<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED DECEMBER 31, 1995 COMMISSION FILE NUMBER 0-16594
MEDICAL TECHNOLOGY SYSTEMS, INC.
_________________________________________________________________
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 59-2740462
- ---------------------------------- ---------------------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER ID NUMBER)
INCORPORATION OR ORGANIZATION)
12920 AUTOMOBILE BOULEVARD, CLEARWATER, FLORIDA 34622
------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (813) 576-6311
--------------
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OF 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (FOR SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS) AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
------ -------
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES
OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.
CLASS OUTSTANDING AT DECEMBER 31, 1995
----- --------------------------------
COMMON STOCK, $.01 PAR VALUE 3,992,832
PREFERRED STOCK, $.0001 PAR VALUE 6,500,000
<PAGE>
MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
INDEX
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
December 31, 1995 and March 31, 1995 . . . . . . . . . . 1
Consolidated Statements of Operations -
Three months and nine months ended
December 31, 1995 and 1994 . . . . . . . . . . . . . . . 2
Consolidated Statement of Changes in Stockholders' Equity -
Nine months ended December 31, 1995. . . . . . . . . . . 3
Consolidated Statements of Cash Flows -
Nine months ended December 31, 1995 and 1994. . . . . . 4
Notes to Consolidated Financial Statements . . . . . . . . . 5-14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . 15
PART II - OTHER INFORMATION
Item 3. Signature. . . . . . . . . . . . . . . . . . . . . . . 20
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MEDICAL TECHNOLOGY SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars In Thousands)
<TABLE>
<CAPTION>
ASSETS
December 31, March 31,
1995 1995
---- ----
(Unaudited) (Audited)
<S> <C> <C>
CURRENT ASSETS:
Cash. . . . . . . . . . . . . . . . . . . . . . $ 617 $ 896
Accounts Receivable . . . . . . . . . . . . . . 4,372 4,794
Income Taxes Receivable . . . . . . . . . . . . 867 808
Inventories . . . . . . . . . . . . . . . . . . 6,212 7,105
Prepaids and Other . . . . . . . . . . . . . . 294 197
------- -------
Total Current Assets . . . . . . . . . . . . 12,362 13,800
Property and Equipment, Net . . . . . . . . . . . 16,261 19,450
OTHER ASSETS:
Software Development Costs, Net . . . . . . . . 1,216 1,306
Goodwill, Net . . . . . . . . . . . . . . . . . 3,453 2,613
MedServ-TM- Development and Related
Software, Net . . . . . . . . . . . . . . . . 2,178 3,012
Development Costs of Joint Ventures . . . . . . 788 4,657
Patents, Net . . . . . . . . . . . . . . . . . 802 760
Other, Net . . . . . . . . . . . . . . . . . . 1,330 1,057
------- -------
Total Other Assets . . . . . . . . . . . . . 9,767 13,405
------- -------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . $38,390 $46,655
------- -------
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current Maturities of Long-Term Debt . . . . . $27,900 $ 1,187
Accounts Payable-Trade and Accrued
Liabilities . . . . . . . . . . . . . . . . . 8,631 4,599
------- -------
Total Current Liabilities . . . . . . . . . 36,531 5,786
Long-Term Debt, Less Current Maturities . . . . . 1,105 23,728
Deferred Income Taxes . . . . . . . . . . . . . . 0 1,660
Minority Interest in Joint Venture . . . . . . . . (277) (159)
------- -------
Total Liabilities . . . . . . . . . . . . . 37,359 31,015
------- -------
STOCKHOLDERS' EQUITY:
Voting Preferred Stock . . . . . . . . . . . . 1 1
Common Stock . . . . . . . . . . . . . . . . . 40 40
Capital in Excess of Par Value . . . . . . . . 7,946 7,941
Retained Earnings . . . . . . . . . . . . . . . (6,625) 7,989
Less: Treasury Stock . . . . . . . . . . . . . (331) (331)
------- -------
Total Stockholders' Equity . . . . . . . . . 1,031 15,640
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY . . . . $38,390 $46,655
------- -------
------- -------
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
<PAGE>
MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars In Thousands; except Earnings Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUE:
Net Sales and Services . . . . . . . . . . . . $ 5,797 $ 5,508 $ 18,326 $ 15,483
COSTS AND EXPENSES:
Cost of Sales . . . . . . . . . . . . . . . . . 4,920 2,419 13,756 7,394
Selling, General and Administrative . . . . . . 2,698 1,179 8,052 2,845
Terminated Joint Venture Expense. . . . . . . . 0 0 4,571 0
Loss on Early Retirement of Fixed Assets. . . . 0 0 3,000 0
Project and Product Development . . . . . . . . 0 0 1,574 0
Loss on Inventory Revaluation . . . . . . . . . 0 0 1,018 0
Depreciation and Amortization . . . . . . . . . 393 248 1,259 796
Interest, net . . . . . . . . . . . . . . . . . 653 444 1,860 943
--------- --------- --------- ---------
Total Costs and Expenses . . . . . . . . . . 8,664 4,290 (35,090) 11,978
--------- --------- --------- ---------
Income (Loss) Before Income Taxes and
Minority Interest. . . . . . . . . . . . . . . (2,867) 1,218 (16,764) 3,505
Income Tax Benefit (Expense) . . . . . . . . 422 (475) 2,030 1,344
--------- --------- --------- ---------
Income (Loss) Before Minority Interest. . . . . (2,445) 743 (14,734) 2,161
Minority Interest. . . . . . . . . . . . . . 16 0 118 0
--------- --------- --------- ---------
Net Income (Loss) . . . . . . . . . . . . . . . $ (2,429) $ 743 ($14,616) $2,161
--------- --------- --------- ---------
--------- --------- --------- ---------
PRIMARY NET EARNINGS (LOSS) PER COMMON SHARE:
Net Income (Loss) . . . . . . . . . . . . . . . ($ 0.61) $ 0.19 ($3.66) $0.54
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average Common Shares
outstanding, Primary . . . . . . . . . . . . . 3,992,832 3,969,229 3,992,832 3,969,168
ASSUMING FULLY DILUTED NET EARNINGS (LOSS)
PER COMMON SHARE:
Net Income (Loss) . . . . . . . . . . . . . . . $ (0.61) $ 0.16 ($ 3.66) $ 0.47
