SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[x] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 1999 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ______________________ to ______________________
0-16594
Commission file number _______________________________________________________
MEDICAL TECHNOLOGY SYSTEMS, INC.
- -------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 59-2740462
- -------------------------------- ------------------------
(State or other jurisdiction of (I.R.S.) Employer
Incorporation or Organization) Identification No.)
12920 Automobile Boulevard, Clearwater, Florida 33762
- -------------------------------------------------------------------------------
(Address of Principal Executive Offices)
727-576-6311
- -------------------------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
- -------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
If changed since last report)
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. Yes X No ______
APPLICABLE ONLY TO ISSUERS INVOLVED IN
BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS
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. Yes X No ______
<PAGE>
i
MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
Index
Page
Part I - Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
September 30, 1999 and March 31, 1999......................... 1
Condensed Consolidated Statements of Operations -
Three Months and Six Months Ended September 30, 1999 and 1998. 2
Condensed Consolidated Statements of Changes in Stockholders'
Equity (Deficit) - Six Months Ended September 30, 1999........ 3
Condensed Consolidated Statements of Cash Flow -
Six Months Ended September 30, 1999 and 1998.................. 4
Notes to Condensed Consolidated Financial Statements........... 5 - 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...........................10 - 14
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security-Holders............ 15
Item 6. Exhibits and Reports on Form 8-K............................... 15
Signature...................................................... 15
<PAGE>
1
Item 1. Financial Statements
PART 1 - FINANCIAL INFORMATION
MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
ASSETS
<TABLE>
<CAPTION>
September 30, March 31,
1999 1999
--------------- ---------------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash $ 0 $ 205
Accounts Receivable, Net 2,548 2,473
Inventories 2,034 1,990
Prepaids and Other 279 69
------------- -------------
Total Current Assets 4,861 4,737
Property and Equipment, Net 1,816 2,013
Other Assets, Net 1,300 1,761
------------- -------------
Total Assets $ 7,977 $ 8,511
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Current Maturities of Long-Term Debt $ 802 $ 874
Accounts Payable and Accrued Liabilities 2,494 2,405
--------------- ---------------
Total Current Liabilities 3,296 3,279
Net Liabilities of Discontinued Operations 542 1,917
Long-Term Debt, Less Current Maturities 14,601 14,915
--------------- ---------------
Total Liabilities 18,439 20,111
--------------- ---------------
Stockholders' Equity (Deficit):
Voting Preferred Stock 1 1
Common Stock 64 64
Capital In Excess of Par Value 8,583 8,583
Retained Earnings (Deficit) (18,782) (19,920)
Less: Treasury Stock (328) (328)
--------------- ---------------
Total Stockholders' Equity (Deficit) (10,462) (11,600)
--------------- ---------------
Total Liabilities and Stockholders' Equity (Deficit) $ 7,977 $ 8,511
=============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
2
MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue:
Net Sales and Services $ 4,231 $ 3,492 $ 8,070 $ 6,992
Costs and Expenses:
Cost of Sales and Services 2,167 2,067 4,247 4,051
Selling, General and Administrative 1,151 1,011 2,310 1,922
Depreciation and Amortization 255 248 509 487
Interest, Net 296 284 591 570
------------ ------------ --------- ----------
Total Costs and Expenses 3,869 3,610 7,657 7,030
------------ ------------ --------- ----------
Income (Loss) Before Extraordinary Gain 362 (118) 413 (38)
Loss from Operations of Discontinued Operations (572) (582) (1,097) (1,098)
Extraordinary Gain on Forgiveness of Debt 0 0 0 662
Gain on Disposal of Discontinued Operations 0 0 1,822 0
------------ ------------ ------------ ------------
Net Income (Loss) $ (210) $ (700) $ 1,138 $ (474)
============ ============ ============ ============
Earnings (Loss) Per Basic and Diluted Common Share:
Income (Loss) from Continuing Operations 0.06 (0.02) 0.07 (0.01)
Income (Loss) from Discontinued Operations (0.09) (0.10) 0.11 (0.07)
------------ ------------ ------------ ------------
Earnings (Loss) per Basic and Diluted Common Share $ (0.03) $ (0.12) $ 0.18 $ (0.08)
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
3
MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
SIX MONTHS ENDED SEPTEMBER 30, 1999
(In Thousands Except Share Data)
(Unaudited)
<TABLE>
<CAPTION>
COMMON STOCK
---------------------------------------------------------------------------------------------
Number Par Capital in Retained Treasury
of Value Excess of Earnings Stock Total
Shares Par Value (Deficit)
----------- ----------- ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, March 31, 1999 6,406,191 $ 64 $ 8,583 $ (19,920) $ (328) $ (11,601)
Net Income for Six Months
Ended September 30, 1999 - - - 1,138 - 1,138
---------------------------------------------------------------------------------------------
Balance, September 30, 1999 6,406,191 $ 64 $ 8,583 $ (18,782) $ (328) $ (10,463)
=========== =========== =========== ============ ============= ===========
VOTING PREFERRED STOCK
---------------------------------------------------------------------------------------------
Number Par
of Value
Shares
----------- -----------
Balance, March 31, 1999 6,500,000 $ 1 $ 1
----------- ----------- -------------
Balance September 30, 1999 6,500,000 $ 1 $ 1
----------- ----------- -------------
Total Stockholders' Equity
-------------
(Deficit), September 30, 1999 $ (10,462)
=============
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
4
MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
September 30,
--------------------------------------
1999 1998
------------- --------------
<S> <C> <C>
Operating Activities
Net Income (Loss) from Continuing Operations $ 413 $ (38)
------------- --------------
Adjustments to Reconcile Net Income (Loss) to Net Cash
Provided (Used) by Operating Activities:
Depreciation and Amortization 509 487
Legal Settlement 0 215
(Increase) Decrease in:
Accounts Receivable (75) 147
Inventories (44) (109)
Prepaids and Other (166) (117)
Loss on Early Retirement of Fixed Assets 0 21
Increase (Decrease) in:
Accounts Payable and Other Accrued Liabilities 86 (199)
------------- --------------
Total Adjustments 310 445
------------- --------------
Net Cash Provided by Operating Activities 723 407
------------- --------------
Investing Activities
Expended for Property and Equipment (201) (58)
Expended for Product Development (39) (78)
Expended for Other Assets (68) (140)
------------- --------------
Net Cash Used by Investing Activities (308) (276)
------------- --------------
Financing Activities
Payments on Notes Payable and Long-Term Debt (407) (26)
Proceeds from Borrowing on Notes Payable and Long-Term Debt 0 150
Advances to Affiliates - Discontinued Operations (213) (549)
------------- --------------
Net Cash Used by Financing Activities (620) (425)
------------- --------------
Net Decrease in Cash (205) (294)
Cash at Beginning of Period 205 465
------------- --------------
Cash at End of Period $ 0 $ 171
============= ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
5
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the six-month period ended September 30,
1999 are not necessarily indicative of the results that may be expected for the
year ended March 31, 2000. The unaudited condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's annual report on Form
10-K for the year ended March 31, 1999.
