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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1997
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OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For transition period from to
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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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(Address of Principal Executive Offices) (Zip Code)
(813) 576-6311
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(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
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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 reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. /X/ Yes / / No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
Aggregate market value of voting Common Stock held by non-affiliates was
$3,200,000 as of June 25, 1997.
Indicate by check mark whether the Registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. /X/ Yes / / No
The number of shares outstanding of the Registrant's Common Stock, $.01 par
value, was 5,957,173 as of June 25, 1997.
Documents Incorporated by Reference
Parts of the Company's definitive proxy statement for the Annual Meeting of the
Company's stockholders to be held on September 10, 1997, are incorporated by
reference into Part III of this Form.
Total number of pages, including cover page - 55 (excluding exhibits)
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MEDICAL TECHNOLOGY SYSTEMS, INC.
CLEARWATER, FLORIDA
INDEX
PAGE
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PART I
Item 1. Business.......................................................................... 1-10
2. Properties........................................................................ 10
3. Legal proceedings................................................................. 10-12
4. Submission of matters to a vote of security holders............................... 12
PART II
Item 5. Market for registrant's common equity and related
stockholder matters............................................................... 13-14
6. Selected financial data........................................................... 15
7. Management's discussion and analysis of financial
condition and results of operations............................................... 16-20
8. Financial statements and supplementary data....................................... 21
9. Changes in and disagreements with accountants on accounting
and financial disclosure.......................................................... 21
PART III
Item 10. Directors and executive officers of the Registrant................................ 22
11. Executive compensation............................................................ 22
12. Security ownership of certain beneficial
owners and management............................................................. 22
13. Certain relationships and related transactions.................................... 22
PART IV
Item 14. Exhibits, financial statements, schedules and reports on Form 8-K................. 23-24
INDEX TO FINANCIAL STATEMENTS............................................................................ 25
SIGNATURES............................................................................................... 51
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PART I
This Annual Report on Form 10-K contains forward-looking statements within
the meaning of that term in Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Additional written or oral
forward-looking statements may be made by the Company from time to time, in
filings with the Securities and Exchange Commission or otherwise. Statements
contained herein that are not historical facts are forward-looking statements
made pursuant to the safe harbor provisions described above. Forward-looking
statements may include, but are not limited to, projections of revenues, income
or losses, capital expenditures, plans for future operations, the elimination of
losses under certain programs, financing needs or plans, compliance with
financial covenants in loan agreements, plans for sale of assets or businesses,
plans relating to products or services of the Company, assessments of
materiality, predictions of future events and the effects of pending and
possible litigation, as well as assumptions relating to the foregoing. In
addition, when used in this discussion, the words "anticipates," "estimates,"
"expects," "intends," "plans" and variations thereof and similar expressions are
intended to identify forward-looking statements.
Forward looking statements are inherently subject to risks and
uncertainties, some of which cannot be predicted or quantified based on current
expectations. Consequently, future events and actual results could differ
materially from those set forth in, contemplated by, or underlying the
forward-looking statements contained herein. Statements in this Annual Report,
particularly in "Item 1. Business," "Item 3. Legal Proceedings," "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Notes to Consolidated Financial Statements, describe
factors, among others, that could contribute to or cause such differences. Other
factors that could contribute to or cause such differences include, but are not
limited to, unanticipated increases in operating costs, labor disputes, capital
requirements, increases in borrowing costs, product demand, pricing, market
acceptance, intellectual property rights and litigation, risks in product and
technology development and other risk factors detailed in the Company's
Securities and Exchange Commission filings.
Readers are cautioned not to place undue reliance on any forward-looking
statements contained herein, which speak only as of the date hereof. The Company
undertakes no obligation to publicly release the result of any revisions to
these forward-looking statements that may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of unexpected
events.
ITEM 1. BUSINESS
Introduction
Medical Technology Systems, Inc., a Delaware corporation (the "Company"),
was incorporated in March 1984. The Company is a holding company operating
through a number of separate subsidiaries, including MTS Packaging Systems,
Inc., Medical Technology Laboratories, Inc., Performance Pharmacy Systems, Inc.,
Medication Management Systems, Inc., MTS Sales and Marketing, Inc. and
Medication Management Technologies, Inc. These subsidiaries provide a diverse
line of proprietary medication dispensing systems, laboratory services and
clinical information systems to the health care industry. The Company also had
ownership interests in Vangard Labs, Inc. and Glasgow Pharmaceutical Corporation
during fiscal 1997. Each of those subsidiaries, however, is being reported as a
discontinued operation.
MTS Packaging Systems, Inc. ("MTS Packaging"), primarily manufactures and
sells disposable medication punch cards, packaging equipment and allied
ancillary products throughout the United States. Its customers are predominantly
pharmacies that supply nursing homes and assisted living facilities with
prescription medications for their patients. MTS Packaging manufactures its
proprietary disposable punch cards and packaging equipment in its own
facilities. This manufacturing process utilizes technologically advanced
integrated machinery for manufacturing the disposable medication punch cards.
The disposable medication punch cards and packaging equipment are designed to
provide a cost effective method for pharmacies to dispense medications. The
Company's medication dispensing systems and products provide innovative methods
for dispensing medications in disposable packages.
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Medical Technology Laboratories, Inc. ("MTL") was formed as a result of
the acquisition and combination of Clearwater Medical Services and Clinical
Diagnostic Centers during fiscal year 1992. MTL conducts anatomical services and
testing of blood, tissue and other body fluids for hospitals, physicians and
other health care providers in Florida. On March 17, 1995, MTL purchased the
rights and interests in certain clinical laboratory services of Tampa Pathology
Laboratory, including the right, title and interest in the customer accounts
associated with Tampa Pathology Laboratory and the right to service and continue
sales of clinical laboratory services to these customers. The purchase agreement
provided for a purchase price of approximately $1.4 million. In connection with
its reorganization, the Company negotiated to reduce the purchase price to
$500,000. See "Item 3. Legal Proceedings."
The Company acquired a majority of the common stock of Performance
Pharmacy Systems, Inc. ("Performance Pharmacy") on November 9, 1992. Performance
Pharmacy develops and sells pharmaceutical software systems for hospitals and
nursing homes for in-house pharmacy use.
The Company formed Medication Management Systems, Inc. ("MMS") during
fiscal year 1995. MMS was formed to expand the hospital pharmacy management
software (the "Performance Pharmacy System"), which has been sold to
approximately 130 hospitals throughout the United States. MMS has further
developed its MedServ product line of 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 medication administration record) for 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 not aware of any other products
that address this important health care need with the same level of system
integration.
On March 10, 1995, the Company established MTS Sales and Marketing, Inc.
("MTS Sales"). This subsidiary was established to provide administrative support
and sales and marketing services to the other subsidiaries.
A subsidiary of the Company, Medication Management Technologies, Inc.
("MMT"), which was formed in January 1994, entered into an Agreement and Plan of
Merger with Cygnet Laboratories, Inc. ("Cygnet") on April 24, 1997, which became
effective on June 20, 1997. Cygnet, which is located in Campbell, California,
develops, markets and supports an obstetrical information system that creates an
automated data collection environment for hospitals and other obstetric
facilities. Cygnet's principal product is used by health care providers to
collect, chart and archive patient related clinical information at the point of
care. Prior to the merger with Cygnet, MMT had no material business operations.
MMT will assume the liabilities of Cygnet as a result of the merger and Cygnet
will discharge its obligations to its sole secured creditor. MMT will continue
the existing royalty arrangement with this creditor. The royalty agreement is
dependent solely on future sales. MMT will assume substantial liabilities and
intends to negotiate with the remaining creditors of Cygnet with a view toward
restructuring these liabilities. There can be no assurance that MMT will be
successful in restructuring these liabilities. In the event that MMT is not able
to restructure these liabilities, it may seek protection under Chapter 11 of the
United States Bankruptcy Code.
The Company acquired all of the Common Stock of Vangard Labs, Inc.
("Vangard") on June 1, 1992. Vangard suspended operations in January 1996.
Vangard, now identified as a discontinued operation for financial reporting
purposes, previously packaged and sold oral solid unit-dose generic drugs to
hospital and nursing home institutional pharmacies effective March 31, 1997
(formal closing April 17, 1997). The Company sold certain assets of Vangard
Labs, Inc. on April 17, 1997 to an unrelated third party. The terms of the
agreement of sale provided for the payment to the Company of $3.1 million in
cash and the assumption of certain liabilities by the buyer. The $3.1 million
received by the Company was used to reduce debt. See "Item 3.
Legal Proceedings."
On November 3, 1993, the Company signed a joint venture agreement to
create Glasgow Pharmaceutical Corporation ("GPC") for the purpose of marketing
and selling pharmaceutical products to the long-term health care industry. GPC
is owned 50% by Vangard and 50% by Creighton Pharmaceuticals Corporation
("Creighton"), a wholly owned subsidiary of Sandoz Pharmaceuticals Corporation
("Sandoz"). 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
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provide additional product lines. The principal product of GPC was MedCard,
which was a medication punch card that could be prefilled with oral solid
generic and brand name drugs. Operations of GPC commenced in May 1994 and were
suspended in January 1996 along with the operations of Vangard. The Vangard
asset sale agreement did not include GPC. The Company has no immediate plans to
resume operations of GPC. GPC does not have any material assets or liabilities.
The principal executive offices and manufacturing facilities of the
Company are located at 12920 Automobile Boulevard, Clearwater, Florida 34622 and
the Company's telephone number is (813) 576-6311.
Segments
The Company maintains two business segments, medication dispensing systems
and clinical laboratory services. MTS Packaging, MMS and Performance Pharmacy
contribute to the revenues generated by the medication dispensing systems
business segment. MTL contributes to the clinical laboratory services business
segment revenues.
The following is operating information for these industry segments for the
years ended March 31:
1997 1996 1995
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(In Thousands)
Revenue:
Medication Dispensing Systems $ 13,134 $ 11,900 $ 11,252
Clinical Laboratory Services 6,113 5,152 3,578
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Total Revenue $ 19,247 $ 17,052 $ 14,830
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Operating Profit (Loss):
Medication Dispensing Systems $ 2,040 $ (12,550) $ 3,269
Clinical Laboratory Services 136 (4,443) 307
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2,176 (16,993) 3,576
Corporate (2,161) (7,624) (5,692)
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Total Operating Profit (Loss) $ 15 $ (24,617) $ (2,116)
=========== ============== ==============
Depreciation and Amortization Expense:
Medication Dispensing Systems $ 684 $ 1,411 $ 616
Clinical Laboratory Services 250 579 183
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934 1,990 799
Corporate 447 692 261
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Total Depreciation and Amortization $ 1,381 $ 2,682 $ 1,060
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Identifiable Assets:
Medication Dispensing Systems $ 6,944 $ 8,024 $ 18,009
Clinical Laboratory Services 2,560 2,551 5,887
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9,504 10,575 23,896
Corporate 3,039 4,094 8,602
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Total Identifiable Assets $ 12,543 $ 14,669 $ 32,498
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Capital Expenditures:
Medication Dispensing Systems $ 215 $ 774 $ 2,244
Clinical Laboratory Services 67 2 600
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282 776 2,844
Corporate 25 21 159
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Total Capital Expenditures $ 307 $ 797 $ 3,003
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Impairment of Long-Lived Assets:
Medication Dispensing Systems $ -0- $ 12,662 $ 3,471
Clinical Laboratory Services -0- 3,759 800
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Total Impairment of Long-Lived Assets $ -0- $ 16,421 $ 4,271
=========== ============== ==============
Events Leading to the Chapter 11 Filing
During the second quarter of fiscal 1996, the Company recorded 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 the Company's
computerized medication dispensing product and an additional charge of
approximately $500,000 relating to the valuation of certain inventory and
project development costs.
During the third quarter of fiscal 1996, Creighton terminated its
relationship with the GPC joint venture. The revenues attributable to the joint
venture for the fiscal years ending March 31, 1995 and 1996 were $258,000 and
$1,127,000, respectively. The Company's interest in this joint venture has been
treated as a discontinued operation for financial reporting purposes. As a
result of the termination, the Company recorded a $4.6 million 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 Vangard, which had been acquired for the joint
venture. As a direct result of the joint venture termination, the Company
re-evaluated its position in the medication packaging market. The Company
determined that the automated manufacturing equipment associated with the MTS
Packaging business should be more fully utilized in order to remain competitive.
The early retirement of portions of the older and less automated equipment
resulted in a $3.0 million charge against earnings.
As a result of these significant losses, the Company was in violation of
certain financial covenants in 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 ("Chapter 11") of Title 11 of the United States
Bankruptcy Code in the Middle District of Florida, Tampa Division (the
"Bankruptcy Court") for certain of its subsidiaries.
During the fourth quarter of fiscal 1996, the Company filed voluntary
petitions for relief under Chapter 11 for four of its subsidiaries, MTS
Packaging, MTL, Vangard and MTS Sales (collectively, the "MTS debtors"). Trading
of the Company's common stock on The NASDAQ National Market ("NASDAQ") was
discontinued on February 8, 1996 for failure to meet the requirements for
continued inclusion in the NASDAQ. Since February 1996, the Company's stock has
traded on the NASD OTC Bulletin Board (the "Bulletin Board"). On September 4,
1996, the Bankruptcy Court approved a plan of reorganization (the "Plan of
Reorganization").
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.