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average Common Shares outstanding,
Assuming Fully Diluted. . . . . . . . . . . . 3,992,832 4,603,916 3,992,832 4,603,916
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED DECEMBER 31, 1995
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
COMMON STOCK
------------------------------------------------------------------------
Number $.01 Capital in
of Par Excess of Retained Treasury
Shares Value Par Value Earnings Stock Total
------ ----- --------- -------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance, March 31,1995 . . . . . . . . 4,026,832 $ 40 $ 7,941 $ 7,989 $ (331) $ 15,639
Stock Issued . . . . . . . . . . . . . 6,000 $ 5 $ 5
Net Loss for Three Months
Ended June 30, 1995. . . . . . . . . $ (486) $ (486)
Balance, June 30, 1995 . . . . . . . . 4,032,832 $ 40 $ 7,946 $ 7,503 $ (331) $ 15,158
Net Loss for Three Months
Ended September 30,1995. . . . . . . $(11,699) $ (11,699)
------------------------------------------------------------------------
Balance, September 30, 1995. . . . . . 4,032,832 $ 40 $ 7,946 $ (4,196) $ (331) $ 3,459
Net Loss for Three Months
Ended December 31, 1995. . . . . . . $ (2,429) $(2,429)
------------------------------------------------------------------------
Balance, December 31, 1995 . . . . . . 4,032,832 $ 40 $ 7,946 $ (6,625) $ (331) $ 1,030
------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
VOTING PREFERRED STOCK
------------------------------------------------------------------------
Number $.0001
of Par
Shares Value
--------- ------
<S> <C> <C>
Balance, March 31, 1995. . . . . . . . 6,500,000 $ 1 $ 1
--------- ------ ------
Balance, June 30, 1995 . . . . . . . . 6,500,000 $ 1 $ 1
--------- ------ ------
Balance, September 30, 1995. . . . . . 6,500,000 $ 1 $ 1
--------- ------ ------
Balance, December 31, 1995 . . . . . . 6,500,000 $ 1 $ 1
--------- ------ ------
Total Stockholders' Equity,
December 31, 1995 . . . . . . . . . $ 1,031
------
------
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(Dollars In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
December 31,
1995 1994
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss). . . . . . . . . . . . . . . . . $(14,616) $ 2,161
Adjustments to Reconcile Net Income (Loss) to
Net Cash Provided by Operating Activities:
Depreciation and Amortization of Goodwill,
Patents and Other Assets. . . . . . . . . . . 1,259 796
Minority Interest . . . . . . . . . . . . . . . (118) - 0 -
Loss on Early Retirement of Fixed Assets. . . . 3,000 - 0 -
Project and Product Development Expenses, Net . 1,174 - 0 -
Terminated Joint Venture Expense. . . . . . . . 4,571 - 0 -
(Increase) Decrease in Accounts Receivable
and Income Tax Receivable . . . . . . . . . . 364 (880)
(Increase) Decrease in Inventories. . . . . . . 893 (1,385)
(Increase) in Prepaid Expenses and other
Assets. . . . . . . . . . . . . . . . . . . . (97) (292)
Increase (Decrease) in Accounts Payable and
other Accrued Liabilities . . . . . . . . . . 4,007 (295)
(Decrease) in Income Taxes Payable and
Deferred Taxes. . . . . . . . . . . . . . . . (1,634) (312)
-------- --------
Net Cash Used for Operating Activities . . . . . . (1,197) (207)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Expended for Property and Equipment. . . . . . . . (932) (5,398)
Expended for Software Development. . . . . . . . . (242) (898)
Expended for Development Costs of Joint Ventures . (702) - 0 -
Expended for Other Assets. . . . . . . . . . . . . (1,301) (3,891)
-------- --------
Net Cash Used by Investing Activities. . . . . . . (3,177) (10,187)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on Notes Payable, Long-Term Debt. . . . . (20,219) (12,202)
Net Proceeds from Line of Credit . . . . . . . . . 24,309 23,198
Issuance of Common Stock . . . . . . . . . . . . . 5 - 0 -
Proceeds from Exercise of Common Stock Warrants. . - 0 - 10
-------- --------
Net Cash Provided by Financing Activities. . . . . 4,095 11,006
-------- --------
NET INCREASE (DECREASE) IN CASH. . . . . . . . . . (279) 612
CASH AT BEGINNING OF PERIOD. . . . . . . . . . . . 896 365
-------- --------
CASH AT END OF PERIOD. . . . . . . . . . . . . . . $ 617 $ 977
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1995
NOTE 1 - BACKGROUND INFORMATION
Medical Technology Systems, Inc., a Delaware corporation, incorporated in
March of 1984, provides a diverse line of products and services to providers of
prescription pharmaceuticals in nursing homes, hospitals and other assisted care
facilities. The Company's products and services consist of three product lines
which are: (i) the core business of manufacturing and selling proprietary
medication dispensing systems and punch cards for use by pharmacy providers in
dispensing prescription medicines to nursing homes; and the repackaging
operation of Vangard Laboratories, Inc. acquired from Owens and Minor, Inc., in
June 1992, which packages generic pharmaceuticals in individual unit doses
primarily for the hospital and institutional pharmacy markets; (ii) medication
dispensing information systems developed by Medication Management Systems, Inc.
and Performance Pharmacy Systems, Inc. being marketed as MedServ - Floor Stock
("FS"), MedServ - Electronic Medication Administration Record ("EMAR") lines
consisting of mobile computerized medication administration systems for
hospitals and nursing homes, and Performance hospital pharmacy computer system,
respectively; and, (iii) the clinical laboratory service business of supplying
diagnostic testing services to the medical profession that is conducted by
Medical Technology Laboratories, Inc.
On November 3, 1993, the Company signed a joint venture agreement which
created Glasgow Pharmaceutical Corporation for the purpose of marketing and
selling pharmaceutical products, primarily prefilled medication cards, to the
long-term health care industry. Glasgow Pharmaceutical Corporation is 50% owned
by Vangard Labs, Inc. and 50% by Creighton Products Corporation, a wholly owned
subsidiary of Sandoz Pharmaceuticals Corporation. The Company has been notified
by Creighton Products Corporation of termination of the joint venture.