The unaudited condensed consolidated financial statements include the
accounts of the Company and its subsidiaries, MTS Packaging Systems, Inc. ("MTS
Packaging"), Medical Technology Laboratories, Inc. ("MTL") and LifeServ
Technologies, Inc. ("LifeServ"). MTL and LifeServ represent discontinued
operations, and accordingly, these discontinued segments' net liabilities are
shown as one amount under the captions "Net Liabilities of Discontinued
Operations" for fiscal 2000 and fiscal 1999. The results of operations of these
discontinued segments for fiscal 2000 and fiscal 1999 have been excluded from
the components of "Income (Loss) from Continuing Operations" and shown under the
caption "Loss from Operations of Discontinued Operations" in the Statements of
Operations.
The unaudited condensed consolidated financial statements include the
classification of the amounts due pursuant to the Company's bank term loan
according to the repayment terms of the loan agreement. Certain events of
default under the loan agreement may have occurred and the Company has requested
a waiver of these events of default. Although the Company is discussing the
waivers with the bank, there are no assurances that the waivers will be
obtained. In the event that waivers are not obtained and the bank exercises its
rights regarding the repayment of the loan, the classification of the amounts
due to the bank on the balance sheet may change from long-term to current. If
the bank elects to exercise its rights under the loan agreement regarding the
repayment of the indebtedness, the Company's results of operations, liquidity
and financial condition would be adversely affected (See Note E).
NOTE B - INVENTORIES
The components of inventory consist of the following:
<TABLE>
<CAPTION>
September 30, March 31,
1999 1999
----------------- -----------------
(In Thousands)
<S> <C> <C>
Raw Materials $ 931 $ 767
Finished Goods and Work in Progress 1,243 1,363
Less: Inventory Valuation Allowance (140) (140)
================ ================
$ 2,034 $ 1,990
================ ================
</TABLE>
Inventories are stated at the lower of cost (first-in, first-out) or
market.
<PAGE>
6
NOTE C - EARNINGS PER SHARE
Net income per common share is computed by dividing net income by the basic
and diluted weighted average number of shares of common stock outstanding. For
diluted weighted average shares outstanding, the Company used the Treasury stock
method to calculate the common stock equivalents that stock options would
represent. The effect of all options and warrants were not included in the
calculation of net income per diluted common share as the effect would have been
anti-dilutive.
NOTE D - DISCONTINUED OPERATIONS
During the fourth quarter of fiscal 1999, the Company implemented a
strategy of focusing its resources on its core business, MTS Packaging, and
divesting the other two business segments it historically operated.
In May 1999, the Company sold LifeServ, its Health Care Information Systems
business segment. The Asset Acquisition Agreement provided, among other things,
for the buyer to receive substantially all the assets of LifeServ in
consideration for the assumption of certain stated liabilities of approximately
$5 million. The sale resulted in a gain of approximately $1.8 million, which has
been recognized in the accompanying financial statements as a gain on disposal
of discontinued operations. During the first quarter, LifeServ had revenue of
$454,000 and costs and expenses of $978,000 resulting in a loss from
discontinued operations of $524,000. LifeServ had no operations after the first
quarter.
The Company is discussing the possible sale of its Clinical Laboratory
Services subsidiary, MTL, with several potential buyers. In the event that a
sale is not consummated, management has committed itself to abandon the
business. In September 1999, MTL entered into a Management Services Agreement
with one potential buyer. The Agreement provides, among other things, for the
potential buyer to make loans and advances to MTL for working capital. As of
September 30, 1999, MTL had borrowed $120,000 from the potential buyer. MTL's
net revenue for the first six months of fiscal 2000 and fiscal 1999 was
$4,145,000 and $5,208,000 respectively. The net loss from the discontinued
operations of MTL was $1,072,000 and $184,000 in the first six months of fiscal
2000 and fiscal 1999, respectively.
The Company estimated the loss on disposal of MTL to be $2.5 million and
recorded a charge of that amount in the fourth quarter of fiscal 1999. The loss
on disposal of MTL included a reserve of $500,000 for the estimated cost of
disposal and operating losses through the disposal date. Accordingly, the
Company charged $500,000 of the net loss from discontinued operations to the
reserve and recorded a loss from operations of discontinued operations of
$572,000 in the second quarter of fiscal 2000. The Company believes that if a
sale of the business can be negotiated with the potential buyer, the sale will
be concluded before December 31, 1999. The terms of the Management Services
Agreement provide that the potential buyer will advance the amounts necessary to
fund any operating losses incurred by MTL. In addition, the operations of MTL
have historically been seasonal and generally have been profitable during the
months of October, November and December. As a result, the Company has elected
not to provide any additional amounts as a reserve for operating losses that may
be incurred until the anticipated closing date. In the event that a sale is not
concluded, the Company is committed to liquidating the business and believes
that the net proceeds received in liquidation will exceed the amount of
liabilities that will ultimately be satisfied.
<PAGE>
7
The carrying value of the net assets (liabilities) of discontinued
operations at September 30, 1999 and March 31, 1999 is comprised of the
following.
<TABLE>
<CAPTION>
Total
LifeServ MTL Discontinued
Operations
--------------------------- --------------------------- ----------------------------
September March 31, September March 31, September March 31,
30, 30, 30,
1999 1999 1999 1999 1999 1999
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Current Assets $ 0 $ 1,047 $ 3,094 $ 3,945 $ 3,094 $ 4,992
Other Assets 0 2,088 0 71 0 2,159
----------- ----------- ----------- ----------- ----------- -----------
Total Assets $ 0 $ 3,135 $ 3,094 $ 4,016 $ 3,094 $ 7,151
----------- ----------- ----------- ----------- ----------- -----------
Current Liabilities $ 0 $ 4,532 $ 2,327 $ 2,876 $ 2,327 $ 7,408
Long-Term Liabilities 0 346 1,309 1,314 1,309 1,660
----------- ----------- ----------- ----------- ----------- -----------
Total Liabilities $ 0 $ 4,878 $ 3,636 $ 4,190 $ 3,636 $ 9,068
----------- ----------- ----------- ----------- ----------- -----------
Net Assets (Liabilities)
of Discontinued $ 0 $ (1,743) $ (542) $ (174) $ (542) $ (1,917)
Operations
=========== =========== =========== =========== =========== ===========
</TABLE>
NOTE E - LONG-TERM DEBT
Long-term debt related to continuing operations consists of the following:
<TABLE>
<CAPTION>
September 30, March 31,
1999 1999
------------- --------------
(In Thousands)
<S> <C> <C>
Bank Term Loan; payable in installments of interest at 7.5% and principal
monthly for ten years ending September 1, 2006, with a lump sum payment of
approximately $11.4 million on that date secured by all tangible and
intangible assets of the Company. $ 14,509 $ 14,806
Unsecured Notes Payable plus interest at 12% through February 1999, and 18%
until repaid. 150 150
Unsecured Notes Payable plus interest at 13% in monthly installments of
$8,905 through September 2001. 185 200
Unsecured Note Payable plus interest at 3%, payable in monthly installments
of $2,394 through September 2006. 181 193
Unsecured Note Payable under settlement agreement with State of Florida
Department of Revenue, payable in monthly installments of $2,500-$3,500
over a period of four to eight years. 273 284
Other Notes and Agreements; interest and principal payable monthly and
annually at various amounts through March 2000. 105 156
------------ -------------
Total Long -Term Debt 15,403 15,789
Less Current Portion (802) (874)
============ =============
LONG-TERM DEBT DUE AFTER 1 YEAR $ 14,601 $ 14,915
============ =============
</TABLE>
<PAGE>
8
The bank notes payable are collateralized by the Company's accounts
receivables, inventory, equipment and intangibles.