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Plans of Reorganization
Plans of reorganization for MTS Packaging and MTL were submitted to the
Bankruptcy Court on May 16, 1996. A plan of reorganization was submitted for
Vangard on July 15, 1996. The Bankruptcy Court approved all plans of
reorganization at a confirmation hearing on September 4, 1996.
Inherent in a successful plan of reorganization is a capital structure
that permits a debtor to generate sufficient cash flow to meet its restructured
obligations and fund its current obligations. The rights and ultimate payments
to prepetition creditors were substantially altered under the Plan of
Reorganization.
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 Bankruptcy Court protection provided by the filings
for the MTS debtors allowed the resumption of normal business operations, which
have continued after confirmation of the Plans of Reorganization.
Products/Services
MTS Packaging manufactures proprietary medication dispensing systems and
related products for use by medication prescription service providers. These
systems utilize disposable medication punch cards and specialized machines that
automatically or semi-automatically assemble, fill and seal drugs into
medication punch cards representing a 30 day supply of a patient's medication.
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 970
medication dispensing systems with pharmacy clientele. MTS Packaging also sells
prescription labels and medication carts. These products and ancillary supplies
are designed to complement sales of disposable medication punch cards. MTS
Packaging had approximately $265,000 in unshipped orders as of June 30, 1997.
Through MMS, 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
physicians' medication orders quickly and accurately. The organization of
screens, use of overlapping windows, in-process access to multiple files and
other user friendly techniques make the Performance Pharmacy System an
attractive and functional hospital pharmacy software system. Performance
Pharmacy System pricing starts at approximately $30,000, which includes
hardware, software, training and pre-loaded drug files. To date, approximately
130 Performance 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.
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 medication administration record) for electronic charting of
patients scheduled medications. MedServ has been specifically designed for use
in hospital and
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nursing home facilities. With its unique hardware and customized software
programs, the MedServ system's objective is to introduce controls and audit
trails to reduce the likelihood of medication errors while providing a more
efficient option to paperwork documentation within the hospital. This computer
based system automatically logs all activity and allows integration with
existing information systems. As nurses make rounds, MedServ can move with them
providing finger tip "touch screen" access to important patient and prescription
information. The benefits include accurate patient billing, reduced probability
of missed dosages and medication errors, and reduction of burdensome paperwork
documentation. 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 product has not been made widely available to the
health care industry. MedServ FS has been installed in 20 hospitals and the
pre-released version of MedServ EMAR system is in testing.
MTL provides clinical laboratory testing services. The analytical tests of
blood, tissues and other bodily fluids that it provides are typical of
diagnostic laboratories and the facilities presently have no particular
specialization in any of its testing procedures and services. MTL performs
in-house over 95% of the testing routinely ordered by physicians for their
patients, which typically includes chemistry, hematology, serology, urinalysis
and bacteriology.
Research and Development
Research and development activities during the past three years have not
been significant and, therefore, have not been separately classified in the
financial statements. The Company has dedicated substantially all of its
resources to the development of products that have been determined to be
technologically feasible in an effort to realize a return on the investment made
as quickly as possible.
Product Development
The Company had a significant number of projects underway to develop new
products during fiscal year 1996. These projects were primarily being developed
within the medication dispensing system business segment. The most significant
projects were as follows:
Medication Management Systems, Inc.
MedServe EMAR
MTS Packaging Systems, Inc.
Approximately 12 new punch card packaging and dispensing systems
Throughout fiscal 1997, the Company has dedicated a limited amount of
resources to complete development of MedServ EMAR and approximately seven punch
card packaging and dispensing systems. The continued development of these
projects is dependent upon the Company's ability to generate sufficient cash
flow from operations. In order for the Company to maximize its market
opportunities for these projects, it may require capital which might not be
available to the Company.
Manufacturing Processes
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MTS Packaging has developed integrated punch card manufacturing equipment
that will accomplish the various punch card manufacturing steps in a
single-line, automated process. The Company believes that its advanced
automation gives it certain speed, cost and flexibility advantages over
conventional punch card manufacturers. The Company's equipment produces finished
cards in one eight hour shift that 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. In addition to the manufacturing of punch cards, MTS
Packaging manufactures machines, which are utilized by its customers to fill
punch cards with medication. The majority of these machines are sold to
customers; however, from time to time, customers are provided or rented machines
in conjunction with an agreement to purchase certain quantities of punch cards
over a specified time period.
During 1996, the Company disposed of all production equipment and tooling
it no longer was utilizing in its manufacturing processes because of its
conversion to automated equipment, which resulted in a charge of $8.3 million
against earnings. 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.
MTS Packaging is dependent on a number of suppliers for the raw materials
essential in the production of its products. The Company believes that relations
are adequate with its existing vendors. However, there can be no assurance that
such relations will be adequate in the future or that shortages of any of these
raw materials will not arise, causing production delays. The inability to obtain
raw materials on a timely basis and on acceptable terms may have an impact on
the future performance of the Company.
MMS integrates computer hardware into its MedServ product line 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 130 installations of the Performance Pharmacy System.
MTL 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 include bacteriology, chemistry,
hematology, serology and urinalysis. MTL provides services and as a result, is
not dependent upon a supply of raw materials; however, certain disposable
supplies are utilized to perform services. Revenue derived from services is
dependent upon referrals by physicians.
Performance Pharmacy develops and sells software systems. It is not
dependent upon a supply of raw materials; however, the development and software
support services provided are dependent upon the subsidiary's ability to attract
and retain qualified personnel who are experienced in computer software matters.
As a result of the Company's financial condition, as well as the Chapter
11 filings of the MTS debtors, many of the suppliers of raw materials to the
Company's subsidiaries have required that purchases be made on a COD basis or
payment in advance. The Company's ability to obtain raw materials is, therefore,
dependent upon the amount of cash that the Company has available.
MTS Packaging believes it is necessary to maintain an inventory of
materials and finished products that allows for customer orders to be shipped
within the industry standard of 2 - 3 days.
MMS maintains an inventory of raw materials, which are assembled at the
time an order is received from customers. Systems are made to order;
accordingly, raw materials are ordered when needed. The Company believes this is
standard in the industry.
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The services provided by MTL and Performance Pharmacy do not require these
companies to maintain inventory.
Markets and Customers
MTS Packaging's 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. The Company
presently has no customers that account for greater than 10% of its
consolidated sales.
The primary customers for MTS Packaging's proprietary packaging machinery
and the related disposable punch cards, labels and ancillary supplies are
pharmacies that supply prescription medication to nursing homes. Such pharmacies
serve from 250 to 20,000 nursing home beds per location and many serve the home
health care marketplace as well.
The Company has begun selling its MedServ product line, which is a
computerized medication dispensing system, to hospitals throughout the United
States. The Company believes this technology is attractive to hospitals because
it provides the opportunity for the hospital to reduce medication dispensing and
administration errors. Approximately 2,500 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 2,500 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, there is an opportunity within most of those 2,500 hospitals for
systems, such as the Company's MedServ EMAR, that can adequately administer a
patient's regularly scheduled medications. The floor stock systems that have
been installed are primarily justified by reducing inventory shortages and
decreasing "lost billings" rather than reducing or eliminating medication
errors. As of June 25, 1997, the Company had 20 MedServ hospital installations
within the U.S. The Company expects that pricing for MedServ products will range
from $25,000 to $800,000 for a hospital installation depending on the number of
beds and service level requirements. The Company believes that the market for
such systems currently is favorable.
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.
Competition
The pharmacies that 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 Company believes that products developed by the Company's competitors are
not as efficient as the Company's systems because they are not as automated. The
Company's method of dispensing medication replaces more traditional dispensing
methods such as prescription vials. The principal methods of competition in
supplying medication dispensing systems to prescription service providers are
product innovation, price, customization and product performance. Many of the
Company's competitors have been in business longer and have substantially
greater resources than the Company. The Company's medication dispensing systems
are relatively new and there can 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, Inc., PCI/Trans Aid, Inc. and RX Systems, Inc. The Company
believes that its automated proprietary packaging machinery distinguishes
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MTS Packaging from its competitors'. Manual systems are capable of only filling
and sealing 30-45 disposable medication punch cards per hour. The Company's new
automated packaging machinery can fill and seal up to 720 disposable medication
cards per hour. This is important because many of the Company's customers are
consolidating and require higher productivity to meet their growing market
share.
MMS 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 HBO & Company, SMS Corporation, MEDITECH, Inc. and other major
corporations. Also included are pharmacy management systems providers such as
Cerner Corporation, Mediware Information Systems, Inc. and Health Care Services,
Inc. Among suppliers of automated dispensing systems to hospitals, the Company
will be competing with such major companies as Pyxis Corporation, a subsidiary
of Cardinal Health Inc., Baxter International, Inc., Diebold Incorporated and
others for its new MedServ product line. Although the Company believes it
provides superior technological systems, there can be no assurance that it will
be able to effectively compete with companies that have more financial resources
or established market distribution channels.
MTL conducts its business in a very competitive marketplace. There are a
number of diagnostics laboratories in the Tampa Bay area that 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 MTL believes it provides a high level of service
and quality, there can be no assurance that competitors, governmental
regulators, 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 that MTS
Packaging uses and sells. The Trust is the assignee of all such proprietary and
patent rights used in the Company's business that were invented or developed by
Harold B. Siegel, the founder of the Company. The Trust and the Company are
parties to a license agreement whereby the Company is granted an exclusive and
perpetual license from the Trust to utilize the know-how and patent rights in
the manufacture and sale of the Company's medication dispensing systems. MTS
Packaging is heavily dependent upon the continued use of the proprietary rights
associated with these patents. The patents begin to expire in 2001 and continue
to expire through 2006. The license agreements are co-extensive with the
patents.
There are numerous patent applications and patent license agreements for
products that have been sold and that have been in development within MMS;
however, its business is not materially dependent upon its ownership of any one
patent or group of patents.
There can be 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.
MTL does not presently benefit from any proprietary technology. The
Company has completed a program to upgrade to more technologically advanced
equipment for the delivery of diagnostic information to its customers.
Regulation
Certain subsidiaries of the Company are subject to various federal, state
and local regulations with respect to their particular businesses. The Company
believes that it currently is in compliance with these regulations.
MTS Packaging'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 can be no
assurance that significant
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changes in the regulations applicable to MTS Packaging's products will not occur
in the foreseeable future. Any such changes could have a material adverse effect
on the Company.
The operations of MTL are subject to extensive federal, state, and local
regulation. Specifically, MTL is licensed by the State of Florida Department of
Health and Rehabilitation Services ("HRS") and is certified by the Health Care
Financial Administration ("HCFA"), a federal governmental agency. The Company
believes MTL is operated in compliance with HRS and HCFA licensing and
certification requirements.
The operations of MTL are subject to Medicare reimbursement requirements
and restrictions imposed by the Social Security Act as administered by HCFA.
Recent regulatory changes directly affect the way Medicare reimburses for
laboratory services. Medicare only pays for laboratory services if the lab
facility is certified under the Clinical Laboratory Improvement Act of 1988. The
Company's operation of MTL complies with this federal legislation.
Most clinical laboratory procedures are paid from laboratory fee schedules
issued by individual Medicare carriers or intermediaries. Laboratory services
are paid based upon a national fee schedule modified by local economic factors.
Medicare carriers pay laboratory claims on a reasonable fee basis. In the case
of laboratory tests, the recommended fee is the lesser of the fee schedule or
the national caps on the actual billed amounts. Most laboratory tests must be
billed on an assigned basis. This means that the provider must accept the
Medicare reimbursement as payment in full for a laboratory test. Medicare
patients are not billed for the additional amount. In addition, Florida has
adopted legislation that limits billing for laboratory services to 120% of the
allowable Medicare reimbursement.
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 June 25, 1997, the Company employed 225 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, MMS and Performance Pharmacy and
the manufacturing facilities for MTS Packaging are located at this location. The
lease expires on April 15, 1999. The Company's current monthly lease payments
are approximately $21,000. The premises are generally suited for light
manufacturing and/or distribution. Currently the Company is operating at
two-thirds of actual manufacturing capacity.
The Company leases approximately 5,200 square feet at approximately $2,500
per month for office and warehouse space at 21530 Drake Road, Cleveland, Ohio.
The lease expires on March 31, 1999. This space is used by the Ohio Label
business acquired by the Company in 1989. This business is now part of MTS
Packaging.
The Company leases approximately 3,300 square feet of space for MTL
located in Pinellas County, Florida. This lease expires on April 1, 2002, with
monthly rents not in excess of $5,046.
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 Note 15 to the
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13
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,
MTL and MTS Sales, filed voluntary petitions for relief under Chapter 11 in the
Bankruptcy Court. On February 22, 1996, Vangard filed a voluntary petition for
relief under Chapter 11 in the same jurisdiction.
On September 4, 1996, the Plans of Reorganization for the MTS debtors were
confirmed by the Bankruptcy Court. As part of the Plans of Reorganization for
the MTS debtors, certain liabilities were compromised by creditors of the
Company as follows:
Secured Claims (Bank) - Bank notes payable, line of credit, accrued
interest and other charges and expenses, in the amount of approximately $28.0
million, were combined and restructured into two separate promissory notes.
Plan Note I, in the stated principal amount of approximately $27.0
million, provided for a portion of the principal amount, $15.0 million, to be
due and payable as follows:
a) Interest at the rate of 7.5% for a period of two years ending September
1, 1998.
b) Installments of principal and interest at the rate of 7.5% payable
monthly for a period of ten years ending September 1, 2006. At which time, the
then outstanding remaining principal amount of the $15,000,000 debt is due and
payable in full . The monthly installments of principal and interest are
calculated based on the principal amount amortized in level monthly payments
over twenty years.
