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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, 1996
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OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to __________________
Commission File Number 0-16594
MEDICAL TECHNOLOGY SYSTEMS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 59-2740462
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12920 AUTOMOBILE BOULEVARD, CLEARWATER, FLORIDA 34622
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Registrant's telephone number, including area code (813) 576-6311
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Securities registered pursuant to Section 12 (b) of the Act:
Title of each class Name of each exchange on which registered
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NONE NONE
Securities registered pursuant to Section 12 (g) of the Act:
COMMON STOCK, PAR VALUE $.01
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(Title of Class)
COMMON STOCK PURCHASE WARRANTS
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all required to be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or of such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
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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.
Aggregate market value of voting common stock held by non-affiliates was
$3,700,000 at July 1, 1996.
The number of shares outstanding of the registrant's common stock, $.01 par
value, was 5,444,335 at July 1, 1996.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Location in Form 10-K Incorporated Document
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Part III Registrant's definite proxy
statement for 1996 annual
meeting of shareholders.
Total number of pages, including cover page - 42 (excluding the exhibits)
MEDICAL TECHNOLOGY SYSTEMS, INC.
CLEARWATER, FLORIDA
I N D E X
PAGE
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PART I
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-7
2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
3. Legal proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . 8
4. Submission of matters to a vote of security holders. . . . . . . . . 8
PART II
5. Market for registrant's common equity and related
stockholder matters. . . . . . . . . . . . . . . . . . . . . . . .9-10
6. Selected financial data. . . . . . . . . . . . . . . . . . . . . 11-12
7. Management's discussion and analysis of financial
condition and results of operations. . . . . . . . . . . . . . . 13-16
8. Financial statements and supplementary data. . . . . . . . . . . . .17
9. Changes in and disagreements with accountants
on accounting and financial disclosure . . . . . . . . . . . . . . .17
PART III
10. Directors and executive officers of the Registrant . . . . . . . . .18
11. Executive compensation . . . . . . . . . . . . . . . . . . . . . . .18
12. Security ownership of certain beneficial owners and management . . .18
13. Certain relationships and related transactions . . . . . . . . . . .18
PART IV
14. Exhibits, financial statements, schedules and reports on Form 8-K. 42
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .42
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PART I
ITEM 1. BUSINESS
INTRODUCTION
Medical Technology Systems, Inc., a Delaware corporation, incorporated in
March of 1984, provides products and services to pharmacies that dispense
prescription pharmaceuticals to nursing homes, hospitals and other health
assisted care facilities. The Company's principal businesses consist of the
following product lines: (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) computerized pharmacy
information and dispensing systems business which consists of the Performance
hospital pharmacy management software and the MedServ-TM- mobile computerized
medication dispensing systems for hospitals and nursing homes and (iii) the
clinical laboratory service business of supplying diagnostic testing services to
the medical profession.
During the second quarter of 1996, the Company received notice from
Creighton Pharmaceuticals Corporation, a wholly owned subsidiary of Sandoz
Pharmaceuticals Corporation, that it intended to terminate its relationship with
the Company in the Glasgow Pharmaceutical Corporation (GPC) joint venture which
packaged and distributed pharmaceutical products. As a result of this
termination, the Company recorded a $4.6 million dollar write-off of its
investment in GPC. In addition to the terminated joint venture expense, the
Company recorded a related valuation allowance in the amount of approximately
$505,000 on inventory carried in its drug packaging subsidiary, which had been
acquired for the joint venture. The GPC joint venture was created to provide
the Company with a competitive price advantage in the acquisition cost of its
pharmaceuticals as well as provide additional product lines. As a direct result
of the joint venture termination, the Company re-evaluated its position in the
medication packaging market. It was determined that the automated packaging
equipment associated with the core packaging business should be more fully
utilized in order to remain competitive. The early retirement of portions of
the existing packaging equipment resulted in a $3.0 million charge.
During the same quarter, the Company recorded other losses and write-downs
which impacted its earnings. These adjustments included a $1.2 million charge
relating to the obsolescence of an early version of its computerized medication
dispensing product and an additional charge of approximately $500,000 relating
to the valuation of certain inventory and project development costs.
As a result of these significant losses in the second quarter of fiscal
1996, the Company was in violation of certain financial covenants in the
borrowing agreements with its principal lenders. The Company was unable to
reach an agreement with its lenders to amend or restructure the debt. The
extended negotiations with the Company's lenders created substantial uncertainty
which led to management's decision to file for protection under Chapter 11 for
certain of its subsidiaries.
During the fourth quarter of 1996, the Company filed voluntary petitions
for relief under Chapter 11 ("Chapter 11") of Title 11 of the United States
Bankruptcy Code in the Middle District of Florida, Tampa Division (the
"Bankruptcy Court") for four of its subsidiaries (MTS debtors). The MTS debtors
are presently operating their businesses as debtors-in-possession under the
jurisdiction of the Bankruptcy Court and intend to reorganize pursuant to
Chapter 11. As debtors-in-possession, these subsidiaries may engage in
transactions within the ordinary course of business without approval of the
Bankruptcy Court.
Because of the events described above, the Company's working capital and
borrowing capacity were extremely limited. The Company ultimately decided to
suspend most project development activities, incurring substantial write-offs of
the suspended project costs.
Liabilities subject to compromise in the accompanying consolidated balance
sheets represent the Company's estimate of liabilities as of the filing date
subject to adjustment in the reorganization process. Under Chapter 11, actions
to enforce certain claims against the MTS debtor subsidiaries are stayed if the
claims arose, or are based on events that occurred, on or before the petition
date. The ultimate terms of settlement of these liabilities and claims will be
determined in accordance with a plan of reorganization which requires the
approval of prepetition creditors and confirmation by the Bankruptcy Court.
Other liabilities may arise or be subject to compromise as a result of rejection
of executory contracts, including leases, or the Bankruptcy Court's resolution
of claims for contingencies and other disputed amounts. The ultimate resolution
of such liabilities will be part of a plan of reorganization. Claims secured by
the debtor's assets ("secured claims") also are stayed, although the creditors
of such claims have the right to move the court for relief from the stay.
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The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The Company
incurred losses during the current year of approximately $34.6 million and its
total liabilities exceed its total assets by approximately $18.5 million as of
March 31, 1996. The Company also had negative cash flows from operations during
the current year of approximately $.9 million and loans in the amount of
approximately $29 million are past due. In addition, the major operating
subsidiaries of the Company have filed for protection under Chapter 11 of the
U.S. Bankruptcy Code. These conditions raise substantial doubt as to the
Company's ability to continue as a going concern. The consolidated financial
statements do not include any adjustments that might result from the outcome of
these uncertainties.
A plan of reorganization could materially change the amounts reported in
the accompanying consolidated financial statements, which do not give effect to
adjustments to the carrying values of assets and liabilities which might be a
consequence of a plan of reorganization. The ability of the Company to continue
as a going concern is dependent on, among other things, confirmation of an
acceptable plan of reorganization, future profitable operations, the ability to
generate sufficient cash from operations, and the ability to obtain financing
sources to meet future obligations.
CHAPTER 11 REORGANIZATION UNDER THE BANKRUPTCY CODE
Pursuant to Section 362 of the Bankruptcy Code, the commencement of the
Chapter 11 proceedings provided an automatic stay of all judicial proceedings as
of the petition dates.
The Company, with Bankruptcy Court jurisdiction, is in possession of its
property and assets and is maintaining and operating its business in the
ordinary course. The Bankruptcy Code provides that all liabilities as of the
petition date are subject to restructure under the terms of a plan of
reorganization.
RESOLUTION OF CLAIMS
Schedules were filed with the Bankruptcy Court setting forth the assets and
liabilities of the MTS debtors as of the petition date. The ultimate amount and
settlement terms for any prepetition liabilities will be subject to a plan of
reorganization (see "Plans of Reorganization" below), and accordingly, are not
presently determinable.
PLANS OF REORGANIZATION
Plans of reorganization for MTS Packaging Systems, Inc. and Medical
Technology Laboratories, Inc. were submitted to the Bankruptcy Court on May 16,
1996. A plan of reorganization was submitted for Vangard Labs, Inc. on July 5,
1996. A confirmation hearing is scheduled for September 4, 1996 for all MTS
debtors. No assurance can be given that these plans will be confirmed by the
Bankruptcy Court.
Inherent in a successful plan of reorganization is a capital structure
which permits a debtor to generate sufficient cash flow to meet its restructured
obligations and fund its current obligations. Under the Bankruptcy Code, the
rights of and ultimate payments to prepetition creditors and stockholders may be
substantially altered.
In connection with the filings of the MTS debtors, the Company entered into
a Bankruptcy Court approved agreement with its lenders to permit continued use
of cash collateral, primarily accounts receivables and inventories, to conduct
its business. The Company believes that the Bankruptcy Court protection
provided by the filings for the MTS debtors has allowed the resumption of normal
business operations.
At this time, it is not possible to predict the outcome of the filings in
general, or the effects of the filings on the business of the Company and its
subsidiaries, or the interests of the prepetition creditors and stockholders.
Because of these and other contingencies, the value of the Company's common
stock is uncertain. The uncertainty regarding the eventual outcome of the
filings and the potential effects of other unknown adverse factors could
threaten the Company's existence as a going concern. Trading of the Company's
common stock on NASDAQ was discontinued on February 9, 1996 for failure to meet
the requirements for continued inclusion in the NASDAQ.
GENERAL
The Company's MTS Packaging Systems, Inc. subsidiary primarily manufactures
and sells disposable medication punch cards, packaging equipment and allied
ancillary products. Its customers are predominantly pharmacies that supply
nursing home and assisted living patients with prescription medications. This
subsidiary manufactures its proprietary disposable punch cards and packaging
equipment in its own facilities. This process utilizes technologically advanced
integrated machinery for manufacturing the disposable medication punch cards.
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The disposable medication punch cards and packaging equipment are designed
to provide a cost effective and customized method for pharmacies dispensing
medications at competitive prices. The Company's medication dispensing systems
and products are relatively new and innovative for dispensing medications in
disposable packages.
Vangard Labs, Inc. now identified as a discontinued operation for reporting
purposes, packages and sells oral solid unit-dose generic drugs to hospital and
nursing home institutional pharmacies. The Company previously installed
proprietary medication punch card packaging machinery at Vangard Labs, Inc. so
that it could pre-fill the medication punch cards (manufactured by MTS Packaging
Systems, Inc.) with oral solid generic and brand name drugs. The product is
called MedCard-TM-. The MedCard product was the principal product of the GPC
joint venture.
The Company formed Medication Management Systems, Inc. (MMS) to expand its
hospital pharmacy management software (Performance) which has been sold to
approximately 120 hospitals throughout the United States. MMS has further
developed its MedServ product line of mobile computerized medication dispensing
systems to interface with the Performance Pharmacy System. The MedServ product
line consists of MedServ FS-TM- (inventory control of floor stocked items) and
MedServ EMAR-TM- (electronic charting of patients scheduled medications). The
Company believes it has developed a comprehensive solution to enhanced
documentation of medication use within the hospital environment. The Company is
unaware of any other products that address this important healthcare need with
the same level of system integration. As a result of the Company's current
financial condition, the necessary capital to continue development of this
product might not be available, and the Company is at risk of losing this unique
business opportunity.
Medical Technology Laboratories, Inc. ("MTL") was formed in 1992 for the
purpose of acquiring Clearwater Medical Services, Inc. and Clinical Diagnostic
Centers, Inc. MTL conducts clinical laboratory services and testing for
hospitals, physicians and other health care providers in the State of Florida.
During 1996, MTL purchased the rights and interests in certain clinical
laboratory services of Tampa Pathology Laboratory.
The principal executive offices and manufacturing facilities of the Company
are located at 12920 Automobile Boulevard, Clearwater, Florida 34622, and its
telephone number is (813) 576-6311.
PRODUCTS/SERVICES
The Company's MTS Packaging Systems, Inc. subsidiary 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 into medication punch cards: 30, 60,
or 90 tablets or capsules, representing a 30 day supply of a patient's
medication.
The Company'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 Company's package.
The retail price of the Company's medication packaging machinery ranges
from $650 to $120,000 depending upon the degree of automation and options
requested by a customer. The Company's punch cards typically sell from $155 to
$225 per 1,000 cards, depending upon the size, design, quality and volume of
cards ordered by a customer. To date, the Company has placed approximately 850
medication dispensing systems with pharmacy clientele. The Company's MTS
Packaging Systems, Inc. subsidiary also sells prescription labels and medication
carts. These products and ancillary supplies are designed to complement sales of
disposable medication punch cards.