On July 15, 1999, the Company received a waiver of certain defaults that
occurred under its bank term loan agreement through June 30, 1999. In addition,
the bank and the Company agreed to modify the loan agreement for results of
operations subsequent to July 1, 1999. To date the bank and the Company have not
agreed on the terms of the modification. The Company has requested that the bank
extend its waiver of certain defaults past June 30, 1999 and has requested the
bank to waive certain other events of default that may have occurred. There are
no assurances that the bank will extend the waiver or waive any additional
events of default that may have occurred. If the bank does not ultimately
provide a waiver of events of default and/or a loan agreement modification is
not executed, long-term debt of approximately $14.5 million may be reclassified
as current and thereby, will adversely affect the Company's results of
operations, liquidity and financial condition.
NOTE F - CONTINGENCIES
On November 19, 1998, MTL received a refund request in the amount of $1.8
million from Medicare Program Safeguards ("MPS") and $104,000 from the State of
Florida Agency for Health Care Administration ("AHCA"). The request follows an
onsite review in May 1997, by federal and state agencies, of MTL's Medicare and
Medicaid billing practices in 1996. MTL has conducted an internal review of the
billing procedures, records and services in question and disputes MPS's findings
and determination. On December 17, 1998, MTL responded to the MPS determination
and subsequently received a response from MPS in which MPS informed MTL that
recoupment of the refund amount would be stayed while MPS reviewed MTL's
response. Although MTL believes that MPS's determination and the request for
refund are without merit, there can be no assurance that this matter will be
resolved over the near term or that the ultimate outcome of the matter will not
have a material adverse affect on the Company's financial condition and results
of operation.
In July 1999, MTL was served with a summons and complaint relating to a
replevin action commenced by a secured creditor of Community Clinical
Laboratories, Inc. ("CCL"). MTL purchased certain assets of CCL in September
1998. The replevin action seeks to allow the secured creditor to obtain
possession of certain equipment used by MTL in the operation of its business. If
the secured creditor is successful in obtaining possession of the equipment, the
operations of MTL would be adversely affected. The Company has retained legal
counsel and is in the process of responding to the action.
In October 1999, MTL determined that certain lenders of CCL held security
interests in the assets MTL purchased from CCL. MTL was not made aware of the
security interests, which relate to indebtedness of approximately $235,000, at
the time the assets were purchased and received representations and warranties
from CCL that the assets purchased were free and clear of any liens or
encumbrances other than those specifically disclosed. In the event that MTL
becomes responsible for the indebtedness, MTL will pursue its remedies against
CCL including right of offset against other amounts owed to CCL.
The Company is involved in certain claims and other legal actions arising
in the ordinary course of business. There can be no assurances that these
matters will be resolved on terms acceptable to the Company. In the opinion of
management, based upon advice of counsel and consideration of all facts
available at this time, the ultimate disposition of these matters will not have
a material adverse affect on the financial position, results of operations or
liquidity of the Company.
<PAGE>
9
NOTE G - INCOME TAXES
The Company's utilization of net operating loss carry forwards from
continuing and discontinued operations that have not been previously recognized
substantially eliminated the current periods income tax provision.
NOTE H - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
September 30,
-------------------------------
1999 1998
------------- --------------
(In Thousands)
<S> <C> <C>
Cash Paid for Interest $ 538 $ 670
Cash Flow Information for Discontinued Operations:
Operating Activities
Net Cash Used by Discontinued Operations (289) (718)
Investing Activities
Net Cash Used by Investing Activities of Discontinued Operations (31) (113)
Financing Activities
Net Cash Provided by Investing Activities of Discontinued Operations 87 407
------------ -------------
Net (Decrease) in Cash - Discontinued Operations (233) (424)
Cash at Beginning of Period - Discontinued Operations 61 (141)
Cash Provided by Continuing Operations 213 549
------------ -------------
Cash at End of Period - Discontinued Operations $ 41 $ (16)
============ =============
</TABLE>
<PAGE>
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Form 10-Q 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 can 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 Quarterly
Report, particularly in "Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Notes to Condensed
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 of
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.
RESULTS OF OPERATIONS
Three Months Ended September 30, 1999 and 1998
- ----------------------------------------------
Net sales for the three months ended September 30, 1999 increased 21% to
$4.2 million from $3.5 million during the same period the prior year.
Net sales increased primarily as a result of a greater number of punch
cards and other disposable supplies sold to pharmacies. MTS Packaging's customer
base continues to consolidate as a result of acquisitions that has increased the
number of pharmacies serviced by MTS Packaging. This consolidation has had a
favorable impact on the volume of product MTS Packaging sells to its existing
customers.
Cost of sales and services for the three months ended September 30, 1999
increased 5% to $2.2 million from $2.1 million during the same period the prior
year. Cost of sales and services as a percentage of sales decreased to 51.2%
from 59.2% during the same period the prior year. The decrease is primarily due
to certain fixed components of cost of sales and services not increasing as
revenue increased.
<PAGE>
11
Selling, general and administration expenses for the three months ended
September 30, 1999 increased 14% to $1.2 million from $1.0 million during the
same period the prior year. The increase resulted primarily from an increase in
personnel costs that resulted from the addition of personnel to accommodate
increased sales and services.
Depreciation and amortization expenses for the three months ended September
30, 1999 increased 3% to $255,000 from $248,000 during the same period the prior
year. This increase is a result of new assets being placed into service.
Interest expense for the three months ended September 30, 1999 increased 4%
to $296,000 from $284,000 during the same period the prior year. The increase
results from additional debt, which the Company incurred during the fourth
quarter of the previous fiscal year.
Six Months Ended September 30, 1999 and 1998
- --------------------------------------------
Net sales for the six months ended September 30, 1999 increased 15% to $8.1
million from $7.0 million during the same period the prior year.
