents relating to Clearwater Medical Services, Inc.
10.12(2) Acquisition and financial documents relating to Clearwater Diagnostic Center, Inc.
24
10.13(3) Stock Purchase Agreement for Vangard Labs, Inc.
10.14(4) Warrant Agreement between Ladenburg Thalman & Co. and the Company
10.15(5) Loan and Security Agreement dated December 1, 1992 with Daiwa Bank, Limited
10.16(6) Amended and Restated Loan and Security Agreement dated September 28, 1993 with SouthTrust Bank of Alabama
10.17(7) First Amendment to Amended and Restated Loan and Security Agreement dated April 25, 1994 with
SouthTrust Bank of Alabama
10.18(7) Addendum to Lease dated September 30, 1993 with Leslie A. Rubin for facilities located at 12920
and 12910 Automobile Boulevard, Clearwater, Florida
10.19(7) Lease effective August 2, 1993 by and between C & C Park Building and Medical Technology Systems, Inc.
for property located at 21540 Drake Road, Strongsville, Ohio
10.20(7) Form of 1994 Stock Option Plan
10.21(7) Form of Employment Agreement for Todd Siegel and Gerald Couture
10.22(7) Form of Executive Stock Appreciation Rights and Non-Qualified Stock Option Agreement
10.23(7) Form of Director's Stock Option Agreement
10.24(7) Form of Directors' Consulting Agreement
10.25(7) Form of Director/Officer Indemnification Agreement
10.26(7) Joint Venture Agreement between MedVantage, Inc. and the Company dated January 5, 1995
10.27(7) Third Amendment to Amended and Restated Loan and Security Agreement effective March 28, 1995
10.28(9) Form of Executive Director's Agreement for Gerald Couture
10.29(9) Stock Option Plan dated March 4, 1997
10.30(9) Stock Option Agreement with David Kazarian
10.31(9) Stock Subscription Agreement, dated April 28, 1998, between the Company and LifeServ Technologies, Inc.
10.32(9) Loan Agreement dated May 13, 1998, between Ella Kedan and LifeServ Technologies, Inc.,
Performance Pharmacy Systems, Inc., Cart-Ware Inc., Medication Management Systems, Inc. and
Systems Professional, Inc. and related Promissory Note and Security Agreement.
10.33(9) Form of Warrant dated May 13, 1998 between LifeServ and Ella Kedan
10.34(9) Form of Warrant dated May 13, 1998 between the Company and Ella Kedan
10.35(9) Form of Warrant dated May 13, 1998 between LifeServ and Ella Kedan
10.36(9) LINC Capital, Inc. - Sale and Leaseback Agreement dated February 23, 1998
10.37(9) Employment Agreement between LifeServ Technologies, Inc. and Michael T. Felix dated April 1, 1998
10.38(9) Employment Agreement between Medical Technology Systems, Inc. and Michael P. Conroy dated March 1, 1998
10.39(9) Amendment to Second Amended and Restated Loan and Security Agreement between the Company and
SouthTrust Bank dated April 16, 1998
21(8) List of Subsidiaries
23(9) Consent of Independent Certified Public Accountants
27(8) Financial Data Schedule
* Incorporated herein by reference to same Exhibit(s), respectively, Registration Statement No.
33-40678 filed with the Commission on May 17, 1991
** Incorporated herein by reference to same Exhibit(s), respectively, Registration Statement (SEC
File No. 33-17852)
*** Incorporated herein by reference to Form 8-K filed on November 18, 1988
**** Incorporated herein by reference to Form 8-K filed on November 16, 1989
(1) Incorporated herein by reference to Form 8-K for event dated November 8, 1991
(2) Incorporated herein by reference to Form 8-K for event dated November 14, 1991
(3) Incorporated herein by reference to Form 8-K for event dated May 27, 1991
(4) Incorporated herein by reference to Form S-3 filed April 16, 1993
(5) Incorporated herein by reference to Form 10-K for year ended March 31, 1993
(6) Incorporated herein by reference to Post Effective Amendment No. 1 to Form S-1 (File No.
33-40678) dated October 14, 1993
(7) Incorporated herein by reference to Form 10-K for year ended March 31, 1995
(8) Incorporated herein by reference to Form 10-K for year ended March 31, 1996
(9) Filed herewith
25
MEDICAL TECHNOLOGY SYSTEMS, INC.
INDEX TO FINANCIAL STATEMENTS
Page
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS..................... 26-27
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of March 31, 1998 and 1997............ 28
Consolidated Statements of Operations for the years ended
March 31, 1998, 1997 and 1996...................................... 29
Consolidated Statement of Changes in Stockholders' Equity (Deficit)
for the years ended March 31, 1998, 1997 and 1996.................. 30
Consolidated Statement of Cash Flows for the years ended
March 31, 1998, 1997 and 1996.................................. 31
Notes to Consolidated Financial Statements............................ 32-51
FINANCIAL STATEMENT SCHEDULE:
Schedule II - Valuation and Qualifying Accounts......................... S-1
All other schedules are omitted since the required information is not
present in amount sufficient to require submission of the schedule or because
the information required is included in the financial statements and notes
thereto.
26
Report of Independent Certified Public Accountants
Board of Directors
Medical Technology Systems, Inc. and Subsidiaries
Clearwater, Florida
We have audited the accompanying consolidated balance sheets of Medical
Technology Systems, Inc. and Subsidiaries as of March 31, 1998 and 1997, and the
related consolidated statements of operations, changes in stockholders' equity
(deficit) and cash flows for the years then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Medical
Technology Systems, Inc. and Subsidiaries as of March 31, 1998 and 1997, and the
consolidated results of their operations and cash flows for the years then ended
in conformity with generally accepted accounting principles.
GRANT THORNTON LLP
Tampa, Florida
June 26, 1998
27
Independent Auditors' Report
Board of Directors
Medical Technology Systems, Inc. and Subsidiaries
Clearwater, Florida
We have audited the accompanying consolidated statements of operations,
changes in stockholders' deficit and cash flows for the year ended March 31,
1996 of Medical Technology Systems, Inc. and Subsidiaries. These financial
statements are the responsibility of the management of the Company. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the 1996 consolidated statement of operations, changes in
stockholders deficit and cash flows referred to above present fairly, in all
material respects, the results of their operations and cash flows of Medical
Technology Systems, Inc. and Subsidiaries in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The Company incurred
losses during the current year of approximately $34.6 million and its total
liabilities exceed its total assets by approximately $18.6 million as of March
31, 1996. The Company also had negative cash flows from operations during the
current year of approximately $.9 million. In addition, the major operating
subsidiaries of the Company have filed for protection under Chapter 11 of the
U.S. Bankruptcy Code. These conditions raise substantial doubt as to the
Company's ability to continue as a going concern. These consolidated financial
statement do not include any adjustments that might result from the outcome of
these uncertainties.
Pender Newkirk & Company
Certified Public Accountants
Tampa, Florida
June 20, 1996
28
MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 AND 1997
(In Thousands)
ASSETS
1998 1997
--------------- ---------------
Current Assets:
Cash $ 324 $ 616
Accounts Receivable, Net 5,277 3,041
Inventories 2,481 2,260
Prepaids and Other 206 222
Other Receivables 0 350
--------------- ---------------
Total Current Assets 8,288 6,489
Property and Equipment, Net 3,173 4,004
Other Assets, Net 4,301 2,050
--------------- ---------------
Total Assets $ 15,762 $ 12,543
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Current Maturities of Long-Term Debt $ 625 $ 310
Accounts Payable and Accrued Liabilities 4,811 2,190
--------------- ---------------
Total Current Liabilities 5,436 2,500
Liabilities Subject to Compromise 826 0
Long-Term Debt, Less Current Maturities 15,613 15,459
--------------- ---------------
Total Liabilities 21,875 17,959
--------------- ---------------
Stockholders' Equity (Deficit):
Voting Preferred Stock 1 1
Common Stock 62 60
Capital In Excess of Par Value 8,588 8,433
Retained Earnings (Deficit) (14,433) (13,579)
Less: Treasury Stock (331) (331)
--------------- ---------------
Total Stockholders' Equity (Deficit) (6,113) (5,416)
--------------- ---------------
Total Liabilities and Stockholders' Equity (Deficit) $ 15,762 $ 12,543
=============== ===============
Liabilities Subject to Compromise consist of the following:
Secured Debt $ 45 $ 0
Trade and Other Miscellaneous Claims 781 0
--------------- ---------------
$ 826 $ 0
=============== ===============
The accompanying notes are an integral part of these financial statements.