Plan Note II, in the stated principal amount of $1,000,000 provided for
payment of $750,000 on or about the date of confirmation of the Plans of
Reorganization. The Company made the payment of $750,000 on or about September
5, 1996 and in accordance with the terms of Plan Note II, the stated principal
amount was deemed fully satisfied.
Plan Note I further provided that the net proceeds from the sale of
Vangard, would be paid to the Bank. In addition, certain other mandatory
prepayments of the stated principal amount were required upon the occurrence of
a capital transaction in which any of the Company's subsidiaries are sold, as
well as upon the receipt of any proceeds resulting from certain causes of action
commenced by the Company. Plan Note I also provided that the full stated
principal amount of approximately $28 million would be due and payable upon the
occurrence of specified major events of default.
Effective March 31, 1997, the stated principal amount of Plan Note I was
reduced to $15.0 million. Thereby, permanently removing any contingent amount
due including the additional $12 million principal amount, except for the
mandatory prepayments for any capital transactions. As a result of this
modification and the receipt of the proceeds of the sale of Vangard, the Company
realized during the fourth quarter and for the year an extraordinary gain of
approximately $8.2 million, after the mandatory payment from the Vangard sales
proceeds of approximately $3.1 million.
The remaining portion of extraordinary gain reported in the Company's
statement of operations, $1,800,000, relates to the forgiveness of the Company's
prepetition debt by its unsecured creditors.
Plan Note I contains certain financial covenants including prohibiting
the Company from exceeding a maximum consolidated tangible deficit, maintaining
various financial ratios and limits the amount of capital expenditures. In
addition, Plan Note I requires the bank's approval of the payment of dividends
and the borrowing of any additional amounts from other parties.
Unsecured Claims (Trade Creditors) - The holders of approximately $2.3
million of trade and other miscellaneous claims elected to receive payment of
their claims under one of the three options provided for in the Plans of
Reorganization.
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Unsecured Claims (Other) - In March 1995, the Company entered into an
agreement relating to the acquisition of certain clinical laboratory accounts
for MTL. The Company reached a compromise with the seller which reduced the
acquisition indebtedness to $500,000 from approximately $1.4 million.
The adjustment of unsecured claims, of the Plans of Reorganization have
been classified as an extraordinary gain in the Company's consolidated
statement of operations and statement of cash flow for the year ended March 31,
1997.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of the fiscal year ending March 31, 1997.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Price Range of the Company's Securities
Prior to February 9, 1996, the Company's common stock traded on NASDAQ.
Trading of the Company's common stock on NASDAQ was discontinued on February 9,
1996 for failure to meet the requirements for continued inclusion on 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 bid information for
the Company's common stock for the periods indicated, as reported by NASDAQ
quotation system for each quarter through the third quarter of fiscal year 1996
and by the Bulletin Board for the fourth quarter of 1996 and for each quarter of
fiscal year 1997. Over-the-counter market quotations reflect interdealer prices,
without retail markup, markdown or commission and may not necessarily represent
actual transactions.
High Low
----------- ------------
1997 Fiscal Year
- ----------------
First Quarter $ 1 $ 1/4
Second Quarter 1 3/8 7/16
Third Quarter 1 1/16 9/16
Fourth Quarter 1 17/32
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 Company's warrants to purchase the Company's common stock are traded
through the National Quotation Bureau, LLC. The table below sets forth the range
of high and low bid information for the Company's warrants for the periods
indicated. Over-the-counter market quotations reflect interdealer prices,
without retail markup, markdown or commission and may not necessarily represent
actual transactions.
High Low
----------- ------------
1997 Fiscal Year
- ----------------
First Quarter * *
Second Quarter * *
Third Quarter * *
Fourth Quarter * *
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
*Quotations not available. The last reported bid for the Company's warrants
occurred on January 4, 1996. At that time the bid price was 1/32.
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As of June 24, 1997, there were approximately 4,000 holders of record of
the Company's common stock.
Historically, the Company has not paid dividends on its common stock and
has no present intention of paying dividends in the foreseeable future. Payment
of dividends are subject to the prior approval by the Company's secured lender,
SouthTrust Bank.
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ITEM 6. SELECTED FINANCIAL DATA
The following tables set forth selected financial and operating data
regarding the Company. This information should be read in conjunction with
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" and the Company's Financial Statements and Notes thereto. See
"FINANCIAL STATEMENTS."
YEARS ENDED MARCH 31,
-----------------------------------------------------------
(In Thousands, Except Earnings Per Share Amounts)
Income Statement Data: 1997 1996 1995 1994 1993
- ---------------------- ---- ---- ---- ---- ----
Sales................................................ $19,247 $ 17,052 $ 14,830 $ 12,301 $ 10,858
Cost of Sales and Other Expenses..................... $19,232 $ 41,669 $ 16,946 $ 9,367 $ 8,052
Income (Loss) from Continuing Operations
Before Cumulative Effect of Accounting Change....... $ 15 $ (22,717) $ (1,272) $ 1,856 $ 1,740
Income (Loss) from operations of Discontinued
Operations.......................................... (2,800) (6,634) 16 762 552
Gain on Forgiveness of Debt of Discontinued
Operations......................................... 3,500 -0- -0- -0- -0-
Estimated gain (Loss) on Disposal of Discontinued
Operations.......................................... 2,200 (5,229) -0- -0- -0-
Extraordinary Gain on Debt Forgiveness............... 10,097 -0- -0- -0- -0-
Cumulative Effect of Accounting
Change for FASB No. 109............................. -0- -0- -0- 543 -0-
------- --------- -------- ------- --------
Net Income (Loss).................................... $13,012 $ (34,580) $ (1,256) $ 3,161 $ 2,292
======= ========= ======== ======= ========
Primary Net Earnings (Loss) Per Share:
From Continuing Operations.......................... $ .00 $ (5.60) $ (.32) $ .48 $ .46
Income (Loss) from Discontinued Operations........... .51 (2.92) .00 .20 .15
Cumulative Effect of Accounting Change
For FASB No. 109.................................... .00 .00 .00 .14 .00
Extraordinary Gain on Debt Forgiveness............... 1.76 .00 .00 .00 .00
------- --------- -------- -------- --------
Net Earnings (Loss) Per Share $ 2.27 $ (8.52) $ (0.32) $ .82 $ .61
======= ========= ======== ======== ========
Average Common Shares 5,737 4,059 3,974 3,879 3,789
Outstanding
AT MARCH 31,
-----------------------------------------------------------
(In Thousands)
Balance Sheet Data: 1997 1996 1995 1994 1993
- ------------------- -------- -------- --------- -------- --------
Net Working Capital.................................. $ 3,989 $ 5,406 $ 5,410 $ 1,695 $ 1,899
Assets............................................... 12,543 14,669 44,243 33,018 25,527
Short-Term Debt...................................... 310 168 1,165 979 654
Long-Term Debt....................................... 15,459 350 23,224 10,588 7,227
Stockholders' Equity (Deficit)....................... (5,416) (18,546) 15,640 16,853 13,655
Liabilities Subject To Compromise.................... -0- 30,457 -0- -0- -0-
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
During fiscal year 1997, the Company returned its focus to its core
business. The Chapter 11 filings of the MTS debtors were concluded in the second
quarter of fiscal year 1997. The confirmation of the Plan of Reorganization was
done in connection with the successful negotiation of a ten-year agreement with
the Company's principal lender.
During fiscal year 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.
During the fourth quarter of fiscal 1996, the Company's principal
operating subsidiaries filed voluntary petitions under Chapter 11. The
Bankruptcy Court approved the Plan of Reorganization eight months later on
September 4, 1996. 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 the interests of its stockholders.
RESULTS OF OPERATIONS
FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996
Revenues
Net sales for the fiscal year ended March 31, 1997 increased 12.9% to
$19.2 million from $17.0 million the prior fiscal year. Revenues for the
medication dispensing system segment increased 10.4% and revenues for the
clinical laboratory services segment increased 18.7%. The increase in revenue
for the medication dispensing system segment resulted primarily from increases
in sales of disposable medication punch cards. The continued focus of marketing
efforts on wholesale distribution of disposables has contributed significantly
to the increase in revenue. In addition, the Company added several national
accounts, customers who are significant long-term care pharmacy providers. The
increase in revenues for the clinical laboratory segment resulted primarily from
the greater sales and marketing efforts, which have increased the number of
physicians serviced by the laboratory.
Cost of Sales and Services
Cost of sales for the year ended March 31, 1997 increased 1% to $10.7
million from $10.6 million in the prior year. Cost of sales as a percentage of
sales decreased to 55.9% from 62.5%. Cost of sales as a percentage of sales for
the medication dispensing segment decreased to 54.6% in fiscal 1997 compared to
62.0% in the prior year. The decrease resulted primarily from the incremental
gross margin contributed by increases in the sales of disposable punch cards.
Cost of sales for the clinical laboratory segment decreased to 58.5% in fiscal
1997 compared to 62.8% the prior year. The incremental profit margin realized
from increased revenues in the laboratory business contributed significantly to
the reduction of costs of services as a percentage of revenue. These services
did not require the addition of any material amount of fixed costs.
Selling, General and Administrative Expenses ("SG&A")
SG&A expenses for the year ended March 31, 1997 decreased 24.2% to $6.5
million compared to $8.5 million the prior year. The decrease resulted primarily
from reductions in corporate overhead expense of approximately $2.0 million.
The Company implemented cost reduction measures during fiscal 1997 as part of
its overall reorganization efforts including reductions in personnel and other
overhead expenses. The reductions were partially offset by increases in sales
and marketing expenses concomitant with increases in revenue in both the
medication dispensing segment and the clinical laboratory segment.
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Depreciation and Amortization
Depreciation and amortization expense decreased 48.5% to $1.4 million in
fiscal 1997 from $2.7 million the prior year. The Company reduced the estimated
useful lives of its property and equipment in fiscal 1996 to reflect technical
changes. These changes resulted in additional depreciation in 1996 of $589,000.
In addition, during 1996, the Company reduced the carrying value of certain
long-lived assets which had been impaired. As a result of these reductions,
depreciation and amortization expense was reduced in fiscal 1997 compared to the
prior year.
Interest Expense
Interest expense decreased 65.0% to $609,000 in fiscal 1997 from $1.7
million in the prior year. The decrease resulted primarily from the reduction
in indebtedness which the Company realized as a result of the restructured
debt with its secured lenders, and the suspension of interest payments during
the Chapter 11 proceedings. Interest expense for fiscal 1997 would have been
approximately $1.1 million higher if payments had been required during the
Chapter 11 proceedings.
Income Taxes
In 1996, the Company recognized an income tax benefit of $1.9 million from
the use of net operating loss carrybacks. In 1997, no income tax expense or
benefit was recognized as taxes on income from continuing operations,
discontinued operations and extraordinary items were offset by the net
operating loss carryforward. See Note 15 to the financial statements.
Gain on Disposal of Discontinued Operations
The Company completed the sale of certain assets of Vangard Labs, Inc.
effective March 31, 1997. The Company received $3.1 million for the assets. In
addition, the buyer assumed approximately $700,000 in liabilities. As a result
of the sale the Company realized a gain of approximately $2.2 million.
Extraordinary Gain on Forgiveness of Debt
The Company's principal subsidiaries emerged from Chapter 11 during fiscal
1997. The Plans of Reorganization provided for a reduction of the amounts owed
to both secured and unsecured creditors. The reduction, less certain expenses
relating to the reorganization, has been recognized as an extraordinary gain.
RESTRUCTURING CHARGES
The Company recognized significant restructuring charges in fiscal
1996. No further restructuring charges were required in 1997.
Loss from Discontinued Operations
The Company elected to treat Vangard as a discontinued operation due to
management's decision to dispose of the business. Vangard was managed by a
plan Trustee approved by the Bankruptcy Court (see Note 3 to the Consolidated
Financial Statements). The loss incurred by Vangard was $2.8 million in 1997
compared to a loss of $06.6 million in 1996.
Gain on Forgiveness of Debt of Discontinued Operation
The Plan of Reorganization of Vangard provided for a reduction of the amounts
owed to unsecured creditors. In addition, certain past petition loans made to
Vangard were forgiven by its bank. The reductions and the forgiveness of debt
has been recognized as a gain on forgiveness of debt of discontinued
operations.
Product Development
Throughout fiscal 1997, the Company has dedicated a limited amount of
resources to complete development of MedServ EMAR and approximately seven punch
card packaging and dispensing systems. The continued development of these
projects is dependent upon the Company's ability to generate sufficient cash
flow from operations. In order for the Company to maximize its market
opportunities for these projects, it may require capital which might not be
available to the Company on terms acceptable to the Company. The Company's
inability to continue development of these projects may have a material impact
on its ability to remain competitive and could have a material impact on its
future operation.
FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995
Revenues
Net sales for continuing operations for the fiscal year ending March 31,
1996 increased 15.0% to $17.1 million from $14.8 million in the prior fiscal
year. The increase was primarily attributable to a 44.0% increase in revenues
experienced by the clinical laboratory business segment which resulted from
improved sales and marketing efforts, as well as the acquisition of additional
accounts from Tampa Pathology Laboratory. The Company's medication dispensing
system business segment experienced a 5.8% increase in revenue primarily as a
result of the Company's decision to focus its sales and marketing efforts
through the wholesale distribution channel.