Net sales increased primarily as a result of a greater number of punch
cards and other disposable supplies sold to pharmacies. MTS Packaging's customer
base continues to consolidate as a result of acquisitions that has increased the
number of pharmacies serviced by MTS Packaging. This consolidation has had a
favorable impact on the volume of product MTS Packaging sells to its existing
customers.
Cost of sales and services for the six months ended September 30, 1999
increased 5% to $4.2 million from $4.1 million during the same period the prior
year. Cost of sales and services as a percentage of sales decreased to 52.6%
from 57.9% during the same period the prior year. The decrease is primarily due
to certain fixed components of cost of sales and services not increasing as
revenue increased.
Selling, general and administration expenses for the six months ended
September 30, 1999 increased 20% to $2.3 million from $1.9 million during the
same period the prior year. The increase resulted primarily from an increase in
personnel costs that resulted from the addition of personnel to accommodate
increased sales and services.
Depreciation and amortization expenses for the six months ended September
30, 1999 increased 5% to $509,000 from $487,000 during the same period the prior
year. This increase is a result of new assets being placed into service.
Interest expense for the six months ended September 30, 1999 increased 4%
to $591,000 from $570,000 during the same period the prior year. The increase
results from additional debt, which the Company incurred during the fourth
quarter of the previous fiscal year.
Year 2000 Compliance
- --------------------
Introduction
The Company's year 2000 ("Y2K") compliance project is intended to determine
the readiness of the Company's business for the year 2000. The Company has
identified three areas where the Y2K problem creates risk to the Company. These
areas are a) internal information systems; b) system capabilities of third party
business with relationships with the Company, including product suppliers,
customers, service providers and companies that interface their software and
hardware products with products sold by the Company; and c) product liability
claims arising out of the non-performance of computer products sold by the
Company. Although the Company is currently addressing these areas, there can be
no assurance that its efforts will prevent all potential adverse consequences to
the Company resulting from any Y2K problem.
<PAGE>
12
Plan to Address Y2K Compliance
In December 1998, the Company formed a Y2K compliance project team to
develop an overall plan to address Y2K readiness issues. The plan was developed
in phases.
o Phase I
a) Identify all internal hardware and software systems that must be
compliant.
b) Appoint individuals within the Company to be responsible for
communication with third party businesses regarding Y2K
readiness.
c) Appoint individuals within the Company to be responsible for
evaluation of product liability issues that may exist regarding
products sold by the Company.
o Phase II - Identify Y2K problems that may exist in each risk area.
o Phase III - Repair, modify or replace systems that are determined to
be non-compliant.
o Phase IV - Test systems to confirm that any repairs, modification or
replacements have resulted in compliance.
State of Readiness
Internal Systems
----------------
Although the Company believes that the internal information systems in its
Medication Packaging and Dispensing Systems subsidiary are in a state of Y2K
readiness, there can be no assurance that the Company will not experience any
problems related to its Y2K readiness.
The internal information systems utilized in the Company's Clinical
Laboratory Services, MTL, business are not Y2K compliant. MTL's billing and
collection information system must be upgraded to Y2K compliance in order to
maximize the liquidation value of its account receivable. MTL has contracted
with third party software suppliers to ensure Y2K compliance before December 31,
1999, however, there can be no assurance that Y2K compliance will be achieved in
a timely manner.
Material Third Party Readiness
------------------------------
Individuals within the Company have been assigned responsibility for
communicating with material third party businesses with whom the Company has
business relationships and have completed a survey process. The Company has
received representations from third parties as to their Y2K readiness, however,
the Company has not independently verified these representatives and there can
be no assurance that material vendors and customers will not experience Y2K
related problems, which could have a material adverse affect on the Company.
Product Liability
Although the Company believes the products sold by the Medication Packaging
and Dispensing Systems subsidiary do not have Y2K issues associated with them,
there can be no assurance that the Company will not experience any problems
related to Y2K liability.
<PAGE>
13
The Services rendered by the Company's Clinical Laboratory Services
business are directly affected by the internal information systems utilized to
perform analytical laboratory tests. If the Company is not successful in
implementing Y2K compliant internal information systems in its Clinical
Laboratory Services business, it could adversely affect that business' ability
to perform diagnostic tests and provide the results of those test to its client
physicians.
The rights to sell the products of the Company's Health Care Information
Systems business were sold in May 1999. Any liabilities arising from Y2K issues
have been assumed by the buyer.
Notwithstanding the foregoing, there can be no assurance that the Company
will be successful in implementing its Y2K compliance project and that it will
not be adversely affected by the failure of third party suppliers or significant
customers to become Y2K compliant. Although the Company is taking steps to
address Y2K problems, if unexpected or unresolved Y2K problems develop, such
problems could have a material impact on the Company's results of operations,
liquidity and financial condition.
Cost of Project
Expenditures to date on Y2K compliance have not been material to the
Company's operation or financial condition. The Company does not anticipate any
material expenditures for Y2K compliance in its medication and dispensing
systems subsidiary.
LIQUIDITY AND CAPITAL RESOURCES
During the first six months of the current fiscal year, the Company had net
income from continuing operations of $413,000 compared to a net loss from
continuing operations of $38,000 the prior year. Cash provided by operating
activities of continuing operations was $723,000 during the six months ended
September 30, 1999 compared to $407,000 provided in the prior year. The Company
had working capital of $1,565,000 at September 30, 1999.
Cash was provided by operating activities of continuing operations during
the six months ended September 30, 1999 primarily due to profitable operations.
Investing activities used $308,000 during six months ended September 30,
1999 as a result of expenditures for capital equipment and product development.
Financing activities used $620,000 during the six months ended September
30, 1999 primarily as a result of payments made to the Company's principal
lenders. In addition, the operations of MTL required cash to support working
capital needs while potential buyers are identified or a liquidation of the
business occurs.
The Company's short-term and long-term liquidity is primarily dependent on
its ability to generate cash flow from operations. Inventory levels are not
expected to change significantly based upon the Company's current level of
operation. Increases in revenue have generally resulted in corresponding
increases in accounts receivable. Cash flow from operations is anticipated to
support an increase in accounts receivable.
The Company has several new product development projects underway that are
expected to be funded by cash flow from operations. These projects are monitored
on a regular basis to attempt to ensure that the anticipated costs associated
with them do not exceed the Company's ability to fund them from cash flow from
operations.
The Company believes that cash generated from operations will be sufficient
to meet the capital expenditures, product development and working capital needs
of MTS Packaging.
<PAGE>
14
Certain events of default may have occurred under the Company's loan
agreement with its bank. Although the Company has requested a waiver of these
events of default, there are no assurances that the waivers will be obtained. If
the bank elects to exercise its rights under the loan agreement regarding the
repayment of the indebtedness, the Company's results of operations, liquidity
and financial condition would be adversely affected.