As of December 31, 1995, the Company was in default of its loan
agreements with its Banks (SouthTrust Bank of Alabama, N.A. is the lead bank
and Daiwa Bank is a participant in the Company's loan facility, collectively
called the "Banks"). On January 4, 1996, notice was given by the Banks to the
Company demanding payment-in-full of its bank loans which required treating
all loans from the Banks as current liability.
On January 3, 1996, three of the Company's subsidiaries, MTS Packaging
Systems, Medical Technology Laboratories, and MTS Sales & Marketing, Inc. filed
voluntary petitions for relief under Chapter 11 of Title 11 of the United States
Code in the United States Bankruptcy Court for the Middle District of Florida,
Tampa Division.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements include the accounts of Medical
Technology Systems, Inc. and its subsidiaries, MTS Packaging, Inc., Medical
Technology Laboratories, Inc., Clearwater Medical Services, Inc., Clinical
Diagnostic Center, Inc., Vangard Labs, Inc., Performance Pharmacy Systems, Inc.,
Medication Management Systems, Inc., Vangard Pharmaceutical Packaging, Inc.,
Medication Management Technologies, Inc., MTS Sales & Marketing, Inc., Systems
Professionals, Inc. and Glasgow Pharmaceutical Corporation. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Certain minor reclassifications have been made in the Company's consolidated
prior years financial statements for comparability to the current year's
statements.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
by the first-in, first-out (FIFO) method. . Inventories at interim dates are
valued using the gross profit method.
5
<PAGE>
MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1995
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is calculated by
the straight-line method over a five to thirty year period. 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 is recorded.
SOFTWARE DEVELOPMENT COST
The Company capitalizes software development costs in accordance with the
guidelines set forth in Financial Accounting Standard #86. All costs associated
with the software development from the point of technological feasibility to its
general distribution to customers are capitalized and, subsequently, amortized
over an eight-year period.
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 forty-year period.
MEDSERV DEVELOPMENT
MedServ product development costs will be amortized using the greater of a
units of production basis or a straight-line method over a five period.
DEVELOPMENT COSTS OF JOINT VENTURES
Costs of the Joint Ventures are incurred in developing products and markets
for the joint ventures' activities. These amounts will be amortized on a unit of
production basis. The Company uses the equity method of accounting for their
investment in MVI-MTS Ventures Inc. joint venture.
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 PER SHARE
Primary earnings per common and common equivalent share and earnings per
common and common equivalent share assuming full dilution were computed using
the weighted average number of shares outstanding adjusted for the incremental
shares attributed to outstanding warrants and options to purchase common stock.
INCOME TAXES
Deferred income taxes are provided for when transactions are reflected in
income for financial reporting purposes in a year other than the year of their
inclusion in taxable income. For income tax purposes, the Company uses
accelerated methods of depreciation and amortization.
TREASURY STOCK
The Company records its treasury stock at cost.
6
<PAGE>
MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1995
NOTE 3 - ACCOUNTS RECEIVABLE
During the second quarter of fiscal year 1996, the company determined that
an early version of its software product was no longer viable in the market
place. Accordingly, the company has ceased marketing this early version of
software and has recognized a $400,000 reserve against associated receivables
for credits to those installed users of the early software version. This expense
has been treated as a project and product development expense in the
accompanying financial statements.
Accounts Receivable consist of the following:
<TABLE>
<CAPTION>
December 31, March 31,
1995 1995
-------- --------
(Dollars in Thousands)
<S> <C> <C>
Accounts Receivable at Gross. . . . . . . . . . . . . . $5,201 $4,981
Less: Allowance for Doubtful Accounts . . . . . . . . . (829) (187)
------ ------
$4,372 $4,794
------- ------
------- ------
</TABLE>
Substantially all of the Company's accounts receivable are pledged as collateral
on bank notes.
NOTE 4 - INVENTORIES
As a result of the anticipated termination of the Glasgow Pharmaceutical
Corporation (GPC) joint venture, during the second quarter of fiscal year
1996 the Company reduced the net carrying value of inventory produced and
carried in its Vangard division for GPC by $505,000. Additionally, during the
second quarter, the Company conducted a review of its cost basis in inventory
in its Medication Management Systems, Inc. (MMS) division. As a result of the
decision to cease marketing an early version if its automated dispensing
software product, the Company has reduced the net carrying value of inventory
held by MMS associated with the product in the amount of $229,000. As a
result of a review of its inventory during the second quarter of 1996 in its
MTS Packaging division, the Company reduced the value of its inventory by
$284,000 in this division to more realistically reflect current net
realizable value.
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31, March 31,
1995 1995
-------- --------
(Dollars In Thousands)
<S> <C> <C>
Raw Material. . . . . . . . . . . . . . . . . . . . . $ 1,259 $ 1,648
Finished Goods and Work in Process. . . . . . . . . . 4,953 5,457
------ ------
$ 6,212 $ 7,105
------- -------
------- -------
</TABLE>
Substantially all of the Company's inventories are pledged as collateral on
bank notes.
NOTE 5 - PROPERTY AND EQUIPMENT
7
<PAGE>
MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1995
During the second quarter of 1996, the Company changed some of its toolings and
methods of production in its MTS Packaging division and made the decision to
discontinue servicing certain accounts on a job shop basis. As a result of these
changes, certain assets were removed from production due to functional
obsolescence. The Company also expensed certain other fixed assets withdrawn
from service during the period. These assets were written down to salvage value
resulting in a charge against net book value of $3,000,000.
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31, March 31,
1995 1995
-------- --------
(Dollars in Thousands)
<S> <C> <C>
Property and Equipment. . . . . . . . . . . . . . . . $20,479 $23,542
Leasehold Improvements. . . . . . . . . . . . . . . . 1,128 1,123
------ ------
21,607 24,665
Less: Accumulated Depreciation and Amortization . . . (5,346) (5,215)
------ ------
$16,261 $19,450
------- -------
------- -------
</TABLE>
Substantially all of the Company's property and equipment are pledged as
collateral on bank notes.
NOTE 6 - DEVELOPMENT COSTS, GOODWILL AND OTHER ASSETS
8
<PAGE>
MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1995
On March 17, 1995 the Company entered into an agreement to purchase
substantially all of the clinical laboratory accounts of Independent Clinical
Laboratory, Inc. d/b/a/ Tampa Pathology Laboratory. The purchase agreement
provides for the purchase price to be determined based upon a multiple of
collected cash revenues over the eight month billing period March 1, to October
31, 1995. Substantially all of the costs of acquisition to date have been
capitalized into goodwill.