Within its Medication Management Systems, Inc. ("MMS") subsidiary, the
Company offers a proprietary computer-based pharmacy management system for
hospitals called Performance Pharmacy System. The primary emphasis of this
system is to provide the hospital pharmacist with a comprehensive collection of
automated tools for completing day-to-day activities in an efficient manner.
The system performs important medication management responsibilities and
sophisticated drug therapy monitoring and documentation. The system also
provides hospital pharmacists with the ability to process physician's medication
orders quickly and accurately. The organization of screens, use of overlapping
windows, in-process access to multiple files and other user friendly techniques
makes the Performance Pharmacy System an attractive and functional hospital
pharmacy software system. Performance Systems pricing starts at about $30,000
which includes hardware, software, training and pre-loaded drug files. To date,
approximately 120 Performance Hospital Pharmacy Software Systems have been
installed with users. The Company believes that the market for such systems is
favorable. However, the Company has reduced the carrying value of such assets
due to the lack of financing and other uncertainties that might preclude further
development of the system.
3
Also within MMS, the Company has developed the MedServ product line which
consists of MedServ FS (inventory control of floor stocked items) and MedServ
EMAR (electronic charting of patients scheduled medications). The MedServ
Medication Cart has been specifically designed for use in hospital and nursing
home facilities. With its unique hardware and customized software programs, the
MedServ system objective is to introduces controls and audit trails to reduce
the likelihood of medication errors while helping to provide high levels of
security within the hospital. This mobile computer based system automatically
logs all activity and allows integration with existing information systems. As
nurses make rounds, the MedServ Cart moves with them providing finger tip "touch
screen" access to vital patient and prescription information. The benefits
include accurate patient billing, reduced probability of missed dosages and
medication errors, and adherence to pharmacy and nursing drug administration
policies. Further benefits include improved drug accountability, curtailed
pilferage and better inventory control through "proof-of-use" management. It
also supports the clinical pharmacist's activities by identifying dosing
compliance.
Currently, the MedServ FS product has not been made widely available to the
healthcare industry. MedServ FS has been installed in 14 hospitals, and the
MedServ EMAR system is due to be installed in fiscal year 1997. The continued
development of MedServ EMAR contemplates a successful reorganization of the
Company and the availability of capital.
Vangard Labs, Inc. now identified as a discontinued operation for financial
reporting purposes, buys generic drugs (including analgesics, anti-arthritics,
antibiotics, cardiovascular, laxatives, nutritionals and psychotropics) from
leading manufacturers of generic drugs. The drugs are repackaged predominantly
in a unit-dose format and sold to wholesalers. These pharmaceutical products
are, in turn, resold to individual hospitals and nursing home pharmacies.
Medical Technology Laboratories, Inc. provides clinical laboratory testing
services. The analytical tests which it provides are typical of diagnostic
laboratories and the facilities presently have no particular specialization in
any of its testing procedures and services. This Company performs in-house
over 95% of the testing routinely ordered by physicians for their patients,
which typically includes chemistry, hematology, serology, urinalysis and
bacteriology.
GLASGOW PHARMACEUTICAL CORPORATION JOINT VENTURE
The Company, through its Vangard Labs, Inc. subsidiary, has been a partner
in a joint venture with Creighton Pharmaceuticals Corporation, a wholly owned
subsidiary of Sandoz Pharmaceuticals, Inc. This joint venture, named Glasgow
Pharmaceutical Corporation ("GPC") is fifty percent owned by each party. During
fiscal year 1995, GPC began selling medication punch cards pre-filled with
pharmaceuticals to customers of the Company in the long-term care market. MTS
Packaging Systems, Inc. has provided medication punch cards to the Vangard Labs,
Inc. facility where they have been packaged with pharmaceuticals and delivered
to GPC for marketing and sales. On November 9, 1995, Creighton Pharmaceuticals,
owner of a 50% interest in GPC notified the Company that it desired to terminate
its involvement in the joint venture. The Company's interest in this joint
venture has been treated as a discontinued operation for financial reporting
purposes.
MANUFACTURING PROCESSES
The Company has developed an integrated punch card assembly machine which
will accomplish the various punch card manufacturing steps in a single in-line,
automated process. The Company believes that its advanced automation gives it
certain speed, cost and flexibility advantages over conventional punch card
manufacturers. The Company's equipment produces finished cards in one 8 hour
shift which previously took one week using conventional methods. This represents
a substantial reduction in time over conventional punch card manufacturing
systems. The Company has two machines capable of producing punch cards in this
manner.
During 1996, the Company disposed of all production equipment and tooling
it no longer was utilizing in its manufacturing processes due to the exclusive
use of automated equipment resulting in a charge of $8.3 million. The machines
that the Company's MTS Packaging Systems, Inc. subsidiary sells, leases or
provides to its customers for use with the Company's medication punch cards are
manufactured by the Company. The Company uses automated fabrication equipment
to produce its medication packaging machinery. All essential components of the
machines are manufactured by the Company without reliance on outside vendors.
The MTS Packaging Systems, Inc. subsidiary is dependent upon a limited
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. The inability to obtain raw materials on a
timely basis and on acceptable terms may have an adverse impact on the future
performance of the Company.
4
Medication Management Systems, Inc. integrates computer hardware into its
MedServ mobile medication carts and then installs its proprietary software. All
hardware is purchased from outside vendors but is common to many suppliers. The
Company believes its proprietary software adds substantial value to the product,
primarily because of the Company's extensive knowledge of hospital pharmacy
management practices derived from the more than 120 installations of its
Performance Pharmacy Systems.
The Medical Technology Laboratories, Inc. subsidiary primarily relies upon
sophisticated diagnostic testing equipment to evaluate bodily fluid samples.
The Company has upgraded its laboratory equipment through the acquisition of
automated analyzers. Each analyzer is capable of performing 36 different tests
on up to 160 patients per hour. The testing categories performed by such
machinery includes bacteriology, chemistry, hematology, serology and urinalysis.
MARKETS AND CUSTOMERS
The MTS Packaging Systems, Inc. products are sold throughout the United
States, primarily through its sales organization and independent sales
representatives. The Company also participates in trade shows and training
seminars. Although the Company has been able to market its products, there is
no assurance that its sales efforts will continue to be successful, particularly
in light of the bankruptcy filings for its three principal subsidiaries.
The primary customers for the MTS Packaging Systems, Inc. proprietary
packaging machinery and the related disposable punch cards, labels and ancillary
supplies are pharmacies that supply prescription medication to nursing homes.
Such pharmacies generally serve from 250 to 5,000 nursing home beds per
location, and many serve the home health care marketplace as well.
The Company has begun commercializing its MedServ product line, which is a
mobile computerized medication dispensing system, to hospitals throughout the
United States. This technology is attractive to hospitals because it provides
the opportunity for the hospital to reduce medication dispensing and
administration errors. Approximately 2,000 of the more than 6,000 acute care
and specialty care hospitals throughout the United States currently have
computerized medication dispensing systems. Most of those 2,000 hospitals
utilize floor stock systems for inventory control in primarily the emergency
room, operating room, or in areas where narcotic floor stock was previously
stored. Thus, an opportunity within most of those 2,000 hospitals is provided
for systems, such as the Company's MedServ EMAR, that can adequately handle a
patient's regularly scheduled medications. The systems that have been installed
are primarily justified by reducing inventory shortages and decreasing "lost
billings" rather than reducing or eliminating medication errors. As of July 1,
1996, the Company had 14 MedServ hospital installations within the U.S. The
Company anticipates that pricing for MedServ products will range from $25,000 to
$500,000 for a hospital installation depending on the number of beds and service
level requirements. The Company believes that the market for such systems is
favorable. However, the Company has reduced the carrying value of such assets
due to the lack of financing and other uncertainties that might preclude further
development of the product line.
The Company believes that as more nursing home and hospital pharmacy
providers learn of the cost effectiveness of the Company's medication dispensing
and information systems, the number of nursing home and hospital pharmacies
using these systems will continue to increase, although there can be no
assurance of any such increase.
The additional markets for other assisted care facilities, such as sub-
acute care and assisted living facilities, are relatively new. Although the
Company has no specific data for these markets, it believes that the extension
of the health care market from nursing homes and hospitals into sub-acute care,
assisted living facilities and other health care facilities represents a
potential to expand the customer base for its products. Although the Company is
optimistic that it will be able to generate additional revenues from the growing
assisted care facilities market, there is no assurance that it can significantly
penetrate such markets.
The primary market and customers for the services offered by the Medical
Technology Laboratory, Inc. subsidiary are doctors and hospitals in the State
of Florida.
The Company presently has no customers which account for greater than 10%
of its consolidated sales.
COMPETITION
The pharmacies which supply prescription medicines to nursing homes and
hospitals are the primary market for the Company's products. This market is
highly competitive. There are several competitors that presently market other
systems utilizing punch cards. The Company believes it is the industry leader
in the automation of packaging and sealing of solid medications into punch
cards. The products developed by the Company's competitors are not as efficient
as the
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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 price, customization,
and product performance. Many of the Company's competitors have been in
business longer and have substantially greater resources than the Company. The
Company's medication dispensing systems are relatively new and there is no
assurance that the Company will be able to compete effectively with traditional
methods of dispensing medication or other punch card systems.
The Company's primary competitors for medication dispensing systems are
Drug Package, PCI and RX Systems. The Company believes that its automated
proprietary packaging machinery distinguishes MTS Packaging Systems, Inc. from
its competitors' manual systems which are capable of only filling and sealing
30-45 disposable medication punch cards per hour. The Company's new automated
packaging machinery can fill and seal up to 600 disposable medication cards per
hour.
Vangard Labs, Inc. which has been identified as a discontinued business
unit held for sale, has faced competition from numerous packagers of generic
oral solid unit dose medications for hospitals and nursing homes. This market
is highly competitive and includes companies such as Schein, UDL, Goldline,
Roxanne and Medirex. The principal methods of competition for unit dose
repackagers are price, quality of product and reputation. Vangard Labs, Inc.
has numerous competitors who have been in business longer and have greater
financial and marketing resources.
Medication Management Systems, Inc. faces intense competition within the
hospital marketplace for both its Performance Pharmacy management systems and
its MedServ products. For pharmacy management systems, competitors include
dominant hospital information system vendors such as HBOC, SMS, MediTech, and
other such major corporations. Also included are pharmacy management systems
providers such as Megasource, Cerner, Continental and HCS. Among suppliers of
automated dispensing systems to hospitals, the Company will be competing with
such major companies as Pyxis, Baxter, Diebold, and others for its new MedServ
product line. Although the Company believes it provides superior technological
systems, there is no assurance that it will be able to effectively compete with
companies that have more financial resources or established market distribution
channels.
The Medical Technology Laboratories, Inc. subsidiary conducts its business
in a very competitive marketplace. There are a number of diagnostics
laboratories in the Tampa Bay area which compete with the Company's facilities.
In addition, hospitals are offering their own diagnostic clinical laboratory
services which places additional competitive pressure on the Company. Although
management of the Company's MTL subsidiary believes it provides a high level of
service and quality, there can be no assurance that competitors, governmental
regulations, or reductions in Medicare reimbursement rates will not erode its
business prospects.
PROPRIETARY TECHNOLOGY
The Siegel Family QTIP Trust (the "Trust") is the holder of certain patents
and other proprietary rights for the equipment and processes which the Company's
MTS Packaging Systems, Inc. subsidiary uses and sells. The Trust is the
assignee of all such proprietary and patent rights used in the Company's
business which was invented or developed by Mr. 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 utilize the know-how and patent rights in the manufacture and sale of the
Company's medication dispensing systems.
There are numerous patent applications and patent license agreements for
products sold and that have been in development within the Medication Management
Systems, Inc. subsidiary.
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, or that may be issued in the future, will
ultimately provide meaningful protection from competition.
The MTL subsidiary does not presently benefit from any proprietary
technology. The Company has completed a program to upgrade to more
technologically advanced equipment for its analytical services and the delivery
of diagnostic information to its customers.
REGULATION
The Company's MTS Packaging Systems, Inc. subsidiary's products are
governed by federal regulations concerning components of packaging materials
which are in contact with food. The Company has obtained assurances from its
vendors that the packaging materials used by the Company are in conformity with
such regulations. However, there
6
can be no assurance that significant changes in the regulations applicable to
the MTS Packaging Systems, Inc. subsidiary's products will not occur in the
foreseeable future. Any such changes could have an adverse effect on the
Company.
The operations of the MTL subsidiary are subject to extensive federal,
state and local regulation. Specifically, the Company's MTL subsidiary are
licensed by the State of Florida Department of Health and Rehabilitation
Services (HRS) and are certified by the Health Care Financial Administration
(HCFA), a federal governmental agency. The Company believes its MTL subsidiary
is operated in compliance with HRS and HCFA licensing and certification
requirements.