29
MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
(In Thousands; except Earnings Per Share Amounts)
1998 1997 1996
----------------- -------------- ---------------
Revenue:
Net Sales and Services $ 24,072 $ 19,247 $ 17,052
Costs and Expenses:
Cost of Sales and Services 13,167 10,762 10,665
Selling, General and Administrative 9,401 6,480 8,549
Loss on Early Retirement of Fixed Assets 46 0 8,329
Loss on Inventory Revaluation 0 0 1,510
Depreciation and Amortization 1,473 1,381 2,682
Interest, Net 1,109 609 1,739
----------------- -------------- ---------------
Total Costs and Expenses 25,196 19,232 33,474
----------------- -------------- ---------------
Reorganization items:
Product Development and Software Costs 0 0 4,605
Goodwill Write-down 0 0 2,937
Terminated Joint Venture 0 0 550
Professional Fees 0 0 103
----------------- -------------- ---------------
Income (Loss) from Continuing Operations Before
Income Taxes, Discontinued Operations and
Extraordinary Gain (1,124) 15 (24,617)
Income Tax (Benefit) Expense (270) 0 (1,900)
----------------- -------------- ---------------
Income (Loss) from Continuing Operations Before
Discontinued Operations and Extraordinary Gain (854) 15 (22,717)
Income (Loss) from Operations of Discontinued Operations,
Net of Income Tax in 1997 and 1996 0 (2,800) (6,634)
Gain on Forgiveness of Debt of Discontinued Operations 0 3,500 0
Gain (Loss) on Disposal of Discontinued Operations,
Net of Income Tax in 1997 and 1996 0 2,200 (5,229)
Extraordinary Gain on Forgiveness of Debt 0 10,097 0
----------------- -------------- ---------------
Net Income (Loss) $ (854) $ 13,012 $ (34,580)
================= =============== ===============
Earnings (Loss) per Basic and Diluted Common Share:
Income (Loss) from Continuing Operations $ (0.14) $ 0.00 $ (5.60)
Income (Loss) from Discontinued Operations 0.00 0.51 (2.92)
Extraordinary Gain in Debt Forgiveness 0.00 1.76 0.00
----------------- -------------- ---------------
Net Income (Loss) per Basic and Diluted Common Share $ (0.14) $ 2.27 $ (8.52)
================= ============== ===============
Weighted average Common Shares Outstanding - Basic and Diluted 6,062 5,737 4,059
================= ============== ===============
The accompanying notes are an integral part of these financial statements.
30
MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
(In Thousands Except Share Data)
COMMON STOCK
-----------------------------------------------------------------------------------------------
Number $0.01 Capital in Retained
of Par Excess of Earnings Treasury
Shares Value Par Value (Deficit) Stock Total
----------- ----------- ----------- ------------ ------------ -----------
Balance, March 31, 1995 4,026,832 $ 40 $ 7,941 $ 7,989 $ (331) $ 15,639
Stock Issued 1,458,503 15 379 394
Net Loss for Year Ended
March 31, 1996 (34,580) (34,580)
-----------------------------------------------------------------------------------------------
Balance, March 31, 1996 5,485,335 55 8,320 (26,591) (331) (18,547)
Stock Issued 471,838 5 113 118
Net Income for Year Ended
March 31, 1997 13,012 13,012
-----------------------------------------------------------------------------------------------
Balance, March 31, 1997 5,957,173 60 8,433 (13,579) (331) (5,417)
Stock Issued 172,500 2 155 157
Net Loss for Year Ended
March 31, 1998 (854) (854)
-----------------------------------------------------------------------------------------------
Balance, March 31, 1998 6,129,673 $ 62 $ 8,588 $ (14,433) $ (331) $ (6,114)
=========== ============= ============== ============== ============== =============
VOTING PREFERRED STOCK
-----------------------------------------------------------------------------------------------
Number $0001.
of Par
Shares Value
----------- -----------
Balance, March 31, 1996 6,500,000 $ 1 $ 1
----------- ------------- -------------
Balance, March 31, 1997 6,500,000 $ 1 $ 1
----------- ------------- -------------
Balance, March 31, 1998 6,500,000 $ 1 $ 1
----------- ------------- -------------
Total Stockholders' (Deficit)
March 31, 1998 $ (6,113)
=============
The accompanying notes are an integral part of these financial statements.
31
MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
(In Thousands)
1998 1997 1996
--------------- -------------- ---------------
Operating Activities
Net Income (Loss) from Continuing Operations $ (854) $ 15 $ (22,717)
--------------- -------------- ---------------
Adjustments to Reconcile Net Income (Loss) to Net Cash
Provided (Used) by Operating Activities:
Depreciation and Amortization 1,473 1,381 2,682
Product Development and Software Cost 0 0 4,605
Goodwill Write-down 0 0 2,937
Loss on Early Retirement of Fixed Assets 46 0 8,329
Loss on Inventory Revaluation 0 0 1,510
Write-off of Accounts Receivable and Other Assets 0 0 1,323
Stock Issued from Stock Compensation Plan 0 118 388
(Increase) Decrease in:
Accounts Receivable (2,099) 219 (458)
Income Taxes Receivable 0 880 (72)
Inventories (190) 185 297
Prepaids and Other 92 42 (100)
Other Receivables 350 (350) 0
Other Assets (712) 0 0
Increase (Decrease) in:
Accounts Payable and Other Accrued Liabilities 2,199 (935) 1,724
Income Taxes Payable and Deferred Taxes 0 0 (1,347)
--------------- -------------- ---------------
Total Adjustments 1,159 1,540 21,818
--------------- -------------- ---------------
Net Cash Provided (Used) by Continuing Operations 305 1,555 (899)
--------------- -------------- ---------------
Net Cash (Used) by Discontinued Operations 0 0 (117)
--------------- -------------- ---------------
Investing Activities
Expended for Property and Equipment (362) (307) (797)
Expended for Software Development 0 0 (30)
Expended for Product Development (354) (233) (484)
Expended for Patents and Other Assets (48) (44) (109)
Expended for Acquisition, Net of Cash Acquired (357) 0 (1,453)
--------------- -------------- ---------------
Net Cash Used by Investing Activities (1,121) (584) (2,873)
--------------- -------------- ---------------
Financing Activities
Payments on Notes Payable, Long-Term Debt (222) (1,399) (947)
Net Proceeds from Line of Credit 0 0 2,162
Issuance of Common Stock 7 0 5
Proceeds from Borrowing on Notes Payable and Long-Term Debt 739 79 3,021
--------------- -------------- ---------------
Net Cash Provided (Used) by Financing Activities 524 (1,320) 4,241
--------------- -------------- ---------------
Net Increase (Decrease) in Cash (292) (349) 352
Cash at Beginning of Period 616 965 613
--------------- -------------- ---------------
Cash at End of Period $ 324 $ 616 $ 965
=============== ============== ===============
Supplemental Disclosure of Cash Flow Information:
Cash Paid for Interest $ 1,100 $ 609 $ 1,570
=============== ============== ===============
Cash Received from Income Tax Refund $ 270 $ 880 $ 0
=============== ============== ===============
See Note 22 for supplemental disclosures of non-cash financing and investing
activities.
The accompanying notes are an integral part of these financial statements.
