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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, 1999 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For transition period from ___________ to ___________
Commission File Number 0-16594
MEDICAL TECHNOLOGY SYSTEMS, INC.
--------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 59-2740462 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
$1,300,000 as of July 15, 1999.
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 6,406,191 as of July 1, 1999.
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 1999 fiscal year end, are
incorporated by reference into Part III of this Form.
Total number of pages, including cover page - 46 (excluding exhibits)
1
MEDICAL TECHNOLOGY SYSTEMS, INC.
CLEARWATER, FLORIDA
INDEX
PART I PAGE
Item 1. Business.................................................. 2-6
2. Properties................................................ 6
3. Legal Proceedings......................................... 6
4. Submission of Matters to a Vote of Security Holders....... 8
PART II
Item 5. Market for Registran't Common Equity and Related Stockholder
Matters.............................................. 9
6. Selected Financial Data................................... 10
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................ 11
7A. Quantitative and Qualitative Disclosure about Market Risk. 15
8. Financial Statements and Supplementary Data............... 15
9. Changes In and Disagreements With Accountants On Accounting and
Financial Disclosure............................... 15
PART III
Item 10. Directors and Executive Officers of the Registrant........ 16
11. Executive Compensation.................................... 16
12. Security Ownership of Certain Beneficial Owners and Management 16
13. Certain Relationships and Related Transactions............ 16
PART IV
Item 14. Exhibits, Financial Statements, Schedules and
Reports on Form 8-K.................................. 17
Index to Financial Statements............................................ 20
Signatures .............................................................. 44
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
that historically operated through a number of separate subsidiaries, including
MTS Packaging Systems, Inc.(TM) ("MTS Packaging"), Medical Technology
Laboratories, Inc. ("MTL") and LifeServ Technologies, Inc.(TM) ("LifeServ").
MTS Packaging primarily manufactures and sells disposable medication punch
cards, packaging equipment and allied ancillary products throughout the United
States. Its customers are predominantly pharmacies that supply nursing homes 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 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. In September 1998, MTL purchased certain assets of Community Clinical
Laboratories, Inc. ("CCL") including the right to service and continue sales of
clinical laboratory services to the customers of CCL. See Item 3 - Legal
Proceedings. The Company is discussing the possible sale of MTL with several
potential buyers. There can be no assurances a sale will be closed, however, the
Company has determined that the operations of MTL are not consistent with its
strategy of expanding its core business, and therefore, management has approved
a plan to dispose of MTL and is committed to either sell the business or abandon
it. The Company has treated the operations of MTL in fiscal 1999 as discontinued
operations.
3
The Company acquired all of the Common Stock of Vangard Labs, Inc.
("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 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 February 24, 1998, the Company formed LifeServ Technologies, Inc.
("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"), Medication Management Technologies, Inc.
("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. On May 27, 1999,
the assets of LifeServ were sold to AIMCare, Inc. ("AIMCare"). AIMCare assumed
the stated liabilities of LifeServ of approximately $5.0 million. The Company
has treated the operations of LifeServ in fiscal 1999 as discontinued operations
as a result of the sale of this subsidiary.
Segments
- --------
The continuing operations of the Company are composed of one operating
segment, Medication Packaging and Dispensing Systems. MTS Packaging and MTS
Sales are the only subsidiaries in this segment and are supported by corporate
personnel and services.
Continuing Operations
- ---------------------
Products and 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 weekly or monthly 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 $145 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 $362,000 in
unshipped orders as of June 25, 1999.
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.
4
MTS Packaging is presently developing:
o Medication dispensing systems that more fully automate its customers'
operation and increase the productivity of the pharmacy.
o A dispensing system for the packaging of unit dose medication for
hospitals.
o Multi-Dose punch card for the assisted living market.
o Proprietary automated dispensing system that will allow customers to
dispense medication in a variety of blister pack system formats.
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 on a single in-line Flexographic press. This process takes the
place of approximately five different offset presses using conventional offset
printing 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.
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 from operations.
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. Sales to
countries outside the U.S. represent less than ten percent (10%) of the total
revenue. Three customers comprise approximately forty-three percent (43%) of MTS
Packaging's annual revenue.
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.
5
Competition
- -----------
The pharmacy customers of MTS Packaging supply prescribed medications to
nursing homes, which are the primary market for MTS Packaging's products. This
market is highly competitive. There are several competitors that have developed
machines that automate the packaging and sealing of solid medications into punch
cards. The Company believes that products developed by the Company's competitors
are not as efficient as the Company's systems because they are not as automated.
The Company's method of dispensing medication replaces more traditional
dispensing methods, such as prescription vials. The principal methods of
competition in supplying medication dispensing systems to prescription service
providers are product innovation, price, customization and product performance.
Many of the Company's competitors have been in business longer and have
substantially greater resources than the Company. There is no assurance that the
Company will be able to compete effectively with competitive methods of
dispensing medication or other punch card systems.
The Company's primary competitors for punch card dispensing systems are
Drug Package, Inc., PCI/Trans Aid and RX Systems, Inc. The Company believes that
its automated proprietary packaging machinery distinguishes MTS Packaging from
its competitors' less automated systems, which are capable of only filling and
sealing 100 disposable medication punch cards per hour. The Company's new
automated packaging machinery can fill and seal over 900 disposable medication
cards per hour. The Company believes that its production rates will meet the
needs of its customers who are consolidating and require higher productivity to
meet their growing market share.
Proprietary Technology
----------------------
The Siegel Family QTIP Trust (the "Trust") is the holder of certain patents
and other proprietary rights for the equipment and processes that MTS Packaging
uses and sells. The Trust is the 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 2004 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, however, its business is 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.
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 Company cannot predict the extent to which its operations will be
effected under the laws and regulations described above or any new regulations
that may be adopted by regulatory agencies.
Discontinued Operations
- -----------------------
The Company operated two business segments in fiscal 1999 that management
determined to discontinue in the fourth quarter.
6
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. The assets of LifeServ were sold
in May 1999 in exchange for the assumption of certain liabilities of
approximately $5.0 million.
MTL provides clinical laboratory testing services including analytical
tests of blood tissues and other bodily fluids. The Company is discussing the
possible sale of MTL with several potential buyers. In the event a sale does not
close, management has committed to a plan to attempt to sell the business to
other potential buyers or abandon the business.
Employees
- ---------
As of June 24, 1999, the Company employed 250 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 St.
Petersburg/Clearwater International Airport at 12920 Automobile Boulevard. The
Company's corporate administrative offices and the manufacturing facilities for
MTS Packaging Systems, Inc. ("MTS Packaging") are at this location. The lease
expires on April 15, 2002. The Company's current monthly lease payments are
approximately $22,000. The premises are generally suited for light manufacturing
and/or distribution. Currently the Company is operating at two-thirds of actual
manufacturing capacity.
MTS Packaging 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 expired 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.
Medical Technology Laboratories, Inc. ("MTL") leases approximately 20,000
square feet at approximately $15,000 per month for its laboratory and general
administrative offices located at 1375 S. Fort Harrison Street, Clearwater,
Florida.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in certain claims and legal actions arising in the
ordinary course of business. There can be no assurances that these matters will
be resolved on terms acceptable to the Company. In the opinion of management,
based upon advice of counsel and consideration of all facts available at this
time, the ultimate disposition of these matters will not have a material adverse
effect on the financial position, results of operations or liquidity of the
Company.
On November 19, 1998, Medical Technology Laboratories, Inc. ("MTL")
received a refund request in the amount of $1.8 million from Medicare Program
Safeguards ("MPS") and $104,000 from the State of Florida Agency for Health Care
Administration ("AHCA"). The requests followed an onsite review in May 1997, by
federal and state agencies, of MTL's Medicare and Medicaid billing practices in
1996. MTL has conducted an internal review of the billing procedures, records
and services in question and disputes MPS's findings and determination. On
December 17, 1998, MTL responded to the MPS determination and subsequently
received a response from MPS in which MPS informed MTL that recoupment of the
refund amount would be stayed while MPS reviewed MTL's response. On June 22,
1999, the Company was informed by MPS that the recoupment of the refund had been
suspended pending a decision from the Central Office of the Health Care
Financing Administration (HCFA), regarding certain matters related to the refund
request. Nevertheless, in order to preserve its rights, the Company requested a
hearing on the matter. The hearing is not expected to take place until a final
decision is reached by HCFA. Although MTL believes that MPS's determination and
the request for refunds are without merit, there can be no assurance that this
matter will be resolved over the near term or that the ultimate outcome of the
matter will not have a material adverse effect on the Company's financial
condition and results of operation.