The operations of the MTL subsidiary are subject to Medicare reimbursement
requirements and restrictions imposed by the Social Security Act as administered
by HCFA. Recent regulatory changes directly affect the way Medicare reimburses
for laboratory services. Commencing September 1, 1992, Medicare no longer paid
for laboratory services unless the lab facility was certified under the Clinical
Laboratory Improvement Act of 1988. The Company's operation of its MTL
subsidiary complies with this federal legislation.
Most clinical laboratory procedures are paid from laboratory fee schedules
issued by individual Medicare carriers or intermediaries. Since January 1,
1992, laboratory services are paid based upon a national fee schedule modified
by local economic factors. Medicare carriers pay laboratory claims on a
reasonable fee basis. In the case of laboratory tests, the recommended fee is
the lesser of the fee schedule, or the national caps on the actual billed
amounts. Most laboratory tests must be billed on an assigned basis. This means
that the provider must accept the Medicare reimbursement as payment in full for
a laboratory test. Medicare patients are not billed for the additional amount.
In addition, the State of Florida has adopted legislation which limits billing
for laboratory services to 120% of the allowable Medicare reimbursement.
The operations of Vangard Labs, Inc. (treated as discontinued for reporting
purposes) are subject to the Good Manufacturing Practice regulations promulgated
by the FDA as codified in 21CFR Parts 210 and 211. The operations of Vangard
Labs, Inc. are also subject to field inspections by regional offices of the FDA
and DEA for compliance with regulations dealing with drug manufacturers. The
Company believes it has instituted sufficient quality control procedures and has
taken such other steps so as to be in compliance with FDA and DEA regulations
and requirements as currently in effect. The Company is currently in compliance
with applicable FDA and DEA regulations.
Regulations regarding the "stability" of repackaged drugs and the
expiration dating of repackaged products are extremely important to the
operations of Vangard Labs, Inc. Changes in the methods employed by Vangard
Labs, Inc. in repackaging drugs require additional stability studies.
Unfavorable results could adversely effect Vangard's product lines.
It is impossible for the Company to predict the extent to which its
operations will be effected under the laws and regulations described above or
any new regulations which may be adopted by regulatory agencies.
EMPLOYEES
As of July 1, 1996, the Company employed 197 including 30 at Vangard Labs,
Inc., persons full time. None of the Company's employees are covered by a
collective bargaining agreement.
ITEM 2. PROPERTIES
The Company leases a 62,000 square foot plant consisting of office space
and air-conditioned manufacturing and warehousing space near the Clearwater/St.
Petersburg International Airport at 12920 Automobile Boulevard. The Company's
corporate administrative and marketing offices, its MMS subsidiary, and the
manufacturing facilities for the MTS Packaging Systems, Inc. subsidiary are
located at this address. The lease had an initial term of five years commencing
on April 1, 1987 and now expires on April 15, 1999. The Company's current
monthly lease payments are approximately $21,000.
The Company leases approximately 5,200 square feet at approximately $2500
per month for office and warehouse space at 21530 Drake Road, Cleveland, Ohio.
This space is used by the Ohio Label business acquired by the Company in 1989.
This business is now part of MTS Packaging Systems, Inc.
The Company leases approximately 3,300 square feet of space for its MTL
subsidiary located in Pinellas County, Florida. This lease expires on April 1,
1997, with monthly rents not in excess of $5,046.
7
In connection with the ownership of Vangard Labs, Inc. the Company owns two
buildings in Glasgow, Kentucky used for administration and warehousing. These
facilities, together with a leased building used for manufacturing, contain
approximately 46,000 square feet. The monthly payments for the Vangard Labs,
Inc. leased facilities are approximately $3,950. The Company agreed to assume
certain obligations related to this property including a promissory note with an
unpaid balance of approximately $204,000, with a 3% interest rate and monthly
payments of approximately $2,400. As security for this note, the Company
granted a first mortgage on the Vangard real estate.
ITEM 3. LEGAL PROCEEDINGS
The Company was not involved in any litigation which, in the opinion of
management, would have a material adverse effect on the Company's financial
position. As more fully described in the last paragraph of the Note 14 to the
consolidated financial statements, the Company is disputing a proposed
assessment by the State of Florida, Department of Revenue.
On January 3, 1996, three of the Company's subsidiaries, MTS Packaging
Systems, Inc., Medical Technology Laboratories, Inc. and MTS Sales & Marketing,
Inc. filed voluntary petitions for relief under Chapter 11 of Title 11 of the
United States Bankruptcy Code in the United States Bankruptcy Court for the
Middle District of Florida, Tampa Division. On February 22, 1996, the Company's
subsidiary, Vangard Labs, Inc. filed a voluntary petition for relief under
Chapter 11 of Title 11 of the United States Bankruptcy Code in the United States
Bankruptcy Court for the Middle District of Florida, Tampa Division.
The Company and the MTS debtors are in possession of their respective
properties and assets and the subsidiaries are operating their respective
businesses as debtors-in-possession pursuant to provisions of the Bankruptcy
Code. With the exception of Vangard Labs, Inc. the Company intends to continue
the operation of its businesses and the management of its operations and has
proposed plans of reorganization for these entities pursuant to Chapter 11 of
the Bankruptcy Code (see "Business" for further information regarding Chapter
11 filings). Vangard Labs, Inc. has been identified as a discontinued operation
and the Company plans to dispose of Vangard Labs, Inc. within the current year.
Under Chapter 11, actions against the Company's filed subsidiaries are
automatically stayed if a claim arose or is based upon events that occurred on
or before the petition dates.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
8
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The authorized capital stock consists of 25,000,000 shares of Common
Stock, $.01 par value ("Common Stock"), and 7,500,000 shares of Preferred Stock,
$0.0001 par value ("Voting Preferred Stock"), issuable in series. On January 6,
1992 the Company declared a reverse 1 for 4 split of its Common Stock to obtain
entry to the NASDAQ-NMS. Trading of the Company's common stock on NASDAQ was
discontinued on February 9, 1996 for failure to meet the requirements for
continued inclusion in the NASDAQ.
COMMON STOCK
Holders of shares of Common Stock are entitled to one vote per share
on all matters to be voted on by stockholders, including the election of
directors. There is no right to cumulate votes in the election of directors.
However, Todd E. Siegel through the JADE Partnership ("Partnership") and the
Trust which maintains ownership of the Voting Preferred Stock, controls the
affairs of the Company, including the election of directors. The holders of
Common Stock are entitled, upon liquidation or dissolution of the Company, to
receive pro rata all assets remaining available for distribution to
stockholders after payment of $10,000 to the holders of the Preferred Stock.
The Common Stock has no preemptive or other subscription rights, and there are
no conversion rights or redemption or sinking fund provisions with respect to
such shares. All the outstanding shares of Common Stock, are validly issued,
fully paid and non-assessable.
The holders of Common Stock are entitled to receive such dividends, if
any, as may be declared from time to time by the Board of Directors, in its
discretion, from such funds as are legally available. The Company's financing
agreements include restrictions on the payment of dividends. The Company has
never paid cash dividends on its Common Stock, however, and it currently intends
to retain all earnings for use in its business. Accordingly, it is anticipated
that no dividends will be paid in the foreseeable future. During 1996, an
Employee Stock Purchase Plan was initiated which provided approximately
$400,000 in equity with a corresponding expense in exchange for the issuance of
approximately 1.4 million of the 2 million shares of common stock reserved for
this plan.
As of July 1, 1996, there were approximately 1,300 registered holders
of the common shares of the Company's outstanding Common Stock.
PREFERRED STOCK
The Company has outstanding 6,500,000 shares of Voting Preferred Stock,
all of which are held by the JADE Partnership. The Voting Preferred Stock has
the right to cast two votes per share on each and any matter on which the Common
Stock is entitled to vote. 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 issued to the Partnership is not subject to further calls or
assessments by the Company.
OPTIONS
Four hundred thousand (400,000) shares of common stock are reserved for
issuance to employees under the Company's Employee Stock Option Plan. Eighty
thousand, four hundred eighty four (80,484) of these options, at various prices
which range from $4.00 to $10.00 per share, were outstanding at March 31, 1996.
During fiscal 1996, options to acquire 59,000 shares of common stock at
an exercise price of $1.63 were issued to certain officers, directors, and
former directors of the Company.
As of March 31, 1996, approximately 320,250 options, at $1.63 per
share, were outstanding and held by certain officers, directors, and former
directors of the Company.
The options currently outstanding expire on various dates commencing
April 1998 and ending March 2006.
9
WARRANTS
The Company has 1,200,000 outstanding warrants exercisable to purchase
one share of Common Stock at $7.00 per share, which were issued in connection
with its July 1991 public offering. In addition, the Company has 120,000
outstanding warrants, which were issued to the underwriter of the July 1991
offering, exercisable to purchase one share of Common Stock at $7.00 per share.
These warrants were originally to expire on July 9, 1996, but have been extended
to July 17, 1997. These warrants are callable by the Company, upon 30 days
written notice, at $.05 per warrant.
The above warrants contain anti-dilution provisions providing for
adjustment of the exercise price upon the occurrence of certain events,
including the issuance of any Common Stock or other securities convertible into
or exercisable for Common Stock at a price per share less than the exercise
price, or in the event of any recapitalization, reclassification, stock
dividend, stock split, stock combination or similar transaction. The
outstanding warrants do not confer upon the holders thereof any voting
preemptive rights, or any other rights of the shareholders of the Company.
REPORTS TO STOCKHOLDERS
The Company will furnish its stockholders with annual reports
containing audited financial statements that have been examined and reported on
by independent certified public accountants and quarterly reports for the first
three quarters of each fiscal year containing unaudited financial statements.
TRANSFER AGENT AND WARRANT AGENT
Continental Stock Transfer & Trust Company, New York, New York is the
registrar and transfer agent for all of the Company's securities.
PRICE RANGE OF THE COMPANY'S SECURITIES
Previous to February 9, 1996, the Company's Common shares traded on
NASDAQ National Market. Trading of the Company's common stock on NASDAQ was
discontinued on February 9, 1996 for failure to meet the requirements for
continued inclusion in the NASDAQ. Since that time, the Company's common stock
has traded on the over-the-counter market. The table below sets forth the range
of high and low sale prices for the Company's Common Shares for the period
indicated.
High Low
1995 Fiscal Year ----- -----
First Quarter 9 1/4 7 5/8
Second Quarter 8 1/8 6 5/8
Third Quarter 7 3/8 5 1/2
Fourth Quarter 7 3/4 5 1/8
1996 Fiscal Year
First Quarter 9 1/8 4 5/8
Second Quarter 6 1/16 4 5/8
Third Quarter 6 3/4
Fourth Quarter 1 3/16 3/16
The table below sets forth the range of high and low sales prices for
the Company's warrants for the period indicated.
1995 Fiscal Year
First Quarter 3 5/16 2 1/4
Second Quarter 2 5/8 1 11/16
Third Quarter 2 1/4 1 1/4
Fourth Quarter 2 1/2 1 5/16
1996 Fiscal Year
First Quarter 3 7/8
Second Quarter 1 1/2 11/16
Third Quarter 1 1/8 1/32
Fourth Quarter 1/32 1/32
10
ITEM 6. SELECTED FINANCIAL DATA
The following table sets 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)
Income Statement Data: 1996 1995 1994 1993 1992
- - ---------------------- -------- -------- ------- ------- ---------
Sales $17,052 $14,830 $12,301 $10,858 $ 7,500
Cost of Sales and Other Expenses 41,669 16,946 9,367 8,052 5,185
Income (Loss) from Continuing
Operations Before Cumulative Effect
of Accounting Change (22,717) (1,272) 1,856 1,740 1,476
Income (Loss) from Discontinued
Operations (6,634) 16 762 552 -0-
Estimated Loss on Disposal of
Discontinued Operations (5,229) -0- -0- -0- -0-
Cumulative Effect of Accounting
Change for FASB No. 109 -0- -0- 543 -0- -0-
Net Income (Loss) (34,580) (1,256) 3,161 2,292 1,476
Primary Net Earnings (Loss) Per Share:
From Continuing Operations (5.60) (.32) .48 .46 .45
Income (Loss) from Discontinued Operations (2.92) .00 .20 .15 .00
Cumulative Effect of Accounting Change
For FASB No. 109 .00 .00 .14 .00 .00
-------- ------- ------- ------- -------
Net Earnings (Loss) Per Share $ (8.52) $ (0.32) $ .82 $ .61 $ .45
-------- ------- ------- ------- -------
-------- ------- ------- ------- -------
Average Common Shares and Common
Share Equivalents Outstanding* 4,059 3,974 3,879 3,789 3,306
*No dividends were declared or paid during periods presented.