32
MEDICAL TECHNOLOGY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998, 1997 AND 1996
NOTE 1 - BACKGROUND INFORMATION
Medical Technology Systems, Inc. (the "Company") is a Delaware corporation,
incorporated in March of 1984. The Company is a holding company operating
through a number of separate subsidiaries providing a diverse line of
proprietary medication dispensing systems, clinical information systems and
laboratory services to the health care industry. The Company's principal
businesses consist of the following reportable segments: (i) the core business
of manufacturing and selling proprietary medication dispensing systems which
include punch cards for use by pharmacies in dispensing prescription medicines;
(ii) the health care information system business consisting of the
Performance(TM) pharmacy software, the MedServ and E-mar computerized medication
management systems for hospitals and other health care facilities, and Cygnet,
the fetal monitoring and archiving information systems for obstetrical clinics
of hospitals and doctors' offices; and (iii) the clinical laboratory service
business of supplying anatomical diagnostic testing services to the medical
profession. (See Note 20)
As a result of significant losses in the second and third quarter of fiscal
1996, the Company was in violation of certain financial covenants in the
borrowing agreements with its principal lenders. The Company was unable to reach
an agreement with its lenders to amend or restructure the debt. The extended
negotiations with the Company's lenders created substantial uncertainty which
led to management's decision, during the fourth quarter of fiscal 1996, to file
voluntary petitions for relief under Chapter 11 ("Chapter 11") of Title 11 of
the United States Bankruptcy Code in the Middle District of Florida, Tampa
Division (the "Bankruptcy Court") for four of its subsidiaries (the "MTS
debtors"). Plans of Reorganization for each of the MTS debtors were approved by
the Bankruptcy Court on September 4, 1996 (collectively, the "Plan of
Reorganization" ). The Plan of Reorganization provided for the following
significant matters:
a. A reduction in the amount of the existing bank indebtedness, as
well as a reduction in the interest rate on the indebtedness.
b. A restructuring of the repayment terms of the bank indebtedness,
which provides for interest payments only for a certain period
and principal payments over an extended period of time.
c. A reduction in the amount payable pursuant to the acquisition of
Tampa Pathology Laboratory, as well as modification of the method
of calculating the repayment.
d. A restructuring of the amounts and repayment terms for the
unsecured creditors of the MTS debtors.
e. A restructuring of the management of the Company.
f. The disposition of one of its subsidiaries, Vangard Labs, Inc.
On July 10, 1997, Medication Management Technologies, Inc. ("MMT") filed a
voluntary petition for relief under Chapter 11 of Title 11 of the United States
Bankruptcy Code in the Middle District of Florida, Tampa Division. On June 12,
1998, the Plan of Reorganization for MMT was confirmed by the bankruptcy court.
The Plan of Reorganization provided for the restructuring of amounts and
repayment terms for secured and unsecured creditors.
NOTE 2 - RESTRUCTURING AND OTHER CHARGES
In December 1995, the Company initiated a cost reduction strategy that
focused upon reducing operating expenses and returning the Company to
profitability. This plan included the filing on January 3, 1996 of voluntary
petitions under Chapter 11 for three of the Company's subsidiaries: MTS
33
Packaging Systems, Inc. ("MTS Packaging"), Medical Technology Laboratories, Inc.
("MTL") and MTS Sales and Marketing, Inc. ("MTS Sales"). On February 22, 1996,
the Company also filed a voluntary petition under Chapter 11 for its generic
drug repackaging subsidiary, Vangard Labs, Inc. ("Vangard")
These Chapter 11 filings, together with the limitation on the Company's
financing alternatives, necessitated a comprehensive examination of the
Company's business operations. Because of the numerous development projects that
the Company had underway, and the limited opportunity that existed for
completion of these projects, it was decided by management that, without
additional capital, virtually none of the existing development projects could be
successfully completed.
The following restructuring charges were incurred during the fiscal year
ended March 31, 1996 (in thousands):
Loss on Early Retirement of Fixed Assets $ 8,329
Loss on Inventory Revaluation 1,510
----------------
9,839
Chapter 11 Reorganization Charges:
Product Development and Software Costs 4,605
Goodwill Write-down 2,937
Terminated Joint Venture 550
Professional Fees 103
----------------
8,195
----------------
Total From Continuing Operations, including 18,034
$16,421 of impairment losses
----------------
Loss on Disposal of Discontinued Operations 5,229
----------------
Total Restructuring Charges $ 23,263
================
As of March 31, 1996 and 1997, there were no additional reserves
established for these projects. During 1998 there were no further restructuring
charges recorded.
NOTE 3 - DISCONTINUED OPERATIONS
As part of a corporate restructuring strategy, the Company plans to
concentrate its resources on its medication packaging and dispensing system
business and the health care information system products which have been
developed and are presently marketable. Although the clinical diagnostic
laboratory business has been identified as a non-core business, its operations
may be a potential source of cash to support repayment of debt obligations of
the Company. The Company's generic drug repackaging subsidiary, Vangard, whose
production operations were curtailed on January 3, 1996 and subsequently filed a
voluntary petition under Chapter 11 on February 22, 1996, was sold on April 17,
1997. In addition, the GPC joint venture with Creighton Pharmaceuticals
Corporation, a wholly owned subsidiary of Sandoz Pharmaceuticals, Inc., is
considered a discontinued operation primarily because of its dependence upon
Vangard production capabilities. A pre-tax charge of approximately $5.2 million
for a loss on disposal of these discontinued operations was recorded in fiscal
year 1996 and is shown in the Consolidated Statement of Operations as estimated
loss on disposal of discontinued operations.
34
During 1997, Vangard was principally managed by a plan trustee approved by
the bankruptcy court. Vangard's operations were minimal, basically at a
maintenance level only with revenue of $550,000. Vangard's costs and expenses
totaled $3.4 million, creating a loss from operations of $2.8 million, before
the effect of the gain of $3.5 million recognized from the forgiveness of
Vangard's pre-petition unsecured creditors ($2.7 million) debt as part of the
bankruptcy proceedings and the gain on forgiveness of a post petition loan made
by Vangard's bank ($800,000). Vangard's 1997 operations were funded primarily
from the collection of accounts receivable, new bank debt of $800,000 and
approximately $450,000 from the Company.
In April 1997, the Company completed the sale of Vangard to an unrelated
third party which was effective on March 31, 1997. In accordance with the
Company's Plan of Reorganization and its amended bank agreement, the proceeds of
the sale, approximately $3.1 million were utilized to reduce the Company's
outstanding obligation to its principal lender. In addition, the buyer assumed
certain post petition obligations of Vangard of $673,000. As a result of the
sale, the Company recognized an extraordinary gain on the disposal of the assets
of Vangard of approximately $2.2 million net of income taxes.
Net revenue of discontinued operations were $0, $542,000 and $5,968,000 in
fiscal years 1998, 1997 and 1996 respectively.
NOTE 4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
- -------------
The consolidated financial statements include the accounts of the Company
and its subsidiaries, MTS Packaging, MTL and LifeServ Technologies, Inc.
("LifeServ"). LifeServ was formed in February 1998 for the purpose of holding
the Company's health care information subsidiaries: Performance Pharmacy
Systems, Inc. ("PPS"), Medication Management Systems, Inc. ("MMS"), Medication
Management Technologies, Inc. ("MMT"), Cart-Ware, Inc. ("Cart-Ware") and Systems
Professional, Inc. ("SPI"). All significant inter-company accounts and
transactions have been eliminated in consolidation.
Vangard, a wholly owned subsidiary of the Company, and Glasgow
Pharmaceutical Corporation, a 50% joint venture with Creighton Pharmaceuticals,
Inc., are treated as discontinued operations for 1997 and 1996 as set forth in
Note 3. In April 1997, the Company completed the sale of Vangard.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Cash
- ----
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or less
to be cash equivalents. There were no cash equivalents for all periods
presented.
35
Inventories
- -----------
Inventories are stated at the lower of cost or market. Cost is determined
by the first-in, first-out ("FIFO" ) method. As of March 31, 1998 and 1997, the
Company has established an inventory valuation allowance of $269,000 and
$80,000, respectively, to account for the estimated loss in value of inventory
due to obsolescence. The Company will continue to evaluate the inventory and
review the valuation allowance if deemed necessary.
Revenue Recognition
- -------------------
The Company recognizes revenue when products are shipped by MTS Packaging.
MTL recognizes revenue from the clinical laboratory services net of estimated
contractual adjustments resulting from the unpaid portion of the assigned
insurance billings and other third party payers, as services are performed.