During the second quarter of fiscal year 1996, the Company determined that an
early version of its automated medication dispensing product was not viable in
the market place. Accordingly the company has ceased marketing this early
version of software and has expensed $1,174,000 of costs which had been
previously capitalized related thereto.
Software development costs, goodwill and other assets consist of the following:
<TABLE>
<CAPTION>
December 31, March 31,
1995 1995
-------- -------
(Dollars In Thousands)
<S> <C> <C>
Software Development Costs . . . . . . . . . . . . . . . . . $ 1,797 $ 1,555
Less: Accumulated Amortization . . . . . . . . . . . . . . (581) (249)
------- -------
$ 1,216 $ 1,306
------- -------
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,907 $ 2,809
Less: Accumulated Amortization . . . . . . . . . . . . . . ( 454) (196)
------- -------
$ 3,453 $ 2,613
------- -------
MedServTM Development and Related Software . . . . . . . . . $ 3,247 $ 3,027
Less: Accumulated Amortization . . . . . . . . . . . . . . (1,069) (15)
------- -------
$ 2,178 $ 3,012
------- -------
Patents. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 939 $ 853
Less: Accumulated Amortization . . . . . . . . . . . . . . (137) (93)
------- -------
$ 802 $ 760
------- -------
Other Assets:
Acquisition of Business. . . . . . . . . . . . . . . . . . $ 605 $ 219
Finance Costs. . . . . . . . . . . . . . . . . . . . . . . 400 337
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . 580 584
Less: Accumulated Amortization . . . . . . . . . . . . . (255) (83)
------- -------
$ 1,330 $ 1,057
------- -------
</TABLE>
Substantially all of the Company's intangible assets are pledged as collateral
on bank notes.
NOTE 7 - LONG-TERM DEBT
9
<PAGE>
MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1995
On March 17, 1995 the Company entered into an agreement to purchase
substantially all of the clinical laboratory accounts of Independent Clinical
Laboratory, Inc. d/b/a/ Tampa Pathology Laboratory. The purchase agreement
provides for the seller to provide purchase money financing over a period of
indeterminant years without interest. Variable monthly payments are to equal 25%
of collections from the purchased accounts. Accordingly, the obligation has been
discounted to net present value based upon estimated future payment amounts and
the Company's incremental borrowing rate.
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31, March 31,
1995 1995
--------- --------
(Dollars in Thousands)
<S> <C> <C>
Note payable; interest at bank prime plus 1/2%; or LIBOR rate plus 2 1/4%;
payable $109,118 per month plus interest, due September, 1998. . . . . . . . . $10,398 $ 9,595
Community Development Block Grant loan payable $2,394 per month,
including imputed interest of 3%; due March, 2004. . . . . . . . . . . . . . . 210 226
Bank line of credit, interest at bank prime plus 1/2%, or LIBOR rate
plus 2%; interest payable monthly; principal due September, 1996 . . . . . . . 17,431 14,699
Note Payable; interest at 6%; interest and principal due May, 1999 . . . . . . . 300 300
Seller Financing Under Tampa Pathology Acquisition Agreement,
face value of $783,226 discounted at prime plus 1/2, variable monthly payment
until satisfied (unamortized discount $179,000) . . . . . . . . . . . . . . . . 604 0
Other Notes; interest and principal payable monthly at $4,000; due
through April 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 95
------- -------
Total Long-Term Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,005 24,915
Less Current Portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (27,900) (1,187)
------- -------
LONG-TERM DEBT DUE AFTER 1 YEAR. . . . . . . . . . . . . . . . . . . . . . . . . $ 1,105 $23,728
------- -------
------- -------
</TABLE>
The following is a schedule by year of the principal payments
required on these notes payable and long-term debts as of December 30,1995:
<TABLE>
<CAPTION>
(Dollars In Thousands)
<S> <C>
1996. . . . . . . . . . . . . . . . . . . . $ 27,900
1997. . . . . . . . . . . . . . . . . . . . $ 39
1998. . . . . . . . . . . . . . . . . . . . $ 24
1999. . . . . . . . . . . . . . . . . . . . $ 325
2000. . . . . . . . . . . . . . . . . . . . $ 26
Thereafter. . . . . . . . . . . . . . . . . $ 691
</TABLE>
Interest paid amounted to $1,601,968 and $888,748 for the nine months ended
December 31, 1995 and 1994, respectively. The above bank loans and line of
credit are collateralized by the Company's accounts receivables, inventory,
equipment and intangibles. The prime rate at December 31, 1995 was 8.5%.
NOTE 7 - LONG-TERM DEBT (CONT'D)
Notes payable and bank line of credit contain certain restrictive
covenants. The major restrictions concern
10
<PAGE>
MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1995
working capital, tangible net worth, debt service, and limitations on capital
expenditures and payment of dividends among others.
As of December 31, 1995, the Company was in default of its loan
agreements with its Banks (SouthTrust Bank of Alabama, N.A. is the lead bank
and Daiwa Bank is a participant in the Company's loan facility, collectively
called the "Banks"). On January 4, 1996, notice was given by the Banks to the
Company demanding payment-in-full of its bank loans which required treating
all loans from the Banks as current liability.
As a result of the Company's inability to restructure its bank debt,
management initiated the filing on January 3, 1996 of a Chapter 11 bankruptcy
petition for three of its divisions: MTS Packaging, Inc., MTS Sales and
Marketing, Inc. and Medical Technology Laboratories, Inc. Such an undertaking
will allow the Company to reorganize its financial affairs which include the
outstanding $28.0 million debt obligation. No assurance can be given that a
satisfactory outcome to the pending restructuring arrangements can be achieved.
In March 1995, the Company signed an expanded $30,000,000 loan facility
with SouthTrust Bank of Alabama, N.A. This new facility provides for a
$17,432,000 revolver with a maturity of September, 1996, and a $12,568,000 term
credit. Both credits provide for prime rate based interest with a LIBOR option
provision. As of December 31, 1995, the Company had fully utilized its bank
facility; additionally, as a result of its loan default, the Company does not
have any present or future borrowing capacity under the credit facilities.