MTL has entered into a Management Services Agreement with a potential buyer
of the business. The agreement provides for the potential buyer to loan or
advance funds to MTL for working capital. At September 30, 1999, MTL had
borrowed $120,000 from the potential buyer. The Company has determined that the
operations of MTL must be supported by the cash flow generated from the business
and advances from the potential buyer. In the event that operating costs exceed
cash flow from operations and advances, the Company is committed to a plan to
liquidate the business.
After the disposal of MTL, the Company will focus on its core business, MTS
Packaging, which has historically generated positive cash flow from operations.
As a result, management believes that certain administrative costs that were
previously required to support three separate businesses can be reduced.
<PAGE>
15
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security-Holders.
The Annual Meeting of the Shareholders of the Company was held on September
28, 1999. Messrs. Todd E. Siegel, David Kazarian, Michael Conroy, and John
Stanton were elected directors of the Company for one-year terms. There were
4,903,384 common shares and 6,500,000 shares of voting preferred shares voted in
favor of Todd E. Siegel's appointment; 104,934 common shares and 0 voting
preferred shares voted against the appointment and 267,520 common shares and 0
voting preferred shares abstained. There were 4,991,284 common shares and
6,500,000 shares of voting preferred shares voted in favor of Michael P.
Conroy's appointment; 17,034 common shares and 0 voting preferred shares voted
against the appointment and 267,520 common shares and 0 voting preferred shares
abstained. There were 4,910,809 common shares and 6,500,000 shares of voting
preferred shares voted in favor of David Kazarian's appointment; 97,509 common
shares and 0 voting preferred shares voted against the appointment and 267,520
common shares and 0 voting preferred shares abstained. There were 4,993,284
common shares and 6,500,000 shares of voting preferred shares voted in favor of
John Stanton's appointment; 15,034 common shares and 0 voting preferred shares
voted against the appointment and 267,520 common shares and 0 voting preferred
shares abstained.
Grant Thornton LLP was ratified as the Company's independent certified
public accountants for fiscal year 2000 with 5,023,572 shares of Common Stock
and 6,500,000 shares of Voting Preferred Stock voting in favor, 30,531 shares of
Common Stock and zero shares of Voting Preferred Stock voting against, and
220,735 shares of Common Stock and zero shares of Voting Preferred Stock
abstaining.
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
10 - Management Service Agreement dated September 8, 1999
27 - Financial data schedule as of September 30, 1999 filed
herewith (for SEC use only).
B. Reports on Form 8-K
None
Signature
- ---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MEDICAL TECHNOLOGY SYSTEMS, INC.
Date: November 12, 1999 By: /s/ Michael P. Conroy
----------------- --------------------------------------------------
Michael P. Conroy
Vice President & Chief Financial Officer
(Principal Financial and Chief Accounting Officer)
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED FINANCIAL STATEMENTS OF MEDICAL TECHNOLOGY SYSTEMS, INC. FOR THE SIX
MONTHS ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
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<NAME> Medical Technology Systems, Inc.
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<FISCAL-YEAR-END> Mar-31-2000
<PERIOD-START> Apr-1-1999
<PERIOD-END> Jun-30-1999
<EXCHANGE-RATE> 1.00
<CASH> 0
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<RECEIVABLES> 2,789
<ALLOWANCES> (241)
<INVENTORY> 2,034
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<PAGE>
1
MANAGEMENT AGREEMENT
This Management Agreement (the "Agreement") dated as of September 8, 1999,
(the "Effective Date") by and between Brittany Leigh, Inc., a Florida
corporation ("MANAGER") and Medical Technology Laboratories, Inc., a Florida
corporation ("LAB") (singularly "party", collectively "parties").
RECITALS:
A. LAB owns and operates a Medicare-certified clinical blood laboratory
operating in Pinellas County, Florida (the "laboratory").
B. MANAGER is in the business of providing management services.
C. LAB desires to obtain the professional assistance of MANAGER in
performing the management functions of its organization on the terms and subject
to the conditions set forth herein.
D. MANAGER and LAB have determined the fair market value of services to be
rendered and, based on this fair market value, have established a relationship
which permits all parties to devote their skills and expertise to the
appropriate responsibilities to be performed by the parties.
NOW THEREFORE, in consideration of the mutual covenants and agreements
contained herein, which includes the RECITALS hereto, LAB hereby agrees to
appoint MANAGER to provide the Management Services (as hereinafter defined), and
MANAGER agrees to provide such Management Services, on the terms and conditions
provided in this Agreement.
ARTICLE 1
1.1 "Affiliate" of a corporation means (a) any person or entity directly or
indirectly controlled by, or under common control with, such corporation, (b)
any person or entity directly or indirectly controlling such corporation.
1.2 "Management Services" shall be those services provided by MANAGER to
LAB pursuant to this Agreement, including, but not limited to, the following:
(a) Implements LAB's policies and procedures.
(b) Approves and supports the implementation of marketing and sales
plans to expand base business as approved by LAB.
<PAGE>
2
(c) Approves sales proposals to assure profitability and compliance
with all regulations as approved by LAB.
(d) Directs quality control and quality assurance programs to
maintain necessary certification and licenses.
(e) Continue training programs to maintain the highest personnel
performance standards.
(f) Directs and coordinates the Laboratory services performed,
including, but not limited to drawing, collecting, processing and
testing of specimens, timely reporting of testing results to
physicians, timely and accurate processing and transition of
bills to the proper payor source, management of materials and
supplies necessary to continue operations and proper performance
of all assets required to operate business.
(g) Confers with LAB and reviews activity, operating and sales
reports to determine changes in programs or operations.
(h) Implements compliance related directives throughout the
Laboratory, which outline policy, program or operational changes.
(i) Coordinates with compliance officer to assure strict compliance
to all laws, rules and regulations for all aspects of the
Laboratory.
ARTICLE 2
2.1 Independent Relationship. LAB and MANAGER intend to act and perform as
independent contractors. This Agreement does not create a partnership, joint
venture, agency or employment relationship between the parties. Each party shall
be responsible solely for and shall comply with all state and federal laws
pertaining to employment taxes, income withholding, unemployment compensation
contributions and other employment related statutes applicable to that party.
2.2 MANAGER Matters. Matters involving the internal agreements and finances
of MANAGER, including whether MANAGER=s services to LAB are provided by
MANAGER=s employees or subcontractors (including, without limitation, any
wholly-owned subsidiary of MANAGER), and payroll and accounts payable
administration, shall remain the sole responsibility of MANAGER.