7
In September 1998, the Company, through its subsidiary MTL, entered into an
asset purchase agreement with Community Clinical Laboratories, Inc. ("CCL"), a
clinical laboratory that historically competed with MTL. The terms of the asset
purchase agreement provided for MTL to acquire certain assets including the
customer list and equipment of CCL in exchange for a contingent note payable of
$2,500,000. The terms of the note provide for repayment over five years based
upon 9% of cash collected from revenue generated by tests performed for
customers identified on the CCL customer list. Prior to MTL entering into the
asset purchase agreement, the operations of CCL had been suspended as a result
of the revoking of CCL's Medicare and Medicaid provider privileges by agencies
of both the State of Florida and the federal government. As part of MTL's due
diligence regarding the purchase of certain CCL's assets, MTL obtained
assurances from its legal counsel that MTL would not be liable for any
violations of state or federal health care laws that may have occurred prior to
MTL's acquisition of certain assets of CCL. In addition, MTL retained the
services of an outside consultant specializing in health care compliance for
clinical laboratories to review all of MTL's operations to ensure that MTL was
compliant with applicable health care laws and regulations. Also, MTL employs a
compliance officer to monitor the ongoing operations of the laboratory to ensure
continued compliance.
Reorganizations Under Chapter 11
- --------------------------------
On January 3, 1996, three of the Company's subsidiaries, MTS Packaging
Systems, Inc. ("MTS Packaging"), Medical Technology Laboratories, Inc. ("MTL")
and MTS Sales and Marketing, Inc. ("MTS Sales"), filed voluntary petitions for
relief under Chapter 11 in the Bankruptcy Court. On February 22, 1996, Vangard
Labs, Inc. ("Vangard") filed a voluntary petition for relief under Chapter 11 in
the same jurisdiction. On July 10, 1997, Medication Management Technologies,
Inc. ("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.
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.
8
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.
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.
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.
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 12, 1998.
9
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
---------------- -----------------
1999 Fiscal Year
-----------------------
First Quarter $ .44 $ .31
Second Quarter $ .40 $ .28
Third Quarter $ .36 $ .17
Fourth Quarter $ .29 $ .26
1998 Fiscal Year
-----------------------
First Quarter $ .63 $ .44
Second Quarter $ .53 $ .44
Third Quarter $ .53 $ .22
Fourth Quarter $ .44 $ .13
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
---------------- -----------------
1999 Fiscal Year
-----------------------
First Quarter * *
Second Quarter * *
Third Quarter * *
Fourth Quarter * *
1998 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, 1999, 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 is subject to the prior approval by the Company's secured lender,
SouthTrust Bank.
10
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)
1999 1998 1997 1996 1995
------------ ------------- ------------ ------------- ------------
Income Statement Data:
Sales $ 15,073 $ 12,337 $ 11,169 $ 10,651 $ 9,475
Cost of Sales and Other Expenses 14,740 12,707 10,818 24,691 11,829
------------ ------------- ------------ ------------- ------------
Income (Loss) from Continuing Operations
Before Income Taxes, Discontinued Operations and
Extraordinary Gain 333 (370) 351 (14,040) (2,354)
Income Tax (Benefit) Expense 125 (270) 131 (1,900) (844)
Income (Loss) from Discontinued Operations (3,764) (754) (3,005) (17,211) 254
Gain on Forgiveness of Debt of Discontinued
Operations 569 0 3,500 0 0
Estimated Gain (Loss) on Disposal of
Discontinued Operations (2,500) 0 2,200 (5,229) 0
Extraordinary Gain on Debt Forgiveness 0 0 10,097 0 0
------------ ------------- ------------ ------------- ------------
Net Income (Loss) $ (5,487) $ (854) $ 13,012 $ (34,580) $ (1,256)
============ ============= ============ ============= ============
Net Earnings (Loss) Per Basic and Diluted Share:
From Continuing Operations $ 0.03 $ (0.02) $ 0.04 $ (2.99) $ (0.38)
Income (Loss) from Discontinued Operations (0.91) (0.12) 0.47 (5.33) 0.06
Extraordinary Gain on Debt Forgiveness 0.00 0.00 1.76 0.00 0.00
------------ ------------- ------------ ------------- ------------
Net Earnings (Loss) Per Basic and Diluted Share $ (0.88) $ (0.14) $ 2.27 $ (8.52) $ (0.32)
============ ============= ============ ============= ============
Average Common Shares Outstanding - Basic and Diluted 6,233 6,062 5,737 4,059 3,974
============ ============= ============ ============= ============
AT MARCH 31,
--------------------------------------------------------------------------
(In Thousands)
Balance Sheet Data: 1999 1998 1997 1996 1995
------------ ------------- ------------ ------------- ----------
Net Working Capital $ 1,458 $ 1,592 $ 2,916 $ 5,139 $ 3,188
Assets 8,511 11,532 11,380 12,015 43,508
Short-Term Debt 874 294 205 99 1,122
Long-Term Debt 14,915 14,892 15,161 350 23,176
Stockholders' Equity (Deficit) (11,600) (6,113) (5,416) (18,546) 15,640
Liabilities Subject To Compromise 0 0 0 29,586 0
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
- --------
During fiscal 1999, the Company continued to implement its strategy of
expansion of its core business, MTS Packaging Systems, Inc. ("MTS Packaging").
In the fourth quarter, the Company adopted a plan to divest of the other two
business segments that it historically operated.
In May 1999, the Company sold its Health Care Information business,
LifeServ Technologies, Inc. ("LifeServ"). A gain of approximately $1,300,000 is
anticipated to be recognized on this transaction in the first quarter of fiscal
2000. In addition, the Company is discussing the sale of its clinical laboratory
business, Medical Technology Laboratories, Inc. ("MTL") with several potential
buyers. The Company anticipates that the disposal of MTL will result in a loss
and as a result has recorded a charge of $2,500,000 in fiscal 1999. Prior to the
end of fiscal 1999, management committed itself to a formal plan to dispose of
both LifeServ and MTL. As a result, the operations of both business segments
have been treated as discontinued for financial statement purposes for the
fourth quarter of fiscal year 1999.
Results of Continuing Operations
- --------------------------------
Fiscal Year 1999 Compared to Fiscal Year 1998
- ---------------------------------------------
Revenue
- -------
Net sales for the fiscal year ended March 31, 1999 increased 22.2% to $15.0
million from $12.3 million the prior fiscal year. Revenue increased in fiscal
1999 primarily as a result of an increase in the amount of disposable punch
cards and packaging machines sold to existing customers. In addition, prices for
machines sold increased approximately 2% and prices for disposables decreased
approximately 1%. The Company anticipates that pricing on disposables could
continue to experience downward pressure as reimbursement amounts received by
customers from the end user of the products sold continue to be reduced. The
volume of disposable punch cards and machines is anticipated to continue to grow
as a result of consolidation of the Company's customer base and new business
development.
Cost of Sales and Services
- --------------------------
Cost of sales for the year ended March 31, 1999 increased 20.3% to $8.4
million from $6.9 million in the prior year. Cost of sales as a percentage of
sales decreased to 55.6% from 56.4%. The increase in cost of sales resulted from
increased revenue. The decrease in cost of sales as a percentage of sales
resulted primarily from increased revenue that did not require increases in
certain fixed costs of operations. The decrease was partially offset by
increases in costs of raw material and labor.
Selling, General and Administrative Expenses ("SG&A")
- -----------------------------------------------------
SG&A expenses for the year ended March 31, 1999 increased 16.2% to $4.3
million compared to $3.7 million the prior year. The increase resulted primarily
from increases in personnel and selling costs associated with the increase in
revenue.
Depreciation and Amortization
- -----------------------------
Depreciation and amortization expense decreased 8.9% to $874,000 in fiscal
1999 from $959,000 the prior year. The decrease resulted from the fact that
certain assets became fully depreciated during fiscal 1999.
12
Interest Expense
- ----------------
Interest expense increased 9.1% to $1.2 million in fiscal 1999 from $1.1
million in the prior year. The increase resulted primarily from additional
borrowing in fiscal 1999 to support working capital needs of discontinued
operations.
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. The
Company recorded income tax expense of $125,000, which was offset by a benefit
of $125,000, included in discontinued operations.
Loss from Operations of Discontinued Operations
- -----------------------------------------------
The Company discontinued the operations of two business segments during
fiscal 1999. The operations of one discontinued business segment, the Health
Care Information Systems segment, resulted in a loss from discontinued
operations of $3.7 million in fiscal 1999 compared to a loss of $1.2 million the
prior year. The operations of the other discontinued business segment, the
Clinical Laboratory Services segment, resulted in a loss from discontinued
operations of $164,000 in fiscal 1999 compared to a profit of $460,000 the prior
year.
Gain on Forgiveness of Debt of Discontinued Operations
- ------------------------------------------------------
A plan of reorganization in the Chapter 11 Bankruptcy of a subsidiary
included in the Company's Health Care Information Systems business segment was
approved in fiscal 1999. The plan of reorganization provided for reductions of
the amounts owed to both secured and unsecured creditors. The reduction, less
certain expenses related to the reorganization, of $569,000 has been recognized
as an extraordinary gain included within discontinued operations.
Results of Discontinued Operations
- ----------------------------------
In May 1999, the Company sold its Health Care Information Systems business
segment, LifeServ. The Asset Acquisition Agreement provided, among other things,
for the buyer to receive substantially all the assets of LifeServ in
consideration of the assumption of certain stated liabilities of approximately
$5 million. During fiscal 1999, LifeServ had revenue of $5.2 million and costs
and expenses of $8.9 million resulting in a loss from discontinued operations of
$3.7 million. LifeServ's net revenue for fiscal year 1998 and 1997 were $4.3
million and $1.9 million respectively.