Cost of Sales and Services
Cost of sales for the fiscal year ending March 31, 1996, increased 37.5%
to $10.7 million from $7.8 million in the prior year. The increase was primarily
due to increased revenues experienced by both the clinical laboratory and
medication dispensing business segments. Cost of sales, as a percentage of
sales, increased from 52.3% in fiscal year 1995 to 62.5% in fiscal year 1996.
Cost of sales for the clinical laboratory segments increased to 62.8% in 1996
from 47.9% the prior year. The costs incurred by the clinical laboratory
relating to the testing of patient specimens which are performed by outside
contractors, as well as the operating costs of the patient service centers,
increased in fiscal year 1996. The clinical laboratory was not able to pass on
these additional costs to the insurance providers, primarily Medicare. In
addition, the cost of manufacturing punch cards and medication dispensing
systems increased due to increases in raw material and labor costs. The cost of
sales increased to 62.0% from 53.8% for this segment.
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Selling, General and Administrative Expenses ("SG&A")
SG&A expenses for the year ended March 31, 1996, increased to $8.5 million
from $2.4 million in the prior year. The increase in revenue experienced by the
clinical laboratory resulted in a significant increase in the number of patient
specimens processed. The increase in specimens required additional personnel to
process and bill for the services provided. In addition, the increased sales and
marketing efforts resulted in additional costs and expenses. The increase in
SG&A expenses for this business segment was approximately $1.1 million.
During the first and second quarters of fiscal year 1996, the Company
added administrative and sales personnel to accommodate anticipated growth in
its medication dispensing system business segment. The increase in SG&A expenses
for this business segment was approximately $3.2 million. Also, additions were
made in the staff and information systems of the holding company to improve the
administrative, accounting, and information support systems. The increase in
SG&A expenses for the holding company was $1.2 million. In addition, the Company
incurred one-time charges for severance and related employee separation costs of
approximately $600,000.
Product Development
The Company had a significant number of projects underway to develop new
products during fiscal year 1996 and 1995. These projects were primarily being
developed within the medication dispensing system business segment. The most
significant projects were as follows:
Medication Management Systems, Inc.
MedServe EMAR
MTS Packaging Systems, Inc.
Approximately 12 new punch card packaging and dispensing systems
Due to the uncertainties surrounding the Company's financial condition,
the filing of Chapter 11, the ultimate outcome of the plan of reorganization,
and its ability to attract and obtain qualified employees, the completion of
these projects is in doubt.
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Restructuring Charges
The Chapter 11 filings, together with the limitation on the Company's
financing alternatives, necessitated a comprehensive review of the Company's
operations. As a result of this review, during the fiscal year ended March 31,
1996, the Company recognized the following restructuring charges (In Thousands):
Loss on Early Retirement of Fixed Assets $ 8,329
Loss on Inventory Revaluation 1,510
--------
9,839
Chapter 11 Reorganization Charges:
Product Development and Software Costs 4,605
Goodwill Write-down 2,937
Terminated Joint Venture 550
Professional Fees 103
--------
8,195
--------
Total From Continuing Operations, including
$16,421 of impairment losses 18,034
--------
Loss on Disposal of Discontinued Operations 5,229
--------
Total Restructuring Charges $ 23,263
========
Depreciation and Amortization
Depreciation and amortization expense increased by $1.6 million (153%) to
$2.7 million in 1996 as compared to $1.1 million in 1995. The increase resulted
from the fact that the Company reduced the estimated useful lives of its
property and equipment to reflect technological changes. Although the Company
believes that certain machinery and equipment utilized in its manufacturing
process are technologically advanced, depreciation rates are estimates and are
determined as accurately as possible based upon past experience and other
pertinent information. Due to the fact that the technology inherent in much of
the medication dispensing system equipment is changing rapidly, the Company
continually evaluates its estimates and adjusts them accordingly. 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 elected to treat Vangard as a discontinued operation because
of management's decision to dispose of the business. The loss incurred by
Vangard was $6.6 million 1996; there was no loss from discontinued operations in
1995.
Interest Expense
Interest expense for the fiscal year ending March 31, 1996 increased
21.6% to approximately $1.7 million from $1.4 million the prior year. This
increase primarily resulted from an increase in debt. The Company discontinued
accruing interest on its secured debt effective January 3, 1996 due to its
Chapter 11 filing. The amount of interest that was not accrued was $609,000,
had this amount been accrued, the total interest payments for 1996 would have
been $2.3 million.
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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 compared
to an income tax benefit of approximately $844,000 million in 1995. 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.
Going Concern Uncertainty
Certain events and the Company's financial results and condition in 1996,
as described in Notes 1, 2, and 3 of the notes to the consolidated financial
statements and elsewhere in this Form 10-K, resulted in the Company's auditors,
including an explanatory paragraph in their auditors report dated June 20, 1996
on the 1996 financial statements as to a going concern uncertainty. During
1997, as explained herein, and in other sections of this Form 10-K, the
Company's operating and financial condition has improved. The Company
successfully emerged from bankruptcy, restructured its primary bank debt,
disposed of its discontinued operation, and improved the operation of its core
business. The auditors report dated June 24, 1997 on the 1997
financial statements does not include the discussion of a going concern
uncertainty.
LIQUIDITY AND CAPITAL RESOURCES
The Company had net income of $13.0 million in fiscal 1997 compared to a
net loss of $34.6 million the prior year. Cash provided from continuing
operations was $1.6 million in fiscal 1997 compared to cash used of $899,000 the
prior year. The increase in cash provided from continuing operations resulted
primarily from positive cash flow from operations, income tax refunds, and
reductions in accounts receivable and inventory.
Investing activities used $584,000 in fiscal 1997 compared to $2.9 million
in fiscal 1996. The decrease resulted from the fact that the Company
significantly reduced its capital equipment expenditures and product development
activities in 1997. The reduction was necessitated by the limited capital
resources available to the Company.
Financing activities used $1.3 million in fiscal 1997. The Company made
principal payments on long term debt of $1.4 million.
The Company had working capital of $4.0 million at March 31, 1997 and had
no source of additional working capital other than that which is generated from
operations.
Included in the Company's working capital is $250,000 which has been
placed in escrow with the Company's legal bankruptcy counsel to be utilized for
the first payment to unsecured creditors claims and other administrative costs
pursuant to the Plan of Reorganization.
In March 1996, the Company entered into a Severance Agreement with its
former Chief Financial Officer, Gerald Couture. As part of that agreement, the
Company acknowledged that it owed Mr. Couture past-due compensation in the
amount of $32,789. Pursuant to the Severance Agreement, the parties agreed that
the Company would deliver to Mr. Couture furniture valued at $4,886 in partial
settlement of the past-due compensation. Additionally, the Company paid Mr.
Couture $14,883 and applied $13,000 against amounts Mr. Couture owed to the
Company to fully satisfy the past due compensation obligation. The Company also
agreed to pay Mr. Couture severance compensation in the amount of $450,000,
payable in sum certain amounts though June 16, 1998. The Company, in its sole
discretion, has the option of paying such severance compensation in Common Stock
of the Company.
The Company's short-term and long-term liquidity is dependent on its
ability to generate cash flow from operations. Accounts receivable and inventory
levels are not expected to change significantly based upon the Company's current
level of operation. The Company believes that cash generated from operations
will be sufficient to meet its capital expenditure and working capital needs.
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23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this item are contained at the end of
this report.
ITEM 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On October 23, 1996, the Board of Directors of the Registrant approved the
engagement of Grant Thornton LLP ("Grant Thornton") as its independent auditors
for the fiscal year ended March 31, 1997 to replace Pender, Newkirk & Company
("Pender Newkirk") who were dismissed as auditors of the Registrant effective
October 23, 1996. The Company reported the change of auditors in a Form 8-K (the
"Form 8-K") filed with the Securities and Exchange Commission on October 28,
1996.
In connection with the audits of the Registrant's consolidated financial
statements for the fiscal years ended March 31, 1995 and 1996, and in the
subsequent interim period, there did not exist any disagreements between the
Registrant and Pender Newkirk on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure which,
if not resolved to the satisfaction of Pender Newkirk, would have caused Pender
Newkirk to have referred to the subject matter of disagreement in its report.
On June 20, 1996, Pender Newkirk issued its Independent Auditors' Report
relating to the Company's consolidated financial statements for the fiscal year
ended March 31, 1996. This report contained a paragraph indicating that certain
conditions raised substantial doubt as to the Company's ability to continue as a
going concern and that the Company's consolidated financial statements had been
prepared assuming that the Company would continue as a going concern.
Prior to the engagement of Grant Thornton, no member of that firm was
consulted by the Registrant (i) for the purpose of obtaining a written report or
oral advice with regard to the application of accounting principles to a
specified transaction of the Registrant, either completed or proposed, (ii)
regarding an inquiry as to the type of audit opinion that may be rendered on the
Registrant's financial statements or (iii) regarding any matter that was the
subject of a disagreement with Pender Newkirk or which constituted a reportable
event pursuant to Item 304(a)(1)(v) of Regulation S-K.
By letters dated October 25, 1996, copies of the Form 8-K were delivered
to Pender Newkirk and to Grant Thornton for their comment. Pender Newkirk's
response stating its agreement with the above facts was filed as an exhibit to
the Form 8-K.
21
24
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference to the
definitive proxy statement to be filed by the Company for the Annual Meeting of
Stockholders to be held on September 10, 1997.
ITEM 11: EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
definitive proxy statement to be filed by the Company for the Annual Meeting of
Stockholders to be held on September 10, 1997.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
definitive proxy statement to be filed by the Company for the Annual Meeting of
Stockholders to be held on September 10, 1997.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
definitive proxy statement to be filed by the Company for the Annual Meeting of
Stockholders to be held on September 10, 1997.
22
25
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. and 2. The Financial Statements and schedule filed as part of this report are listed separately in the
Index to Financial Statements beginning on page 25 of this report
3. For Exhibits, see Item 14(c) below. Each management
contract or compensatory plan or arrangement required to be
filed as an Exhibit hereto is listed in Exhibit Nos. 10.20, 10.21,10.22, 10.23, 10.24
and 10.25 of Item 14(c) below.
(b) No reports on Form 8-K have been filed by the Company
during the last quarter of the year ended March 31, 1997
(c) List of Exhibits:
(9)2.1 Agreement and Plan of Merger - Medication Management Technologies, Inc. and Cygnet
Technologies, Inc.
(9)2.2 Sale Agreement Vangard Labs, Inc. and NLS Healthcare, 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 Siegel Family Revocable Trust Agreement
(8)10.2(a) Amendment and Restated Siegel Family Revocable Trust Agreement
(8)10.2(b) Siegel Family Limited Partnership Agreement
**10.3(a) Agreements and Assignments of Patent Rights between Harold B. Siegel and the Siegel
Family Revocable Trust
**10.3(b) License Agreement between the Company and the Siegel Family Revocable Trust
**10.3(c) Assignment of Trade Names, Licenses, and Accounts Receivable from DRG Consultants,
Inc. to the Company
**10.4 Agreement for Sale of Stock between Lawrence E. Steinberg and the Company dated
April 27, 1987
**10.5 Warrant Agreement between Lawrence E. Steinberg and the Company dated April 27,
1987
**10.6 Warrant Agreement between Overseas Group and the Company dated May 8, 1987
**10.7 Option Agreement between the Siegel Family Revocable Trust and Lawrence E. Steinberg
dated December 18, 1987
***10.8 Pilot Project and Option Agreement between Sandoz and the Company
****10.9 Documents relating to the acquisition of the business of Ohio Label & Packaging Inc. dated
November 3, 1989
*10.10 Agreement among Company, Trust and Harold B. Siegel
regarding modification to royalty arrangements and issuance
of Common Stock and retirement of preferred stock dated
September 2, 1990
(1)10.11 Acquisition and financing documents relating to Clearwater Medical Services, Inc.
23
26
(2)10.12 Acquisition and financial documents relating to Clearwater Diagnostic Center, Inc.
(3)10.13 Stock Purchase Agreement for Vangard Labs, Inc.