2.3 No Patient Referrals. The parties agree that the benefits to MANAGER
hereunder do not require, are not payments to induce, and are not in any way
contingent upon, the referral of patients or any other arrangement for the
provision of any item or service offered by LAB, or its Affiliates, to the
patients of LAB in any facility controlled, managed or operated by LAB or its
Affiliates. Neither party hereto shall refer any patient or referral source
directly or indirectly to the other party during the term of this Agreement. The
parties to this Agreement agree that no payments made hereunder are made in
return for, or to induce any person to:
<PAGE>
3
(a) Refer an individual to anyone for the furnishing or arranging for
the furnishing of items or services for which payment may be made
in whole or in part under Medicare or Medicaid, or
(b) Purchase, lease, order, or arrange for or recommend purchasing,
leasing or ordering any good, facility, services, or item for
which payment may be made in whole or in part under Medicare or
Medicaid.
2.4 Effects of Certain Legislative Changes. During the term of this
Agreement, and notwithstanding any other provisions of this Agreement, the
parties hereto agree that, if any federal, state or local government or agency
passes, issues, promulgates, or modifies any law, court decision, rule,
regulation, standard or interpretation ("Legislative Amendment") that affects
the operations of the laboratory, the parties will abide by said Legislative
Amendment. Further, the parties agree that the Agreement shall be construed as
if amended to comply therewith, unless the parties agree that such Legislative
Amendment requires specific modification of this Agreement, in which case the
parties shall cooperate in negotiating the required modification(s).
ARTICLE 3
APPOINTMENT FOR MANAGEMENT SERVICES
3.1 LAB hereby appoints MANAGER as its sole and exclusive provider of all
Management Services. MANAGER agrees that the purpose and intent of this
Agreement is to relieve LAB to the maximum extent possible of such aspects of
LAB's operation, with MANAGER assuming responsibility and all necessary
authority to perform the Management Services. MANAGER shall consult with LAB's
appointed representative prior to making decisions, which financially affect the
laboratory. MANAGER shall further be available to consult with the board of
directors, officers and department heads of LAB concerning matters pertaining to
the organization of the staff, the fiscal policy of LAB, the relationship of LAB
with its employees, and, in general, important matters of concern in the
business affairs of LAB as reasonably requested. MANAGER shall assist LAB in the
preparation of, and shall review, financial statements of LAB on a monthly basis
with LAB and shall advise LAB with respect thereto. MANAGER shall direct and
manage activities of Laboratory with the objective of obtaining optimum
efficiency and economy of operations while maximizing profits by performing the
duties described in Section 1.2 personally or through LAB supervisors.
3.2 LAB will maintain responsibility for all compliance related matters and
will implement any procedures or policies it deems necessary to remain compliant
with all state and federal rules and regulations. The cost of said compliance
matters shall be included in the current operating expenses of the laboratory.
LAB will consult with MANAGER prior to implementing any changes that may have a
material effect.
<PAGE>
4
ARTICLE 4
OBLIGATIONS AND REPRESENTATIONS OF LAB AND MANAGER
4.1 Representations of LAB.
4.1.1 LAB represents that it is certified by Medicare and the
State of Florida to operate a clinical blood laboratory, and
that LAB shall use all reasonable efforts to maintain, in
good standing, such certification. Prior to executing this
Agreement, LAB shall provide MANAGER with a copy of LAB's
current certification.
4.1.2 LAB represents that, to its knowledge, there are no pending
or threatened legal actions or investigations by
governmental authorities other than those listed in Exhibit
4.1.2 that would affect the ongoing operations of the
laboratory.
4.2 Representations of MANAGER. Manager represents that there are no
pending or threatened legal proceedings or investigations, which would prohibit
MANAGER from performing the duties outlined herein, or which would adversely
affect MANAGER'S ability to perform such duties.
4.3 Compliance with Laws. Both parties agree to comply with all federal,
state, county and municipal laws, rules, ordinances and regulations applicable
to the operation of the laboratory.
4.4 Cooperation with Management Functions. LAB shall direct its employees
and agents to cooperate in every manner reasonably requested by MANAGER in
connection with MANAGER performing its obligations hereunder. All LAB employees
shall be instructed that they are to answer to MANAGER during the term of the
Agreement, provided that:
(a) nothing shall prevent LAB from communicating with such employees
in order to determine how matters are proceeding with respect to
this Agreement or the operation of the laboratory.
(b) MANAGER conducts itself in accordance with employment practices
and standards acceptable to LAB and in accordance with this
Agreement.
<PAGE>
5
4.5 Required Disclosures. If either party becomes aware of any of the
following events, it shall notify the other party within twenty-four (24) hours
pursuant to Section 9.18.
4.5.1 Any legal proceeding against either party relating to
either party is threatened or filed in any federal or state
court;
4.5.2 Either party (or any Affiliate thereof) becomes the subject
of any new audit or similar proceeding by any federal,
state, or local agency, or any Medicare or Medicaid carrier
or intermediary;
4.5.3 LAB's Medicare certification as a laboratory provider is
suspended, revoked, terminated, or made subject to an
investigation or terms of probation of other restrictions;
4.5.4 An event occurs that substantially interrupts all or a
portion of LAB's operations.
4.5.5 LAB or MANAGER receives notice that its professional or
general liability insurance is to be modified or canceled;
4.5.6 Either party or any Affiliate thereof is sanctioned by the
Medicare or Medicaid programs or excluded from participating
in those programs;
4.5.7 Either party files a petition for voluntary bankruptcy
(other than the currently pending chapter 11 case of LAB) or
a third party files an involuntary bankruptcy petition
against either LAB or MANAGER.
4.6 Indemnity.
4.6.1 Claims Covered. Each party shall defend, indemnify and hold
harmless the other party, the other party's Affiliates, and
their officers, directors, shareholders, partners, employees
and agents, and shall pay, as incurred, all damages, costs,
fees and expenses (including reasonable attorney's fees)
(collectively, ALosses") associated with any claim, action,
suit or other proceeding that results from any breach by the
indemnifying party of any representation, warranty or other
obligation contained in this Agreement. In addition, MANAGER
shall defend, indemnify and hold harmless LAB and its
Affiliates, officers, directors, shareholders, partners,
employees and agents, and shall pay, as incurred, all Losses
arising from MANAGER=S actions and omissions in providing
the Management Services.
4.6.2 Indemnity Procedures. The party to be indemnified shall (a)
provide to the indemnifying party notice of any claim of
indemnity promptly after receiving knowledge of same, (b)
reasonably cooperate in the defense and settlement of the
claim, and (b) tender sole control of the defense or
settlement of such claim to the indemnifying party;
provided, however, that (1) the indemnifying party shall not
admit or impose any liability upon the indemnified party, or
its Affiliates, without the prior written consent of the
indemnified party, or its Affiliates (as the case may be);
(2) the indemnifying party shall not enter into any
settlement without prior written notice to the indemnified
party, (3) the indemnified party may participate in the
defense of any claim with counsel of its choice (and at its
sole expense), and (4) the indemnified party may prohibit
indemnifying party from entering into any proposed
settlement, in which case the indemnifying party's indemnity
obligation under this Section shall be limited to the amount
for which the indemnifying party would have been liable had
the indemnified party consented to the proposed settlement.