The Company is discussing the possible sale of MTL with several potential
buyers. In the event that a sale does not close, management has committed itself
to a plan to dispose of MTL either through a sale to another potential buyer or
abandon the business. During fiscal 1999, MTL had revenue of $14.0 million and
costs and expenses of $14.1 million resulting in a net loss from discontinued
operations of $164,000 during the year ended March 31, 1999. MTL's net revenue
for years 1998 and 1997 were $7.4 million and $6.1 million.
Loss on Disposal of Discontinued Operations
- -------------------------------------------
The Company has estimated the loss on disposal of its Clinical Laboratory
Services business to be $2.5 million including the costs associated with the
disposal as well as the anticipated losses that may be incurred by the business
until its estimated disposal date.
The Company's Health Care Information Systems business, which was also
discontinued in fiscal 1999, was sold in May 1999 (fiscal 2000). The Company
expects to realize a gain of approximately $1.3 million on the disposal of this
business and will recognize the gain in the first quarter of fiscal 2000.
13
Results of Continued Operations
- -------------------------------
Fiscal Year 1998 Compared to Fiscal Year 1997
- ---------------------------------------------
Revenue
- -------
Net sales for the fiscal year ended March 31, 1998 increased 10.5% to $12.3
million from $11.1 million the prior fiscal year. The increase in revenue
resulted from increases in the amount of disposal punch cards and machines sold
to existing customers. Changes in prices of products sold during fiscal 1998
compared to the prior year were not material.
Cost of Sales and Services
- --------------------------
Cost of sales for the year ended March 31, 1998 increased 12.6% to $6.9
million from $6.2 million in the prior year. Cost of sales as a percentage of
sales increased to 56.4% from 55.4%. The increase in cost of sales as a
percentage of revenue resulted primarily from increased costs of raw materials
and labor. Competitive issues precluded the Company from adjusting the prices
charged to customers in order to offset these increases.
Selling, General and Administrative Expenses ("SG&A")
- -----------------------------------------------------
SG&A expenses for the year ended March 31, 1998 increased 21.0% to $3.7
million compared to $3.0 million the prior year. The increase resulted primarily
from increased personnel and selling costs associated with increased revenue.
Depreciation and Amortization
- -----------------------------
Depreciation and amortization expense decreased 2.2% to $959,000 in fiscal
1998 from $981,000 the prior year. The decrease resulted from the fact that
certain assets became fully depreciated in fiscal 1998.
Interest Expense
- ----------------
Interest expense increased 82.0% to $1.0 million in fiscal 1998 from
$583,000 in the prior year. The increase resulted primarily from the suspension
of interest payments during the Chapter 11 proceedings in fiscal 1997. Interest
expense for fiscal 1997 would have been approximately $1.1 million higher if
payments had been required during the Chapter 11 proceedings. Interest payments
resumed in fiscal 1998.
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.
Year 2000 Compliance
- --------------------
Introduction
The Company's year 2000 ("Y2K") compliance project is intended to determine
the readiness of the Company's business for the year 2000. The Company has
identified three areas where the Y2K problem creates risk to the Company. These
areas are a) internal information systems; b) system capabilities of third party
business with relationships with the company, including product suppliers,
customers, service providers and companies that interface their software and
hardware products with products sold by the Company; and c) product liability
claims arising out of the non-performance of computer products sold by the
Company.
Plan to Address Y2K Compliance
In December 1998, the Company formed a Y2K compliance project team to
develop an overall plan to address Y2K readiness issues. The plan is being
developed in phases.
14
o Phase I
a) Identify all internal hardware and software systems that must be
compliant.
b) Appoint individuals within the Company to be responsible for
communication with third party businesses regarding Y2K
readiness.
c) Appoint individuals within the Company to be responsible for
evaluation of product liability issues that may exist regarding
products sold by the Company.
o Phase II - Identify Y2K problems that may exist in each risk area.
o Phase III - Repair, modify or replace systems that are determined to
be non-compliant.
o Phase IV - Test systems to confirm that any repairs, modification or
replacements have resulted in compliance.
State of Readiness
Internal Systems
----------------
The Company has determined that the internal information systems in its
Medication Packaging and Dispensing Systems subsidiary are in a state of Y2K
readiness.
The internal information systems utilized in the Company's Clinical
Laboratory Services business are not Y2K compliant. Management has committed to
a plan to dispose of this business and anticipates that the disposal of the
business will occur before any Y2K readiness issues need to be addressed.
The internal systems utilized by the Company's Health Care Information
Systems business to develop software products for resale were sold in May 1999.
Material Third Party Readiness
------------------------------
Individuals within the Company have been assigned responsibility for
communicating with material third-party businesses with whom the Company has
business relationships and have begun a survey process. The Company will
determine the readiness of third parties prior to September 30, 1999.
Product Liability
The products sold by the Company's Medication Packaging and Dispensing
Systems subsidiary do not have Y2K issues associated with them.
The Services rendered by the Company's Clinical Laboratory Services
business are directly effected by the internal information systems utilized to
perform analytical laboratory tests. If the Company is not successful in
implementing Y2K compliant internal information systems in its Clinical
Laboratory Services business, it could adversely effect that business' ability
to perform diagnostic tests and provide the results of those test to its client
physicians, however, management has committed to a plan to dispose of this
business before the Y2K readiness issues need to be addressed.
The rights to sell the products of the Company's Health Care Information
Systems business were sold in May 1999. Any liabilities arising from Y2K issues
will be assumed by the buyer.
Cost of Project
Expenditures to date on Y2K compliance have not been material to the
Company's operation or financial condition.
15
Liquidity and Capital Resources
- -------------------------------
The Company had a net loss of $5.4 million in fiscal 1999 compared to a net
loss of $854,000 the prior year. Cash provided from continuing operations was
$1,117,000 in fiscal 1999 compared to $1,591,000 the prior year. Investing
activities of continuing operations used $665,000 in fiscal 1999 compared to
$442,000 in fiscal 1998. The increase resulted primarily from increased capital
expenditures for manufacturing equipment.
Financing activities of continuing operations used $713,000 in fiscal 1999
compared to $1,443,000 the prior year. The decrease resulted primarily from a
decrease in amounts advanced to discontinue operations of the Company. The
decrease was offset in part by payments on long-term debt. The Company's loan
agreement required interest only payments until September 1998 and principal
payments commencing in October 1998.
The Company had working capital of approximately $1.4 million at March 31,
1999 and has 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 is anticipated to
support an increase in accounts receivable.
The Company has several new product development projects underway that will
be funded by cash flow from operations. These projects are monitored on a
regular basis to attempt to ensure that the anticipated costs associated with
them do not exceed the Company's ability to fund them from cash flow from
operations.
The Company believes that cash generated from operations will be sufficient
to meet the capital expenditures, product development and working capital needs
of MTS Packaging as well as support the operations of MTL until its disposal.
In addition, after the disposal of two business segments, the Company will
focus on its core business, MTS Packaging, which has historically generated
positive cash flow from operations. As a result, management believes that
certain administrative costs that were required to support three separate
businesses can be reduced and thereby improve the profitability and liquidity of
the Company.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company does not have any material market risk sensitive financial
instruments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this item are contained at the end of
this report.
ITEM 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
NONE
16
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 1999
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 1999
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 1999
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 1999
fiscal year.
17
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(10) Agreement and Plan of Merger between Medication Management Technologies, Inc. and Cygnet
Technologies, Inc. dated April 24, 1997
2.2(11) Sale Agreement Vangard Labs, Inc. and NCS Healthcare, Inc. dated April 17, 1997
2.3(13) Asset Acquisition Agreement effective April 30, 1998 among the Company, LifeServ Technologies,
Peritronics Medical, Ltd. and 562577 B.C., Ltd.
2.4(12) 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.
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
18
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(10) Form of Executive Director's Agreement for Gerald Couture
10.29(10) Stock Option Plan dated March 4, 1997
10.30(10) Stock Option Agreement with David Kazarian
10.31(13) Stock Subscription Agreement, dated April 28, 1998, between the Company and LifeServ Technologies,
Inc.
10.32(13) 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(13) Form of Warrant dated May 13, 1998 between LifeServ and Ella Kedan
10.34(13) Form of Warrant dated May 13, 1998 between the Company and Ella Kedan
10.35(13) Form of Warrant dated May 13, 1998 between LifeServ and Ella Kedan
10.36(13) LINC Capital, Inc. - Sale and Leaseback Agreement dated February 23, 1998
10.37(13) Employment Agreement between LifeServ Technologies, Inc. and Michael T. Felix dated April 1, 1998
10.38(13) Employment Agreement between Medical Technology Systems, Inc. and Michael P. Conroy dated March 1,
1998
10.39(13) Amendment to Second Amended and Restated Loan and Security Agreement between the Company and
SouthTrust Bank dated April 16, 1998
10.40(14) Asset Acquisition Agreement dated August 4, 1998 between Medical Technology Laboratories, Inc. and
Community Clinical Laboratories, Inc.