LifeServ recognizes revenue when systems are placed in service.
The American Institute of Certified Public Accounts has issued Statement of
Position (SOP) No. 97-2, "Software Revenue Recognition" which is effective for
fiscal years beginning after December 15, 1997. SOP 97-2 establishes certain
criteria which must be satisfied prior to the recognition of revenue for
licensing, selling, leasing or otherwise marketing computer software. Although
the Company plans to adopt SOP 97-2 in fiscal 1999, management has not yet
determined the potential effect that SOP 97-2 will have on the Company's
financial statements.
Property and Equipment
- ----------------------
Property and equipment are recorded at cost. Additions to and major
improvements of property and equipment are capitalized. Maintenance and repair
expenditures are charged to expense as incurred. As property and equipment is
sold or retired, the applicable cost and accumulated depreciation is eliminated
from the accounts and any gain or loss recorded. Depreciation and amortization
are calculated using the straight-line method based upon the assets' estimated
useful lives as follows: Years
Property and Equipment........................................ 3-7
Leasehold Improvements........................................ 5
The Company uses accelerated methods of depreciation for tax purposes.
Software and Product Development Cost
- -------------------------------------
All costs associated with the product development from the point of
technological feasibility to its general distribution to customers are
capitalized and, subsequently, amortized. Annually, the Company re-examines its
amortization policy relating to its software and product development cost. The
Company has determined that a five-year period is appropriate.
Goodwill
- --------
Goodwill represents amounts paid in excess of fair market value of assets
acquired by the Company in the purchase of other companies. These amounts are
amortized over a ten-year period. See the Accounting for Impairment Note below.
Other Assets
- ------------
Other assets are carried at cost less accumulated amortization, which is
being provided on a straight-line basis over a five to seventeen year period.
36
Earnings (Loss) Per Share
- -------------------------
The Company has adopted Statement of Financial Accounting Standards No. 128
(SFAS No. 128), "Earnings Per Share" as this standard became effective for
financial statements issued after December 15, 1997. SFAS No. 128 eliminates
primary and fully dilutive net income per common share and replaces them with
basic and diluted net income per common share. Accordingly, all income (loss)
per common share for the previous periods have been restated to conform to the
new standard.
Research and Development
- ------------------------
The Company expenses research and development costs as incurred. During
fiscal 1998, 1997 and 1996, the Company dedicated its resources to the
completion of product development projects and therefore did not incur any
material research and development costs.
Income Taxes
- ------------
Income taxes are provided for under the liability method in accordance with
FASB No. 109, "Accounting for Income Taxes", whereby deferred tax assets are
recognized for deductible temporary differences and operating loss and tax
credit carryforwards and deferred tax liabilities are recognized for taxable
temporary differences. Temporary differences are the differences between the
reported amounts of assets and liabilities and their tax bases. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of enactment.
Treasury Stock
- --------------
The Company records its treasury stock at cost.
Stock Based Employee Compensation
- ---------------------------------
The Company accounts for its stock options granted to employees in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, Accounting for Stock Issued to Employees, and related interpretations.
As such, compensation expense would be recorded on the date of granting the
stock options only if the current market price of the underlying stock exceeded
the exercise price. As permitted by SFAS No. 123, Accounting for Stock-Based
Compensation, the Company also provides certain pro forma disclosure provisions
of Statement 123 (See Note 16).
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
- ---------------------------------------------------------------------------
Assets to be Disposed of
- ------------------------
Long-lived assets and certain identifiable intangibles, including goodwill,
to be held and used by the Company are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of these assets
may not be recoverable. In performing the review for recoverability, the Company
estimates the future cash flows expected to result from the use of the assets
and their eventual disposition. If the sum of the expected future cash flows
(undiscounted and without interest charges) is less than the carrying amount of
the assets, an impairment loss is recognized. Long-lived assets and certain
identifiable intangibles to be disposed of are to be reported at the lower of
the carrying amount or the fair value less cost to sale, except for assets that
are related to discontinued operations which are reported at the lower of
carrying value or net realizable value.
The Company recognized impairment losses of $16,421,000 in fiscal 1996.
These losses related to the early retirement of certain production equipment and
tooling, product development projects which were suspended and goodwill related
to the acquisition of various businesses.
37
Discontinued Operations
- -----------------------
The Company's generic drug repackaging business, Vangard was classified as
a discontinued operation in fiscal year 1996 and disposed of in April 1997.
Bankruptcy Related Accounting Matters and Extraordinary Gain
- ------------------------------------------------------------
The financial statements and the notes thereto reflect various disclosures
principally required by AICPA SOP 90-7, "Financial Reporting by Entities in
Reorganization under the Bankruptcy Code". Since the voting control of the
Company's stock remained the same as a result of the confirmation of the Plan of
Reorganization, fresh start accounting was not appropriate. However, the
liabilities compromised by the confirmed plans have been recorded at the present
values of the amounts to be paid. The forgiveness of debt resulting from the
compromise has been recognized as an extraordinary gain. See Notes 1, 3 and 10.
Fair Value of Financial Instruments
- -----------------------------------
The carrying amounts of cash receivables, accounts payable and accrued
liabilities approximates fair value because of the short-term nature of the
items.
The carrying amount of current and long-term portions of long-term debt
approximates fair value since the interest rates approximate current prevailing
market rates.
New Accounting Pronouncement Not Yet Adopted
- --------------------------------------------
SFAS No. 130, Reporting Comprehensive Income, is effective for fiscal years
beginning after December 15, 1997. This Statements establishes standards for the
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. The new rule requires that the Company
(a) classify items of other comprehensive income by their nature in a financial
statement and (b)display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
section of the balance sheet. The Company plans to adopt SFAS No. 130 in fiscal
1999 and expects no material impact to the Company's financial statement
presentation.
NOTE 5 - ACCOUNTS RECEIVABLE
The Company maintains an allowance for potential losses on individual and
commercial accounts receivable. Management considers the allowances provided to
be reasonable.
Accounts Receivable consist of the following:
March 31, March 31,
1998 1997
--------------- --------------
(In Thousands)
Accounts Receivable at Gross $ 7,281 $ 4,081
Less: Allowance for Doubtful Accounts (830) (388)
Contractual Adjustments (1,174) (652)
--------------- --------------
$ 5,277 $ 3,041
=============== ==============
Substantially all of the Company's accounts receivable are pledged as
collateral on bank notes.
38
NOTE 6 - INVENTORIES
Inventories consist of the following:
March 31, March 31,
1998 1997
-------------- ---------------
(In Thousands)
Raw Material $ 531 $ 588
Finished Goods and Work in Process 2,219 1,752
Less: Inventory Valuation Allowance (269) (80)
-------------- --------------
$ 2,481 $ 2,260
============== ==============
Substantially all of the Company's inventories are pledged as collateral on
bank notes.
NOTE 7 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
March 31, March 31,
1998 1997
-------------- ---------------
(In Thousands)
Property and Equipment $ 7,777 $ 7,581
Leasehold Improvements 833 806
-------------- --------------
8,610 8,387
Less: Accumulated Depreciation and Amortization (5,437) (4,383)
-------------- --------------
$ 3,173 $ 4,004
============= ==============
Substantially all of the Company's property and equipment are pledged as
collateral on bank notes. Depreciation expense and amortization of leasehold
improvement totals approximately $1,180,000, $1,222,000 and $1,308,000 for
fiscal years ending March 31, 1998, 1997 and 1996 respectively.