11
AT MARCH 31,
-------------------------------------------------
(In Thousands)
Balance Sheet Data: 1996 1995 1994 1993 1992
- - ------------------- --------- -------- --------- -------- --------
Net Working Capital* $5,406 $ 5,410 $ 1,695 $ 1,899 $ 513
Assets 14,669 44,243 33,018 25,527 17,217
Short-Term Debt* 168 1,165 979 654 1,658
Long-Term Debt* 350 23,224 10,588 7,227 1,541
Stockholders' Equity (Deficit) (18,546) 15,640 16,853 13,655 10,487
*Excluding Liabilities Subject to Compromise of $30,457 in 1996.
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
During Fiscal 1996, operating losses and limited working capital
necessitated a thorough review of all operations and an assessment of the
carrying value of all assets. Stringent measures were taken in the fourth
quarter to preserve the Company's assets and core businesses. Management
believes that the ultimate result will be a profitable and growing company
refocused on its core businesses.
As described below, during the fourth quarter the Company's principal
operating subsidiaries filed voluntary petitions under Chapter 11 of the United
States Bankruptcy Code. The Company's intent in such filings was a
reorganization of its underlying businesses, the restructuring of indebtedness
with its principal lenders and protection of interests of its stockholders. The
Company has recently filed reorganization plans that await approval by its
creditors and the Bankruptcy Court.
CHAPTER 11 REORGANIZATION
During fiscal 1996, the Company experienced disappointing operating results
from its new MedServ product and operating losses at Vangard Labs, Inc. On
January 4, 1996, the Company received notice from its lenders that its failure
to make a scheduled mandatory principal amortization and interest payment of
approximately $307,000 on December 5, 1995 was an event of default under its
credit agreement.
On January 3, 1996, three of the Company's subsidiaries, MTS Packaging
Systems, Inc., Medical Technology Laboratories, Inc. and MTS Sales & Marketing,
Inc. filed voluntary petitions under Chapter 11 of Title 11 of the United
States Bankruptcy Code in the United States Bankruptcy Court for the Middle
District of Florida, Tampa Division. At that time, the Company also suspended
production operations at Vangard Labs, Inc. to avert further operating losses.
On February 22, 1996, a voluntary petition under Chapter 11 of Title 11 of
the United States Bankruptcy Code in the United States Bankruptcy Court for
the Middle District of Florida, Tampa Division was filed for Vangard Labs,
Inc. Vangard Labs, Inc. is presented as a discontinued operation in the
consolidated financial statements of the Company. It is the intent of
management, with the cooperation of its lenders, to sell the Vangard Labs,
Inc. assets and use the proceeds to retire debt. The Glasgow Pharmaceutical
Corporation joint venture is highly dependent upon Vangard Labs, Inc.
production capability to manufacture, package and distribute medication cards
filled with pharmaceuticals to long-term care pharmacy and other health care
facilities. MedCard is the pre-filled medication card provided through this
joint venture with Creighton Pharmaceuticals Corporation, a wholly owned
subsidiary of Sandoz Pharmaceuticals Corporation. The marketing and
distribution of MedCard to the long-term care industry began in fiscal 1995.
The significant expansion anticipated in 1996 did not materialize when
Creighton withdrew its support from this joint venture. This event
necessitated a reappraisal of the carrying costs of this venture and an
assessment of its viability. Divesting Vangard Labs, Inc. makes the viability
of GPC tenuous, accordingly, it also is treated as a discontinued operation.
The Company determined that it was prudent to consider the impact of the
bankruptcy filings and the unavailability of additional funding on the
realization of the carrying values of its assets. Management has decided to
reduce the carrying value of its joint venture, inventory, goodwill, project
development and fixed assets. Such an undertaking was also required by the
recently implemented FASB No. 121. The result was a write-off of more than
$23.5 million which included a $5.2 million investment in joint ventures and
Vangard Labs, Inc. $4.6 million in project development costs, $8.3 million in
fixed asset revaluations, $2.9 million in goodwill, $1.5 million in inventory
revaluation to the lower of cost or market, and $1.0 million in other charges.
These substantial adjustments had a significant negative impact on the
Company's operating results for the fiscal year ended March 31, 1996.
RESULTS OF OPERATIONS
FISCAL YEAR 1996 COMPARED TO FISCAL 1995
The consolidated financial statements have been presented on the basis that
the Company is a going concern, which contemplates the realization of assets and
the satisfaction of liabilities in the normal course of business. As a result
of the Chapter 11 filings for the Company's principal operating subsidiaries and
related circumstances, realization of assets and satisfaction of liabilities in
the normal course of business is uncertain. A plan of reorganization could
further materially change the amounts reported in the accompanying consolidated
financial statements. The ability of the Company to continue as a going concern
is dependent upon, among other things, confirmation of plans of reorganization,
future profitable operations, and compliance with future loan agreements.
13
REVENUES
Net sales for continuing operations for the fiscal year ending March 31,
1996 increased 15% to $17.1 million from $14.8 million in the prior fiscal year
primarily due to higher sales from the Company's Medical Technology
Laboratories, Inc. subsidiary which experienced a 44% increase in revenues.
Additionally, the Company's MTS Packaging Systems, Inc. subsidiary had a 9%
increase in revenues.
GROSS PROFIT
Cost of sales for the fiscal year ending March 31, 1996 increased 37% to
$10.7 million from $7.8 million in the prior year. Consequently, gross profit
in the fiscal year ending March 31, 1996 decreased to 37% from 48% in the prior
year. This decrease in gross profit was primarily due to lower margins on
revenue in the Company's Medical Technology Laboratories, Inc. subsidiary, as
well as inventory revaluations.
SALES, GENERAL AND ADMINISTRATIVE EXPENSES (SG & A)
SG&A for the year ended March 31, 1996 increased to $9.2 million from $2.4
million in the prior year. The increase primarily resulted from increased
selling and marketing expenses related to the increase in revenue. In addition,
the Company increased its administrative staff during the first and second
quarters of 1996 in anticipation of the revenue increases in MedServ product
line and GPC operations. Also, certain one-time charges were incurred during
the year including expenses relating to employee severance costs, and bad debts.
PRODUCT DEVELOPMENT
The Company expensed product development and software costs previously
capitalized in the amount of $4.6 million. Of this, $3.7 million related to all
computerized medication dispensing systems marketing development and pharmacy
software costs for Medication Management Systems, Inc. and Performance Pharmacy
Systems. The current financial condition of the Company, as well as other
uncertainties, have impaired the Company's ability to complete the development
of these products.
In addition, there were other charges in the total amount of $0.9 million
related to project development and software costs previously capitalized by MTS
Packaging Systems, Inc. and Medical Technology Laboratories, Inc.
RESTRUCTURING CHARGES
Within the fiscal year ending March 31, 1996, the Company recognized a
charge of approximately $17.9 million for the impairment of certain of its
investments in part due to the restructuring of its businesses. This amount
includes an estimated charge of $5.2 million related to the anticipated disposal
of Vangard Labs, Inc., a loss on obsolete fixed assets of $8.3 million,
inventory revaluation of $1.5 million and a goodwill write-off of $2.9 million.
The above charges resulted, in part, from actions taken after a
comprehensive examination of all of the Company's business operations. Because
of the numerous development projects that the Company had underway, and the
limited opportunity that now exists for completion of these projects, the
Company evaluated the carrying value of certain assets and adjusted them
downward to reflect their estimated value.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense increased $1.6 million (153%) in
1996. The increase resulted from the fact that the Company reduced the
estimated useful lives of its property and equipment to reflect technological
changes. These changes resulted in additional depreciation expense in 1996 in
the amount of $589,000. In addition, depreciation and amortization increased
due to the acquisition of equipment and other assets in 1995. In accordance
with the Company's policy, these assets were depreciated or amortized for one-
half year in 1995 and a full year in 1996.
LOSS FROM DISCONTINUED OPERATIONS
The company has elected to treat its Vangard Labs, Inc. subsidiary as a
discontinued operation because of management's decision to dispose of the
business. The loss incurred by Vangard Labs, Inc. was $6.6 million 1996.
14
INTEREST EXPENSE
Interest expense for the fiscal year ending March 31, 1996 increased 22% to
approximately $1.7 million from $1.4 million in the prior year. The increase
primarily resulted from an increase in debt. The Company discontinued accruing
interest on its secured debt effective January 3, 1996 due to Chapter 11. The
amount of interest which was not accrued was $609,000.
INCOME TAXES
The Company realized an income tax benefit of $1.9 million for the year
ended March 31, 1996, primarily as a result of the net operating loss. A
portion of this loss has been carried back to recover taxes paid in previous
years. In addition, the unused portion of $17.8 million will be carried forward
to offset future taxable income. The Company recorded a valuation allowance in
the amount of approximately $6.9 million to offset entirely the deferred tax
asset related to the net operating loss carryforward.
LIQUIDITY, CAPITAL RESOURCES AND CASH FLOW
The Company incurred a net loss from continuing operations for the fiscal
year ended March 31, 1996 of $22.7 million versus $1.3 million in 1995. Cash
used by operating activities during the fiscal year ended March 31, 1996 was
$0.9 million versus $0.4 million provided in 1995.
The increase in the cash used by operating activities resulted primarily
from the operating loss incurred in 1996.
Investing activities utilized $2.9 million for the year ended March 31,
1996 versus $9.8 million in 1995. The decrease resulted primarily from the fact
that the Company significantly reduced its capital equipment and project
development activities in 1996.
Financing activities provided $4.2 million for the year ended March 31,
1996 versus $12.8 million in 1995. The decrease resulted primarily from the
fact that the Company significantly reduced its capital equipment and project
development activities which had been funded in 1995 primarily with long-term
debt.
The Company had working capital as of March 31, 1996 and March 31, 1995 of
$5.4 million. Current liabilities do not include $30 million of liabilities
subject to compromise in connection with the plans of reorganization for the MTS
debtors.
No assurances can be given that additional equity capital will be made
available to the Company. In the event the Company is able to raise additional
equity, the raising of such equity will likely dilute the interests of existing
stockholders. There can be no assurance that the Company will be able to secure
such additional equity capital or that the Company will be successful in
reorganizing its affairs within the Chapter 11 bankruptcy proceedings.
The Company's lender has a first security interest in and lien upon
substantially all of the Company's assets. The Company has not filed a
bankruptcy petition for the parent corporation. If it were to become necessary
for the Company to take such action, the interests of the Company's stockholders
would very likely be impaired.
Other then cash flow from operations, the Company does not currently have
any other source of liquidity.
RESULTS OF OPERATIONS
FISCAL YEAR 1995 COMPARED TO FISCAL YEAR 1994
REVENUES
Net revenues for the year ended March 31, 1995 increased to approximately
$14.8 million, a 20% increase over fiscal year 1994 revenues of $12.3 million.
This revenue growth primarily resulted from the continued growth in the
medication dispensing product business of the Company.
GROSS PROFIT
During fiscal year 1995, cost of sales increased to $7.8 million from
$5.5 million in the prior year, a 41% increase. Gross profit margin decreased
to 47% from the prior year's 55% primarily as a result of the increases in raw
15
material costs which the Company was not able to recover in pricing its
products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (SG & A)
SG & A expenses were constant at about $2.4 million in fiscal year 1995
which was 6% lower than the prior fiscal year. As a percentage of revenues,
these expenses were 16% and 21% for fiscal years 1995 and 1994, respectively.
The reduction of these expenses as a percentage of revenues is primarily
attributed to the decline of fixed expenses as a percentage of revenues on
higher sales recorded.
INTEREST EXPENSE
Net interest expense increased to approximately $1.4 million as compared to
approximately $0.4 million in the prior year due to the increased debt incurred
primarily for expenditures for development projects, acquisition of fixed assets
and the higher interest rates in effect this fiscal year.
OTHER ITEMS
In this period, the Company had increased depreciation and amortization
expenses of approximately $1.1 million as compared to approximately $0.8 million
in the prior fiscal year, while project and development expenses increased to
approximately $4.3 million compared to no charge in the prior fiscal year, as a
result of management's decision to focus its resources to better realize the
potential of its new MedServ product line of computerized medication dispensing
carts. As a consequence, the Company elected to expense all other project and
product development costs except those related to MedServ.