10.41(14) Loan Agreement dated May 13, 1998, between Stanley D. Estrin Irrevocable Trust dtd March 16, 1993,
Judith C. Estrin, Trustee and Medical Technology Systems, Inc.
10.42(14) Form of Warrant dated May 13, 1998, between Stanley D. Estrin Irrevocable Trust dtd March 16,
1993, Judith C. Estrin, Trustee and Medical Technology Systems, Inc.
10.43(14) Form of Warrant dated May 13, 1998, between Stanley D. Estrin Irrevocable Trust dtd March 16,
1993, Judith C. Estrin, Trustee and Medical Technology Systems, Inc.
10.44(14) Loan Agreement dated August 7, 1998, between Sally Siegel and Medical Technology Systems, Inc.
10.45(14) Form of Warrant dated August 7, 1998, between Sally Siegel and Medical Technology Systems, Inc.
10.46(14) Form of Warrant dated August 7, 1998, between Sally Siegel and Medical Technology Systems, Inc.
10.47(14) Loan Agreement dated August 18, 1998, between Todd and Shelia Siegel and Medical Technology
Systems, Inc.
10.48(14) Form of Warrant dated August 18, 1998, between Todd and Shelia Siegel and Medical Technology
Systems, Inc.
10.49(14) Form of Warrant dated August 18, 1998, between Todd and Shelia Siegel and Medical Technology
Systems, Inc.
10.50(15) Asset Acquisition Agreement dated May 25, 1999 between LifeServ Technologies, Inc., Medical
Technology Systems, Inc. and AIMCare, Inc.
10.51(16) Loan Agreement dated October 16, 1998, between Joan L. Fitterling, as Trustee, or her successor in
Trust of the Joan L. Fitterling Revocable Trust dated August 15, 1995 and Medical Technology
Systems, Inc.
19
10.52(16) Form of Warrant dated October 16, 1998, between Joan L. Fitterling, as Trustee, or her successor
in Trust of the Joan L. Fitterling Revocable Trust dated August 15, 1995 and Medical Technology
Systems, Inc.
10.53(16) Form of Warrant dated October 16, 1998, between Joan L. Fitterling, as Trustee, or her successor
in Trust of the Joan L. Fitterling Revocable Trust dated August 15, 1995 and Medical Technology
Systems, Inc.
10.53(16) Form of Warrant dated October 16, 1998, between Joan L. Fitterling, as Trustee, or her successor
in Trust of the Joan L. Fitterling Revocable Trust dated August 15, 1995 and Medical Technology
Systems, Inc.
27(16) 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) Incorporated herein by reference to Form 10-Q dated November 11, 1996 for the quarter ended
September 30, 1996
(10) Incorporated herein by reference to Form 10-K for the year ended March 31, 1997
(11) Incorporated herein by reference to Form 8-K dated May 2, 1997
(12) Incorporated herein by reference to Form 10-Q dated February 13, 1998 for the quarter ended
December 31, 1997
(13) Incorporated herein by reference to Form 10-K for the year ended March 31, 1998
(14) Incorporated herein by reference to Form 10Q filed November 12, 1998 for quarter ending September
30, 1998
(15) Incorporated herein by reference to Form 8K filed on June 9, 1999 for event dated May 25, 1999
(16) Filed herewith
20
MEDICAL TECHNOLOGY SYSTEMS, INC.
INDEX TO FINANCIAL STATEMENTS
Page
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS........................ 21
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of March 31, 1999 and 1998........... 22
Consolidated Statements of Operations for the years
ended March 31, 1999, 1998 and 1997............................. 23
Consolidated Statement of Changes in Stockholders' Equity (Deficit)
for the years ended March 31, 1999, 1998 and 1997............... 24
Consolidated Statements of Cash Flows for the years ended
March 31, 1999, 1998 and 1997.................................... 25
Notes to Consolidated Financial Statements.......................... 26-43
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTS ON FINANCIAL
STATEMENT SCHEDULE............................................... 45
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.
21
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, 1999 and 1998, and the
related consolidated statements of operations, changes in stockholders' equity
(deficit) and cash flows for each of the three years in the period ended March
31, 1999. 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, 1999 and 1998, and the
consolidated results of operations and cash flows for each of the three years in
the period ended March 31, 1999 in conformity with generally accepted accounting
principles.
GRANT THORNTON LLP
Tampa, Florida
July 6, 1999, except for paragraph 3 of
Note 9 to the financial statements as to
which the date is July 16, 1999.
22
MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1999 AND 1998
(In Thousands)
ASSETS
1999 1998
--------------- ---------------
>
Current Assets:
Cash $ 205 $ 466
Accounts Receivable, Net 2,473 1,933
Inventories 1,990 1,879
Prepaids and Other 69 67
------------- -------------
Total Current Assets 4,737 4,345
Property and Equipment, Net 2,013 2,490
Other Assets, Net 1,761 1,548
Net Assets of Discontinued Operations 0 3,149
--------------- ---------------
Total Assets $ 8,511 $ 11,532
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Current Maturities of Long-Term Debt $ 874 $ 294
Accounts Payable and Accrued Liabilities 2,405 2,459
--------------- ---------------
Total Current Liabilities 3,279 2,753
Net Liabilities of Discontinued Operations 1,917 0
Long-Term Debt, Less Current Maturities 14,915 14,892
--------------- ---------------
Total Liabilities 20,111 17,645
--------------- ---------------
Stockholders' Equity (Deficit):
Voting Preferred Stock 1 1
Common Stock 64 62
Capital In Excess of Par Value 8,583 8,588
Accumulated Deficit (19,920) (14,433)
Less: Treasury Stock (328) (331)
--------------- ---------------
Total Stockholders' Equity (Deficit) (11,600) (6,113)
--------------- ---------------
Total Liabilities and Stockholders' Equity (Deficit) $ 8,511 $ 11,532
=============== ===============
The accompanying notes are an integral part of these financial statements.
23
MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31, 1999, 1998 AND 1997
(In Thousands; except Earnings Per Share Amounts)
1999 1998 1997
-------------- -------------- --------------
Revenue:
Net Sales and Services $ 15,073 $ 12,337 $ 11,169
Costs and Expenses:
Cost of Sales and Services 8,381 6,964 6,183
Selling, General and Administrative 4,327 3,723 3,071
Depreciation and Amortization 874 959 981
Interest, Net 1,158 1,061 583
-------------- -------------- --------------
Total Costs and Expenses 14,740 12,707 10,818
-------------- -------------- --------------
Income (Loss) from Continuing Operations Before
Income Taxes, Discontinued Operations and
Extraordinary Gain 333 (370) 351
Income Tax (Benefit) Expense 125 (270) 131
-------------- -------------- --------------
Income (Loss) from Continuing Operations Before
Discontinued Operations and Extraordinary Gain 208 (100) 220
Loss from Operations of Discontinued Operations,
Net of Income Tax in 1999 and 1997 (3,764) (754) (3,005)
Gain on Forgiveness of Debt of Discontinued Operations 569 0 3,500
Gain (Loss) on Disposal of Discontinued Operations,
Net of Income Tax in 1999 and 1997 (2,500) 0 2,200
Extraordinary Gain on Forgiveness of Debt 0 0 10,097
-------------- -------------- --------------
Net Income (Loss) $ (5,487) $ (854) $ 13,012
============== ============== ==============
Earnings (Loss) per Basic and Diluted Common Share:
Income (Loss) from Continuing Operations $ 0.03 $ (0.02) $ 0.04
Income (Loss) from Discontinued Operations (0.91) (0.12) 0.47
Extraordinary Gain on Debt Forgiveness 0.00 0.00 1.76
-------------- -------------- --------------
Net Income (Loss) per Basic and Diluted Common Share $ (0.88) $ (0.14) $ 2.27
============== ============== ==============
Weighted average Common Shares Outstanding - Basic and Diluted 6,233 6,062 5,737
============== ============== ==============
The accompanying notes are an integral part of these financial statements.
24
MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED MARCH 31, 1999, 1998 AND 1997
(In Thousands Except Share Data)
COMMON STOCK
------------------------------------------------------------------------------------------------
Number 0.01 Capital in Accumulated Treasury Total
Shares Value Par Value
----------- ------------- ------------- --------------- ------------- ------------
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)
Stock Cancellation (10,800) (3) 3
Stock Issued 287,318 2 (2)
Net Loss for Year Ended
March 31, 1999 (5,487) (5,487)
------------------------------------------------------------------------------------------------
Balance, March 31, 1999 6,406,191 $ 64 $ 8,583 $ (19,920) $ (328) $ (11,601)
=========== ============= ============= =============== ============= ============
VOTING PREFERRED STOCK
------------------------------------------------------------------------------------------------
Number $0001.
of Par
Shares Value
----------- -----------
Balance, March 31, 1997 6,500,000 $ 1 $ 1
----------- ------------- ------------
Balance, March 31, 1998 6,500,000 $ 1 $ 1
----------- ------------- ------------
Balance, March 31, 1999 6,500,000 $ 1 $ 1
----------- ------------- ------------
Total Stockholders' (Deficit)
March 31, 1999 $ (11,600)
============
The accompanying notes are an integral part of these financial statements.