NOTE 8 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities are comprised of the following:
March 31, March 31,
1998 1997
-------------- ---------------
(In Thousands)
Accounts Payable/Trade $ 2,505 $ 987
Accrued Liabilities:
Salaries & Commissions 693 301
Medical Claims 184 212
Interest 128 28
Legal 68 346
State Taxes 564 168
Other 669 148
-------------- --------------
$ 4,811 $ 2,190
============== ==============
39
NOTE 9 - OTHER ASSETS
Other assets consists of the following:
March 31, March 31,
1998 1997
-------------- ---------------
(In Thousands)
Goodwill $ 2,405 $ 1,204
Less: Accumulated Amortization (455) (307)
-------------- --------------
$ 1,950 $ 897
-------------- --------------
Product Development $ 327 $ 131
Less: Accumulated Amortization 0 0
-------------- --------------
$ 327 $ 131
-------------- --------------
MedServ Development and Related Software $ 462 $ 314
Less: Accumulated Amortization (130) (85)
-------------- --------------
$ 332 $ 229
-------------- --------------
Patents $ 1,109 $ 1,079
Less: Accumulated Amortization (423) (349)
-------------- --------------
$ 686 $ 730
-------------- ---------------
Lease Contract Receivable $ 843 $ 0
Other 196 93
Less: Accumulated Amortization (33) (30)
--------------- ---------------
$ 1,006 $ 63
--------------- ---------------
Total Other Assets, Net $ 4,301 $ 2,050
=============== ===============
Substantially all of the Company's intangible assets are pledged as
collateral on bank notes.
The Company entered into a direct financing lease agreement of MedServ and
E-mar systems with a customer calling for lease payments of $20,000 per month
for 5 years beginning April 1998. The value of the lease payments receivable
($843,000) was determined based on an imputed interest rate of 6.4% and the
related systems serve as collateral against the receivable.
40
NOTE 10 - LONG-TERM DEBT
Long-term debt consists of the following:
March 31, March 31,
1998 1997
--------------- --------------
Plan Note I; interest only at 7.5% payable monthly until September 1,
1998; installments of interest and principal monthly for ten
September 1, 2006, with a lump sum payment of approximately $11.4 million
on years endingthat date secured by all tangible and intangible
assets of the Company. $ 15,000 $ 15,000
Note Payable; interest at 12% payable $20,026 per month including
interest maturing September 1, 2002. Secured by equipment at a
customer site and the payments from a lease contract receivable. 688 0
Seller Financing Under Tampa Pathology Acquisition Agreement,
face value of $487,628 discounted at 10%, with variable monthly
payments until satisfied, subject to compromise at March 31, 1996. 234 273
Other Notes and Agreements; interest and principal payable monthly and
annual at various amounts through March 2000. 316 496
-------------- ---------------
Total Long -Term Debt 16,238 15,769
Less Current Portion (625) (310)
--------------- ---------------
LONG-TERM DEBT DUE AFTER 1 YEAR $ 15,613 $ 15,459
=============== ===============
The following is a schedule by year of the principal payments required on
these notes payable and long-term debts as of March 31, 1998:
In Thousands)
1999. . . . . . . . . . . . . . . . . . . . . . . . . $ 625
2000. . . . . . . . . . . . . . . . . . . . . . . . . $ 593
2001. . . . . . . . . . . . . . . . . . . . . . . . . $ 620
2002. . . . . . . . . . . . . . . . . . . . . . . . . $ 561
2003. . . . . . . . . . . . . . . . . . . . . . . . . $ 475
Thereafter. . . . . . . . . . . . . . . . . . . . . $ 13,364
The above notes payable are collateralized by the Company's accounts
receivables, inventory, equipment and intangibles.
On September 4, 1996, the Plan of Reorganization for the MTS debtors were
confirmed by the bankruptcy court. As part of the Plan of Reorganization for the
MTS debtors, the notes payable and bank line of credit were restructured as
follows:
Bank notes payable, line of credit, accrued interest and other charges and
expenses, in the amount of approximately $28.0 million, were combined and
restructured into two separate promissory notes.
Plan Note I, in the stated principal amount of approximately $27.0 million,
provided for a portion of the principal amount, $15.0 million, to be due and
payable as follows:
41
a. Interest at the rate of 7.5% for a period of two (2) years ending
September 1, 1998.
b. Installments of principal and interest at the rate of 7.5%
payable monthly for a period of ten years ending September 1,
2006. At which time, the then outstanding remaining principal
amount of the $15,000,000 debt is due and payable in full. The
monthly installments of principal and interest are calculated
based on the principal amount amortized in level monthly payments
over twenty years.
Plan Note II, in the stated principal amount of $1,000,000 provided for
payment of $750,000 on or about the date of confirmation of the Plans of
Reorganization. The Company made the payment of $750,000 on or about September
5, 1996 and in accordance with the terms of Plan Note II, the stated principal
amount was deemed fully satisfied.
Plan Note I further provided that the net proceeds from the sale of
Vangard, would be paid to the Bank (see Note 3). In addition, certain other
mandatory prepayments of the stated principal amount were required upon the
occurrence of a capital transaction in which any of the Company's subsidiaries
are sold, as well as upon the receipt of any proceeds resulting from certain
causes of action commenced by the Company. Plan Note I also provided that the
full stated principal amount of approximately $28.0 million would be due and
payable upon the occurrence of specific major events of default.
Effective March 31, 1997, the stated principal amount of Plan Note I was
reduced to $15.0 million. Thereby, permanently removing any contingent amount
due, including the additional $12.0 million principal amount, except for the
mandatory prepayments for any capital transactions in which certain of the
Company's subsidiaries are sold or a portion of the ownership surrendered. As a
result of this modification and receipt of the proceeds of the sale of Vangard,
the Company realized during the fourth quarter and for the year an extraordinary
gain of approximately $8.2 million, after the mandatory payment from the Vangard
sales proceeds of approximately $3.1 million.
The remaining portion of extraordinary gain reported in the Company's
statement of operation, $1,800,000 relates to the forgiveness of the Company's
pre-petition debt by its unsecured creditors.
On December 5, 1997, the Company received a notification from its bank that
certain events of default had occurred under Plan Note I. As a result of
discussions between the Company and the bank, Plan Note I was amended on April
16, 1998 to provide for the following:
a. The formation of LifeServ as a subsidiary of the Company.
b. The inclusion of LifeServ as a co-borrower.
c. The consent of the bank for the incurrence of additional debt and a
private placement of equity by LifeServ.
d. Release of LifeServ as a co-borrower in the event that LifeServ is
successful in obtaining equity capital.
e. Accelerated repayment of $1,000,000 of the stated principal amount
beginning November 1998 based upon 25% of excess cash flow generated
by the Company.
f. Waiver by the bank of any events of default which may have occurred
prior to April 16, 1998.
g. A limitation in the amount of funding which the Company can provide to
LifeServ.
42
h. Accelerated repayments of the stated principal amount in the event of
certain capital transactions involving subsidiaries of the Company as
well as recoveries from certain causes of action.
i. Additional payments above the stated principal amount in the event
that capital transactions result in proceeds to the Company in excess
of certain amounts and recoveries from certain causes of action.
Management believes that these additional payments, if any are made,
will be offset by gains recognized on these transactions and
recoveries.
Plan Note I contains certain financial covenants including prohibiting the
Company from exceeding a maximum consolidated deficit of $6.5 million,
maintaining various financial ratios and limits the amount of capital
expenditures. In addition, Plan Note I requires the banks approval of the
payment of dividends and the borrowing of any additional amounts from other
parties.
On May 13, 1998, LifeServ obtained a $500,000 loan from an individual. The
terms of the loan provide for repayment in full plus interest at 10% on the
earliest of: the date LifeServ receives the proceeds of a sale of equity or July
31, 1998. In addition, LifeServ and the Company issued warrants to the lender to
purchase shares of their common stock as follows:
LifeServ Warrants
-----------------
200,000 warrants exercisable on the date of the loan through the tenth
anniversary of their issuance at $1.00 per share.
15,000 warrants exercisable on the maturity date of the loan, if the
loan is not repaid on the maturity date, through the tenth anniversary
of their issuance at $1.00 per share.
15,000 warrants exercisable on August 31, 1998, if the loan is not
repaid on August 31, 1998, through the tenth anniversary of their
issuance at $1.00 per share.
15,000 warrants exercisable on September 30, 1998, if the loan is not
repaid on September 30, 1998, through the tenth anniversary of their
issuance at $1.00 per share.
The Company Warrants
--------------------
25,000 exercisable on October 30, 1998, if the loan is not repaid on
October 30, 1998, through the tenth anniversary date of their issuance
at $0.45 per share.