(4)10.14 Warrant Agreement between Ladenburg Thalman & Co. and the Company
(5)10.15 Loan and Security Agreement dated December 1, 1992 with Daiwa Bank, Limited
(6)10.16 Amended and Restated Loan and Security Agreement dated September 28, 1993 with
SouthTrust Bank of Alabama
(7)10.17 First Amendment to Amended and Restated Loan and Security
Agreement dated April 25, 1994 with SouthTrust Bank of
Alabama
(7)10.18 Addendum to Lease dated September 30, 1993 with Leslie A. Rubin for facilities located at
12920 and 12900 Automobile Boulevard, Clearwater, Florida
(7)10.19 Lease effective August 2, 1993 by and between C & C Park Building and Medical
Technology Systems, Inc. for property located at 21540 Drake Road, Strongville, Ohio
(7)10.20 Form of 1994 Stock Option Plan
(7)10.21 Form of Employment Agreement for Todd Siegel and Gerald Couture
(7)10.22 Form of Executive Stock Appreciation Rights and Non-Qualified Stock Option Agreement
(7)10.23 Form of Director's Stock Option Agreement
(7)10.24 Form of Directors' Consulting Agreement
(7)10.25 Form of Director/Officer Indemnification Agreement
(7)10.26 Joint Venture Agreement between MedVantage, Inc. and the Company dated
January 5, 1995
(7)10.27 Third Amendment to Amended and Restated Loan and Security Agreement effective March
28, 1995
(8)10.28 Form of Executive Director's Agreement for Gerald Couture
(9)10.29 Stock Option Plan dated March 4, 1997
(9)10.30 Stock Option Agreement with David Kazarian
(8)21. List of Subsidiaries
(9)23. Consent of Independent Certified Public Accountants
(9)27. Financial Data Schedule
* Incorporated herein by reference to same Exhibit(s), respectively, Registration Statement
No. 33-40678 filed with the Commission on May 17, 1991
** Incorporated herein by reference to same Exhibit(s), respectively, Registration Statement
(SEC File No. 33-17852)
*** Incorporated herein by reference to Form 8-K filed on November 18, 1988
**** Incorporated herein by reference to Form 8-K filed on November 16, 1989
(1) Incorporated herein by reference to Form 8-K for event dated November 8, 1991
(2) Incorporated herein by reference to Form 8-K for event dated November 14, 1991
(3) Incorporated herein by reference to Form 8-K for event dated May 27, 1991
(4) Incorporated herein by reference to Form S-3 filed April 16, 1993
(5) Incorporated herein by reference to Form 10-K for year ended March 31, 1993
(6) Incorporated herein by reference to Post Effective Amendment No. 1 to Form S-1 (File
No. 33-40678) dated October 14, 1993
(7) Incorporated herein by reference to Form 10-K for year ended March 31, 1995
(8) Incorporated herein by reference to Form 10-K for year ended March 31, 1996
(9) Filed herewith
24
27
MEDICAL TECHNOLOGY SYSTEMS, INC.
INDEX TO FINANCIAL STATEMENTS
Page
----
REPORTS OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 26-27
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of March 31, 1997 and 1996 28
Consolidated Statements of Operations for the years ended
March 31, 1997, 1996 and 1995 29
Consolidated Statement of Changes in Stockholders' Equity
(Deficit) for the years ended March 31, 1997, 1996 and 1995 30
Consolidated Statement of Cash Flows for the years ended
March 31, 1997, 1996 and 1995 31
Notes to Consolidated Financial Statements 32
FINANCIAL STATEMENT SCHEDULE:
Schedule II - Valuation and qualifying accounts S-1
All other schedules are omitted since the required information is not
present in amount sufficient to require submission of the schedule or because
the information required is included in the financial statements and notes
thereto.
25
28
Report of Independent Certified Public Accountants
Board of Directors
Medical Technology Systems, Inc.
and Subsidiaries
Clearwater, Florida
We have audited the accompanying consolidated balance sheet of Medical
Technology Systems, Inc. and Subsidiaries as of March 31, 1997 and the related
consolidated statements of operations, changes in stockholders' equity (deficit)
and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Medical
Technology Systems, Inc. and Subsidiaries as of March 31, 1997, and the
consolidated results of their operations and cash flows for the year then ended
in conformity with generally accepted accounting principles.
GRANT THORNTON LLP
Tampa, Florida
June 24, 1997
26
29
Independent Auditors' Report
Board of Directors
Medical Technology Systems, Inc.
and Subsidiaries
Clearwater, Florida
We have audited the accompanying consolidated balance sheet of Medical
Technology Systems, Inc. and Subsidiaries as of March 31, 1996 and the related
consolidated statements of operations, changes in stockholders' deficit and cash
flows for the years ended March 31, 1996 and 1995. These financial statements
are the responsibility of the management of the Company. Our responsibility is
to express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those 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
provides a reasonable basis for our opinion.
In our opinion, the 1996 and 1995 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, and the results of their operations and cash flows for the year
ended March 31, 1996 and 1995 in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The Company incurred
losses during the current year of approximately $34.6 million and its total
liabilities exceed its total assets by approximately $18.6 million as of March
31, 1996. The Company also had negative cash flows from operations during the
current year of approximately $.9 million 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. These consolidated financial
statement do not include any adjustments that might result from the outcome of
these uncertainties.
Pender Newkirk & Company
Certified Public Accountants
Tampa, Florida
June 20, 1996
27
30
MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1997 AND 1996
(In Thousands)
ASSETS 1997 1996
-------- --------
Current Assets:
Cash.............................................................. $ 616 $ 965
Accounts Receivable, Net.......................................... 3,041 3,260
Income Taxes Receivable........................................... -0- 880
Inventories....................................................... 2,260 2,445
Prepaids and Other................................................ 222 264
Other Receivables................................................. 350 -0-
-------- --------
Total Current Assets.............................................. 6,489 7,814
Property and Equipment, Net....................................... 4,004 4,917
Other Assets, net................................................. 2,050 1,938
-------- --------
Total Assets........................................................ $ 12,543 $ 14,669
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Current Maturities of Long-Term Debt.............................. $ 310 $ 168
Accounts Payable and Accrued Liabilities.......................... 2,190 2,240
--------- --------
Total Current Liabilities......................................... 2,500 2,408
Liabilities Subject to Compromise................................... -0- 30,457
Long-Term Debt, Less Current Maturities............................. 15,459 350
-------- --------
Total Liabilities................................................... 17,959 33,215
-------- --------
Stockholders' Equity (Deficit):
Voting Preferred Stock............................................ 1 1
Common Stock...................................................... 60 55
Capital In Excess of Par Value.................................... 8,433 8,320
Retained Earnings (Deficit)....................................... (13,579) (26,591)
Less: Treasury Stock............................................. (331) (331)
-------- --------
Total Stockholders' Equity (Deficit).............................. (5,416) (18,546)
-------- --------
Total Liabilities and Stockholders' Equity (Deficit)................ $ 12,543 14,669
======== ========
a) Liabilities Subject to Compromise consist of the following:
Secured Debt...................................................... $ -0- $ 28,158
Trade and Other Miscellaneous Claims.............................. $ -0- $ 2,299
-------- --------
$ -0- $ 30,457
======== ========
The accompanying notes are an integral part of these financial statements.
28
31
MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31, 1997, 1996 AND 1995
(In Thousands; except Earnings Per Share Amounts)
1997 1996 1995
---- ---- ----
Revenue:
Net Sales and Services.................................................. $ 19,247 $ 17,052 $ 14,830
Costs and Expenses:
Cost of Sales and Services.............................................. 10,762 10,665 7,756
Selling, General and Administrative..................................... 6,480 8,549 2,429
Loss on Early Retirement of Fixed Assets................................ -0- 8,329 -0-
Product Development and Software Costs.................................. -0- -0- 4,271
Loss on Inventory Revaluation........................................... -0- 1,510 -0-
Depreciation and Amortization........................................... 1,381 2,682 1,060
Interest, Net........................................................... 609 1,739 1,430
-------- --------- ---------
Total Costs and Expenses............................................ 19,232 33,474 16,946
-------- --------- ---------
Reorganization items:
Product Development and Software Costs.............................. -0- 4,605 -0-
Goodwill Write-down................................................. -0- 2,937 -0-
Terminated Joint Venture............................................ -0- 550 -0-
Professional Fees................................................... -0- 103 -0-
-------- --------- ---------
-0- 8,195 -0-
Income (Loss) from Continuing Operations Before
Income Taxes, Discontinued Operations and
Extraordinary Gain....................................................... 15 (24,617) (2,116)
Income Tax (Benefit) Expense.............................................. -0- (1,900) (844)
-------- --------- ---------
Income (Loss) from Continuing Operations Before
Discontinued Operations and Extraordinary Gain........................... 15 (22,717) (1,272)
Income (Loss) from operations of Discontinued Operations,
Net of Income Tax in 1996 and 1995 .................................... (2,800) (6,634) 16
Gain on Forgiveness of Debt of Discontinued Operations.................. 3,500 -0- -0-
Gain (Loss) on Disposal of Discontinued Operations,
Net of Income Tax in 1996 and 1995 .................................... 2,200 (5,229) -0-
Extraordinary Gain on Forgiveness of Debt............................... 10,097 -0- -0-
-------- --------- ---------
Net Income (Loss)................................................... $ 13,012 $ (34,580) $ (1,256)
======== ========= =========
Earnings (Loss) per Common Share:
Income (Loss) from Continuing Operations................................ $ .00 $ (5.60) $ (.32)
Income (Loss) from Discontinued Operations.............................. .51 (2.92) .00
Extraordinary Gain in Debt Forgiveness.................................. 1.76 .00 .00
-------- --------- ---------
Net Income (Loss) Per Common Share...................................... $ 2.27 $ (8.52) $ (.32)
======== ========= =========
Weighted average Common Shares outstanding.............................. 5,737 4,059 3,974
======== ========= =========
The accompanying notes are an integral part of these financial statements.
29
32
MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED MARCH 31, 1997, 1996 AND 1995
(in Thousands Except Share Data)
COMMON STOCK
---------------------------------------------------------------------------------
Capital in Retained
Number $.01 Excess of Earnings Treasury
of Shares Par Value Par Value (Deficit) Stock Total
----------------------------------------------------------------------------------
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)
Stock Issued.................. 471,838 5 113 118
Net Income for Year
Ended March 31, 1997......... 13,012 13,012
--------- -------- -------- -------- --------- ---------
Balance, March 31, 1997....... 5,957,173 $ 60 $ 8,433 $(13,579) $ (331) $ (5,417)
========= ======== ======== ======== ========= =========
VOTING PREFERRED STOCK
---------------------------------------------------------------------------------
Number $.0001
of Shares Par Value
----------- -------------
Balance, March 31, 1995 6,500,000 $ 1 $ 1
--------- ------------- -----------
Balance, March 31, 1996 6,500,000 $ 1 $ 1
--------- ------------- -----------
Balance, March 31, 1997 6,500,000 $ 1 $ 1
--------- ------------- -----------
Total Stockholders' $ (5,416)
-----------
(Deficit), March 31, 1997
The accompanying notes are an integral part of these financial statements.
30
33
MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 1997, 1996 AND 1995
(In Thousands)
1997 1996 1995
---- ---- ----
OPERATING ACTIVITIES
Net Income (Loss)................................................................. $ 15 $ (22,717) $ (1,272)
------- ---------- --------
Adjustments to Reconcile Net Income (Loss) to Net Cash
Provided (Used) by Operating Activities:
Depreciation and Amortization................................................... 1,381 2,682 1,060
Product Development and Software Cost........................................... -0- 4,605 4,271
Goodwill Write-down............................................................. -0- 2,937 -0-
Loss on Early Retirement of Fixed Assets........................................ -0- 8,329 -0-
Loss on Inventory Revaluation................................................... -0- 1,510 -0-
Write-off of Accounts Receivable and Other Assets............................... -0- 1,323 -0-
Stock Issued from Stock Compensation Plan....................................... 118 388 -0-
(Increase) Decrease in:
Accounts Receivable........................................................... 219 (458) (899)
Income Taxes Receivable....................................................... 880 (72) (808)
Inventories................................................................... 185 297 (1,542)
Prepaids and Other............................................................ 42 (100) (62)
Other Receivables............................................................. (350) -0- -0-
Increase (decrease) in:
Accounts Payable and Other Accrued Liabilities................................ (935) 1,724 761
Income Taxes Payable and Deferred Taxes....................................... -0- (1,347) (1,145)
------- ---------- --------
Total Adjustments................................................................ 1,540 21,818 1,636
-------- ----------- --------
Net Cash Provided (Used) by Continuing Operations................................. 1,555 (899) 364
------- ---------- --------
Net Cash (used) by Discontinued Operations.......................................... -0- (117) (3,304)
------- ---------- --------
INVESTING ACTIVITIES
Expended for Property and Equipment............................................... (307) (797) (3,003)
Expended for Software Development................................................. -0- (30) (201)
Expended for Product Development.................................................. (233) (484) (4,739)
Expended for Patents and Other Assets............................................. (44) (109) (1,127)
Expended for Acquisition......................................................... -0- (1,453) (682)
------- ---------- --------
Net Cash Used by Investing Activities............................................. (584) (2,873) (9,752)
------- ---------- --------
FINANCING ACTIVITIES
Payments on Notes Payable, Long-Term Debt......................................... (1,399) (947) (1,048)
Net Proceeds from Line of Credit.................................................. -0- 2,162 12,183
Issuance of Common Stock.......................................................... -0- 5 10
Proceeds from Borrowing on Notes Payable and Long-Term Debt....................... 79 3,021 1,687
------- ---------- --------
Net Cash Provided (Used) by Financing Activities.................................. (1,320) 4,241 12,832
------- ---------- --------
NET INCREASE (DECREASE) IN CASH..................................................... (349) 352 140
CASH AT BEGINNING OF PERIOD......................................................... 965 613 473
------- ---------- --------
CASH AT END OF PERIOD............................................................... $ 616 $ 965 $ 613
======= ========== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest............................................................ $ 609 $ 1,570 $ 1,409
======= =========== ========
CASH RECEIVED FROM INCOME TAX REFUNDS............................................... $ 880 $ -0- $ -0-
======= =========== ========
Non Cash Financing and Investing Activities. See Notes 1, 3, 10 and 19 for forgiveness of debt (extraordinary gain) on
Note 3 for gain on disposal of discontinued operations.
The accompanying notes are an integral part of these financial statements.