25
MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 1999, 1998 AND 1997
(In Thousands)
1998 1997 1999
------------- -------------- -------------
Operating Activities
Net Income (Loss) from Continuing Operations $ 208 $ (100) $ 220
------------- -------------- -------------
Adjustments to Reconcile Net Income (Loss) to Net Cash
Provided (Used) by Operating Activities:
Depreciation and Amortization 874 959 981
Legal Settlements 226 0 0
Loss on Early Retirement of Fixed Assets 21 7 0
Deferred Income Taxes 125 0 131
(Increase) Decrease in:
Accounts Receivable (541) (584) 887
Income Taxes Receivable 0 0 880
Inventories (110) (114) (24)
Prepaids and Other 29 59 (255)
Other Receivables 0 350 (350)
Other Assets 0 (230) 0
Increase (Decrease) in:
Accounts Payable and Other Accrued Liabilities 285 1,244 (864)
------------- -------------- -------------
Total Adjustments 909 1,691 1,386
------------- -------------- -------------
Net Cash Provided (Used) by Continuing Operations 1,117 1,591 1,606
------------- -------------- -------------
Investing Activities
Expended for Property and Equipment (297) (198) (149)
Expended for Product Development (159) (196) (131)
Expended for Patents and Other Assets (114) (48) (43)
Expended for Acquisition, Net of Cash Acquired (95) 0 0
------------- -------------- -------------
Net Cash Used by Investing Activities of Continuing Operations (665) (442) (323)
------------- -------------- -------------
Financing Activities
Payments on Notes Payable and Long-Term Debt (309) (44) (1,358)
Advances to Affiliates - Discontinued Operations (754) (1,406) (427)
Issuance of Common Stock 0 7 0
Proceeds from Borrowing on Notes Payable and Long-Term Debt 350 0 0
------------- -------------- -------------
Net Cash Used by Financing Activities of Continuing Operations (713) (1,443) (1,785)
------------- -------------- -------------
Net Decrease in Cash - Continuing Operations (261) (294) (75)
Cash at Beginning of Period - Continuing Operations 466 760 835
------------- -------------- -------------
Cash at End of Period - Continuing Operations $ 205 $ 466 $ 760
============= ============== =============
See Note 20 for supplemental disclosures of other cash flow information.
The accompanying notes are an integral part of these financial statements.
26
MEDICAL TECHNOLOGY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999, 1998 AND 1997
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 that
historically operated 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 primarily consisted 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 Systems
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 Services business of supplying anatomical diagnostic testing
services to the medical profession.
Subsequent to March 31, 1999, the Company sold LifeServ Technologies, Inc.
("LifeServ") its Health Care Information Systems segment. In addition, the
Company began discussions with potential buyers to sell Medical Technology
Laboratories, Inc. ("MTL"), its Clinical Laboratory Services segment, and has
committed to either sell the business to other potential buyers or abandon it.
The operations of both business segments have been treated as discontinued in
the accompanying financial statements. The Company realized a gain on the
disposal of its Health Care Information Systems segment that will be recognized
at the disposal date, which occurred on May 27, 1999. The disposal of the
Clinical Laboratory Services segment is anticipated to occur during the second
quarter of fiscal year 2000. The Company expects to realize a loss in the
disposal of this segment and has provided for the estimated loss in the
accompanying consolidated financial statements.
During the fourth quarter of fiscal 1996, 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") were
filed 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. 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 for all MTS debtors and MMT
provided for the restructuring of amounts and repayment terms for secured and
unsecured creditors.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
- -------------
The consolidated financial statements include the accounts of the Company
and its subsidiaries, MTS Packaging Systems, Inc. ("MTS Packaging"), MTL and
LifeServ. MTL and LifeServ represent discontinued operations, and accordingly,
these discontinued segments' net assets or net liabilities are shown as one
amount under the captions "Net Liabilities of Discontinued Operations" for 1999
and "Net Assets of Discontinued Operations" for 1998. The results of operations
of these discontinued segments for 1999, 1998 and 1997 have been excluded from
the components of "Income (Loss) from Continuing Operations" and shown under the
caption "Loss from Operations of Discontinued Operations" in the Statements of
Operations. In addition, the 1997 Statement of Operations include the operations
of Vangard Labs, Inc. ("Vangard") as discontinued operations. All significant
inter-company accounts and transactions have been eliminated in consolidation.
Discontinued Operations
- -----------------------
The Company`s Health Care Information Systems business (LifeServ) and its
Clinical Laboratory Services business (MTL) were classified as discontinued
operations in fiscal 1999. The assets of LifeServ were sold in May 1999 and MTL
is expected to be disposed of in fiscal year 2000 (see Note 3). The Company's
generic drug repackaging business, Vangard was classified as a discontinued
operation in fiscal year 1996 and disposed of in April 1997 (see Note 3).
27
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,
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. The Company has estimated the contractual adjustments that third party
payors apply to the fee schedules used by MTL to determine the amount that will
ultimately be paid to MTL for services provided. The Company has also estimated
the loss on disposal of MTL. The amount of the actual loss may vary from the
estimate based upon the method of ultimately disposing of the business. 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.
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, 1999 and 1998, the
Company has established an inventory valuation allowance of $140,000 and $0
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 (discontinued operations) 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 (discontinued operations) recognizes revenue
when systems are placed in service.
The American Institute of Certified Public Accounts ("AICPA") 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. The Company adopted SOP 97-2 in fiscal 1999, which had no material
impact 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.
28
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.
Effective April 1, 1998, the Company implemented the AICPA's SOP No. 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use". The SOP segments an internal use software project into stages and
the accounting is based on the stage in which a cost is incurred. Costs related
to the preliminary project stage are expensed as incurred. Specified costs
related to the application development stage are capitalized if the preliminary
project is complete, management has authorized the project, and completion of
the project is probable. Costs incurred in the post-implementation/operation
stage for training and maintenance are expensed as incurred. The implementation
of SOP 98-1 did not have a material effect on the Company's financial
statements.
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.
Earnings (Loss) Per Share
- -------------------------
Earnings per share are computed using the basic and diluted calculations on
the face of the statement of operations. Basic earnings per share is calculated
by dividing net income (loss) by the weighted average number of shares of common
stock outstanding for the period. Diluted earnings per share is calculated by
dividing net income by the weighted average number of shares of common stock
outstanding for the period, adjusted for the dilutive effect of common stock
equivalents, using the treasury stock method (see Note 18).
Research and Development
- ------------------------
The Company expenses research and development costs as incurred. During
fiscal 1999, 1998 and 1997, 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.
29
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 15).
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 sell, except for assets that
are related to discontinued operations, which are reported at the lower of
carrying value or net realizable value. There were no impairment losses
recognized in 1999, 1998 and 1997. In conjunction with discontinued operations
(see Note 3), there were evaluation adjustments made in 1999.
Bankruptcy Related Accounting Matters and Extraordinary Gain
- ------------------------------------------------------------
In 1997, in conjunction with the Company's Plan of Reorganization confirmed
by the Bankruptcy Court, the Company's debt with its primary bank and its
unsecured creditors was reduced, resulting in an extraordinary gain of
approximately $10.1 million. Since the voting control of the Company's stock
remained the same as a result of the confirmation of the Plan of Reorganization
in 1997, fresh start accounting was not used in 1997 accordance with AICPA SOP
90-7. However, the liabilities compromised by the confirmed plans were recorded
at the present values of the amounts to be paid.
Fair Value of Financial Instruments
- -----------------------------------
The carrying amounts of cash receivables, accounts payable and accrued
liabilities approximate fair value because of the short-term nature of the
items.
The carrying amount of current and long-term portions of long-term debt
approximates fair value since the interest rates approximate current prevailing
market rates.
Segment Information
- -------------------
The Company has adopted SFAS No. 131 "Disclosures about Segments of a
Business Enterprise". As continuing operations of the Company are conducted
through one business segment as of March 31, 1999 (see Note 3), segment
disclosures, as previously reported, are not provided for in these financial
statements.
NOTE 3 - DISCONTINUED OPERATIONS
During the fourth quarter of fiscal 1999, the Company implemented a
strategy of focusing its resources in its core business, MTS Packaging, and
divesting of the other two business segments it historically operated.
30
In May 1999, the Company sold LifeServ, its Health Care Information Systems
business segment. The Asset Acquisition Agreement provided, among other things,
for the buyer to receive substantially all the assets of LifeServ in
consideration of the assumption of certain stated liabilities of approximately
$5 million. During fiscal 1999, LifeServ had revenue of $5.2 million, costs and
expenses of $8.9 million, and a gain on debt forgiveness of $500,000 resulting
in a loss from discontinued operations of $3.7 million. LifeServ's net revenue
for fiscal year 1998 and 1997 were $4.3 million and $1.9 million respectively.