NOTE 8 - LEASE COMMITMENTS
The following is a schedule by year of future minimum rental payments
required under operating leases that have an initial or remaining noncancelable
lease term in excess of one year as of December 31, 1995:
<TABLE>
<CAPTION>
(Dollars In Thousands)
<S> <C>
1996. . . . . . . . . . . . . . . . . . .$ 385
1997. . . . . . . . . . . . . . . . . . .$ 339
1998. . . . . . . . . . . . . . . . . . .$ 303
1999. . . . . . . . . . . . . . . . . . .$ 90
Thereafter. . . . . . . . . . . . . . . .$ 0
</TABLE>
Rent expense amounted to $279,540 and $284,394 for the nine months ended
December 31, 1995 and 1994, respectively.
NOTE 9 - 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 nine months ended December 31, 1995 the Company
made no contributions to the Plan.
NOTE 10 - 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. The
maximum exposure in the aggregate to the Company under this self-insurance plan
is limited to approximately $431,000.
NOTE 11 - RELATED PARTY TRANSACTIONS
11
<PAGE>
MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1995
Todd E. Siegel ("Siegel") is the Trustee of the Siegel Family Revocable
Trust ("Trust") which is a significant shareholder of the Company. The Trust has
entered into an exclusive Technology and Patent Licensing Agreement with the
company for certain technologies and patents on machine and product designs.
Under the terms of the amended agreement, the Company is required to pay to
the trust royalties of one percent of sales on licensed products. In addition,
the agreement states that there are no minimum royalty payments due and the
agreement would expire if the Company abandons or ceases to use the
technologies.
Siegel, through his beneficial interest in the Trust, owns approximately 10
percent of the outstanding common stock of the Company. In addition, Siegel
beneficially owns 6,500,000 shares of voting preferred stock which has two votes
per share for all matters submitted to the holders of the common stock of the
Company.
NOTE 12 - TAXES
Income taxes receivable as of December 31, and March 31, 1995 represent
estimated refunds of federal and state taxes previously paid.
The Company had a tax net operating loss for the year ended March 31, 1995
of approximately $3.9 million. The Company elected to forgo carryback of the
loss so that the full amount of the net operating loss will be available to
offset future taxable income. This net operating loss carryforward will expire
in 2010.
Effective April 1, 1993, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." SFAS No. 109
requires the use of the liability method for accounting for income taxes, which
requires that deferred tax liabilities or assets at the end of each period be
determined using the tax rate expected to be in effect when taxes are actually
paid or recovered. Under this method, income tax provisions will increase or
decrease in the same period in which a change in tax rates is enacted. Deferred
taxes resulted from differences in timing of deductions recognized for tax and
financial reporting purposes.
The Florida State Department of Revenue has examined the Company's sales
and use tax and intangible tax returns for the period January, 1988 through
December, 1993. The State proposed an assessment of approximately $1.8 million
including taxes, penalties and interest. A protest has been filed by the Company
as it was informed by its counsel on July 18, 1995. The Company believes the
amount of additional tax owed, if any, is substantially less than the State has
suggested, and intends to vigorously defend its position. A large portion of the
additional tax owed, if any, would be treated as an addition to the cost of
equipment and depreciated over a 15 year life.
NOTE 13 - STOCKHOLDERS' EQUITY
12
<PAGE>
MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
Stockholders' Equity consists of the following:
December 31, March 31,
1995 1995
-------- --------
<S> <C> <C>
Voting Preferred Stock:
Par value $.0001 per share
Authorized Shares. . . . . . . . . . . . . . . . . 7,500,000 7,500,000
Outstanding Shares . . . . . . . . . . . . . . . . 6,500,000 6,500,000
Issued Shares. . . . . . . . . . . . . . . . . . . 6,500,000 6,500,000
Common Stock:
Par value $.01 per share
Authorized Shares. . . . . . . . . . . . . . . . . 25,000,000 25,000,000
Outstanding Shares . . . . . . . . . . . . . . . . 3,992,832 3,986,832
Issued Shares. . . . . . . . . . . . . . . . . . . 4,032,832 4,026,832
</TABLE>
The Company has outstanding 1,200,000 warrants exercisable to purchase one
share of Common Stock at $7.00 per share, which were issued in connection with
its July 1991 public offering. In addition, the Company has outstanding 120,000
warrants, which were issued to the underwriter of the July 1991 offering,
exercisable to purchase one share of Common Stock at $7.00 per share. These
warrants expire on July 9, 1996 and are callable by the Company, upon 30 days
written notice, at $.05 per warrant.
The Company has issued 68,750 options to purchase shares of the Company's
common stock at $1.00 per share. These options will expire on April 1, 1998, but
can only be exercised after April 1, 1997.
As of March 31, 1995, 400,000 shares of common stock are reserved for
issuance to employees under the Company's Employee Stock Option Plan.
During fiscal 1995, options to acquire 80,000 shares of common stock at an
exercise price of $5.625 were issued to officers of the Company. These options
will expire in March, 2005. In addition, during fiscal 1995, these officers were
issued options to acquire 40,000 shares of common stock at an exercise price of
$5.625. These options will expire on March, 2005.
During fiscal 1995, the Company entered into stock appreciation rights
agreements with its officers. These agreements, which are for a term of 10
years, call for additional compensation payable annually equal to 6.5% of the
total of the incremental increase in the value of the Company's outstanding
stock.
During fiscal 1995, options to acquire 39,000 shares of common stock at an
exercise price of $5.625 were issued to outside directors of the Company. These
options will expire in August, 2004, but can only be exercised after August,
1995.
During fiscal 1996, options to acquire 40,000 shares of common stock at an
exercise price of $5.625 were issued to officers of the Company. These options
will expire in March, 2006.
During fiscal 1996, options to acquire 19,000 shares of common stock at an
exercise price of $5.625 were issued to outside directors of the Company. These
options will expire in August, 2005, but can only be exercised after August,
1996.
No dividends have ever been paid on either the Company's Common or
Preferred Stock outstanding.