<PAGE>
6
4.7 Confidentiality. Each party agrees that all information relating
to the LAB and the laboratory (collectively, AConfidential
Information") is considered to be disclosed to the other in
confidence. Neither party will disclose any information that it
receives from the other party relating to any of the foregoing,
or use the same for its own benefit or for the benefit of any
third party, except (a) for the purposes of complying with the
terms of this Agreement and (b) either party may disclose
confidential information to SouthTrust Bank, National
Association, and any participant in the loans heretofore obtained
by LAB and its Affiliates from SouthTrust, unless that
information becomes publicly known, was already known to the
party receiving it, or the party receiving it is granted
permission to disclose such information by the other party. In
furtherance of the foregoing, MANAGER agrees that, if this
Agreement is terminated by either party (other than in connection
with the Closing, as hereinafter defined), MANAGER will not use
any of the Confidential Information in any manner which is
competitive with the operations or activities of LAB in any
market currently served by LAB. The parties agree to make
appropriate arrangements with their respective personnel to
ensure the implementation of this undertaking. This Section 4.7
shall survive the termination or expiration of this Agreement and
any letter of intent or asset purchase agreement which may be
entered into by the parties hereto, except to the extent
expressly provided in any subsequent written agreement entered
into by the parties hereto.
ARTICLE 5
CLOSING CONTINGENCY
Scheduled Closing. The parties acknowledge that this Agreement is being
entered into in connection with the MANAGER's intention to acquire certain
assets of LAB on the terms and subject to the conditions provided for in a
letter of intent between the parties dated as of the date hereof (the "Letter of
Intent"). The Letter of Intent provides for the good faith negotiation of an
asset purchase Agreement (the "Asset Purchase Agreement") within 10 days after
the date hereof, and sets forth the conditions precedent to the parties'
respective obligations to close the transaction contemplated in the Letter of
Intent. The parties acknowledge further that one of the conditions precedent to
closing is the receipt and validation of the MANAGER's Medicare Provider Number,
which MANAGER hereby agrees to take all reasonable actions, and to use its best
efforts, to obtain as quickly as possible following the execution and delivery
of this Agreement. If for any reason the closing of the transaction contemplated
in the Letter of Intent (the "Closing") shall not have occurred within ninety
(90) days after the date hereof, LAB may immediately give MANAGER ten (10) days
notice of the termination of this Agreement and that the MANAGER is to withdraw
from all functions being carried out under this Agreement and the parties will
make reasonable efforts to facilitate an appropriate transition in such event.
If MANAGER is not able to obtain a Medicare Provider Number within ninety (90)
days, but LAB has reasonable assurances, determined in its sole discretion, from
the government agency issuing such licenses that a provider number will be
issued within a reasonable time, then LAB may extend the Closing date under the
Asset Purchase Agreement, provided, that, from and after such 90th day, MANAGER
provides its own working capital to support the operation of the laboratory and
shall no longer use the accounts receivable of LAB generated prior to the
execution of this Agreement to fund the laboratory's operations.
<PAGE>
7
If the Asset Purchase Agreement is terminated in accordance with its terms
by MANAGER, MANAGER shall give LAB ten (10) days advance written notice of such
termination and MANAGER's withdrawal from all functions being carried out under
this Agreement, and the parties will make reasonable efforts to facilitate an
appropriate transition in such event.
5.1 Return of Materials Upon Termination. Upon any termination of this
Agreement, MANAGER shall promptly return to LAB all materials in its possession
or control involving any Confidential Information, knowledge or data including,
but not limited to, any papers, files, records, proposals, policy or procedural
manuals, forms, documents, or financial records, products, or sales records.
MANAGER agrees to represent to LAB in writing, at any time upon request, that it
has complied with the provisions of this Section 5.1 requiring the return of
materials.
5.2 Reasonableness of Restrictive Covenants/Irreparable Injury. The parties
acknowledge and agree that (a) the Confidential Information is of unique and
special character that gives this information a special and proprietary value to
LAB; (b) the restrictive covenants contained herein (and, in particular, in
Section 4.7 hereof) are necessary to protect the legitimate business interests
of LAB and a violation of these restrictive covenants would cause irreparable
injury and loss to LAB; and (c) the restrictive covenants contained in this
Agreement are reasonable with respect to duration, scope, and their effects on
LAB and public health, safety, and welfare.
5.3 Non-Competition. The parties acknowledge and agree that the Asset
Purchase Agreement will provide for a non-competition agreement to be executed
and delivered by LAB at the Closing, pursuant to which LAB will agree that,
effective upon consummation of the Closing and continuing for a period of two
(2) years thereafter, without the prior written consent of MANAGER, it will not,
directly or indirectly, as an agent, consultant or independent contractor or in
any other capacity: (a) engage in any business or activity that is competitive
with the operation of the laboratory; (b) accept employment with or render
services to a competitor of the laboratory; (c) contact, solicit or attempt to
solicit or accept business that is competitive with the operation of the
laboratory from any of MANAGER's customers; or (d) own or operate a medical
laboratory.
5.4 Construction. If a court of competent jurisdiction determines the
restrictive covenants, or provision thereof, are unreasonable, or are otherwise
unenforceable, the parties desire such court to enforce such covenant, or
portion thereof, to the fullest extent permissible by the laws of the State of
Florida. The invalidity or unenforceability of any provision of the restrictive
covenants shall not limit or impair the operation or validity of any other
provision of the restrictive covenants. The restrictive covenants have been
mutually agreed upon by each of the parties, both as to its substance and its
form, and there shall not be applied a rule of law or construction whereby the
restrictive covenants or any of their provisions are construed in favor of or
against either party by reason of who prepared the restrictive covenants.
<PAGE>
8
ARTICLE 6
FINANCIAL ARRANGEMENTS
6.1 Management Services. During the term of this Agreement, MANAGER and LAB
shall collect the outstanding accounts receivable of LAB in the ordinary course
of business. The net proceeds of accounts receivable created prior to the
effective date of this Agreement (the "Existing AR") will be applied ninety-five
percent (95%) to pay current operating expenses as listed in Exhibit B hereof
and five percent (5%) payable to LAB; provided, that MANAGER shall be entitled
to apply such net proceeds from the Existing AR to current operating expenses
only to the extent that new accounts receivable created during the term of this
Agreement ("New AR"), as of the date of such application, equal or exceed 150%
of the amount of the collections from Existing AR, which have been used to fund
operating expenses of the laboratory, calculated on a cumulative basis.