NOTE 11 - LEASE COMMITMENTS
The following is a schedule by year of future minimum rental payments
required under operating leases that have an initial or remaining non-cancelable
lease term in excess of one year as of March 31, 1998.
(In Thousands)
1999...................................... $ 375
2000...................................... 126
2001...................................... 100
2002...................................... 61
Thereafter................................ 0
Rent expense amounted to $832,000, $733,000 and $504,000, for the years
ended March 31, 1998, 1997 and 1996, respectively.
43
NOTE 12 - 401(K) PROFIT SHARING PLAN
The Company has a 401(K) Profit Sharing Plan. The Plan covers substantially
all of its employees. Contributions are at the employees discretion and may be
matched by the Company up to certain limits. For the years ended March 31, 1998,
1997 and 1996, the Company made no contributions to the Plan.
NOTE 13 - SELF INSURANCE PLAN
The Company has a Medical Health Benefit Self-insurance Plan which covers
substantially all of its employees. The Company is reinsured for claims which
exceed $30,000 per participant and has an annual maximum aggregate limit of
approximately $450,000.
NOTE 14 - RELATED PARTY TRANSACTIONS
Todd E. Siegel ("Siegel") is the Trustee of the Siegel Family QTIP Trust
(the "Trust") which is the general partner in JADE Partners, a significant
shareholder of the Company. The Trust has entered into an exclusive Technology
and Patent Licensing Agreement with the Company for certain technologies and
patents on machine and product designs.
Under the terms of the amended agreement, the Company is required to pay to
the Trust royalties of one percent of sales on licensed products. In addition,
the agreement states that there are no minimum royalty payments due and the
agreement would expire if the Company abandons or ceases to use the
technologies. Royalty payments were $50,000, $76,000 and $30,000 in the years
ended March 31, 1998, 1997, and 1996, respectively.
Siegel, through his beneficial interest in the Trust, owns approximately 10
percent of the outstanding Common Stock of the Company. In addition, Siegel
beneficially owns 6,500,000 shares of voting preferred stock which have two
votes per share for all matters submitted to the holders of the Common Stock of
the Company.
Siegel had outstanding indebtedness to the Company at March 31, 1998 and
March 31, 1997 of approximately $10,466 and $11,886. The Company expects to
collect the full balance of this indebtedness.
NOTE 15 - TAXES
The components of related income taxes provided on continuing operations
were as follows:
Years Ended March 31,
------------------------------------------------
1998 1997 1996
------------- ------------- -------------
(In Thousands)
Current Tax (Benefit):
Federal $ (270) $ 6 $ (635)
State 0 1 0
------------- ------------- -------------
(270) 7 (635)
------------- ------------- -------------
Deferred Tax:
Federal $ 0 $ (6) $ (1,132)
State 0 (1) (133)
------------- ------------- -------------
(7) (1,265)
$ (270) $ 0 $ (1,900)
============= ============ =============
44
Total income tax (benefit) expense for 1998, 1997 and 1996 from continuing
operations resulted in effective tax rates of (24.0%), 0.0% and 7.7%,
respectively. The reasons for the differences between these effective tax rates
and the U.S. statutory rate of 35.0% on the continuing operations are as
follows:
Years Ended March 31,
------------------------------------------------
1998 1997 1996
------------- ------------- -------------
(In Thousands)
Tax (Benefit) Expense at U.S. statutory rate $ (382) $ 6 $ (8,616)
State Income Tax, Net (41) 1 (543)
Current tax benefit not recognized 423 0 6,877
Effect of prior year carryback, not previously recognized (270) 0 0
Other, Net 0 (7) 382
------------- ------------- ------------
$ (270) $ 0 $ (1,900)
============= ============= =============
Deferred taxes and deferred tax asset resulted from differences in timing
of deductions recognized for tax and financial reporting purposes.
Deferred taxes for continuing operations consist of the following:
March 31, 1998 March 31, 1997 March 31, 1996
------------- ------------- --------------
(In Thousands)
Deferred Tax Liabilities:
Depreciation/Amortization Gross Deferred Tax Liability $ 0 $ 716 $ 379
------------- ------------- -------------
Deferred Tax Assets:
Depreciation/Amortization Temporary Difference (997) (670) (1,386)
Allowance for Doubtful Accounts (230) (146) (73)
Inventory Valuation Allowance (101) (319) (163)
Tax Loss Carry Forward (4,234) (4,168) (5,525)
Reserves and Provisions (327) (322) (109)
------------- ------------- -------------
Gross Deferred Tax Asset (5,889) (5,625) (7,256)
------------- ------------- -------------
Net Deferred Tax (Asset) Liability (5,889) (4,909) (6,877)
Less Valuation Allowance (5,889) (4,909) (6,877)
------------- ------------- -------------
Deferred Income Taxes $ 0 $ 0 $ 0
============= ============== ==============
45
The Company is currently analyzing among other things, its income tax basis
of property and equipment and intangibles as to the effect of prior impairments
and disposals. Any revisions to the amounts reported herein will not effect the
reported tax deferred income taxes, net (balance sheet account) nor the income
tax (benefit) expense (statement of operations account).
At March 31, 1998, the Company had deferred tax assets available of
approximately $5.9 million. A tax benefit has not been recorded for these assets
as it is not yet more likely than not that these benefits will be realized by
reducing future taxable income. At March 31, 1998, the Company had approximately
$11.0 million of carryforward losses which will expire by 2012 that are
available to offset future taxable income.
The Florida State Department of Revenue has examined the Company's Sales
and Use Tax returns for the period January 1988 through December 1993. The State
Department of Revenue and the Company have agreed on a settlement amount of
$294,000 including taxes, penalties and interest. The settlement amount is
payable over a period of four to eight years depending on certain events
occurring related to the Company's ability to raise capital. In addition, the
State Department of Revenue has proposed a suggested assessment of approximately
$380,000 for intangible taxes, interest and penalties for the period 1987
through 1996. The Company is disputing this amount. A reserve of $310,000 has
been made as of March 31, 1998 for the settlement of the Sales and Use Tax and
the Intangible tax.
NOTE 16 - STOCKHOLDERS' EQUITY (DEFICIT)
Stockholders' Equity (Deficit) consists of the following:
March 31, March 31, March 31,
1998 1997 1996
---------------- ---------------- -----------------
Voting Preferred Stock:
Par Value $.0001 Per Share
Authorized Shares 7,500,000 7,500,000 7,500,000
Issued Shares 6,500,000 6,500,000 6,500,000
Outstanding Shares 6,500,000 6,500,000 6,500,000
Common Stock:
Par Value $.0001 Per Share
Authorized Shares 25,000,000 25,000,000 25,000,000
Outstanding Shares 6,129,673 5,917,173 5,445,335
Issued Shares 6,129,673 5,975,173 5,485,335
Common Stock
During fiscal 1998, the Company issued 150,000 shares of common stock in
lieu of a debt payment to a former employee of the Company. These shares were
valued based upon the value of the debt payment. In addition, 22,500 shares were
issued to employees for services and were valued at $0.32 per share which was
the approximate market value at the time they were issued.
Preferred Stock
The JADE Family Partnership ("Partnership") is currently the holder of
6,500,000 shares of Voting Preferred Stock. The Siegel Family QTIP Trust,
established pursuant to the terms of the Siegel Family Revocable Trust (the
"Trust"), which originally acquired the shares of Voting Preferred Stock in 1986
for the aggregate par value of the shares ($650.00), transferred the shares to
the Siegel Family Limited Partnership in 1993. The Siegel Family Limited
46
Partnership transferred the shares to the Partnership in 1994. The Company's CEO
is the trustee of the Trust, which is the managing general partner of the
Partnership, and accordingly, controls the shares held by the Partnership.
The Voting Preferred Stock has two votes per share on all matters submitted
to a vote of other holders of Common Stock. In addition to preferential voting
rights, the Voting Preferred Stock is entitled to receive upon dissolution or
liquidation of the Company, the first $10,000 of proceeds distributed to
stockholders of the Company upon such events. Thereafter, the Voting Preferred
Stock is entitled to no additional amounts upon dissolution or liquidation of
the Company. The Voting Preferred Stock has no dividend rights, redemption
provisions, sinking fund provisions or conversion, or preemptive or exchange
rights. The Voting Preferred Stock is not subject to further calls or
assessments by the Company.