13
<PAGE>
MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1995
NOTE 14 - DEVELOPMENT COSTS OF JOINT VENTURES
The Company has incurred development costs for the following joint
ventures:
<TABLE>
<CAPTION>
December 31, March 31,
1995 1995
-------- --------
(Dollars In Thousands)
<S> <C> <C>
Glasgow Pharmaceutical Corporation. . . . . . $ 0 $ 4,194
MVI - MTS Venture, Inc., Net. . . . . . . . . $ 588 463
------- -------
$ 588 $ 4,657
------- -------
------- -------
</TABLE>
On November 3, 1993, the Company signed a joint venture agreement which
created Glasgow Pharmaceutical Corporation for the purpose of marketing and
selling pharmaceutical products, primarily prefilled medication cards, to the
long-term health care industry. Glasgow Pharmaceutical Corporation is 50%
owned by Vangard Labs, Inc. and 50% by Creighton Products Corporation, a
wholly owned subsidiary of Sandoz Pharmaceuticals Corporation. The Company
has been notified by Creighton Products Corporation that Creighton wishes to
terminate the joint venture. As a result, the Company expensed $4,571,000 of
suspended project and product development costs related thereto.
During January, 1995, the Company signed a Joint Venture Agreement with a
software development company which established MVI-MTS Venture, Inc. to develop
and market a medication administration system and related software. This Joint
Venture Agreement provides that each partner shall fund twelve monthly payments
of $17,500, totaling $210,000. The Company has agreed to advance its Joint
Venture partner the funds necessary for the partner to fund its commitment.
These advances by the Company to its partner are to be repaid on January 6,
1998, and are evidenced by a Promissory Note and Security Agreement. As of
December 31, 1995, the Company had advanced $385,000 and is obligated to advance
an additional $ 35,000 on behalf of itself and its partner.
NOTE 15 - SUBSEQUENT EVENTS
On January 3, 1996, MTS Packaging, Inc., MTS Sales & Marketing, Inc. and
Medical Technology Laboratories, Inc. filed for bankruptcy protection under
Chapter 11 of the U.S. Bankruptcy laws. The effects, if any, on the Company
because of this action cannot be determined at this time.
On January 4, 1996, as a result of the Company's default on its bank
loans, SouthTrust Bank of Alabama NA, demanded full payment of these loans
in the amount of $27.7 million together with accrued interest and other
charges.
On January 12, 1996, an Employee Stock Purchase Plan was concluded which
provided approximately $388,000 in equity capital to the Company in exchange
for the issuance of approximately 1.4 million shares of the common stock of
the Company. Such shares when issued may have, in part, restrictions as to
sale and/or marketability.
On February 9, 1996, the Company's common stock and warrant were
suspended from trading on the NASDAQ National Market as a result of the
Company not meeting minimum listing requirements.
14
<PAGE>
MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
MANAGEMENT DISCUSSION AND ANALYSIS
Medical Technology Systems, Inc. manufactures and markets proprietary drug
dispensing and information systems to nursing home and hospital pharmacies
throughout the United States as a more economical and efficient way to package,
dispense, administer, and monitor patient medication. The following discussion
explains material changes in the results of operations comparing the third
quarter and first nine months of fiscal years 1996 and 1995 and significant
developments affecting the Company's financial condition since the end of fiscal
1995.
CHAPTER 11 REORGANIZATION
During fiscal 1996, the Company experienced disappointing operating
results attributed to the rampup of its new MedServ product, operating losses
at Vangard Labs, its drug repackaging facility, and the termination for
reporting purposes of a joint venture with Creighton Products Corporation, a
wholly owned subsidiary of Sandoz Pharmaceuticals Corporation In the second
quarter of this fiscal year, the Company determined that is was prudent to
write down the carrying cost of its joint venture and reappraise the carrying
costs of certain of its inventory and fixed assets. This write-down resulted
in a pre-tax charge of $10.1 million which caused a significant net loss for
the second quarter and the six months then ended. This net loss caused the
Company to be in violation of various financial covenants in its borrowing
arrangements and subsequently the Company was unable to reach agreement with
its lenders to both amend or restructure this arrangement on satisfactory
terms and to provide additional working capital. The extended negotiations
with the Company's lenders created substantial uncertainty among the
Company's suppliers, employees, and a potential equity investor that the
Company was in discussion with for additional capital. Events led to the
Company's decision to seek protection of the Bankruptcy Court for three of
its subsidiaries in order to restructure its financial arrangements.
On January 3, 1996, three of the Company's subsidiaries, MTS Packaging
Systems Inc., Medical Technology Laboratories Inc., and MTS Sales &
Marketing, Inc. filed voluntary petitions for relief under Chapter 11 of
Title 11 of the United States Code in the United States Bankruptcy Court for
the Middle District of Florida, Tampa Division.
In light of recent events and as an element of its plan to reorganize
its businesses, the Company is examining all present asset valuations to
determine appropriate "realizable" values. This process will likely be
concluded prior to the end of fiscal year 1996.
RESULTS OF OPERATIONS: QUARTER ENDED DECEMBER 31, 1995
COMPARED WITH THE QUARTER ENDED DECEMBER 31, 1994
Net sales for the three months ending December 31, 1995 increased 5.2% to
$5.8 million from $5.5 million in the comparable three month period ending
December 31, 1994 primarily due to higher sales from the Company's
pharmaceutical dispensing systems and clinical laboratory division.
Cost of sales for the three months ending December 31, 1995 increased by
103% to $4.9 million from $2.4 million over the comparable period last year.
Gross profit margin in the three months ending December 31, 1995 decreased to
14% from 56% in the same period last year. This decrease in gross profit was
primarily the result of lower margins on sales experienced in the Company's
pharmaceutical dispensing system division and the changing mix of the Company's
sales toward greater sales volume in the Vangard Labs division which
historically generates a lower gross profit margin than the other operations
within the Company. The expansion of this business, combined with the
introductory pricing of new pharmaceutical products, has resulted in a lower
gross profit margin for the Company on a blended basis.
Selling, general and administrative expenses ("SG&A") for the three months
ending December 31, 1995, increased 129% to $2.7 million from $1.2 million in
the comparable three month period ending December 31, 1994 primarily due to
higher expenses on increased sales reported, expensing of development costs and
increased marketing expenses for the Company's MedServ-TM- product line, without
corresponding increases in MedServ product sales. Management has instituted
operational changes aimed at reducing overhead and such other austerity measures
as necessary with a goal of achieving lower absolute SG&A expenses, but cost
reductions haven't benefited this present quarter
15
<PAGE>
MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
ended.
Interest expense for the three months ending December 31, 1995, increased
to $0.7 million from $0.4 million in the comparable three month period ending
December 31, 1994. The increase reflects both higher interest rates incurred on
the Company's bank debt and a significant increase in the level of debt.