31
34
MEDICAL TECHNOLOGY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997, 1996 AND 1995
NOTE 1 - BACKGROUND INFORMATION
Medical Technology Systems, Inc. (the "Company") is a Delaware
corporation, incorporated in March of 1984. The Company is a holding company
operating through a number of separate subsidiaries providing products and
services to pharmacies that dispense prescription pharmaceuticals to nursing
homes, hospitals and other health 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;
the computerized pharmacy information and dispensing systems business which
consists of the Performance hospital pharmacy management software and the
MedServ(TM) computerized medication dispensing systems for hospitals and nursing
homes and (ii) the clinical laboratory service business of supplying diagnostic
testing services to the medical profession.
As a result of significant losses in the second and third quarter of fiscal
1996, the Company was in violation of certain financial covenants in the
borrowing agreements with its principal lenders. The Company was unable to reach
an agreement with its lenders to amend or restructure the debt. The extended
negotiations with the Company's lenders created substantial uncertainty which
led to management's decision, during the fourth quarter of fiscal 1996, to file
voluntary petitions for relief under Chapter 11 ("Chapter 11") of Title 11 of
the United States Bankruptcy Code in the Middle District of Florida, Tampa
Division (the "Bankruptcy Court") for four of its subsidiaries (the "MTS
debtors"). Plan of Reorganization for each of the MTS debtors were approved by
the Bankruptcy Court on September 4, 1996 (collectively, the "Plan of
Reorganization"). The Plan of Reorganization provided for the following
significant matters:
(a) A reduction in the amount of the existing bank indebtedness, as well
as a reduction in the interest rate on the indebtedness.
(b) A restructuring of the repayment terms of the bank indebtedness,
which provides for interest payments only for a certain period and
principal payments over an extended period of time.
(c) A reduction in the amount payable pursuant to the acquisition of
Tampa Pathology Laboratory, as well as modification of the method of
calculating the repayment.
(d) A restructuring of the amounts and repayment terms for the unsecured
creditors of the MTS debtors.
(e) A restructuring of the management of the Company.
(f) The disposition of one of its subsidiaries, Vangard Labs, Inc.
NOTE 2 - RESTRUCTURING AND OTHER CHARGES
In December 1995, the Company initiated a cost reduction strategy that
focused upon reducing operating expenses and returning the Company to
profitability. This plan included the filing on January 3, 1996 of voluntary
petitions under Chapter 11 for three of the Company's subsidiaries: MTS
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.
32
35
MEDICAL TECHNOLOGY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997, 1996 AND 1995
These Chapter 11 filings, together with the limitation on the Company's
financing alternatives, necessitated a comprehensive examination of the
Company's business operations. Because of the numerous development projects that
the Company had underway, and the limited opportunity that existed for
completion of these projects, it was decided by management that, without
additional capital, virtually none of the existing development projects could be
successfully completed.
The following restructuring charges were incurred during the fiscal year
ended March 31, 1996 (In Thousands):
Loss on Early Retirement of Fixed Assets $ 8,329
Loss on Inventory Revaluation 1,510
--------
9,839
Chapter 11 Reorganization Charges:
Product Development and Software Costs 4,605
Goodwill Write-down 2,937
Terminated Joint Venture 550
Professional Fees 103
--------
8,195
--------
Total From Continuing Operations, including
$16,421 of impairment losses 18,034
--------
Loss on Disposal of Discontinued Operations 5,229
--------
Total Restructuring Charges $ 23,263
========
As of March 31, 1996 and 1997, there were no additional reserves
established for these projects. During 1997 there were no further restructuring
charges recorded.
NOTE 3 - DISCONTINUED OPERATIONS
As part of a corporate restructuring strategy, the Company plans to
concentrate its resources on its medication 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 repayment of debt obligations of the Company. The Company's generic drug
repackaging subsidiary, Vangard Labs, Inc., whose production operations were
curtailed on January 3, 1996 and subsequently filed a voluntary petition under
Chapter 11 on February 22, 1996, was sold on April 17, 1997. In addition, the
GPC joint venture with Creighton Pharmaceuticals Corporation, a wholly owned
subsidiary of Sandoz Pharmaceuticals, Inc., is considered a discontinued
operation primarily because of its dependence upon Vangard production
capabilities. A pre-tax charge of approximately $5.2 million for a loss on
disposal of these discontinued operations was recorded in fiscal year 1996 and
is shown in the Consolidated Statement of Operations as estimated loss on
disposal of discontinued operations.
During 1997, Vangard was principally managed by a plan trustee approved by
the bankruptcy court. Vangard's operations were minimal, basically at a
maintenance level only with revenues of $550,000. Vangard's costs and expenses
totaled $3.4 million, creating a loss from operations of $2.8 million before
the effect of the gain of $3.5 million recognized from the forgiveness of
Vangard's prepetition unsecured creditors ($2.7 million) debt as part of the
bankruptcy proceedings and the gain on forgiveness of a post petition loan made
by Vangard's bank ($800,000). Vangard's 1997 operations were funded primarily
from the collection of accounts receivable, new bank debt of $800,000 and
approximately $450,000 from the Company.
In April 1997, the Company completed the sale of Vangard Labs, Inc. to an
unrelated third party which was effective on March 31, 1997. In accordance with
the Company's Plan of Reorganization and its amended bank agreement, the
proceeds of the sale, approximately $3.1 million were utilized to reduce the
Company's outstanding obligation to its principal lender. In addition, the buyer
assumed certain post petition obligations of Vangard of $673,000. As a result of
the sale, the Company recognized an extraordinary gain on the disposal of the
assets of Vangard of approximately $2.2 million
33
36
MEDICAL TECHNOLOGY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997, 1996 AND 1995
At fiscal year end, the investment in net assets of the discontinued
operations consisted of:
March 31, March 31,
1997 1996
------------- -----------
(In Thousands)
Current Assets.............................................. $ -0- $ 3,136
Current Liabilities......................................... -0- 4,387
Non-Current Assets.......................................... -0- 2,032
Non-Current Liabilities..................................... -0- 781
----------- --------
$ -0- $ -0-
=========== ========
Net revenues of discontinued operations were $542,000, $5,968,000 and
$6,045,000 in fiscal years 1997, 1996 and 1995, 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., Performance Pharmacy Systems, Inc., Medication
Management Systems, 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.
Cash
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or less
to be cash equivalents. There were no cash equivalents for all periods
presented.
34
37
MEDICAL TECHNOLOGY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997, 1996 AND 1995
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 Managements 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.
Property and Equipment
Property and equipment are recorded at cost. Additions to and major
improvements of property and equipment are capitalized. Maintenance and repair
expenditures are charged to expense as incurred. As property and equipment is
sold or retired, the applicable cost and accumulated depreciation is eliminated
from the accounts and any gain or loss recorded. Depreciation and amortization
are calculated using the straight-line method based upon the assets' estimated
useful lives as follows:
Years
-----
Property and Equipment........................... 3-7
Leasehold Improvements........................... 5
The Company uses accelerated methods of depreciation for tax purposes.
Software and Product Development Cost
All costs associated with the product development from the point of
technological feasibility to its general distribution to customers are
capitalized and, subsequently, amortized. Annually, the Company re-examines its
amortization policy relating to its software and product development cost. The
Company has determined that a five-year period is appropriate.
Goodwill
Goodwill represents amounts paid in excess of fair market value of assets
acquired by the Company in the purchase of other companies. These amounts are
amortized over a ten-year period. See the Accounting for Impairment Note
below.
Other Assets
Other assets are carried at cost less accumulated amortization, which is
being provided on a straight-line basis over a five to seventeen year period.
Earnings (Loss) Per Share
35
38
MEDICAL TECHNOLOGY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997, 1996 AND 1995
Earnings (loss) per common share were computed using the weighted average
number of shares outstanding. Common stock equivalents (warrants and options)
were excluded from the calculation, as their effect would be antidilutive.
In February 1997, FASB issued Statement of Financial Accounting Standards
No. 128, "Earnings per Share" ("FAS No. 128"), which is effective for periods
ending after December 15, 1997. This statement establishes standards for
computing and presenting earnings per share data. Management is currently
assessing the impact of FAS No. 128 on the Company's presentation of earnings
per share data in future periods.
Research and Development
The Company expenses research and development costs as incurred. During
fiscal 1997, 1996 and 1995, the Company dedicated its resources to the
completion of product development projects and therefore did not incur any
material research and development costs.
Income Taxes
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 more likely than
not that some portion or all of the deferred tax assets will not be realized.
Deferred tax assets and liabilities are adjusted for the effects of changes in
tax laws and rates on the date of enactment.
Treasury Stock
The Company records its treasury stock at cost.
Stock Based Compensation
Prior to fiscal 1996, the Company accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, Accounting for Stock Issued to Employees, and related interpretations.
As such, compensation expense would be recorded on the date of granting the
stock options only if the current market place of the underlying stock exceeded
the exercise price. Effective as of April 1, 1996, the Company adopted Statement
of Accounting Standards No. 123, Accounting for Stock-Based Compensation
(Statement 123), which permits entities to recognize as expense over the vesting
period the fair value of all stock-based awards on the date of grant.
Alternatively, Statement 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net income and pro forma
net earnings per share disclosures for employee stock option grants made in 1996
and future years as if the fair-value-based method defined in Statement 123 has
been applied. The Company has elected to continue to apply the provisions of APB
Opinion No. 25 and provide the pro forma disclosure provisions of Statement 123.
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of:
Effective fiscal year 1996, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 121 "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of." SFAS No. 121 requires that
long-lived assets and certain identifiable intangibles to be held and used by an
entity be reviewed
36
39
MEDICAL TECHNOLOGY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997, 1996 AND 1995
for impairment whenever events or changes in circumstances indicate that the
carrying amount of these assets may not be recoverable. In performing the review
for recoverability, the Company estimates the future cash flows expected to
result from the use of the assets and their eventual disposition. If the sum of
the expected future cash flows (undiscounted and without interest charges) is
less than the carrying amount of the assets, an impairment loss is recognized.
Long-lived assets and certain identifiable intangibles to be disposed of are to
be reported at the lower of the carrying amount or the fair value less cost to
sale, except for assets that are related to discontinued operations which are
reported at the lower of carrying value or net realizable value.
If an impairment loss condition exists, the loss is determined as the
difference between the assets' carrying value and: (1) for assets held and
used--the discounted (at an interest rate commensurate with the related risk)
estimated cash flows over the expected recovery period of the related investment
(asset) determined at the Company's business unit or product line level; (2) for
assets to be disposed of--the fair value for the asset(s) less the cost to sell.
Since the accounting methodology promulgated by SFAS No. 121 was similar
to that used prior to the Company's adoption of SFAS No.121, there was no
significant effect on the Company's financial statements upon SFAS No. 121's
adoption in 1996.
The Company recognized impairment losses of $16,421,000 in fiscal 1996 and
$4,271,000 in fiscal 1995. These losses related to the early retirement of
certain production equipment and tooling, product development projects which
were suspended and goodwill related to the acquisition of various businesses.
Discontinued Operations
The Commpany's generic drug repackaging business, Vangard has been
classified as a discontinued operation.
Bankruptcy Related Accounting Matters and Extraordinary Gain
The financial statements and the notes thereto reflect various
disclosures principally required by AICPA SOP 90-7, "Financial Reporting by
Entities in Reorganization under the Bankruptcy Code." Since the voting control
of the Company's stock remained the same as a result of the confirmation of the
Plan of Reorganization, fresh start accounting was not appropriate. However,
the liabilities comprised by the confirmed plans have been recorded at the
present values of the amounts to be paid. The forgiveness of debt resulting
from the compromise has been recognized as an extraordinary gain. See Notes 1,
3 and 10.
Fair Value of Financial Instruments
The carrying amounts of cash receivables, accounts payable and accrued
liabilities approximates fair value because of the short-term nature of the
items.
The carrying amount of current and long-term portions of long-term debt
approximates fair market value since the interest rates approximate current
prevailing market rates.
37
40
MEDICAL TECHNOLOGY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997, 1996 AND 1995
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,
1997 1996
------------- -------------
(In Thousands)
Accounts Receivable at Gross $ 4,081 $ 3,788
Less: Allowance for Doubtful Accounts
and Contractual Adjustments (1,040) (528)
-------------- --------------
$ 3,041 $ 3,260
============== ==============
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,
1997 1996
------------- --------------
(In Thousands)
Raw Material $ 588 $ 661
Finished Goods and Work in Process 1,672 1,784
-------------- --------------
$ 2,260 $ 2,445
============== ==============
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,
1997 1996
-------------- ------------
(In Thousands)
Property and Equipment $ 7,581 $ 7,273
Leasehold Improvements 806 806
------------- -------------
8,387 8,079
Less: Accumulated Depreciation and Amortization (4,383) (3,162)
------------- -------------
$ 4,004 $ 4,917
============= =============
Substantially all of the Company's property and equipment are pledged as
collateral on bank notes.