The sale resulted in a gain of approximately $1.3 million, which has been
recognized in the first quarter of fiscal year 2000.
The Company is discussing the possible sale of its Clinical Laboratory
Services subsidiary, MTL, with several potential buyers. In the event that a
sale does not close, management has committed itself to a plan to dispose of MTL
either through a sale to another potential buyer or abandon the business. MTL
had revenue of $14.0 million and costs and expenses of $14.1 million resulting
in a net loss from discontinued operations of $164,000 during the year ended
March 31, 1999. MTL's net revenue for years 1998 and 1997 were $7.4 million and
$6.1 million. A pre-tax charge of approximately $2.5 million for a loss on
disposal of MTL has been recorded in fiscal year 1999 and is shown in the
Consolidated Statement of Operations as estimated loss on disposal of
discontinued operations.
The carrying value of the net assets of discontinued operations at March
31, 1999 and 1998 are comprised of the following.
LifeServ MTL Total
Discontinued Operations
------------------------ ------------------------ ------------------------
1999 1998 1999 1998 1999 1998
---------- ---------- ----------- ---------- ---------- ---------
Current Assets $ 1,047 $ 1,481 $ 3,945 $ 2,462 $ 4,992 $ 3,943
Other Assets 2,088 2,390 71 1,046 2,159 3,436
- -------- - -------- -- -------- - -------- - -------- - --------
Total Assets $ 3,135 $ 3,871 $ 4,016 $ 3,508 $ 7,151 $ 7,379
- -------- - -------- -- -------- - -------- - -------- - --------
Current Liabilities $ 4,532 $ 1,742 $ 2,876 $ 941 $ 7,408 $ 2,683
Long-Term Liabilities 346 1,313 1,314 234 1,660 1,547
- -------- - -------- -- -------- - -------- - -------- - --------
Total Liabilities $ 4,878 $ 3,055 $ 4,190 $ 1,175 $ 9,068 $ 4,230
- -------- - -------- -- -------- - -------- - -------- - --------
Net Assets (Liabilities)
of Discontinued Operations $ (1,743) $ 816 $ (174) $ 2,333 $ (1,917) $ 3,149
= ======== = ======== == ======== = ======== = ======== = ========
The charge of $2.5 million for a loss on disposal of MTL resulted in a
reduction of the carrying value of assets of approximately $2.0 million
(goodwill of approximately $900,000 and equipment of approximately $1,100,000)
and a reserve of $500,000, included in current liabilities, for the estimated
costs of disposal and operating losses through the disposal date.
In January 1996, the operations of Vangard Labs, Inc. ("Vangard") were
curtailed, and Vangard filed a Voluntary Petition under Chapter 11 in the
bankruptcy court in February 1996 and was subsequently sold in April 1997. 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 liabilities of Vangard of $673,000. As a result of the sales,
the Company recognized an extraordinary gain on the disposal of the assets of
Vangard of $2.2 million, net of income taxes, in the fiscal year ended March 31,
1997.
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 $3.7 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).
31
NOTE 4 - 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,
1999 1998
-------------- ---------------
(In Thousands)
Accounts Receivable $ 2,684 $ 2,111
Less: Allowance for Doubtful Accounts (211) (178)
------------- -------------
$ 2,473 $ 1,933
============= ==============
Substantially all of the Company's accounts receivable are pledged as
collateral on bank notes.
The geographic sales of the Company are in the United States. There were 2,
1 and 3 customers whose sales exceeded 10% of revenue for 1999, 1998 and 1997,
respectively.
NOTE 5 - INVENTORIES
Inventories consist of the following:
March 31, March 31,
1999 1998
------------- --------------
(In Thousands)
Raw Material $ 767 $ 530
Finished Goods and Work in Process 1,363 1,349
Less: Inventory Valuation Allowance (140) 0
------------- --------------
$ 1,990 $ 1,879
============= ==============
Substantially all of the Company's inventories are pledged as collateral on
bank notes.
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
March 31, March 31,
1999 1998
------------- --------------
(In Thousands)
Property and Equipment $ 6,298 $ 6,190
Leasehold Improvements 695 693
------------- --------------
6,993 6,883
Less: Accumulated Depreciation and Amortization (4,980) (4,393)
-------------
==============
$ 2,013 $ 2,490
============= ==============
Substantially all of the Company's property and equipment are pledged as
collateral on bank notes.
32
Depreciation expense and amortization of leasehold improvement totals
approximately $723,000, $880,000 and $943,000 for fiscal years ending March 31,
1999, 1998 and 1997 respectively.
NOTE 7 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities are comprised of the following:
March 31, March 31,
1999 1998
-------------- --------------
(In Thousands)
Accounts Payable/Trade $ 1,198 $ 1,167
Accrued Liabilities:
Salaries & Commissions 518 250
Medical Claims 100 122
Interest 27 97
Legal 0 68
State Taxes 25 404
Royalties 200 104
Deferred Revenue 85 0
Other 252 247
-------------- --------------
$ 2,405 $ 2,459
============== ==============
NOTE 8 - OTHER ASSETS
Other assets consists of the following:
March 31, March 31,
1999 1998
-------------- --------------
(In Thousands)
Goodwill $ 588 $ 498
Less: Accumulated Amortization (27) (5)
-------------- --------------
$ 561 $ 493
-------------- --------------
Product Development $ 530 $ 327
Less: Accumulated Amortization (89) 0
-------------- --------------
$ 441 $ 327
-------------- --------------
Patents $ 1,109 $ 1,109
Less: Accumulated Amortization (473) (423)
-------------- --------------
$ 636 $ 686
-------------- --------------
Other 125 42
Less: Accumulated Amortization (2) 0
-------------- --------------
$ 123 $ 42
-------------- --------------
Total Other Assets, Net $ 1,761 $ 1,548
============== ==============
Substantially all of the Company's intangible assets are pledged as
collateral on bank notes.
33
NOTE 9 - LONG-TERM DEBT
Long-term debt related to continuing operations consists of the following:
March 31, March 31,
1999 1998
------------ -------------
(In Thousands)
Bank Term Loan; payable in installments of interest at 7.5% and principal
monthly for ten years ending September 1, 2006, with a lump sum payment of
approximately $11.4 million on that date secured by all tangible and
intangible assets of the Company.
$ 14,806 $ 15,000
Unsecured Notes Payable plus interest at 12% through February 1999, and 18%
until repaid. 150 0
Unsecured Notes Payable due September 1999 plus interest at 12%. 200 0
Unsecured Note Payable plus interest at 3%, payable in monthly installments
of $2,394 through September 2006. 193 0
Unsecured Note Payable under settlement agreement with State of Florida
Department of Revenue, payable in monthly installments of $2,500-$3,500
over a period of four to eight years. 284 0
Other Notes and Agreements; interest and principal payable monthly and
annually at various amounts through March 2000. 156 186
------------ -------------
Total Long -Term Debt 15,789 15,186
Less Current Portion (874) (294)
============ =============
LONG-TERM DEBT DUE AFTER 1 YEAR $ 14,915 $ 14,892
============ =============
The bank notes payable are collateralized by the Company's accounts
receivables, inventory, equipment and intangibles.
At March 31, 1999, the Company was in violation of certain covenants of the
bank term loan agreement. The Company requested a waiver of certain defaults,
which may have occurred under the loan agreement as a result of these
violations. On July 16, 1999, the bank provided the Company with a waiver of the
defaults through June 30, 1999. In addition, the bank and the Company agreed to
modify these financial covenants of the loan agreement for results of operations
subsequent to July 1, 1999. The covenants prohibit the Company from exceeding a
maximum deficit net worth and provide for limits on annual capital expenditures
as well as the maintenance of certain financial ratios.
In August 1998, the Company borrowed $150,000 from three individuals,
including $100,000 from the Chairman and C.E.O. to support the operations of
Medical Technology Laboratories, Inc. ("MTL"). The terms and conditions of these
obligations provide for repayment within six months from the borrowing date
including interest payable at 12% per annum. In addition, the notes provide the
lenders with warrants to purchase 88,500 shares of common stock of the Company
at $.75 per share for a period of ten (10) years. The fair value assigned to the
warrants is insignificant. The obligation is currently in default for
non-payment.
34
In October 1998, the Company borrowed $200,000 from an individual to
support the operations of MTL. The terms and conditions of this obligation
include repayment on September 1, 1999 including interest at 12% per annum. The
notes provide the lenders with warrants to purchase 100,000 shares of common
stock of the company at $.75 per share for a period of ten (10) years. The fair
value assigned to the warrants is insignificant. In the event that the Company
defaults on its obligations under the promissory note, the lender is entitled to
receive warrants to purchase up to 800,000 and 18,000 shares of common stock at
$.05 and $.75 per share, respectively, for a period of ten (10) years. In
addition, the note is secured by 290,313 shares of the Company's common stock
owned by the Chairman and C.E.O.