The Company experienced a loss before income taxes and minority interest of
$2.9 million for the three months ending December 31, 1995, as compared to
income of $1.2 million for the year ago period. This loss is primarily
attributable to the lower gross profit margins contributed by MTS Packaging,
Inc. and the negative margin attributed to Vangard Labs, the Company's drug re-
packaging operation, higher SGA and interest expenses.
For the current period, an income tax benefit was realized because of
the Company's operating losses. This tax benefit has been recognized to the
extent of the availability of loss carry forwards, that are to be realized by
the Company.
After the minority interest, the Company had a loss of $2.4 million for the
three month period ending December 31, 1995 as compared to a net income of $0.7
million for the comparable period ending December 31, 1994. On a fully diluted
per share basis, net loss for the period was $.61 compared to earnings of $0.16
for the prior year's quarter on the weighted average number of shares
outstanding.
RESULTS OF OPERATIONS: NINE MONTHS ENDED DECEMBER 31, 1995
COMPARED WITH THE NINE MONTHS ENDED DECEMBER 31, 1994
Net sales for the nine months ending December 31, 1995 increased 18% to
$18.3 million from $15.5 million in the comparable period last year primarily
due to higher sales from the Company's pharmaceutical dispensing systems and
clinical laboratory division.
Cost of sales for the nine months ending December 31, 1995 increased by
86% to $13.8 million from $7.4 million over the comparable period last year.
Gross profit margin in the nine months ending December 31, 1995 decreased to
25% from 52% in the same period last year. This decrease in gross profit was
primarily the result of lower margins on sales experienced in the Company's
pharmaceutical dispensing system division and the changing mix of the
Company's sales towards greater sales volume in the Vangard Labs division
which historically generates a lower gross profit margin than the other
operations within the Company. The expansion of this business, combined with
the introductory pricing of new pharmaceutical products, has resulted in a
lower gross profit margin for the Company on a blended basis. On January 3,
1996, the Company temporarily suspended operations at Vangard Labs to avert
further negative impact on its remaining operations. The Company is presently
assessing proposals from interested partners in restarting the Vangard
operation, or considering offers for its sale. Management has instituted
operational changes aimed at reducing overhead and such other austerity
measures as necessary with a goal of achieving lower absolute SG&A expenses,
but cost reductions haven't benefited the present nine month period ended.
SG&A for the nine months ending December 31, 1995 increased 183% to $8.0
million from $2.8 million in the comparable period last year primarily due to
higher expenses on increased sales reported, increased development costs and
increased marketing expenses for the Company's MedServ-TM- product line, without
corresponding increases in MedServ product sales.
Within the nine month period ending December 31, 1995, a $4.6 million
dollar write-off of terminated joint venture investment was taken for the
Company's interest (exclusive of its direct investment) in the Glasgow
Pharmaceutical Corporation (GPC) joint venture with Creighton Products
Corporation (CPC), a wholly owned subsidiary of Sandoz Pharmaceuticals
Corporation. The Company and CPC have experienced divergent opinions as to
the conduct of the joint venture.
The Company is presently at an impasse as to the terms of the termination
of this joint venture with CPC. The Company intends to seek reimbursement from
CPC for costs incurred related to the formation, start-up and operation of the
joint venture. Management cannot predict or quantify the final terms or
conditions of the joint venture termination;
16
<PAGE>
MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
however, the prior period charge continues to represent the Company's best
estimate of the related expense. Management believes the Company has a strong
basis to seek a substantial payment from CPC to terminate the joint venture. No
assurance can be given that the joint venture will be terminated on terms
favorable to the Company. In addition to terminated joint venture expense, the
Company recognized a related valuation allowance in the amount of approximately
$505,000 on inventory carried in its drug packaging division for the joint
venture also during the second quarter of fiscal year 1996.
Additionally, in the quarter ending September 30,1995, the Company
recorded a loss primarily for the early retirement of fixed assets during the
current period of $3.0 million. The expense related to obsoleted packaging
equipment arising from the change over to automated production equipment in
its packaging division and the decision during the current period to cease
servicing marginal accounts on a job shop basis. In addition, the Company
expensed certain other fixed assets withdrawn from service. The Company also
recognized project and product development costs in the amount of $1.6
million dollars in its Medication Management Systems ("MMS") division. The
charge related to expensing of an early version of the Company's automated
medication dispensing systems software. Of the $1.6 million charge,
approximately $400,000 represented a reserve for credits to installed
customers for the early version of the product and a related valuation
allowance of approximately $229,000 on inventory carried in its MMS division
for the automated dispensing product. Loss on inventory valuation of $1.0
million represents previously discussed valuation allowance relating to the
curtailment of the GPC joint venture and the expensing of project and product
development costs of $505,000 and $229,000, respectively. An additional
$284,000 of valuation allowance was also recognized in the Company's
packaging division to adjust inventory to the lower of cost or market.
Interest expense for the nine months ending December 31, 1995 increased 97%
to $1.9 million from $0.9 million in the comparable period last year. The
increase reflects both higher interest rates incurred on the Company's bank debt
and a significant increase in the level of that debt. The Company has used its
credit facilities to support higher levels of inventory and accounts
receivables, and to complete development of its MedServ Products.
The Company experienced a loss before income taxes and minority interest
of $16.7 million for the nine months ending December 31, 1995, as compared to
income of $3.5 million for the year ago period. This loss is primarily
attributable to the expensing of $4.6 million in anticipated terminated joint
venture expenses related to the GPC joint venture, expenses relating to early
retirement of fixed assets in the MTS Packaging division in the amount of
$3.0 million, the expensing of $1.6 million in early version software and
related costs in the company's Medication Management Systems division, and a
$1.0 million inventory valuation charge and operating losses experienced by
the Company during this period.
After the minority interest, the Company had a loss of $14.6 million for
the nine month period ending December 31, 1995 as compared to a net income of
$2.2 million for the comparable period ending December 31, 1994. On a fully
diluted per share basis, the loss was $3.66 as compared to earnings of $0.47 for
the prior year's comparable nine month period on the weighted average number of
shares outstanding.