Stock Options
The Company has adopted only the disclosure provisions of Financial
Accounting Standard No. 123, "Accounting for Stock-Based Compensation," as it
relates to employment awards. It applies APB Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations in accounting for its
plans and does not recognize compensation expense based upon the fair value at
the grant date for awards under these plans consistent with the methodology
prescribed by SFAS 123, the Company's net income (loss) and earnings (loss) per
share would be reduced to the proforma amounts indicated below:
1998 1997 1996
------------- ------------- --------------
Net Income (Loss) As Reported $ (854) $ 15 $ (22,717)
ProForma (Unaudited) $ (1,066) $ (246) $ (22,921)
Earnings (Loss) Per Common Share As Reported $ (.14) $ .00 $ (5.60)
ProForma (Unaudited) $ (.18) $ (.04) $ (5.65)
The fair value of each option grant is estimated on the date of grant using
the Binominal options-pricing model with the following weighted-average
assumptions used for grants in 1998, 1997 and 1996, respectively, no dividend
yield for all years, expected volatility of 131, 109 and 42 percent; risk-free
interest rates of 5.81, 6.44 and 6.25 percent, and expected lives of 3.7, 5.4
and 6.8 years. Because of the insignificant effect on the pro forma amounts
presented above, the Company has elected not to attempt to adjust (lower) the
volatility factor used. Such adjustment would account for the various factors or
conditions that probably impacted the Company's common stock prices and which
are possibly non-recurring. Such an adjustment which would lower the volatility
factor used would reduce the calculated fair value of the options.
47
Activity related to options is as follows:
Number of Shares Price per Share
------------------- ------------------
Outstanding at March 31, 1995 332,926
Granted in Fiscal 1996:
Officers & Directors 59,000 $1.63
Employees 8,808 $6.00 - $10.00
------------------- ------------------
Outstanding at March 31, 1996 400,734
Granted in Fiscal 1997:
Officers & Directors 145,000 $1.00
Employees 471,878 $1.00 - $7.00
Options Expired (1,323)
------------------- ------------------
1,016,289
Outstanding at March 31, 1997 Granted in Fiscal 1998:
Officers and Directors 152,000 $1.00
Employees 412,000 $1.00
Options Expired (22,170)
------------------- ------------------
Outstanding at March 31, 1998 1,558,119 $1.00 - $10.00
=================== ==================
Outstanding Shares
Weighted Average
Range of Number Remaining Contractual Weighted Average
Exercise Prices Outstanding Life Exercise Price
(Years)
--------------------- ------------------ --------------------- -------------------
$1.00 - $1.63 1,499,049 8.1 $1.11
$4.00 - $6.00 40,250 4.3 $4.80
$6.38 - $10.00 18,820 6.2 $8.79
Exercisable Shares
$1.00 - $1.63 614,914 $1.26
$4.00 - $6.00 40,250 $4.80
$6.38 - $10.00 18,820 $8.79
The options outstanding at March 31, 1998 expire on various dates commencing in
March 2001 and ending in February 2008.
48
Warrants
Activity related to warrants is as follows:
Number of Shares Price Per Share
-------------------- -------------------
Outstanding at March 31, 1994 1,320,000 $7.00
Granted in Fiscal 1995 through Fiscal 1998 0
-------------------- -------------------
Outstanding at March 31, 1998 1,320,000 $7.00
==================== ===================
All of the warrants outstanding at March 31, 1998 expire in July 1999.
During fiscal year 1995, the Company entered into a stock appreciation
rights agreement with its Chief Executive Officer. The agreement, which is for a
term of 10 years, calls for additional compensation payable annually equal to
3.25% of the total of the incremental increase in the value of the Company's
outstanding stock. Additional compensation payable for the years ended March 31,
1998 and 1997 totaled $0 and $53,000, respectively.
NOTE 17 - CONCENTRATION OF CREDIT RISK
The business of MTL is primarily with individuals located in the State of
Florida, many of whom routinely assign to the Company payment by their medical
insurance providers. As of March 31, 1998, MTL's patient accounts receivable
from individuals and commercial medical insurance providers was approximately
$1,563,000. As of March 31, 1998, MTL's accounts receivable from Medicare and
Medicaid was approximately $2,553,000.
NOTE 18 - BUSINESS ACQUISITION
On June 20, 1997, the Company, through its subsidiary MMT, concluded a
merger with Cygnet Laboratories, Inc. ("Cygnet"), a California company which
distributes obstetrical information systems. The plan of merger provided for the
Cygnet shareholders to receive nominal cash consideration in exchange for their
shares. MMT assumed all the liabilities of Cygnet as a result of the merger. The
business combination of MMT and Cygnet has been accounted for using the purchase
method. Accordingly, the difference between the cost of the assets acquired of
$526,000 and the liabilities assumed of $1,247,000 plus the acquisition costs of
$366,000 has been recorded as goodwill in the amount of $1,087,000. The results
of operation for Cygnet from the date of the merger through June 30, 1997 were
not significant. The proforma results, as if the business combination occurred
April 1, 1996 and April 1, 1997, has not been presented as the results of
operation are not significant.
NOTE 19 - SUBSEQUENT EVENT
In April 1998, the Company, through its subsidiary LifeServ Technologies,
Inc. entered into an agreement to purchase certain assets of Peritronics
Medical, Inc. ("Peritronics"), a California company which distributed
obstetrical information systems. The agreement provides for the Company to pay
the Peritronics shareholders $350,000 in cash, 250,000 shares of the Company's
common stock and assuming certain liabilities in the amount of approximately
$330,000. The purchase is anticipated to close in August 1998.
This note should also be read in conjunction with the other notes to the
financial statements for additional subsequent event transactions.
49
NOTE 20 - SEGMENT INFORMATION
The Company has adopted SFAS No. 131 "Disclosures about Segments of a
Business Enterprise" which supercedes the previous disclosure requirements.
1998 1997 1996
--------------- --------------- ----------------
(In Thousands)
Revenue:
Reportable Segments
Medication Packaging & Dispensing Systems $ 12,338 $ 11,169 $ 10,651
Health Care Information Systems 4,306 1,965 1,249
Clinical Laboratory Services 7,428 6,113 5,152
--------------- --------------- ---------------
Total Consolidated Revenue $ 24,072 $ 19,247 $ 17,052
================ =============== ===============
Depreciation and Amortization:
Reportable Segments
Medication Packaging & Dispensing Systems $ 554 $ 534 $ 647
Health Care Information Systems 255 150 764
Clinical Laboratory Services 258 250 579
--------------- --------------- ----------------
1,067 934 1,990
Corporate 406 447 692
--------------- --------------- ----------------
Total Consolidated Depreciation and Amortization $ 1,473 $ 1,381 $ 2,682
=============== =============== ================
Interest Expense:
Reportable Segments
Medication Packaging & Dispensing Systems $ 1 $ 2 $ 5
Health Care Information Systems 13 20 16
Clinical Laboratory Services 36 5 31
---------------- -------------- ----------------
50 27 52
Unallocated Debts 1,059 582 1,687
---------------- ---------------- ----------------
Total Consolidated Interest Expense $ 1,109 $ 609 $ 1,739
================ ================ ================
Operating Profit (Loss):
Reportable Segments
Medication Packaging & Dispensing Systems $ 2,827 $ 2,512 $ (6,752)
Health Care Information Systems (1,214) (472) (5,798)
Clinical Laboratory Services 460 136 (4,443)
--------------- ---------------- ----------------
2,073 2,176 (16,993)
Corporate and Interest (3,197) (2,161) (7,624)
---------------- ---------------- ----------------
Total Consolidated Operating Profit (Loss) $ (1,124) $ 15 $ (24,617)
================ ================ ================
Identifiable Assets:
Reportable Segments
Medication Packaging & Dispensing Systems $ 5,944 $ 6,006 $ 7,557
Health Care Information Systems 3,871 938 1,355
Clinical Laboratory Services 3,509 2,560 2,551
--------------- ---------------- ----------------
13,324 9,504 11,463
Corporate 2,438 3,039 3,206
--------------- --------------- ----------------
Total Consolidated Identifiable Assets $ 15,762 $ 12,543 $ 14,669
=============== =============== ================
Identifiable Liabilities:
Reportable Segments
Medication Packaging & Dispensing Systems $ 1,029 $ 280 $ 1,508
Health Care Information Systems 3,056 382 691
Clinical Laboratory Services 1,175 780 1963
--------------- --------------- ----------------
5,260 1,442 4,162
Corporate 16,615 16,517 29,053
---------------- ---------------- ----------------
Total Consolidated Liabilities $ 21,875 $ 17,959 $ 33,215
================ ================ ================
Capital Expenditures:
Reportable Segments
Medication Packaging & Dispensing Systems $ 131 $ 123 $ 769
Health Care Information Systems 103 92 5
Clinical Laboratory Services 62 67 2
--------------- --------------- ----------------
296 282 776
Corporate 66 25 21
--------------- --------------- ----------------
Total Consolidated Capital Expenditures $ 362 $ 307 $ 797
================ =============== ================
Impairment of Long-Lived Assets:
Reportable Segments
Medication Packaging & Dispensing Systems $ 0 $ 0 $ 7,319
Health Care Information Systems 0 0 3,029
Clinical Laboratory Services 0 0 4,105
--------------- --------------- ----------------
0 0 14,453
Corporate 0 0 1,968
--------------- --------------- ----------------
Total Consolidated Impairment of Long-Lived Assets $ 0 $ 0 $ 16,421
================ ================ ================
50
Corporate expenses are composed primarily of personnel costs and
administrative expenses, which are incurred on behalf of each reportable
segment. The Company cannot accurately allocate these costs and expenses to each
reportable segment.