38
41
MEDICAL TECHNOLOGY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997, 1996 AND 1995
NOTE 8 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities are comprised of the following:
March 31, March 31,
1997 1996
--------- ---------
(In Thousands)
Accounts Payable/Trade $ 987 $ 1,116
Accrued Liabilities:
Salaries 301 198
Medical Claims 212 248
Interest 28 436
Legal 446 110
Other 216 132
------- --------
$ 2,190 $ 2,240
======= ========
NOTE 9 - PRODUCT AND SOFTWARE DEVELOPMENT COSTS, GOODWILL AND OTHER ASSETS
Software development costs, goodwill and other assets consists of the
following:
March 31, March 31,
1997 1996
------------ ------------
(In Thousands)
Goodwill.......................................................... $ 1,204 $ 1,204
Less: Accumulated Amortization................................. (307) (233)
----------- -----------
$ 897 $ 971
----------- -----------
Product Development............................................... $ 131 $ -0-
Less: Accumulated Amortization................................. -0- -0-
----------- -----------
$ 131 $ -0-
----------- -----------
MedServ(TM)Development and Related Software....................... $ 314 $ 212
Less: Accumulated Amortization................................. (85) (42)
----------- -----------
$ 229 $ 170
----------- -----------
Patents........................................................... $ 1,065 $ 1,065
Less: Accumulated Amortization................................. (349) (308)
----------- -----------
$ 730 $ 757
----------- -----------
Other........................................................... $ 93 $ 63
Less: Accumulated Amortization................................. (30) (23)
----------- -----------
$ 63 $ 40
----------- -----------
Total Other Assets, Net........................................... $ 2,050 $ 1,938
=========== ===========
Substantially all of the Company's intangible assets are pledged as
collateral on bank notes.
39
42
MEDICAL TECHNOLOGY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997, 1996 AND 1995
NOTE 10 - LONG-TERM DEBT
Long-term debt consists of the following:
March March 31,
31, 1997 1996
---------- ------------
(In Thousands)
Plan Note I; interest only at 7.5% payable monthly until September 1, 1998;
installments of interest and principal monthly for ten years ending September
1, 2006, with a lump sum payment of
approximately $11.4 million on that date...................................... $ 15,000 $ -0-
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, subject to compromise at March 31, 1996..................... -0- 10,398
Bank line of credit, interest at bank prime plus 1/2%, or LIBOR rate plus 2%;
interest payable monthly; principal maturing
September, 1996, subject to compromise at March 31, 1996..................... -0- 16,862
Seller Financing Under Tampa Pathology Acquisition Agreement, face value of
$487,628 discounted at 10%, with variable monthly
payments until satisfied, subject to compromise at March 31, 1996............ 273 871
Other Notes and Agreements; interest and principal payable monthly
and annual at various amounts through March 2000............................. 496 545
---------- --------
Total Long-Term Debt........................................................... 15,769 28,676
Less Current Portion........................................................... (310) (168)
Subject to Compromise.......................................................... -0- (28,158)
---------- --------
LONG-TERM DEBT DUE AFTER 1 YEAR................................................ $ 15,459 $ 350
========== ========
The following is a schedule by year of the principal payments required on
these notes payable and long-term debts as of March 31, 1997:
(In Thousands)
1998. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 310
1999. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 347
2000. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 377
2001. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 377
2002. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 406
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . $13,952
The above bank loans and line of credit are collateralized by the
Company's accounts receivables, inventory, equipment and intangibles.
On September 4, 1996, the Plan of Reorganization for the MTS debtors were
confirmed by the bankruptcy court. As part of the Plan of Reorganization for the
MTS debtors the notes payable and bank line of credit were restructured as
follows:
40
43
MEDICAL TECHNOLOGY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997, 1996 AND 1995
Bank notes payable, line of credit, accrued interest and other charges and
expenses, in the amount of approximately $28.0 million, were combined and
restructured into two separate promissory notes.
Plan Note I, in the stated principal amount of approximately $27.0
million, provided for a portion of the principal amount, $15.0 million, to be
due and payable as follows:
a) Interest at the rate of 7.5% for a period of two (2) years ending
September 1, 1998.
b) Installments of principal and interest at the rate of 7.5% payable
monthly for a period of ten years ending September 1, 2006. At which time, the
then outstanding remaining principal amount of the $15,000,000 debt is due and
payable in full. The monthly installments of principal and interest are
calculated based on the principal amount amortized in level monthly payments
over twenty years.
Plan Note II, in the stated principal amount of $1,000,000 provided for
payment of $750,000 on or about the date of confirmation of the Plans of
Reorganization. The Company made the payment of $750,000 on or about September
5, 1996 and in accordance with the terms of Plan Note II, the stated principal
amount was deemed fully satisfied.
Plan Note I further provided that the net proceeds from the sale of
Vangard, would be paid to the Bank (see Note 3). In addition, certain other
mandatory prepayments of the stated principal amount were required upon the
occurrence of a capital transaction in which any of the Company's subsidiaries
are sold, as well as upon the receipt of any proceeds resulting from certain
causes of action commenced by the Company. Plan Note I also provided that the
full stated principal amount of approximately $28 million would be due and
payable upon the occurrence of specific major events of default.
Effective March 31, 1997, the stated principal amount of Plan Note I was
reduced to $15.0 million. Thereby, permanently removing any contingent amount
due including the additional $12 million principal amount, except for the
mandatory prepayments for any capital transactions. As a result of this
modification, and the receipt of the proceeds of the sale of Vangard, the
Company realized during the fourth quarter and for the year an extraordinary
gain of approximately $8.2 million, after the mandatory payment from the Vangard
sales proceeds of approximately $3.1 million.
The remaining portion of extraordinary gain reported in the Company's
statement of operations, $1,800,000 relates to the forgiveness of the Company's
prepetition debt by its unsecured creditors.
Plan Note I contains certain financial covenants including prohibiting the
Company from exceeding a maximum consolidated tangible deficit, maintaining
various financial ratios and limits the amount of capital expenditures. In
addition, Plan Note I requires the banks approval of the payment of dividends
and the borrowing of any additional amounts from other parties.
NOTE 11 - LEASE COMMITMENTS
The following is a schedule by year of future minimum rental payments
required under operating leases that have an initial or remaining non-cancelable
lease term in excess of one year as of March 31, 1997.
(In Thousands)
1998.....................................................$ 397
41
44
MEDICAL TECHNOLOGY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997, 1996 AND 1995
1999.......................................................$ 155
2000...................................................... $ 74
2001.......................................................$ 62
2002.......................................................$ 61
Rent expense amounted to $733,000, $504,000, and $422,000, for the years
ended March 31, 1997, 1996 and 1995, respectively.
NOTE 12 - 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 years ended March 31, 1997, 1996 and 1995, the
Company made no contributions to the Plan.
NOTE 13 - 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 $494,000.
NOTE 14 - RELATED PARTY TRANSACTIONS
Todd E. Siegel ("Siegel") is the Trustee of the Siegel Family QTIP Trust
(the "Trust") which is the general partner in JADE Partners, a significant
shareholder of the Company. The Trust has entered into an exclusive Technology
and Patent Licensing Agreement with the Company or certain technologies and
patents on machine and product designs.
Under the terms of the amended agreement, the Company is required to pay
to the Trust royalties of one percent of sales on licensed products. In
addition, the agreement states that there are no minimum royalty payments due
and the agreement would expire if the Company abandons or ceases to use the
technologies. Royalty payments were $76,000, $30,000, and $41,000 in the years
ended March 31, 1997, 1996, and 1995, respectively.
Siegel, through his beneficial interest in the Trust, owns approximately
10 percent of the outstanding Common Stock of the Company. In addition, Siegel
beneficially owns 6,500,000 shares of voting preferred stock which have two
votes per share for all matters submitted to the holders of the Common Stock of
the Company.
Siegel had outstanding indebtedness to the Company at March 31, 1997 and
March 31, 1996 of approximately $11,886 and $12,000 respectively. The Company
expects to collect the full balance of this indebtedness.
42
45
MEDICAL TECHNOLOGY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997, 1996 AND 1995
NOTE 15 - TAXES
The components of related income taxes provided on continuing operations
were as follows:
Years Ended March 31,
------------------------------------------------
1997 1996 1995
------------ ------------ ------------
(In Thousands)
Current Tax (Benefit) Due:
Federal $ 6 $ (635) $ (1,277)
State 1 -0- (208)
---------- ------------ ----------
7 (635) (1,485)
---------- ------------ ----------
Deferred Tax:
Federal $ (6) $ (1,132) $ 547
State (1) (133) 94
---------- ------------ ----------
(7) (1,265) 641
---------- ------------ ----------
$ -0- $ (1,900) $ (844)
========== ============ ==========
Total income tax (benefit) expense for 1997, 1996 and 1995 from continuing
operations resulted in effective tax rates of 0.0%, 7.7% and 39.9%,
respectively. The reasons for the differences between these effective tax rates
and the U.S. statutory rate of 35.0% on the continuing operations are as
follows:
Years Ended March 31,
------------------------------------------
1997 1996 1995
------------ ------------ ------------
(In Thousands)
Tax (Benefit) Expense at U.S. statutory rate.......................... $ 6 $ (8,616) $ (741)
Valuation allowance for deferred tax asset............................ -0- 6,877 -0-
State and local income tax, net....................................... 1 (543) (75)
Difference between marginal and U.S. statutory rate................... -0- 246 21
Other (net)........................................................... (7) 136 (49)
------------ ------------ ------------
Income Tax (Benefit) Expense.......................................... $ -0- $ (1,900) $ (844)
============ ============ ============
Income taxes receivable as of March 31, 1996 in the amount of $880,000
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. For the year ended
March 31, 1996, the Company had a net operating loss of $21 million. A portion
of this loss carried back, and a receivable of $820,000 was recorded to reflect
the anticipated refund which
43
46
MEDICAL TECHNOLOGY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997, 1996 AND 1995
was received in 1997. As discussed in Note 10, effective March 31, 1997, the
stated principal amount of Plan Note I was reduced by $8.2 million to $15.0
million. In addition, $1.8 million of the Company's prepetition debt of its
unsecured creditors was forgiven. Since the reduction of the indebtedness was
done as part of the Chapter 11 Bankruptcy of the Company's principal
subsidiaries, the amount is excluded from taxable income pursuant to IRC Section
108 through the reduction of the Company's net operating losses. At March 31,
1997, the Company had approximately $11 million of carryforward losses which
will expire in 2011 and be available to offset future taxable income.
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,
1997 1996 1995
------------ ------------ ------------
(In Thousands)
Deferred Tax Liabilities:
Depreciation/Amortization Gross Deferred Tax Liability............. $ 716 $ 379 $ 2,909
------- ------- --------
Deferred Tax Assets:
Depreciation/Amortization Temporary Difference..................... (670) (1,386) -0-
Allowance for Doubtful Accounts.................................... (146) (73) (73)
Inventory Valuation Allowance...................................... (319) (163) -0-
Tax Loss Carry Forward............................................. (4,168) (5,525) (1,459)
Reserves and Provisions............................................ (322) (109) -0-
------- -------- --------
Gross Deferred Tax Asset........................................... (5,625) (7,256) (1,532)
------- -------- --------
Net Deferred Tax (Asset) Liability.................................... (4,909) (6,877) 1,377
Less Valuation Allowance........................................... (4,909) (6,877) -0-
------- -------- --------
Deferred Income Taxes.............................................. $ -0- $ -0- $ 1,377
======= ======== ========
The above 1996 balances reflect amounts reported on the Company's
originally filed income tax return which has been subsequently amended. The
above 1996 amounts were not revised to include the amended balances; however,
the amounts had been incorporated with the 1997 balances presented above.
The principal difference between the 1996 and 1997 deferred tax assets is
a result of the use of approximately $4 million of deferred tax assets relating
to net operating loss carryforwards.
At March 31, 1997, the Company had deferred tax assets available of
approximately $4.9 million. A tax benefit has not been recorded for these
assets as it is not yet more likely than not that these benefits will be
realized by reducing future taxable income.
The above is exclusive of the loss from discontinued operations totaling
$3.9 million which has not been deducted for tax purposes.
44
47
MEDICAL TECHNOLOGY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997, 1996 AND 1995
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 has examined the Company's sales
and use tax returns for the period January 1988 through December 1993. The State
Department of Revenue has proposed a suggested assessment of approximately
$1,230,000 including taxes, penalties and interest. The Company has requested a
hearing to determine the actual amount of tax, penalty and interest. The Company
believes the amount of tax owed, if any, is substantially less than the State
has proposed, and intends to vigorously defend its position. Managements
estimate may change in the near term, which change could be material to the
financial statements. However, a reserve for $100,000 has been made as of March
31, 1997 for costs associated with this matter. In addition, the State
Department of Revenue has proposed a suggested assessment of approximately
$130,000 for intangible taxes, penalties and interest for 1992. The company is
disputing this amount. The Department of Revenue is currently conducting an
audit of the Company's intangible tax returns for 1993 - 1995.
NOTE 16 - STOCKHOLDERS' EQUITY (DEFICIT)
Stockholders' Equity (Deficit) consists of the following:
March 31, March 31, March 31,
1997 1996 1995
------------- -------------- -------------
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........................................... 5,917,173 5,445,335 3,986,832
Issued Shares................................................ 5,957,173 5,485,335 4,026,832
45
48
MEDICAL TECHNOLOGY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997, 1996 AND 1995
COMMON STOCK
During fiscal 1997, the Company issued 275,000 shares of common stock to
business advisors and directors of the Company. These shares were valued based
upon the fair value of services rendered which approximated the fair market
value of common stock at the date of issue or $0.25 per share.
In addition, approximately 196,000 shares were issued to employees of the
Company and former employees, including 50,000 shares to the Company's CEO.
These shares were valued at $0.25 per share which was the approximate market
value at the time they were issued.