LIQUIDITY, CAPITAL RESOURCES AND CASH FLOW
For the nine month period ended December 31, 1995, the Company's net
cash used in operating activities was $1.2 million in the current period
compared with $0.2 million used in operating activities in the comparable
period last year. In this period, cash used by operating activities
principally resulted from an increase in prepaid expenses and other assets
due primarily to increases in prepaid installation and training costs related
to the Company 's MedServ product, a decrease in deferred taxes due primarily
to full utilization of the Company's deferred tax liability, an increase in
accounts payables due primarily to extension of trade terms from suppliers
and increased emphasis on working capital management, a decrease in accounts
receivable and income taxes receivable due primarily to improved collection
efforts and the receipt of a tax refund, and a decrease in inventory due
primarily to reduced levels of product in the Company's pharmaceutical
dispensing systems division.
Net cash used in investing activities for the nine month period ended
December 31, 1995 was $3.2 million compared to $10.2 million in the prior year,
primarily due to the curtailment of capital equipment construction in the
Company's pharmaceutical dispensing system division, the reduction in software
development activity in the Company's
17
<PAGE>
MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
Medication Management Systems division, the minimization of incremental
investment in the Glasgow Pharmaceutical Corporation joint venture, and the
curtailment of market development activities.
Net cash from financing activities for the nine month period ended December
31, 1995 was $4.1 million compared to $11.0 million in the prior period
primarily due to a net decrease in incremental borrowings on its credit
facilities.
As of December 31, 1995, the Company had a working capital deficiency of in
the amount of $24.2 million as compared to a working capital of $8.0 million at
fiscal year end 1995. Working capital decreased as a result of a decrease in
current assets and an increase in current liabilities. The Company's ratio of
current assets to current liabilities was 1 : 3 in the current period as
compared to a positive ratio of 2.4 at fiscal year end 1995. Current assets
decreased to $12.4 million in the current period as compared to $13.8 million at
the end of fiscal year 1995. The decrease in current assets was principally due
to a decrease in cash, accounts receivable, and inventories which was partially
offset by an increase in income tax receivables and other. Current liabilities
increased to $36.5 million in the current period from $5.8 million at the end of
fiscal year 1995. Current liabilities increased principally due to an increase
in trade payables and the classification as current the balance of the company's
entire bank credit facility. The decrease in stockholders' equity in the current
period to $1.0 million from $15.6 million at fiscal year end 1995 is primarily
attributable to the net loss of $14.6 million for the period, which included
unusual expenses of approximately $10.2 million.
As of December 31, 1995, the Company was in default of its secured
credit facility with its Banks which requires the Company to treat the total
outstanding obligation of approximately $28.0 million, plus interest, under
the secured credit facility as a current liability.
As a result of the Company's inability to restructure its bank debt,
management initiated the filing on January 3, 1996 of a Chapter 11 bankruptcy
petition for three of its divisions: MTS Packaging, Inc., MTS Sales and
Marketing, Inc. and Medical Technology Laboratories, Inc. Such an undertaking
will allow the Company to reorganize its financial affairs which include the
outstanding $28.0 million debt obligation. No assurance can be given that a
satisfactory outcome to the pending restructuring arrangements can be achieved.
Management has been unsuccessful in raising equity capital. Although
management is currently soliciting additional sources of equity capital, no
assurances can be given that additional equity capital will be made available to
the Company. In the event the Company is able to raise additional equity, the
raising of such equity capital and the proposed effects of restructured credit
arrangements with the Banks, will likely be substantially dilutive to current
stockholders. There can be no assurance that the Company will be able to secure
such additional equity capital or that the Company will be successful in
reorganizing its affairs within the Chapter 11 bankruptcy proceedings.
The Banks have a first security interest in and lien upon substantially
all of the Company's assets. To date, the Company has not filed for
bankruptcy protection itself or any other divisions or subsidiaries other
than the three identified above. It may be necessary, for the Company to take
certain actions, which may include protection under applicable bankruptcy
laws, to stay a Banks' foreclosure and restructure its affairs for the
balance of its businesses. Such actions, if taken, will in all likelihood
effect the interests of the Company's stockholders. If the Company is unable
to restructure its credit facility by fiscal year end 1996, or complete
reorganization of its two principal divisions within the Chapter 11
bankruptcy proceedings, the outside independent auditors would in all
likelihood render a going concern opinion on the Company's fiscal year end
1996 audited financial statements.
Other than cash flow from operations the Company does not currently have
any other sources of liquidity. Accordingly, management has made the generation
of short term cash flow the Company's primary operating objective. The Company
has substantially reduced overhead which has not benefited, as yet, operating
results.
In view of the Chapter 11 reorganization and the Company's operating
results, there is uncertainty with respect to the Company's liquidity. The
Company believes it can develop an approved reorganization plan, although no
assurance can be provided that this will happen. However, any change in the
current status of these or other items affecting the Company, including
continuing adverse operating results, or loss of its customer base could have
a materially adverse effect on the Company's liquidity of its operations and
its ability to continue as a going concern.
18
<PAGE>
MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
Management has previously identified the Company's clinical laboratory
division as a non-core business unit. The Company intends to retain its clinical
laboratory business as an essential part of its current business strategy to
generate positive cash flow. Expenses have been reduced in that operation. No
assurances can be given that the recently implemented efficiencies will generate
incremental positive cash flow in the clinical laboratory division, nor can any
assurances be given at this time that the clinical laboratory division will
continue to generate positive cash flow.
ITEM 5. OTHER INFORMATION.
On January 12, 1996, an Employee Stock Purchase Plan was concluded which
provided approximately $388,000 in equity capital to the Company in exchange
for the issuance of approximately 1.4 million shares of the common stock of
the Company. Such shares when issued may have, in part, restrictions as to
sale and/or marketability.
On February 9, 1996, the Company's common stock and warrant were
suspended from trading on the NASDAQ National Market as a result of the
Company not meeting minimum listing requirements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
Form 8-K for events dated January 3, 1996 regarding bankruptcy filing
for three subsidiaries of Company and resignations of directors on December
29, 1995 and January 2, 1996.
19
<PAGE>
MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Quarterly Report to be signed on its behalf by
the undersigned, thereunto duly authorized, in the County of Pinellas, State of
Florida, on the 19th day of February, 1996.
MEDICAL TECHNOLOGY SYSTEMS, INC.
By: /s/ Todd E. Siegel
--------------------------------
TODD E. SIEGEL
President and C.E.O.
20
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
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