The following is a schedule by year of the principal payments required on
these notes payable and long-term debts as of March 31, 1999:
(In Thousands)
2000. . . . . . . $ 874
2001. . . . . . . $ 477
2002. . . . . . . $ 505
2003. . . . . . . $ 512
2004. . . . . . . $ 542
Thereafter. . . . $ 12,879
Interest expense from continuing operations for the years 1999, 1998 and
1997 amounted to $1,167,000, $1,145,000 and $652,000 respectively.
Long-term debt included in net assets of discontinued operations consists
of the following:
LifeServ March 31, March 31,
1999 1998
------------- -------------
(In Thousands)
Demand note past due at March 31, 1999 plus interest at default rate of 18%. $ 395 $ 0
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. 536 688
Capital lease obligations payable monthly at various amounts through March
2000. 72 80
------------ -------------
Long-Term Debt related to discontinued operations 1,003 768
Less Current Portion (657) (281)
------------ -------------
LONG-TERM DEBT RELATED TO DISCONTINUED OPERATIONS DUE AFTER 1 YEAR
$ 346 $ 487
============ =============
35
MTL March 31, March 31,
1999 1998
------------ -------------
(In Thousands)
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 $ 234
Seller Financing under Community Clinical Laboratories, Inc. (CCL) Acquisition
Agreement, maximum face amount of $2.5 million discounted at 10% with
variable quarterly payments based upon 9% of cash collections from tests
performed for customers acquired pursuant to the acquisition
agreement until satisfied or for 5 years, whichever comes first. 1,058 0
Capital Lease obligation for equipment acquired from CCL; interest and
principal payable monthly at various amounts through May 2001. 130 0
Other Notes and Agreements; interest and principal payable monthly and
annually at various amounts through March 2000. 79 50
------------ -------------
Long-term debt related to discontinued operations. 1,501 284
Less Current Portion (187) (50)
------------ -------------
LONG-TERM DEBT RELATED TO DISCONTINUED OPERATIONS DUE AFTER 1 YEAR
$ 1,314 $ 234
============ =============
NOTE 10 - 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, 1999.
(In Thousands)
2000..............$ 350
2001..............$ 335
2002..............$ 121
2003..............$ 48
Thereafter........$ 12
Rent expense amounted to $311,000, $266,000 and $309,000, for the years
ended March 31, 1999, 1998 and 1997, respectively.
NOTE 11 - 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 year ended March 31, 1999,
the Company contributed $22,000 to the Plan. For the years ended March 31, 1998
and 1997, the Company made no contributions to the Plan.
36
NOTE 12 - 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 that
exceed $30,000 per participant and has an annual maximum aggregate limit of
approximately $650,000.
NOTE 13 - 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 $51,000, $50,000 and $76,000 in the years
ended March 31, 1999, 1998, and 1997, respectively. Accrued royalty payments due
as of March 31, 1999 and 1998 total approximately $75,000 and $104,000,
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, 1999 and
March 31, 1998 of approximately $0 and $10,466.
NOTE 14 - TAXES
The components of related income taxes provided on continuing operations
were as follows:
Years Ended March 31,
------------------------------------------------
1999 1998 1997
------------ ------------ ------------
(In Thousands)
Current Tax (Benefit):
Federal $ 0 $ (270) $ 0
State 0 0 0
------------ ------------ ------------
0 (270) 0
------------ ------------ ------------
Deferred Tax:
Federal $ 117 $ 0 $ 123
State 8 0 8
------------ ------------ ------------
$ 125 $ (270) $ 131
============ ============ ============
In 1999, income tax expense and benefit of equal and offsetting amounts of
$125,000 were allocated to continuing and discontinued operations, respectively.
Total income tax (benefit) expense for 1999, 1998 and 1997 from continuing
operations resulted in effective tax rates of 37.5%, (73.0%) and 37.5%,
respectively. The reasons for the differences between these effective tax rates
and the U.S. statutory rate of 34.0%-35.0% on the continuing operations are as
follows:
Years Ended March 31,
------------------------------------------------
1999 1998 1997
------------ ------------- -------------
(In Thousands)
Tax (Benefit) Expense at U.S. statutory rate $ 117 $ (382) $ 123
State Income Tax, Net 8 (41) 8
Current tax benefit not recognized 0 423 0
Effect of prior year carryback, not previously recognized 0 (270) 0
------------ ------------ ------------
$ 125 $ (270) $ 131
============ ============ ============
Deferred taxes for continuing operations consist of the following:
March 31, 1999 March 31, 1998
----------------- -----------------
(In Thousands)
Deferred Tax Assets:
Depreciation/Amortization Temporary Difference $ 222 $ 997
Allowance for Doubtful Accounts 79 230
Inventory Valuation Allowance 52 101
Tax Loss Carry Forward 5,240 4,234
Reserves and Provisions 212 327
---------------- ----------------
Gross Deferred Tax Asset 5,805 5,889
---------------- ----------------
Less Valuation Allowance (5,805) (5,889)
---------------- ----------------
Deferred Income Taxes $ 0 $ 0
================ ================
At March 31, 1999, the Company had deferred tax assets available from
continuing operations of approximately $5.8 million as shown above. Deferred
taxes for discontinued operations as of March 31, 1999 total approximately $2.2
million consisting principally of estimated losses on disposal of segments and
depreciation/amortization temporary differences. 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, 1999,
the Company had approximately $13.7 million of carryforward losses that will
expire by 2013 that are available to offset future taxable income.
The March 31, 1998 deferred tax asset amounts presented include both
continuing and discontinued operations, as it is not currently practical to
segregate the amounts.
38
NOTE 15 - STOCKHOLDERS' EQUITY (DEFICIT)
Stockholders' Equity (Deficit) consists of the following:
March 31, March 31, March 31,
1999 1998 1997
---------------- ---------------- -----------------
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
March 31, March 31, March 31,
1999 1998 1997
---------------- ---------------- -----------------
Common Stock:
Par Value $.0001 Per Share
Authorized Shares 25,000,000 25,000,000 25,000,000
Outstanding Shares 6,358,991 6,071,673 5,917,173
Issued Shares 6,406,191 6,129,673 5,975,173
Common Stock
During fiscal 1999, the Company issued 287,318 shares of common stock to
complete a previous agreement (see below).
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 reduction, and the agreement
required additional shares to be issued one year later such that the total value
of all shares issued be equal to $150,000. 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
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.
39
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:
1999 1998 1997
------------- ------------- --------------
Net Income (Loss) As Reported $ (5,487) $ (854) $ 13,012
ProForma $ (5,589) $ (1,066) $ 12,751
Earnings (Loss) Per Common Share As Reported $ (.88) $ (.14) $ 2.27
ProForma $ (.90) $ (.18) $ 2.22
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 1999, 1998 and 1997, respectively, no dividend
yield for all years, expected volatility of 148, 131 and 109 percent; risk-free
interest rates of 5.10, 5.81 and 6.44 percent, and expected lives of 4.0, 3.7
and 5.4 years.
Activity related to options is as follows:
Weighted Average
Number of Shares Exercise
Price per Share
-------------------- --------------------
Outstanding at March 31, 1996 400,734 $2.25
Granted in Fiscal 1997:
Officers & Directors 145,000 $1.00
Employees 471,878 $1.04
Options Expired (1,323) $1.40
-------------------- --------------------
Outstanding at March 31, 1997 1,016,289 $1.51
Granted in Fiscal 1998:
Officers and Directors 152,000 $1.00
Employees 412,000 $1.00
Options Expired (22,170) $2.62
-------------------- --------------------
Outstanding at March 31, 1998 1,558,119 $1.31
Granted in Fiscal 1999:
Officers and Directors 22,000 $0.75
Employees 115,000 $1.00
Options Expired (117,688) $1.77
-------------------- --------------------
Outstanding at March 31, 1999 1,577,431 $1.25
==================== ====================
40
Outstanding Shares
- ------------------
Weighted Average
Range of Number Remaining Contractual Weighted Average
Exercise Prices Outstanding Life Exercise Price
(Years)
----------------------- ------------------ --------------------- -------------------
$1.00 - $1.63 1,532,895 7.2 $1.10
$4.00 - $6.00 31,250 3.6 $4.90
$6.38 - $10.00 13,286 5.0 $9.17
Exercisable Shares
- ------------------
$1.00 - $1.63 1,122,562 7.0 $1.14
$4.00 - $6.00 31,250 3.6 $4.90
$6.38 - $10.00 13,286 5.0 $9.17
The options outstanding at March 31, 1999 expire on various dates
commencing in March 2001 and ending in March 2009.
The weighted average grant date fair value of options during fiscal year
1999, 1998 and 1997 was $.28, $.29 and $.54 respectively.
At March 31, 1998 and 1997, exercisable options totaled 673,984 and 415,601
at weighted average exercise prices of $1.68 and $2.09, respectively.
Warrants
- --------
Activity related to warrants is as follows:
Number of Shares Weighted Average
Price Per Share
-------------------- ------------------
Outstanding at March 31, 1996 through March 31, 1998 1,320,000 $7.00
Granted in Fiscal 1999 209,000 $0.75
-------------------- ------------------
Outstanding at March 31, 1999 1,529,000 $6.15
==================== ==================
Of the warrants outstanding at March 31, 1999, 1,320,000 expire in July
1999 with the remaining warrants expiring in March 2009.