Corporate assets are composed primarily of $678,000 of cash, $477,000 of
equipment used by administrative personnel and $1.2 million of intangible
assets.
Corporate liabilities are composed of $1.4 million of short-term accounts
payable and accrued liabilities and $15.2 million in long-term debt.
The geographic sales of the Company are in the United States, and there are
no customers that account for more than 10% of the Company's revenues for all
periods presented.
NOTE 21 - EARNINGS PER SHARE
Net income (loss) per common share is computed by dividing net income
(loss) by the basic and diluted weighted average number of shares of common
stock outstanding. For diluted weighted average shares outstanding, the Company
used the treasury stock method to calculate the Common Stock equivalents that
the stock options would represent.
51
Year Ended Year Ended Year Ended
March 31, 1998 March 31, 1997 March 31, 1996
-------------- --------------- ---------------
Basic and Diluted
Actual weighted average shares outstanding;
weighted average shares used in income per
calculation - basic and diluted 6,062,000 5,737,000 4,059,000
============== =============== ===============
The following table set forth the computation of historical basic and
diluted earnings (loss) per share:
1998 1997 1996
--------------- --------------- ---------------
Numerator:
Net Income (Loss) (854,000) 13,012,000 (34,580,000)
=============== =============== ===============
Denominator:
Denominator for basic and diluted earnings per
share- weighted average shares outstanding 6,062,000 5,737,000 4,059,000
=============== =============== ===============
Net Income (Loss) Per Common Share - Basic $ (0.14) $ 2.27 $ (8.52)
=============== =============== ===============
Net Income (Loss) per Common Share - Diluted $ (0.14) $ 2.27 $ (8.52)
=============== =============== ===============
The effect of all options and warrants (see Note 16) for all years were not
included in the calculation of net income (loss) per diluted common share as the
effect would have been anti-dilutive.
NOTE 22 SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES
See Notes 1,3,10, and 19 for fiscal 1997 forgiveness of debt (extraordinary
gain) and gain on disposal of discontinued operations.
During fiscal 1998, the Company purchased Cygnet for a cash payment of
$357,000 (net of cash acquired) and assumption of liabilities of $1,247,000. The
assets acquired had a fair value of $517,000 (net of cash acquired).
During fiscal 1998, the Company redeemed a minority interest share of a
subsidiary's common stock resulting in a $114,000 addition to goodwill and
accrued expenses.
During fiscal 1998, the Company reduced a debt obligation $150,000 through
the issuance of common stock.
During fiscal 1998, the Company acquired a patent as satisfaction of a
receivable in the amount of $201,000.
52
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Form 10-K to be signed
on its behalf by the undersigned, thereunto duly authorized.
MEDICAL TECHNOLOGY SYSTEMS, INC.
Dated: July 8, 1998 By: /s Todd E. Siegel
---------------------------------------
Todd E. Siegel, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
- ------------------------ ---------------------- --------------
/s Todd E. Siegel Chairman of the Board of Directors, July 8, 1998
----------------------- President and Chief Executive Officer
Todd E. Siegel
/s David Kazarian Director July 8, 1998
David Kazarian
/s Michael P.Conroy Director, Chief Financial Officer July 8, 1998
----------------------- and Vice President
Michael P. Conroy
/s John Stanton Director and Vice Chairman of the July 8, 1998
- ------------------------ Board of Directors
John Stanton
/s David L. Presnell Principal Accounting Officer July 8, 1998
----------------------- and Controller
David L. Presnell
53
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
Board of Directors
Medical Technology Systems, Inc.
In connection with our audit of the consolidated financial statements of
Medical Technology Systems, Inc. and Subsidiaries referred to in our report
dated June 26, 1998, which is included in the Company's Annual Report on SEC
Form 10-K as of and for the year ended March 31, 1998, we have also audited
Schedule II for the years ended March 31, 1997 and 1998. In our opinion, this
schedule presents fairly in all material respects, the information required to
be set forth herein.
GRANT THORNTON LLP
Tampa, Florida
June 26, 1998
54
Independent Auditors' Report on
Supplementary Information
The accompany information shown on Schedule II (Valuation and Qualifying
Accounts) for the year ended March 31, 1996 is presented for purposes of
complying with the Securities and Exchange Commission rules and is not a
required part of the basic financial statements. Our audits of the basic
financial statements were made for the purpose of forming an opinion on those
statements taken as a whole. The accompanying financial information has been
subjected to the auditing procedures applied in the audits of the basic
financial statements.
In our opinion, the accompanying information included on Schedule II
(Valuation and Qualifying Accounts) for the year ended March 31, 1996 is fairly
stated in all material respects in relation to the basic financial statements
taken as a whole.
Pender Newkirk & Company
Certified Public Accountants
Tampa, Florida
June 20, 1996
55
MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended March 31, 1996, 1997 and 1998
Column A Column B Column C Column D Column E
- ----------------------------------------- --------------- --------------- --------------- ---------------
Balance at Charged to Accounts Balance at
Beginning of Costs and Written Off, End of
Year Expenses Net Year
--------------- --------------- --------------- ---------------
Deferred Tax Valuation Allowance:
Year Ended March 31, 1996 $ 0 $ 6,877 $ 0 $ 6,877
Year Ended March 31, 1997 $ 6,877 $ 0 $ 1,968 $ 4,909
Year Ended March 31, 1998 $ 4,909 $ 980 $ 0 $ 5,889
Inventory Valuation Allowance:
Year Ended March 31, 1996 $ 0 $ 850 $ 0 $ 850
Year Ended March 31, 1997 $ 850 $ 94 $ 864 $ 80
Year Ended March 31, 1998 $ 80 $ 189 $ 0 $ 269
Self Insured Medical Claims Valuation Allowance:
Year Ended March 31, 1996 $ 110 $ 853 $ 715 $ 248
Year Ended March 31, 1997 $ 248 $ 726 $ 762 $ 212
Year Ended March 31, 1998 $ 212 $ 583 $ 611 $ 184
Allowance for Doubtful Accounts and Contractual Allowances:
Year Ended March 31, 1996 $ 167 $ 906 $ 545 $ 528
Year Ended March 31, 1997 $ 528 $ 693 $ 181 $ 1,040
Year Ended March 31, 1998 $ 1,040 $ 1,463 $ 499 $ 2,004