NET LOSS
The Company incurred a loss of approximately $1.3 million for fiscal year
ending March 31, 1995 compared to net income of approximately $3.2 million in
the previous year. This loss is attributed to increased interest expense as
described above, the write-off of certain project and product development costs
and increased depreciation and amortization expense. During the prior fiscal
year, an accounting change benefited income by $.5 million as a result of the
cumulative effect of the adoption of FASB No. 109 for income taxes.
On a per share basis, net loss for the period was $0.32 compared to a net
profit of $0.82 for the same period last year.
INCOME TAXES
As a result of the loss the Company had a tax benefit of approximately $0.8
million which the Company carried forward to offset future taxes compared to
the provision for taxes of $1.1 million for fiscal 1994. During fiscal 1994,
the applied tax rate was 37%. The application of such a tax rate was
appropriate for that year and included provisions for both Federal and State
taxes.
16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the audited financial statements of the Company and related
supplementary data attached at the end of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
17
PART III
ITEMS 10, 11, 12 and 13 are incorporated by reference from the Company's Proxy
Statement for its 1996 Annual Meeting of Shareholders.
[BALANCE OF PAGE INTENTIONALLY LEFT BLANK]
18
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a)1. Financial Statements - See attached
2. Financial Schedules - See attached
3. Exhibits - See Index attached and Exhibits included, as appropriate
(b) The following reports on Form 8-K have been filed during the quarter
ended March 31, 1996:
1. 8K - Dated January 3, 1996, relating to filing of Chapter 11.
2. Dated March 14, 1996, relating to issuance of stock to Employee Stock
Purchase Plan.
(c) Exhibits required by Item 601 are attached.
*1.1 Form of Underwriting Agreement
*1.1(a) Form of Agreement between Underwriters
*1.3 Form of Representative's Warrant
*1.4 Form of Warrant Agent Agreement
**2.1 Agreement and Plan of Reorganization between Southwest Resources,
Inc. and DRG Consultants, Inc.
**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 Agreement between Ascot Pharmaceuticals, Inc., Travenol
Laboratories, Inc. and DRG Consultants, Inc. (expired)
**10.3 Sales Representation Agreement between DRG Consultants, Inc. and
Euclid Medical Systems, Inc. (expired)
**10.4 Line of Credit Agreement (paid)
**10.5 Equipment Loan Agreement (paid)
**10.6 Siegel Family Revocable Trust Agreement
(8)10.6(a) Amended and Restated Siegel Family Revocable Trust
Agreement
(8)10.6(b) Siegel Family Limited Partnership Agreement
**10.7(a) Agreements and Assignments of Patent Rights between Harold
B. Siegel and the Siegel Family Revocable Trust
**10.7(b) License Agreement between the Company and the Siegel Family
Revocable Trust
19
**10.7(c) Assignment of Trade Names, Licenses, and Accounts Receivable
from DRG Consultants, Inc. to the Company.
**10.8 [RESERVED]
**10.9 Promissory Note to Lawrence E. Steinberg dated April 27,
1987, in the amount of $50,000 (paid)
**10.10 [RESERVED]
**10.11 Promissory Note to Overseas Group dated May 8, 1987, in the
amount of $75,000 (paid)
**10.12 Agreement for Sale of Stock between Lawrence E. Steinberg
and the Company dated April 27, 1987
**10.13 Warrant Agreement between Lawrence E. Steinberg and the
Company dated April 27,1987
**10.14 Warrant Agreement between Overseas Group and the Company
dated May 8, 1987
**10.15 Modification of Promissory Note and Warrant Agreement between
Overseas Group and the Company dated December 19, 1987 (paid)
**10.16 Modification of Promissory Note and Warrant Agreement between
Lawrence E. Steinberg and the Company dated December 18, 1987 (paid)
**10.17 Option Agreement between the Siegel Family Revocable Trust and
Lawrence E. Steinberg dated December 18, 1987
**10.18 Promissory Note dated November 30, 1987 in the amount of $31,850.00
(paid)
**10.19 Promissory Note dated November 30, 1987 in the amount of $50,000.00
(paid)
**10.20 Convertible Subordinate Notes issued to unaffiliated investors (paid)
**10.21 Letter Agreement between Gerald L. Couture and the Company (expired)
**10.22 $450,000.00 Commitment Letter from Florida National Bank (paid)
**10.23 Agreements with Vendor Funding for Sale/Leaseback of Equipment (paid)
**10.24 First Florida Bank $450,000 Revolving Line and $150,000 Equipment
Line, Loan Commitment (paid)
***10.25 Pilot Project and Option Agreement between Sandoz and the
Company
****10.26 Documents relating to the acquisition of the business of
Ohio Label & Packaging Inc. dated November 3, 1989
*****10.27 Loan Agreement and other related documents between the Company and
Southeast Bank, N.A. for $3,195,000 credit facility dated March 26,
1990 (paid)
*10.28 Loan Agreement and other related documents related to First Florida
Bank, N.A. borrowing dated November 7, 1990 (paid)
*10.30 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
(1)10.31 Acquisition and financing documents relating to Clearwater
Medical Services, Inc.
(2)10.32 Acquisition and financing documents relating to Clearwater
Diagnostic Center, Inc.
(3)10.33 Stock Purchase Agreement for Vangard Labs, Inc.
(4)10.34 Amendment No. 4 to Amended and Restated Loan Agreement with
First Florida Bank, N.A. relating to the acquisition of
Vangard Labs, Inc. (paid)
(5)10.35 Warrant Agreement between Ladenburg Thalman & Co. and the
Company
20
(6)10.36 Loan and Security Agreement dated December 1, 1992 with
Daiwa Bank, Limited
(7)10.37 Amended and Restated Loan and Security Agreement dated
September 28, 1993 with SouthTrust Bank of Alabama
(8)10.38 First Amendment to Amended and Restated Loan and Security
Agreement dated April 25, 1994 with SouthTrust Bank of
Alabama
(8)10.39 Addendum to Lease dated September 30, 1993 with Leslie A.
Rubin for facilities located at 12920 and 12900 Automobile
Boulevard, Clearwater, Florida
(8)10.40 Lease dated August 1, 1993 between Vangard Labs, Inc. and
E.P. Vann and Daryl B. Vann for Glasgow Kentucky facilities
(8)10.41 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
(8)10.42 Form of 1994 Stock Option Plan
(8)10.43 Form of Employment Agreement for Todd Siegel and Gerald
Couture
(8)10.44 Form of Executive Stock Appreciation Rights and Non-
Qualified Stock Option Agreement
(8)10.45 Form of Directors' Stock Option Agreement
(8)10.46 Form of Directors' Consulting Agreement
(8)10.47 Form of Director / Officer Indemnification Agreement
(8)10.48 Joint Venture Agreement between MedVantage, Inc. and the
Company dated January 5,1995
(8)10.49 Third Amendment to Amended and Restated Loan and Security
Agreement effective March 28, 1995
(9) 11. Computation of Earnings Per Share
(9) 22. List of Subsidiaries
(9) 23. Form of Executive Director's Agreement for Gerald Couture
* 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
***** Incorporated herein by reference to Form 10-K for fiscal year end
March 31, 1990
(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 10-K for year ended
March 31, 1992
(5) Incorporated herein by reference to Form S-3 filed April 16, 1993
(6) Incorporated herein by reference to Form 10-K for year ended
March 31, 1993
(7) Incorporated herein by reference to Post Effective Amendment No. 1
to From S-1 (File No. 33-40678) dated October 14, 1993
(8) Incorporated herein by reference to Form 10-K for year ended
March 31, 1995
(9) Filed herewith
21
Independent Auditors' Report
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, 1996, 1995, and 1994
and the related consolidated statements of operations, changes in stockholders'
deficit, and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the management of the Company. Our
responsibility is to express an opinion on these consolidated financial
statements based upon our audits.
We conducted our audits in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audits to
obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the 1996, 1995, and 1994 consolidated 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, 1996, 1995, and 1994 and the results of its operations and cash flows
for the years then ended in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As more fully discussed in
Note 1, the Company incurred losses during the current year of approximately
$34.6 million and its total liabilities exceed its total assets by approximately
$18.5 million as of March 31, 1996. The Company also had negative cash flows
from operations during the current year of approximately $.9 million and loans
in the amount of approximately $29 million are past due. In addition, the major
operating subsidiaries of the Company have filed for protection under Chapter 11
of the U.S. Bankruptcy Code. These conditions raise substantial doubt as to the
Company's ability to continue as a going concern. The consolidated financial
statements do not include any adjustments that might result from the outcome of
these uncertainties.
Pender Newkirk & Company
Certified Public Accountants
June 20, 1996
22
MEDICAL TECHNOLOGY SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1996, 1995 AND 1994
(In Thousands)
ASSETS
1996 1995 1994
---- ---- ----
Current Assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 965 $ 613 $ 473
Accounts Receivable, Net . . . . . . . . . . . . . . . . . . . . . 3,260 3,575 2,676
Income Taxes Receivable. . . . . . . . . . . . . . . . . . . . . . 880 808 -0-
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,445 4,252 2,710
Prepaids and Other . . . . . . . . . . . . . . . . . . . . . . . . 264 164 102
-------- -------- --------
Total Current Assets . . . . . . . . . . . . . . . . . . . . . . . 7,814 9,412 5,961
Property and Equipment, Net. . . . . . . . . . . . . . . . . . . . 4,917 13,876 11,645
Other Assets:
Software Development Costs, Net. . . . . . . . . . . . . . . . . . - 0 - 1,306 1,253
Goodwill, Net. . . . . . . . . . . . . . . . . . . . . . . . . . . 971 2,613 2,640
Product Development, Net . . . . . . . . . . . . . . . . . . . . . -0- -0- 1,517
MedServ Development and Related Software, Net. . . . . . . . . . . 170 3,012 1,043
Development Costs of Joint Ventures. . . . . . . . . . . . . . . . -0- 463 -0-
Patents, Net . . . . . . . . . . . . . . . . . . . . . . . . . . . 565 760 352
Net Assets of Discontinued Operations. . . . . . . . . . . . . . . -0- 11,745 8,425
Other, Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . 232 1,056 182
-------- -------- --------
Total Other Assets . . . . . . . . . . . . . . . . . . . . . . . . 1,938 20,955 15,412
-------- -------- --------
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14,669 $ 44,243 $ 33,018
-------- -------- --------
-------- -------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current Maturities of Long-Term Debt . . . . . . . . . . . . . . . $ 168 $ 1,165 $ 979
Accounts Payable-Trade and Accrued Liabilities . . . . . . . . . . 2,240 2,837 2,076
Income Taxes Payable . . . . . . . . . . . . . . . . . . . . . . . -0- -0- 1,211
-------- -------- --------
Total Current Liabilities. . . . . . . . . . . . . . . . . . . . . 2,408 4,002 4,266
Liabilities Subject to Compromise. . . . . . . . . . . . . . . . . . 30,457 -0- -0-
Long-Term Debt, Less Current Maturities. . . . . . . . . . . . . . . 350 23,224 10,588
Deferred Income Taxes. . . . . . . . . . . . . . . . . . . . . . . . -0- 1,377 1,311
-------- -------- --------
Total Liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . 33,215 28,603 16,165
-------- -------- --------
Stockholders' Equity (Deficit):
Voting Preferred Stock . . . . . . . . . . . . . . . . . . . . . . 1 1 1
Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 40 40
Capital in Excess of Par Value . . . . . . . . . . . . . . . . . . 8,320 7,941 7,898
Retained Earnings (Deficit). . . . . . . . . . . . . . . . . . . . ( 26,591) 7,989 9,245
Less: Treasury Stock . . . . . . . . . . . . . . . . . . . . . . . ( 331) ( 331) ( 331)
-------- -------- --------
Total Stockholders' Equity (Deficit) . . . . . . . . . . . . . . ( 18,546) 15,640 16,853
-------- -------- --------
Total Liabilities and Stockholders' Equity . . . . . . . . . . . . . $ 14,669 $ 44,243 $ 33,018
-------- -------- --------
-------- -------- --------
a) Liabilities Subject to Compromise consist of the following:
Secured Debt . . . . . . . . . . . . . . . . . . . . . . . $28,158
Trade and Other Miscellaneous Claims . . . . . . . . . . . $ 2,299
-------
$30,457
-------
-------
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, 1996, 1995 AND 1994
(In Thousands; except Earnings Per Share Amounts)
1996 1995 1994
---- ---- ----
Revenue:
Net Sales and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $17,052 $14,830 $12,301
Costs and Expenses:
Cost of Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,665 7,756 5,548
Selling, General and Administrative. . . . . . . . . . . . . . . . . . . . . . . . 9,202 2,429 2,577
Product Development and Software Costs . . . . . . . . . . . . . . . . . . . . . . 4,605 4,271 -0-
Loss on Early Retirement of Fixed Assets . . . . . . . . . . . . . . . . . . . . . 8,329 -0- -0-
Loss on Inventory Revaluation. . . . . . . . . . . . . . . . . . . . . . . . . . . 1,510 -0- -0-
Goodwill Write Down. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,937 -0- -0-
Depreciation and Amortization. . . . . . . . . . . . . . . . . . . . . . . . . . . 2,682 1,060 818
Interest, Net (Contractual Interest $2,348). . . . . . . . . . . . . . . . . . . . 1,739 1,430 424
------- ------- -------
Total Costs and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . 41,669 16,946 9,367
------- ------- -------
Income (Loss) from Continuing Operations Before Income Taxes,
Discontinued Operations and Cumulative Effect of Accounting Change . . . . . . . . (24,617) (2,116) 2,934
Income Tax (Benefit) Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 1,900) ( 844) 1,078
------- ------- -------
Income (Loss) from Continuing Operations Before Discontinued Operations and
Cumulative Effect of Accounting Change . . . . . . . . . . . . . . . . . . . . . . (22,717) (1,272) 1,856
Income (Loss) from Discontinued Operations, Net of Income Tax. . . . . . . . . . . (6,634) 16 762
Estimated (Loss) on Disposal of Discontinued Operations. . . . . . . . . . . . . . (5,229) -0- -0-
------- ------- -------
Income (Loss) Before Cumulative Effect of Accounting Change. . . . . . . . . . . . . (34,580) (1,256) 2,618
Cumulative Effect of Accounting Change for Adoption
of FASB No. 109 on Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . -0- -0- 543
------- ------- -------
Net Income (Loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(34,580) $( 1,256) $ 3,161
------- ------- -------
------- ------- -------
Primary Net Earnings (Loss) per Common Share:
Income (Loss) from Continuing Operations . . . . . . . . . . . . . . . . . . . . . $( 5.60) $( . 32) $ .48
Income (Loss) from Discontinued Operations . . . . . . . . . . . . . . . . . . . . ( 2 .92) .00 .20
Cumulative Effect of FASB No. 109 Accounting Change. . . . . . . . . . . . . . . . .00 .00 .14
------- ------- -------
Net Income (Loss) Per Common Share . . . . . . . . . . . . . . . . . . . . . . . . $( 8 .52) $( .32) $ .82
------- ------- -------
------- ------- -------
Weighted average Common Shares outstanding, Primary. . . . . . . . . . . . . . . . 4,059 3,974 3,879
------- ------- -------
------- ------- -------
Assuming Fully Diluted Net Earnings (Loss) per Common Share:
Income (Loss) from Continuing Operations . . . . . . . . . . . . . . . . . . . . . $( 5.60) $( .32) $ .43
Income (Loss) from Discontinued Operations . . . . . . . . . . . . . . . . . . . . ( 2.92) .00 .17
Cumulative Effect of FASB No. #109 Accounting Change . . . . . . . . . . . . . . . .00 .00 .12
------- ------- -------
------- ------- -------
Net Income (Loss) Per Common Share . . . . . . . . . . . . . . . . . . . . . . . . $( 8.52) $( .32) $ .72
------- ------- -------
------- ------- -------
Weighted average Common Shares outstanding, Assuming Fully Diluted . . . . . . . . 4,059 3,974 4,595
------- ------- -------
------- ------- -------
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, 1996, 1995 AND 1994
(in Thousands Except Share Data)
COMMON STOCK
-----------------------------------------------------------------------------------
Number $.01 Capital in
of Par Excess of Retained Treasury
Shares Value Par Value Earnings Stock Total
------ ----- --------- -------- ----- -----
Balance, March 31,1993 . . . . . . . . 3,896,519 $ 39 $7,862 $ 6,084 $(331) $13,654
Exercise of Common Stock
Warrants . . . . . . . . . . . . . . 111,813 1 36 37
Net Income for Year Ended
March 31, 1994 . . . . . . . . . . . 3,161 3,161
-----------------------------------------------------------------------------------
Balance, March 31, 1994. . . . . . . . 4,008,332 40 7,898 9,245 $(331) 16,852
Stock Issued . . . . . . . . . . . . 18,500 43 43
Net Loss For Year Ended
March 31, 1995 . . . . . . . . . . . (1,256) (1,256)
-----------------------------------------------------------------------------------
Balance, March 31, 1995. . . . . . . . 4,026,832 40 7,941 7,989 (331) 15,639
Stock Issued . . . . . . . . . . . . . 1,458,503 15 379 394
Net Loss for Year Ended
March 31, 1996 . . . . . . . . . . . (34,580) (34,580)
-----------------------------------------------------------------------------------
Balance, March 31, 1996. . . . . . . . 5,485,335 $ 55 $ 8,320 $(26,591) $(331) $(18,547)
-----------------------------------------------------------------------------------
-----------------------------------------------------------------------------------
VOTING PREFERRED STOCK
-----------------------------------------------------------------------------------
Number $.0001
of Par
Shares Value
------ -----
Balance, March 31, 1994 6,500,000 $ 1 $ 1
--------- ----- ---
Balance, March 31, 1995 6,500,000 $ 1 $ 1
--------- ----- ---
Balance, March 31, 1996 6,500,000 $ 1 $ 1
--------- ----- ---
Total Stockholders' Equity (Deficit),
March 31, 1996 $(18,546)
--------
--------
The accompanying notes are an integral part of these financial statements.
25
MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
YEARS ENDED MARCH 31, 1996, 1995 AND 1994
(In Thousands)
1996 1995 1994
---- ---- ----
OPERATING ACTIVITIES
Income (Loss) from Continuing Operations . . . . . . . . . . . . . . . . $(22,717) $(1,272) $ 2,399
-------- ------- --------
Adjustments to Reconcile Net Income (Loss) to Net Cash
Provided (Used) by Operating Activities: . . . . . . . . . . . . . .
Depreciation and Amortization. . . . . . . . . . . . . . . . . . . . . 2,682 1,060 818
Product Development and Software Cost. . . . . . . . . . . . . . . . . 4,605 4,271 -0-
Goodwill Writedown . . . . . . . . . . . . . . . . . . . . . . . . . . 2,937 -0- -0-
Loss on Early Retirement of Fixed Assets . . . . . . . . . . . . . . . 8,329 -0- -0-
Loss on Inventory Revaluation. . . . . . . . . . . . . . . . . . . . . 1,510 -0- -0-
Write-off of Accounts Receivable and Other Assets. . . . . . . . . . . 1,323 -0- -0-
Stock Issued from Stock Compensation Plan. . . . . . . . . . . . . . . 388 -0- -0-
(Increase) Decrease in:
Accounts Receivable. . . . . . . . . . . . . . . . . . . . . . . . . (458) (899) (288)
Income Taxes Receivable. . . . . . . . . . . . . . . . . . . . . . . (72) (808) -0-
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 297 (1,542) (305)
Prepaid Expenses and Other Assets. . . . . . . . . . . . . . . . . . (100) (62) (10)
Increase (decrease) in:
Accounts Payable and Other Accrued Liabilities . . . . . . . . . . . 1,724 761 743
Income Taxes Payable and Deferred Taxes. . . . . . . . . . . . . . . (1,347) (1,145) (175)
-------- ------- --------
Total Adjustments. . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,818 1,636 783
-------- ------- --------
Net Cash Provided (used) by Continuing Operations. . . . . . . . . . . . (899) 364 3,182
-------- ------- --------
Net Cash used by Discontinued Operations . . . . . . . . . . . . . . . . (117) (3,304) (2,085)
-------- ------- --------
INVESTING ACTIVITIES
Expended for Property and Equipment. . . . . . . . . . . . . . . . . . . (797) (3,003) (3,023)
Expended for Software Development. . . . . . . . . . . . . . . . . . . . (30) (201) (505)
Expended for Product Development . . . . . . . . . . . . . . . . . . . . (484) (4,739) (1,241)
Expended for Patents and Other Assets. . . . . . . . . . . . . . . . . . (109) (1,127) -0-
Expended for Acquisition . . . . . . . . . . . . . . . . . . . . . . . . (1,453) (682) -0-
-------- ------- --------
Net Cash Used by Investing Activities. . . . . . . . . . . . . . . . . . (2,873) (9,752) (4,769)
-------- ------- --------
FINANCING ACTIVITIES
Payments on Notes Payable, Long-Term Debt. . . . . . . . . . . . . . . . (947) (1,048) (10,057)
Net Proceeds from Line of Credit . . . . . . . . . . . . . . . . . . . . 2,162 12,183 4,225
Issuance of Common Stock . . . . . . . . . . . . . . . . . . . . . . . . 5 10 38
Proceeds from Borrowing on Notes Payable and Long-Term Debt. . . . . . . 3,021 1,687 9,558
-------- ------- --------
Net cash Provided by Financing Activities. . . . . . . . . . . . . . . . 4,241 12,832 3,764
-------- ------- --------
NET INCREASE IN CASH . . . . . . . . . . . . . . . . . . . . . . . . . . . 352 140 92
CASH AT BEGINNING OF PERIOD. . . . . . . . . . . . . . . . . . . . . . . . 613 473 381
-------- ------- --------
CASH AT END OF PERIOD. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 965 $ 613 $ 473
-------- ------- --------
-------- ------- --------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,570 $ 1,409 $ 557
-------- ------- --------
-------- ------- --------
The accompanying notes are an integral part of these financial statements.
26
MEDICAL TECHNOLOGY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996, 1995 AND 1994
NOTE 1 - BACKGROUND INFORMATION
Medical Technology Systems, Inc., a Delaware corporation, incorporated in
March of 1984, provides products and services to pharmacies that dispense
prescription pharmaceuticals to nursing homes, hospitals and other health
assisted care facilities. The Company's principal businesses consist of the
following product lines: (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) computerized pharmacy
information and dispensing systems business which consists of the Performance
hospital pharmacy management software and the MedServ-TM- mobile computerized
medication dispensing systems for hospitals and nursing homes and (iii) the
clinical laboratory service business of supplying diagnostic testing services to
the medical profession.
During the second quarter of 1996, the Company received notice from
Creighton Pharmaceuticals Corporation, a wholly owned subsidiary of Sandoz
Pharmaceuticals Corporation, that it intended to terminate its relationship with
the Company in the Glasgow Pharmaceutical Corporation (GPC) joint venture which
packaged and distributed pharmaceutical products. As a result of this
termination, the Company recorded a $4.6 million dollar write-off of its
investment in GPC. In addition to the terminated joint venture expense, the
Company recorded a related valuation allowance in the amount of approximately
$505,000 on inventory carried in its drug packaging subsidiary, which had been
acquired for the joint venture. The GPC joint venture was created to provide
the Company with a competitive price advantage in the acquisition cost of its
pharmaceuticals as well as provide additional product lines. As a direct result
of the joint venture termination, the Company re-evaluated its position in the
medication packaging market. It was determined that the automated packaging
equipment associated with the core packaging business should be more fully
utilized in order to remain competitive. The early retirement of portions of
the existing packaging equipment resulted in a $3.0 million charge.
During the same quarter, the Company recorded other losses and write-downs
which impacted its earnings. These adjustments included a $1.2 million charge
relating to the obsolescence of an early version of its computerized medication
dispensing product and an additional charge of approximately $500,000 relating
to the valuation of certain inventory and project development costs.
As a result of these significant losses in the second quarter of fiscal
1996, the Company was in violation of certain financial covenants in the
borrowing agreements with its principal lenders. The Company was unable to
reach an agreement with its lenders to amend or restructure the debt. The
extended negotiations with the Company's lenders created substantial uncertainty
which led to management's decision to file for protection under Chapter 11 for
certain of its subsidiaries.
During the fourth quarter of 1996, the Company filed voluntary petitions
for relief under Chapter 11 ("Chapter 11") of Title 11 of the United States
Bankruptcy Code in the Middle District of Florida, Tampa Division (the
"Bankruptcy Court") for four of its subsidiaries (MTS debtors). The MTS debtors
are presently operating their businesses as debtors-in-possession under the
jurisdiction of the Bankruptcy Court and intend to reorganize pursuant to
Chapter 11. As debtors-in-possession, these subsidiaries may engage in
transactions within the ordinary course of business without approval of the
Bankruptcy Court.
Because of the events described above, the Company's working capital and
borrowing capacity were extremely limited. The Company ultimately decided to
suspend most project development activities, incurring substantial write-offs of
the suspended project costs.