The weighted average grant date fair value of warrants during fiscal year
1999 was $.25.
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,
1999, 1998 and 1997 totaled $0, $0 and $53,000, respectively.
41
NOTE 16 - BUSINESS ACQUISITION
In September 1998, the Company, through its subsidiary MTL, entered into an
agreement to purchase certain assets of Community Clinical Laboratories, Inc.
("CCL"), principally equipment and goodwill/customer base, in exchange for a
$2,500,000 contingent note payable for a period of five years. The primary
operations of CCL were previously suspended in July 1998 when certain agencies
of both the State of Florida and the Federal Government revoked CCL's ability to
seek reimbursement for its laboratory testing services from both the Medicare
and Medicaid programs and seized CCL's accounting records.
During the third quarter of fiscal year 1999, the Company recorded the
acquisition of the assets of CCL as a purchase. Accordingly, the Company
estimated the amount ultimately payable pursuant to the contingent note payable
and allocated the total estimated cost of the acquisition to equipment based
upon an independent appraisal, and the remainder to goodwill/customer base.
During the fourth quarter, the Company changed its preliminary estimate of the
present value of the amount that may be ultimately payable on the contingent
note payable from approximately $2,000,000 to approximately $1,058,000 based on
a more thorough analysis of historical and expected cash collections and
correspondingly reduced the amount of goodwill/customer base recorded to
approximately $250,000. The goodwill/customer base has a ten-year amortization
period.
As a result of the uncertainty related to the operations of CCL prior to
the acquisition of certain assets by MTL and the lack of reliable financial
information related to the historical operation of CCL, as well as due to
management's decision in fiscal 1999 to sell or abandon MTL, pro-forma results
as if the business combination occurred April 1, 1997 and 1998 are not deemed
meaningful and have not been presented.
NOTE 17 - SUBSEQUENT EVENT
On May 27, 1999, the Company sold the assets of its subsidiary, LifeServ
(See Note 3).
NOTE 18 - 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.
Year Ended Year Ended Year Ended
March 31, 1999 March 31, 1998 March 31, 1997
-------------- -------------- ---------------
Basic and Diluted
Actual weighted average shares outstanding;
weighted average shares used in income per
calculation - basic and diluted 6,223,000 6,062,000 5,737,000
============== ============== ===============
42
The following table set forth the computation of historical basic and
diluted earnings (loss) per share:
1999 1998 1997
--------------- -------------- ---------------
Numerator:
Net Income (Loss) $(5,487,000) $ (854,000) $ 13,012,00
=============== ============== ===============
Denominator:
Denominator for basic and diluted earnings per
share- weighted average shares outstanding 6,233,000 6,062,000 5,737,000
=============== ============== ===============
Net Income (Loss) Per Common Share - Basic $ (0.88) $ (0.14) $ 2.27
===============
============== ===============
Net Income (Loss) per Common Share - Diluted $ (0.88) $ (0.14) $ 2.27
=============== ============== ===============
The effect of all options and warrants (see Note 15) 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 19 - CONTINGENCIES
The Company sold its subsidiary LifeServ in May 1999 (See Notes 2 and 18).
The buyer assumed all stated liabilities of LifeServ including a certain
long-term obligation of approximately $536,000 payable to a financial
institution and secured by equipment at a customer site and a contract
receivable. The Company was a guarantor of the obligation at the time the
obligation originated and continues as a guarantor.
In November 1998, the Company's subsidiary, MTL, received a refund request
in the amount of $1.8 million from Medicare Program Safeguards ("MPS") and
$104,000 from the State of Florida Agency for Health Care Administration
("AHCA"). The requests followed an onsite review of MTL's billing procedures by
agencies of both the State of Florida and the federal government. The Company
has requested a hearing in the matter, and MPS and AHCA have suspended the
recoupment of the refund until the hearing takes place. Although MTL believes
that MPS's determination and the request for refunds are without merit, there
can be no assurance that this matter will be resolved over the near term or that
the ultimate outcome of the matter will not have a material adverse effect on
the Company's financial condition and results of operation.
The Company is involved in certain claims and legal actions arising in the
ordinary course of business. There can be no assurances that these matters will
be resolved on terms acceptable to the Company. In the opinion of management,
based upon advice of counsel and consideration of all facts available at this
time, the ultimate disposition of these matters will not have a material adverse
effect on the financial position, results of operations or liquidity of the
Company.
The year 2000 issue relates to limitations in computer systems and
applications that may prevent proper recognition of the year 2000. The potential
effect of the year 2000 issue on the Company and its business partners will not
be fully determinable until the year 2000 and hereafter. If year 2000
modifications are not properly completed either by the Company or entities with
which the Company conducts business, the Company's revenues and financial
condition could be adversely impacted.
43
NOTE 20 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
1999 1998 1997
---------- ----------- ----------
Supplemental Disclosure of Cash flow Information
Cash Paid for Interest $ 1,153 $ 1,048 $ 583
Cash Received from Income Tax Refund $ 0 $ 270 $ 880
Supplemental Cash Flow Information for Discontinued Operations
Operating Activities:
Net Cash Provided by Discontinued Operations $ (477) $ (1,286) $ (478)
Investing Activities
Net Cash Used by Investing Activities of Discontinued Operations (1,527) (679) (261)
Financing Activities:
Net Cash Provided by Financing Activities of Discontinued Operations
2,207 1,967 465
Net Increase (Decrease) in Cash - Discontinued Operations 203 2 (274)
Cash at Beginning of Period - Discontinued Operations (142) (144) 130
========= ========= =========
Cash at End of Period - Discontinued Operations $ 61 $ (142) $ (144)
========= ========= =========
Other non-cash investing and financing activities are as follows:
Continuing Operations
---------------------
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.
Discontinued Operations
-----------------------
During fiscal year 1999, the Company acquired certain assets of CCL (See
Note 16) in exchange for a contingent note valued at $1,058,000 and assumption
of a capital lease obligations valued at $151,000. The assets acquired had a
fair value of $1,209,000.
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 $160,000 addition to goodwill and
accrued expenses.
See Notes 1 and 3 for fiscal 1997 forgiveness of debt (extraordinary gain)
and gain on disposal of discontinued operations.
44
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 16, 1999 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 16, 1999
----------------------- President and Chief Executive Officer
Todd E. Siegel
/s David Kazarian Director July 16, 1999
- -----------------------
David Kazarian
/s Michael P.Conroy Director, Chief Financial Officer July 16, 1999
----------------------- and Vice President
Michael P. Conroy
/s John Stanton Director and Vice Chairman of the July 16, 1999
- ------------------------ Board of Directors
John Stanton
/s David L. Presnell Principal Accounting Officer July 16, 1999
----------------------- and Controller
David L. Presnell
45
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 July 6, 1999, which is included in the Company's Annual Report on SEC Form
10-K as of and for the year ended March 31, 1999, we have also audited Schedule
II for the years ended March 31, 1999, 1998 and 1997. In our opinion, this
schedule presents fairly in all material respects, the information required to
be set forth herein.
GRANT THORNTON LLP
Tampa, Florida
July 6, 1999
SCHEDULE II
MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended March 31, 1997, 1998 and 1999
Column A Column B Column C Column D Column E
- ----------------------------------------- -------------- -------------- -------------- --------------
Balance Charged Accounts Balance at
at Costs and Written Off, End of
Beginning Expenses Net Year
-------------- -------------- -------------- --------------
(1) Deferred Tax Valuation Allowance:
Year Ended March 31, 1997 $ 6,877 $ 0 $ 1,968 $ 4,909
Year Ended March 31, 1998 $ 4,909 $ 980 $ 0 $ 5,889
Year Ended March 31, 1999 $ 5,889 $ 84 $ 0 $ 5,805
(1) Inventory Valuation Allowance:
Year Ended March 31, 1997 $ 850 $ 94 $ 864 $ 80
Year Ended March 31, 1998 $ 80 $ 189 $ 0 $ 269
Year Ended March 31, 1999 $ 0 $ 140 $ 0 $ 140
(1) Self Insured Medical Claims
Valuation Allowance:
Year Ended March 31, 1997 $ 248 $ 726 $ 762 $ 212
Year Ended March 31, 1998 $ 212 $ 583 $ 611 $ 184
Year Ended March 31, 1999 $ 122 $ 566 $ 588 $ 100
(1) Allowance for Doubtful Accounts
and Contractual Allowances:
Year Ended March 31, 1997 $ 528 $ 693 $ 181 $ 1,040
Year Ended March 31, 1998 $ 1,040 $ 1,463 $ 499 $ 2,004
Year Ended March 31, 1999 $ 178 $ 58 $ 25 $ 211
(1) For year ended March 31, 1999, amounts (April 1, 1998 balance, 1999
activity and March 31, 1999 balance) reflect continuing operations only. The
years ended March 31, 1998 and 1997 amounts have not been restated to reflect
continuing operations only as to do so is not practical.