PREFERRED STOCK
The JADE Family Partnership ("Partnership") is currently the holder of
6,500,000 shares of Voting Preferred Stock. The Siegel Family QTIP Trust,
established pursuant to the terms of the Siegel Family Revocable Trust (the
"Trust"), which originally acquired the shares of Voting Preferred Stock in 1986
for the aggregate par value of the shares ($650.00), transferred the shares to
the Siegel Family Limited Partnership in 1993. The Siegel Family Limited
Partnership transferred the shares to the Partnership in 1994. The Company's CEO
is the trustee of the Trust, which is the managing general partner of the
Partnership, and accordingly, controls the shares held by the Partnership.
The Voting Preferred Stock has two votes per share on all matter submitted
to a vote of other holders of Common Stock. In addition to preferential voting
rights, the Voting Preferred Stock is entitled to receive upon dissolution or
liquidation of the Company, the first $10,000 of proceeds distributed to
stockholders of the Company upon such events. Thereafter, the Voting Preferred
Stock is entitled to no additional amounts upon dissolution or liquidation of
the Company. The Voting Preferred Stock has no dividend rights, redemption
provisions, sinking fund provisions or conversion, or preemptive or exchange
rights. The Voting Preferred Stock is not subject to further calls or
assessments by the Company.
46
49
MEDICAL TECHNOLOGY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997, 1996 AND 1995
The Company has adopted only the disclosure provisions of Financial
Accounting Standard No. 123, "Accounting for Stock-Based Compensation," as it
relates to employment awards. It applies APB Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations in accounting for its
plans and does not recognize compensation expense based upon the fair value at
the grant date for awards under these plans consistent with the methodology
prescribed by SFAS 123, the Company's net income (loss) and earnings (loss) per
share would be reduced to the proforma amounts indicated below:
1997 1996
------------- -----------
Net income (loss) As reported $ 15 $ (22,717)
Pro forma (unaudited) $ (246) $ (22,921)
Earnings (loss) per Common Share As reported $ .00 $ (5.60)
Pro forma (unaudited) $ (.04) $ (5.65)
The fair value of each option grant is estimated on the date of grant
using the Binominal options-pricing model with the following weighted-average
assumptions used for grants in 1997 and 1996, respectively, no dividend yield
for all years, expected volatility (based on history) of 109 and 42 percent;
risk-free interest rates of 6.44 and 6.25 percent, and expected lives of 5.4
and 6.8 years. Because of the insignificant effect on the pro forma amounts
presented above, the Company has elected not to attempt to adjust (lower) the
volatility factor used. Such adjustment would account for the various factors
or conditions that probably impacted the Company's common stock prices and
which are possibly non-recurring. Such an adjustment which would lower the
volatility factor used would reduce the calculated fair value of the options.
STOCK OPTIONS
Activity related to options is as follows:
NUMBER OF SHARES PRICE PER SHARE
-------------------- -----------------
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 - $10.00
-------------------- -----------------
Outstanding at March 31, 1996...................................... 400,734
Granted in Fiscal 1997:
Officers & Directors......................................... 145,000 $ 1.00
Employees.................................................... 471,878 $1.00 - $ 7.00
Options Expired.............................................. (1,323)
-------------------- -----------------
Outstanding at March 31, 1997...................................... 1,016,289 $1.00 - $10.00
==================== =================
47
50
51
MEDICAL TECHNOLOGY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997, 1996 AND 1995
OUTSTANDING SHARES
Weighted Average
Remaining
Range of Number Contractual Life Weighted Average
Exercise Prices Outstanding (years) Exercise Price
- --------------- ----------- ----------------- ----------------
$1.00 - $1.63 946,664 8.4 $1.17
$4.00 - $6.00 50,664 5.7 $4.72
$6.38 - $10.00 21,607 7.2 $8.63
EXERCISABLE SHARES
$1.00 - $1.63 355,250 $1.45
$4.00 - $6.00 43,583 $4.61
$6.38 - $10.00 16,768 $8.99
WARRANTS
Activity related to warrants is as follows:
NUMBER OF SHARES PRICE PER SHARE
-------------------- -----------------
Outstanding at March 31, 1993................................ 1,320,000 $7.00
Granted in Fiscal 1994 through Fiscal 1997................... -0-
-------------------- -----------------
Outstanding at March 31, 1997................................ 1,320,000 $7.00
==================== =================
All of the warrants outstanding at March 31, 1997 expire in July 1997. The
options outstanding at March 31, 1997 expire on various dates commencing in
April 1998 and ending in March 2006.
During fiscal year 1995, the company entered into a stock appreciation
rights agreement with its Chief Executive Officer. The agreement, which is for a
term of 10 years, calls for additional compensation payable annually equal to
3.25% of the total of the incremental increase in the value of the Company's
outstanding stock. The amount payable for the year ended March 31, 1997 is
$53,000.
No dividends have ever been paid on either the Company's Common or
Preferred Stock.
48
52
MEDICAL TECHNOLOGY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997, 1996 AND 1995
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, 1997,
Medical Technology Laboratories, Inc.'s patient accounts receivable from
individuals and commercial medical insurance providers was approximately
$748,800. As of March 31, 1997, Medical Technology Laboratories, Inc.'s accounts
receivable from Medicare and Medicaid was approximately $510,400.
NOTE 18 - SUBSEQUENT BUSINESS ACQUISITION
In April 1997, the Company, through its subsidiary Medication Management
Technologies, Inc. (MMT), entered into an agreement and Plan of Merger with
Cygnet Laboratories, Inc. (Cygnet), a California Company which distributes
obstetrical information systems. The merger was effective June 20, 1997. The
Plan of Merger provides for the Cygnet Shareholders to receive nominal cash
consideration in exchange for their Shares. MMT will assume all liabilities of
Cygnet as a result of the Merger.
NOTE 19 - INTERIM REPORTING AND FOURTH QUARTER ITEMS
The fourth quarter operating results includes three items that related to
the second and/or third quarters of fiscal 1997.
First, as discussed in Note 10, during the fourth quarter the Company
recognized an extraordinary gain of approximately $10.3 million as a result of
the elimination of certain contingencies associated with its bank debt which
had been restructured during the Company's bankruptcy proceedings. As a result
of the Company's further consideration at year end of the most appropriate
accounting for the restructuring of its bank's debt, interest of $650,000
($.11 per common share) was recorded during the for quarter of which $81,250,
$275,000 and $293,750 related to the second, third and fourth quarters,
respectively. The Company initially believed that the restructuring of the bank
debt should be recorded under the accounting rules pertaining to troubled debt
restructuring, which precluded the recognition of interest in these
circumstances; however, upon further review at year end by the Company, its
legal and accounting counsel, and its bank, the Company concluded that the
bankruptcy accounting rules described in Note 11 were more appropriate.
Second, during the Company's second quarter, an extraordinary gain of
$2.4 million was reported relating to the forgiveness of debt by the unsecured
prepetition creditors of the Company. Upon further review during the Company's
fourth quarter, it was determined that this amount should be reduced by
$340,000 ($.06 per common share).
Third, the gain of approximately $2.7 million ($.47 per common share)
recognized from the forgiveness of Vangard's prepetition unsecured creditors
included in the income from operation the discontinued operation (as described
in Note 3) related to the second quarter of 1997.
NOTE 20 - SEGMENT INFORMATION
The Company manufactures, markets and distributes medication dispensing
systems and supplies used by pharmacies in packaging medication in "punch cards"
for nursing homes and hospitals. The Company also supplies prescription labels
and forms to this same industry. During November 1991, through two acquisitions,
the Company entered the clinical laboratory service business, which primarily
provides its diagnostic testing services to the medical profession. The
medication dispensing system segment provides all products and services other
than laboratory services, which is included in the Company's second business
segment, clinical laboratory services.
The following is operating information for these industry segments for the
years ended March 31:
1997 1996 1995
----------- ---------- ----------
(In Thousands)
Revenue of each Segment:
Medication Dispensing Systems $ 13,134 $ 11,900 $ 11,252
Clinical Laboratory Services 6,113 5,152 3,578
----------- ---------- ----------
49
53
Total Revenue $ 19,247 $ 17,052 $ 14,830
=========== ============ =========
Operating Profit (Loss) of each Segment:
Medication Dispensing Systems $ 2,040 $ (12,550) $ 3,269
Clinical Laboratory Services 136 (4,443) 307
----------- ------------ ---------
2,176 (16,993) 3,576
Corporate
(2,161) (7,624) (5,692)
----------- ------------ ---------
Total Operating Profit (Loss) $ 15 $ (24,617) $ (2,116)
=========== ============ =========
Depreciation and Amortization Expense of
each Segment:
Medication Dispensing Systems $ 684 $ 1,411 $ 616
Clinical Laboratory Services 250 579 183
----------- ------------ ---------
934 1,990 799
Corporate 447 692 261
----------- ------------ ---------
Total Depreciation and Amortization $ 1,381 $ 2,682 $ 1,060
=========== ============ =========
Identifiable Assets of each Segment:
Medication Dispensing systems $ 6,944 $ 8,024 $ 18,009
Clinical Laboratory Services 2,560 2,551 5,887
----------- ------------ ---------
9,504 10,575 23,896
Corporate 3,039 4,094 8,602
----------- ------------ ---------
Total Assets $ 12,543 $ 14,669 $ 32,498
=========== ============ =========
Capital Expenditures of each Segment:
Medication Dispensing Systems $ 215 $ 774 $ 2,244
Clinical Laboratory Services 67 2 600
----------- ------------ ---------
282 776 2,844
Corporate 25 21 159
----------- ------------ ---------
Total Capital Expenditures $ 307 $ 797 $ 3,003
=========== ============ =========
Impairment of Long-Lived Assets:
Medication Dispensing Systems $ -0- $ 12,662 $ 3,471
Clinical Laboratory Services -0- 3,759 800
----------- ------------ ---------
Total Impairment of Long-Lived Assets $ -0- $ 16,421 $ 4,271
=========== ============ =========
50
54
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Form 10-K to be signed
on its behalf by the undersigned, thereunto duly authorized.
MEDICAL TECHNOLOGY SYSTEMS, INC.
Dated: July 2, 1997 By:/s/ Todd E. Siegel
----------------------------------------
Todd E. Siegel, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
- ------------------------------- ----------------------------------------------- -------------
/s/ Todd E. Siegel Chairman of the Board of Directors, President and July 2, 1997
- ------------------- Chief Executive Officer
Todd E. Siegel
/s/ David Kazarian Director July 2, 1997
- -------------------
David Kazarian
/s/ Michael P. Conroy Director, Chief Financial Officer and Vice President July 2, 1997
- ----------------------
Michael Conroy
/s/ John Stanton Director and Vice Chairman of the Board of July 2, 1997
- ------------------- Directors
John Stanton
/s/ Ronald Rhodes Principal Accounting Officer and Controller July 2, 1997
- -------------------
Ronald Rhodes
51
55
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
Board of Directors
Medical Technology Systems, Inc.
In connection with our audit of the consolidated financial statements of
Medical Technology Systems, Inc. and Subsidiaries referred to in our report
dated June 24, 1997, which is included in the Company's Annual Report on SEC
Form 10-K as of and for the year ended March 31, 1997, we have also audited
Schedule II for the year ended March 31, 1997. In our opinion, this schedule
presents fairly in all material respects, the information required to be set
forth therein.
GRANT THORNTON LLP
Tampa, Florida
June 24, 1997
52
56
Independent Auditors' Report on
Supplementary Information
The accompanying information shown on Schedule II (Valuation and Qualifying
Accounts) for the years ended March 31, 1996 and 1995 is presented for purposes
of complying with the Securities and Exchange Commission rules and is not a
required part of the basic financial statements. Our audits of the basic
financial statements were made for the purpose of forming an opinion on those
statements taken as a whole. The accompanying financial information has been
subjected to the auditing procedures applied in the audits of the basic
financial statements.
In our opinion, the accompanying information included on Schedule II (Valuation
and Qualifying Accounts) for the years ended March 31, 1996 and 1995 is fairly
stated in all material respects in relation to the basic financial statements
taken as a whole.
Certified Public Accountants
Tampa, Florida
June 20, 1996
53
57
SCHEDULE II
MEDICAL TECHNOLOGY SYSTEMS, INC.
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended March 31, 1995, 1996 and 1997
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Balance at Charged to Accounts Balance
Beginning Costs and Written Off, at End
Of Year Expenses Net Of Year
--------- --------- ------------ - --------
Deferred Tax Valuation Allowance:
Year ended March 31, 1995 $ -0- $ -0- $ -0- $ -0-
Year ended March 31, 1996 $ -0- $ 6,877 $ -0- $ 6,877
Year ended March 31, 1997 $ 6,877 $ -0- $ 1,968 $ 4,909
Inventory Valuation Allowance:
Year ended March 31, 1995 $ -0- $ -0- $ -0- $ -0-
Year ended March 31, 1996 $ -0- $ 850 $ -0- $ 850
Year ended March 31, 1997 $ 850 $ 94 $ 864 $ 80
Self Insured Medical Claims Valuation Allowance:
Year ended March 31, 1995 $ 65 $ 271 $ 226 $ 110
Year ended March 31, 1996 $ 110 $ 853 $ 715 $ 248
Year ended March 31, 1997 $ 248 $ 726 $ 762 $ 212
Allowance for Doubtful Accounts:
Year ended March 31, 1995 $ 137 $ 30 $ -0- $ 167
Year ended March 31, 1996 $ 167 $ 906 $ 545 $ 528
Year ended March 31, 1997 $ 528 $ 693 $ 181 $ 1,040
S-1