Liabilities subject to compromise in the accompanying consolidated balance
sheets represent the Company's estimate of liabilities as of the filing date
subject to adjustment in the reorganization process. Under Chapter 11, actions
to enforce certain claims against the MTS debtor subsidiaries are stayed if the
claims arose, or are based on events that occurred, on or before the petition
date. The ultimate terms of settlement of these liabilities and claims will be
determined in accordance with a plan of reorganization which requires the
approval of prepetition creditors and confirmation by the Bankruptcy Court.
Other liabilities may arise or be subject to compromise as a result of rejection
of executory contracts, including leases, or the Bankruptcy Court's resolution
of claims for contingencies and other disputed amounts. The ultimate resolution
of such liabilities will be part of a plan of reorganization. Claims secured by
the debtor's assets ("secured claims") also are stayed, although the creditors
of such claims have the right to move the court for relief from the stay.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The Company
incurred losses during the current year of approximately $34.6 million and
27
its total liabilities exceed its total assets by approximately $18.5 million as
of March 31, 1996. The Company also had negative cash flows from operations
during the current year of approximately $.9 million and loans in the amount of
approximately $29 million are past due. In addition, the major operating
subsidiaries of the Company have filed for protection under Chapter 11 of the
U.S. Bankruptcy Code. These conditions raise substantial doubt as to the
Company's ability to continue as a going concern. The consolidated financial
statements do not include any adjustments that might result from the outcome of
these uncertainties.
A plan of reorganization could materially change the amounts reported in
the accompanying consolidated financial statements, which do not give effect to
adjustments to the carrying values of assets and liabilities which might be a
consequence of a plan of reorganization. The ability of the Company to continue
as a going concern is dependent on, among other things, confirmation of an
acceptable plan of reorganization, future profitable operations, the ability to
generate sufficient cash from operations, and the ability to obtain financing
sources to meet future obligations.
NOTE 2 - RESTRUCTURING AND OTHER CHARGES
In December 1995, the Company initiated a cost reduction strategy that
focused upon reducing operating expenses and returning the Company to
profitability. This plan included the filing on January 3, 1996 of voluntary
petitions under Chapter 11 of the United States Bankruptcy Code in the Middle
District of Florida for three of the Company's subsidiaries: MTS Packaging
Systems, Inc., Medical Technology Laboratories, Inc. and MTS Sales and
Marketing, Inc. On February 22, 1996, the Company also filed a voluntary
petition under Chapter 11 for its generic drug repackaging subsidiary, Vangard
Labs, Inc.
These Chapter 11 filings, together with the limitation on the Company's
financing alternatives, necessitated a comprehensive examination of the
Company's business operations. Because of the numerous development projects
that the Company had underway, and the limited opportunity that existed for
completion of these projects, it was decided by management that without
additional capital virtually none of the existing development projects could be
successfully completed. In addition, in March 1995, the Financial Accounting
Standards Board (FASB) issued Statement No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be disposed of, which requires
impairment losses to be recorded on long-lived assets used in operations when
indicators of impairment are present. This statement was effective for fiscal
years beginning after December 15, 1995, but the company decided to apply this
standard as of March 31, 1996 as permitted by the statement. Consequently, in
order to comply with this standard, the Company has charged to expensed
approximately $17.9 million excluding discontinued operations as detailed below:
March 31,
1996
---------
(In Thousands)
Terminated Joint Venture $ 550
Early Retirement of Fixed Assets 8,329
Product Development and Software Cost 4,605
Inventory Revaluation 1,510
Goodwill 2,937
---------
$17,391
---------
---------
NOTE 3 - DISCONTINUED OPERATIONS
As part of a corporate restructuring strategy, the Company plans to
concentrate its resources on its medication card business and the medication
dispensing technology products which have been developed and are presently
marketable. Although the clinical diagnostic laboratory business has been
identified as a non-core business, its operations are a source of cash to
support future debt obligations of the Company. The Company's generic drug
repackaging subsidiary, Vangard Labs, Inc. whose production operations were
suspended on January 3, 1996 and subsequently filed a voluntary petition under
Chapter 11 of the United States Bankruptcy Code in the Middle District of
Florida on February 22, 1996, will be divested. In addition, the Glasgow
Pharmaceutical Corporation (GPC) joint venture with Creighton Pharmaceutical
Corporation, a wholly owned subsidiary of Sandoz Pharmaceuticals, Inc. is
considered a discontinued operation primarily because of its dependence upon
Vangard production capabilities. A pre-tax charge of approximately $5.2
million for a loss on disposal of these discontinued operations was recorded in
fiscal year 1996 and is shown in the Statement of Operations as estimated loss
on disposal of discontinued operations.
In addition, the net assets and operating results of the discontinued
operations were segregated in the consolidated financial statements for all
periods presented.
28
A summary of unusual charges which are included in loss from discontinued
operations during the current year is as follows:
March 31,
1996
------
(In Thousands)
Product Development and Software $ 2,320
Inventory Revaluation 570
Other 237
-------
$ 3,127
-------
-------
At fiscal year end, the investment in net assets of the discontinued
operations consisted of:
March 31, March 31, March 31,
1996 1995 1994
---- ---- ----
(In Thousands)
Current Assets $ 3,136 $ 4,388 $ 2,529
Current Liabilities 4,387 1,783 $ 1,849
Non-Current Assets 2,032 9,769 $ 7,757
Non-Current Liabilities 781 629 $ 12
-------- -------- -------
$ -0- $ 11,745 $ 8,425
-------- -------- -------
-------- -------- -------
Net revenues of discontinued operations were $5,968, $6,045, and $5,942 in
fiscal years 1996, 1995 and 1994, respectively.
NOTE 4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements include the accounts of Medical
Technology Systems, Inc. and its subsidiaries, MTS Packaging, Inc., Medical
Technology Laboratories, Inc., Clearwater Medical Services, Inc., Clinical
Diagnostic Center, Inc., Performance Pharmacy Systems, Inc., Medication
Management Systems, Inc., Medication Management Technologies, Inc., MTS Sales &
Marketing, Inc., and Systems Professionals, Inc. All significant intercompany
accounts and transactions have been eliminated in consolidation. Certain minor
reclassifications have been made in the Company's prior years consolidated
financial statements for comparability to the current year's statements.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Vangard Labs, Inc., a wholly owned subsidiary of the Company, and Glasgow
Pharmaceutical Corporation, a 50% joint venture with Creighton Pharmaceuticals,
Inc. are treated as discontinued operations for all periods presented as set
forth in Note 3.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
by the first-in, first-out (FIFO) method.
REVENUE RECOGNITION
The Company recognizes revenue as follows: when products are shipped by MTS
Packaging Systems, Inc.; when medication dispensing systems are placed into
service by Medication Management Systems, Inc.; when pharmacy management systems
are placed into service by Performance Pharmacy Systems, Inc.; when services are
performed by Medical Technology Laboratories, Inc. The company recognizes
revenues 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.
29
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
-----
Transportation Equipment 3
Computer Equipment 3
Furniture and Fixtures 5
Leasehold Improvements 5
Machinery Equipment 7
Buildings 20
Effective April 1, 1995, the Company reduced the estimated useful lives of
its property and equipment to reflect technological changes. The effect of this
change was to increase the net loss for 1996 by $589,000 ($.15 per share)
SOFTWARE DEVELOPMENT COST
The Company capitalizes software development costs in accordance with the
guidelines set forth in FASB Statement No. 86. All costs associated with the
software 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 development cost. The Company has determined that a five-year period
is appropriate. This represents a change in estimates which does not have a
material effect on the Company's results of operations. In accordance with FASB
Statement No. 121, the Company evaluated the unamortized software development
cost and adjusted the balance downward, if necessary, to reflect the remaining
net realized value.
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.
In accordance with FASB Statement No. 121, the Company evaluates the
unamortized Goodwill and adjusts the balance downward, if necessary, to reflect
the remaining net realizable value.
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.
In accordance with FASB Statement No. 121, the Company evaluates the
unamortized Other Assets and adjusts the balance downward, if necessary, to
reflect the remaining net realizable value.
EARNINGS (LOSS) PER SHARE
Primary earnings (loss) per common and common equivalent share and earnings
(loss) per common and common equivalent share assuming full dilution were
computed using the weighted average number of shares outstanding adjusted for
the incremental shares attributed to outstanding warrants and options to
purchase common stock, if dilutive.
INCOME TAXES
Effective April 1, 1993, the Company adopted FASB No. 109, "Accounting for
Income Taxes". Under FASB No. 109, income taxes are provided for under the
liability method, 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
30
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.
31
NOTE 5 - ACCOUNTS RECEIVABLE
The Company maintains an allowance for potential losses on individual and
commercial accounts receivable. Management considers the allowances provided to
be reasonable.
Accounts Receivable consist of the following:
March 31, March 31, March 31,
1996 1995 1994
--------- --------- ---------
(In Thousands)
Accounts Receivable at Gross $3,788 $3,742 $2,686
Less: Allowance for Doubtful Accounts (528) (167) (10)
--------- --------- ---------
$3,260 $3,575 $2,676
--------- --------- ---------
--------- --------- ---------
Substantially all of the Company's accounts receivable are pledged as
collateral on bank notes.
NOTE 6 - INVENTORIES
Inventories consist of the following:
March 31, March 31, March 31,
1996 1995 1994
--------- --------- ---------
(In Thousands)
Raw Material $ 661 $ 993 $ 716
Finished Goods and Work in Process 1,784 3,259 1,994
--------- --------- ---------
$2,445 $4,252 $2,710
--------- --------- ---------
--------- --------- ---------
Substantially all of the Company's inventories are pledged as collateral
on bank notes.
NOTE 7 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
March 31, March 31, March 31,
1996 1995 1994
--------- --------- ---------
(In Thousands)
Property and Equipment $ 7,273 $16,041 $13,144
Leasehold Improvements 806 817 687
--------- --------- ---------
$ 8,079 $16,858 $13,831
Less: Accumulated Depreciation and
Amortization (3,162) (2,982) (2,186)
--------- --------- ---------
$ 4,917 $13,876 $11,645
--------- --------- ---------
--------- --------- ---------
Substantially all of the Company's property and equipment are pledged as
collateral on bank notes.
32
MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996, 1995 AND 1994
NOTE 8 - PRODUCT AND SOFTWARE DEVELOPMENT COSTS, GOODWILL AND OTHER ASSETS
Software development costs, goodwill and other assets consists of the
following:
March 31, March 31, March 31,
1996 1995 1994
--------- --------- ---------
(In Thousands)
Software Development Costs . . . . . . . $ -0- $1,555 $1,353
Less: Accumulated Amortization. . . . . -0- (249) (100)
--------- --------- ---------
$ -0- $1,306 $1,253
--------- --------- ---------
--------- --------- ---------
Goodwill . . . . . . . . . . . . . . . . $1,204 $2,943 $2,738
Less: Accumulated Amortization . . . . (233) (330) (98)
--------- --------- ---------
$ 971 $2,613 $2,640
--------- --------- ---------
--------- --------- ---------
Product Development. . . . . . . . . . . $ -0- $ -0- $1,790
Less: Accumulated Amortization. . . . . -0- -0- (273)
--------- --------- ---------
$ -0- $ -0- $1,517
--------- --------- ---------
--------- --------- ---------
MedServ-TM- Development and Related
Software. . . . . . . . . . . . . . . . $ 212 $3,027 $1,043
Less: Accumulated Amortization . . . . (42) (15) -0-
--------- --------- ---------
$ 170 $3,012 $1,043
--------- --------- ---------
--------- --------- ---------
Patents. . . . . . . . . . . . . . . . . $ 873 $ 853 $ 416
Less: Accumulated Amortization. . . . (308) (93) (64)
--------- --------- ---------
$ 565 $ 760 $ 352
--------- --------- ---------
--------- --------- ---------
Other Assets:
Acquisition of Business . . . . . . . . $ 192 $ 219 $ -0-
Finance Costs . . . . . . . . . . . . . -0- 337 176
Other . . . . . . . . . . . . . . . . . 63 583 56
Less: Accumulated Amortization. . . . (23) (83) (50)
--------- --------- ---------
$ 232 $1,056 $ 182
--------- --------- ---------
--------- --------- ---------
Substantially all of the Company's intangible assets are pledged as
collateral on bank notes.
33
MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996, 1995 AND 1994
NOTE 9 - LONG-TERM DEBT
Long-term debt consists of the following:
March 31, March 31, March 31,
1996 1995 1994
--------- --------- ----------
(In Thousands)
Note payable; interest at bank prime plus 1/2%; or LIBOR rate plus
2 1/4%; payable $93,000 per month plus interest, maturing
September, 1998, past due . . . . . . . . . . . . . . . . . . . . . . $ 10,398 $ 9,595 $ 9,342
Bank line of credit, interest at bank prime plus 1/2%, or LIBOR
rate plus 2%; interest payable monthly; principal maturing
September, 1996, past due . . . . . . . . . . . . . . . . . . . . . . 16,862 14,699 2,216
Seller Financing Under Tampa Pathology Acquisition Agreement, face
value of $971,000 discounted at 10%, with variable monthly payments
until satisfied, past due . . . . . . . . . . . . . . . . . . . . . . 871 -0- -0-
Other Notes and Agreements; interest and principal payable monthly and
annual at various amounts through June 1998 . . . . . . . . . . . . . 545 95 9
-------- ------- -------
Total Long-Term Debt . . . . . . . . . . . . . . . . . . . . . . . . . 28,676 24,389 11,567
Less Current Portion . . . . . . . . . . . . . . . . . . . . . . . . . (168) (1,165) (979)
Subject to Compromise . . . . . . . . . . . . . . . . . . . . . . . . . (28,158) -0- -0-
-------- ------- -------
LONG-TERM DEBT DUE AFTER 1 YEAR . . . . . . . . . . . . . . . . . . . . $ 350 $23,224 $10,588
-------- ------- -------
-------- ------- -------
The following is a schedule by year of the principal payments required on
these notes payable and long-term debts exclusive of debt subject to compromise
as of March 31, 1996:
(In Thousands)
1997. . . . . . . . . . . . . $ 168
1998. . . . . . . . . . . . . $ 350
The above bank loans and line of credit are collateralized by the Company's
accounts receivables, inventory, equipment and intangibles. The prime rate at
March 31, 1996 was 8.25%.
The Company has reported approximately $1.7 million in interest expense for
the year ended March 31, 1996. This excludes $.6 million that was not accrued
subsequent to filing Chapter 11, as required by generally accepted accounting
principles.
34
MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996, 1995 AND 1994
NOTE 10 - LEASE COMMITMENTS
The following is a schedule by year of future minimum rental payments
required under operating leases that have an initial or remaining non-cancelable
lease term in excess of one year as of March 31, 1996.
(In Thousands)
1997. . . . . . . . . . . . . .$ 340
1998. . . . . . . . . . . . . .$ 279
1999. . . . . . . . . . . . . .$ 279
2000. . . . . . . . . . . . . .$ -0-
2001. . . . . . . . . . . . . .$ -0-
Rent expense amounted to $504,000, $422,000, and $236,000 for the years
ended March 31, 1996, 1995 and 1994, respectively.
NOTE 11 - 401(K) PROFIT SHARING PLAN
During the year ended March 31, 1994 the Company established 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, 1995 and 1996 the
Company made no contributions to the Plan. The Company contributed $7,000 to
the Plan for the year ended March 31, 1994.
NOTE 12 - SELF INSURANCE PLAN
During the year ended March 31, 1993, the Company established a medical
health benefit self-insurance plan for substantially all of its employees.
The Company is reinsured for claims which exceed $30,000 per participant and
has an annual maximum aggregate limit of approximately $390,000.
NOTE 13 - RELATED PARTY TRANSACTIONS
Todd E. Siegel ("Siegel") is the Trustee of the Siegel Family QTIP Trust
("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.
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 has
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, 1996 and
March 31, 1995 of approximately $12,000 and $8,000 respectively. The Company
expects to collect the full balance of this indebtedness, however, no final
payment schedule has been established.
During 1995, the Company paid a related company $16,750 for services
rendered in connection with the refinancing of the Company's debt.
35
MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996, 1995 AND 1994
NOTE 14 - TAXES
Loss from continuing operations of consolidated companies before income
tax benefit was approximately $24.6 million and $2.1 million during the years
ended March 31, 1996 and March 31, 1995 respectively. Income from continuing
operations of consolidated companies before income taxes was approximately
$2.9 million during the year ended March 31, 1994. The components of related
income taxes provided on continuing operations were as follows:
Years Ended March 31,
---------------------
1996 1995 1994
---- ---- ----
(In Thousands)
Current Tax (Benefit) Due:
Federal . . . . . . . . $ (635) $(1,277) $ 813
State . . . . . . . . . -0 - (208) 111
------- ------- ------
(635) (1,485) 924
------- ------- ------
Deferred Tax:
Federal . . . . . . . . (1,132) 547 100
State . . . . . . . . . (133) 94 54
------- ------- ------
(1,265) 641 154
------- ------- ------
$(1,900) $ (844) $1,078
------- ------- ------
------- ------- ------
Total income tax (benefit) expense for 1996, 1995, and 1994 from
continuing operations resulted in effective tax rates of 7.7%, 39.9% and
36.7%, respectively. The reasons for the differences between these effective
tax rates and the U.S. statutory rate of 35.0% on continuing operations are
as follows:
Years Ended March 31,
---------------------
1996 1995 1994
---- ---- ----
(In Thousands)
Tax (Benefit) Expense at U.S. statutory rate......... $(8,616) $ 741 $1,027
Valuation allowance for deferred tax asset........... 6,877
State and local income tax, net...................... (543) (75) 109
Difference between marginal and U.S. statutory rate.. 246 21 (29)
Other (net).......................................... 136 (49) (29)
------- ----- ------
Income Tax (Benefit) Expense......................... $(1,900) $(844) $1,078
------- ----- ------
------- ----- ------
Income taxes receivable as of March 31, 1996 and March 31, 1995 in the
amount of $880,000 and $808,000 represent refunds of federal and state
taxes previously paid.
During the year ended March 31, 1995, the Company had a tax net
operating loss of approximately $3.2 million. The Company elected to forgo
carryback of the loss so that the full amount of the net operating loss would
be available to offset future taxable income. This net operating loss carry
forward will expire in 2010 which included income from discontinued
operations. In the current year, the Company has a net operating loss of $21
million. A portion of this loss has been carried back, and a receivable of
$820,000 has been recorded to reflect the anticipated refund. The unused
loss of $17.8 million, which will expire in 2011, plus the carryforward loss
from the prior year of $3.2 million will be available to offset future
taxable income.
Effective April 1, 1993, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." The
cumulative effect of this accounting change on years prior to April 1, 1993,
was a benefit of approximately $543,000, which is included in the year ended
March 31, 1994 results of operations.
36
MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996, 1995 AND 1994
NOTE 14 - TAXES (Cont'd)
Deferred taxes and deferred tax asset resulted from differences in timing of
deductions recognized for tax and financial reporting purposes.
Deferred taxes for continuing operations consist of the following:
March 31, March 31, March 31,
1996 1995 1994
---- ---- ----
(In Thousands)
Depreciation/Amortization Gross Deferred
Tax Liability ............................... $ 379 $ 2,909 $1,366
------ ------- ------
Depreciation/Amortization temporary difference.. (1,386) -0- -0-
Allowance for Doubtful Accounts................. (73) (73) (55)
Inventory Valuation Allowance................... (163) -0- -0-
Tax Loss Carry forward.......................... (5,525) (1,459) -0-
Reserves and Provisions......................... (109) -0- -0-
------ ------- ------
Gross Deferred Tax Asset........................ (7,256) (1,532) (55)
------ ------- ------
Net deferred tax (asset) liability.............. (6,877) 1,377 1,311
Less Valuation Allowance........................ (6,877) -0- -0-
------ ------- ------
Deferred Income Taxes........................... $ -0- $ 1,377 $1,311
------ ------- ------
------ ------- ------
The Internal Revenue Service has completed its examination of the
Company's consolidated federal income tax returns for the years ended March
31, 1993 and 1992. No deficiencies were proposed. No other income tax
returns have been examined by taxing authorities.
The Florida State Department of Revenue is examining the Company's sales
and use tax and intangible tax returns for the period January, 1988 through
December, 1993. The State has proposed a suggested assessment of $1,375,000
including taxes, penalties and interest. Although a proposed assessment has
been made, the Company has filed a request for reconsideration which was
granted. The Company believes the amount of additional tax owed, if any, is
substantially less than the State has proposed, and intends to vigorously
defend its position should a final assessment be made.
37
MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996, 1995 AND 1994
NOTE 15 - STOCKHOLDERS' EQUITY (DEFICIT)
Stockholders' Equity (Deficit) consists of the following:
March 31, March 31, March 31,
1996 1995 1994
---- ---- ----
Voting Preferred Stock:
Par value $.0001 per share
Authorized Shares............... 7,500,000 7,500,000 7,500,000
Issued Shares................... 6,500,000 6,500,000 6,500,000
Outstanding Shares.............. 6,500,000 6,500,000 6,500,000
Common Stock:
Par value $.01 per share
Authorized Shares............... 25,000,000 25,000,000 25,000,000
Outstanding Shares.............. 5,445,335 3,986,832 3,968,332
Issued Shares................... 5,485,335 4,026,832 4,008,332
STOCK OPTIONS
Activity related to options is as follows:
NUMBER OF SHARES PRICE PER SHARE
---------------- ---------------
Outstanding at March 31, 1993......... 130,500 $1.00 - $6.00
Granted in Fiscal 1994:
Officers & Directors............... 60,000 $1.63
Employees.......................... 30,200 $4.00 - $10.00
-------- --------------
Outstanding at March 31, 1994......... 220,700
Granted in Fiscal 1995:
Officers & Directors............... 99,000 $1.63
Employees.......................... 13,226 $6.00 - $7.75
-------- --------------
Outstanding at March 31, 1995......... 332,926
Granted in Fiscal 1996:
Officers & Directors............... 59,000 $1.63
Employees.......................... 8,808 $6.00 - $8.00
-------- --------------
Outstanding at March 31, 1996......... 400,734 $1.00 - $10.00
-------- --------------
-------- --------------
38
MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996, 1995 AND 1994
15 - STOCKHOLDERS' EQUITY (DEFICIT) (Cont'd)
WARRANTS
Activity related to warrants is a follows:
NUMBER OF SHARES PRICE PER SHARE
---------------- ---------------
Outstanding at March 31, 1993.................. 1,320,000 $7.00
Granted in Fiscal 1994 through Fiscal 1996..... -0-
--------- ------
Outstanding at March 31, 1996.................. 1,320,000 $7.00
--------- ------
--------- ------
All of the warrants outstanding at March 31, 1996 expire in July 1997.
The options outstanding at March 31, 1996 expire on various dates commencing
in April 1998 and ending in March 2006.
During fiscal 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, call for additional compensation payable annually equal to
6.5% of the total of the incremental increase in the value of the Company's
outstanding stock.
No dividends have ever been paid on either the Company's Common or
Preferred Stock.
39
MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996, 1995 AND 1994
NOTE 16 - ACQUISITIONS
In March 1996, the Company acquired the rights and interests in
certain clinical laboratory services of Tampa Pathology Laboratory. The
purchase agreement provided that the total purchase price to be paid by the
Company for the rights and interests was determined based upon the actual
revenues associated with the services performed for designated customer
accounts of Tampa Pathology Laboratory for a period of time in 1996. The
purchase price is payable monthly based upon 25% of the actual revenues of
former Tampa Pathology Laboratory customer accounts.
The Company has estimated the total present value of the purchase
price to be approximately $971,000, based upon an estimated amortization
period of 96 months discounted at 10%.
During 1996, the Company made payments, under the terms of the
purchase agreement, of approximately $131,000.
NOTE 17 - CONCENTRATION OF CREDIT RISK
The business of Medical Technology Laboratories, Inc. is primarily
with individuals located in the State of Florida, many of whom routinely
assign to the company payment by their medical insurance providers. As of
March 31, 1996 Medical Technology Laboratories, Inc.'s patient accounts
receivable from individuals and commercial medical insurance providers was
approximately $310,000. As of March 31, 1996 Medical Technology
Laboratories, Inc.'s accounts receivable from Medicare and Medicaid was
approximately $467,000.
NOTE 18 - SUBSEQUENT EVENTS
On May 16, 1996 the Company filed plans of reorganization with the
bankruptcy court for MTS Packaging Systems, Inc. and Medical Technology
Laboratories, Inc. On July 5, 1996, a reorganization plan was also filed by
the Company for Vangard Labs, Inc.
A confirmation hearing to approve each of these plan is scheduled
for September 4, 1996. No assurance can be given that these plans will be
confirmed by the bankruptcy court.
40
SIGNATURES
Pursuant to the requirements 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.
July 11, 1996 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 Executive Officer, President (Principal
- - ------------------------ (Executive Officer) Treasurer (Principal July 11, 1996
Todd E. Siegel Financial Officer and Director
/s/ R. Rhodes Principal Accounting Officer, Controller July 11, 1996
- - ------------------------
R. Rhodes
/s/ Gerald R. Couture Director July 11, 1996
- - ------------------------
Gerald R. Couture
41