6.2 The Letter of Intent provides (and the Asset Purchase Agreement will
provide) that (a) all New AR that are outstanding as of the Closing will be
included in the assets to be acquired by the MANAGER pursuant to the Asset
Purchase Agreement, and (b) the amount of the Existing AR collected during the
term of this Agreement and used to fund operating expenses as provided above
will be added to the purchase price to be paid by MANAGER to LAB and will be
payable in the manner and at the times described in the Letter of Intent and in
the Asset Purchase Agreement.
6.3 To assure the availability of sufficient funds with which to maintain
the operation of the laboratory, MANAGER will, at the Effective Date of this
Agreement, deposit in LABS operating bank account the sum of $100,000.00. Said
funds shall be drawn upon as needed by MANAGER at MANAGER's sole discretion to
make up any deficiency between accounts receivable collections and operating
expenses of LAB. Should said amount be fully utilized by MANAGER, then MANAGER
will deposit (from its own funds) additional funds (or will otherwise utilize
its own funds) as required for continuing operations of the LAB.
6.4 During the term of this Agreement, all cash collected from accounts
receivable shall be deposited in LAB's bank account, which the parties hereby
agree may be part of a cash management system involving a lockbox account system
maintained by SouthTrust. Disbursements from said account shall require the
signatures of both LAB and MANAGER; however, LAB shall transfer to an account
controlled by MANAGER (but to be used solely for paying operating expenses of
the laboratory) the sum of $30,000.00 from such accounts receivable collections,
to be utilized at the sole discretion of MANAGER for the payment of operating
expenses, and upon receipt from MANAGER of an accounting of amounts disbursed
from said account acceptable to LAB, shall replenish said account from
collections from Existing AR or NEW AR. MANAGER will provide an accounting of
all disbursements from said account to LAB on a weekly basis during the term of
this Agreement.
<PAGE>
9
6.5 During the term of this Agreement, purchase orders for materials and
services required to operate the laboratory that are less than $40,000.00 for
laboratory reagents and supplies and $10,000.00 for all other items shall
require the approval of MANAGER. Any purchase orders in excess of the amounts
set forth above shall require the approval of both LAB and MANAGER. MANAGER
shall indemnify and hold harmless LAB from and against any liability of any kind
arising from any purchase order (regardless of amount) authorized by MANAGER
without the prior written consent of LAB.
6.6 The Asset Purchase Agreement will provide that after the Closing, LAB
shall have access to the computer systems and other information (and personnel
as mutually agreed) required to collect the then remaining Existing AR.
6.7 The Asset Purchase Agreement will provide that after the Closing, cash
collected from the New AR purchased by MANAGER pursuant to the Asset Purchase
Agreement, will continue to be deposited in the LAB's bank account. MANAGER
shall determine the amount of said deposits on a daily basis and notify LAB of
said amounts. LAB shall then pay said amounts to MANAGER within three (3) days
of receipt of said notification. Notwithstanding the foregoing, the Asset
Purchase Agreement and the other documents referred to therein will permit LAB,
its successors and assigns, to set-off any amounts owed by MANAGER to such party
against amounts owed by LAB to MANAGER pursuant to this provision.
6.8 Both parties agree that the amount of accrued, but unpaid, wages due
employees and the amount of accrued, but unpaid, rent due on the effective date
of this Agreement (aggregating $204,753.55) shall be considered operating
expenses and listed on Exhibit 6.8, and will be paid from the sources of funds
described above. However, at the Closing, said amounts, to the extent paid
during the term of this Agreement, shall be deducted from all amounts due
pursuant to Section 6.2.
6.9 [RESERVED]
6.10 LAB shall provide MANAGER, on Exhibit 6.10, with the amount of all
unpaid wages, rents and outstanding checks as of the date of this Agreement.
6.11 MANAGER will not enter into any contracts or agreements on behalf of
LAB without LAB=s prior written consent.
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ARTICLE 7
INSURANCE
7.1 Insurance to be Maintained. Throughout the Term, both parties hereto
shall maintain such insurances as are reasonably requested by the other party
and, in any event, insurance in such amounts and from reputable insurers as
necessary to cover their respective activities under this Agreement. Each party
has consulted with its applicable insurance agency and all carriers to inform
them of the relationship between the parties and has secured adequate and
appropriate insurance and coordination thereof. The parties will work together
with their applicable insurance agents and carriers and when appropriate and
possible will have one another named as insureds on applicable policies and
otherwise follow good insurance practices.
ARTICLE 8
TERM AND TERMINATION
8.1 Term of Agreement. The term of this Agreement shall commence on the
Effective Date and shall extend until the first to occur of the following: (a)
the occurrence of the Closing, (b) notice is given by either party of the
termination of the Asset Purchase Agreement in accordance with its terms, (c)
September 21, 1999, unless the Asset Purchase Agreement has been executed and
delivered by all parties thereto on or prior to such date, or (d) this Agreement
is terminated in accordance with Section 8.2 below.
8.2 Termination. This Agreement may be terminated as follows:
8.2.1 In the event of the filing of a petition in voluntary
bankruptcy or an assignment for the benefit of creditors by
LAB, or upon other action taken or suffered, voluntarily,
under any federal or state law for the benefit of creditors
by LAB, except for (a) the filing of a petition in
involuntary bankruptcy against LAB which is dismissed within
thirty (30) calendar days thereafter, or (b) a voluntary
bankruptcy case (including the currently pending chapter 11
case of LAB) which provides for the sale of assets
contemplated in the Letter of Intent and in which the
Bankruptcy Court approves this Agreement, either party may
give written notice of the immediate termination of this
Agreement in accordance with Section 9.18 herein.
8.2.2 In the event that either party shall default in the
performance of any material duty or obligation imposed upon
it by this Agreement, or otherwise breach any provision of
this Agreement, and such default or breach shall continue
for a period of ten (10) calendar days after written notice
thereof has been given to the breaching party, the
non-breaching party may give notice of the immediate
termination of this Agreement in accordance with Section
9.18 herein.
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8.2.3 Immediate Termination. Unless otherwise expressly provided
herein, this Agreement may be terminated immediately by
either party by written notice pursuant to Section 9.18
herein upon the occurrence of any of the following events:
(a) any attempted assignment of this Agreement by either
party without the prior written consent of the other;
(b) either party fails to make any of the required
disclosures provided for in Section 4.5 herein;
(c) LAB's Medicare certification as a laboratory is
revoked, suspended, restricted, or limited in any way;
(d) either party is sanctioned by the Medicare or Medicaid
programs or excluded from participating in those
programs.
8.2.4 Termination by LAB. This Agreement may be terminated
immediately by LAB, by written notice to MANAGER pursuant to
Section 9.18, if:
(a) MANAGER fails to fund any short fall in operating
expenses pursuant to Section 6.3;
(b) MANAGER has not obtained its Medicare Provider Number
within 90 days after the Effective Date of this
Agreement; or
(c) MANAGER fails to create and maintain a level of New AR
in an amount at least equal to 150% of the amount of
collections on Existing AR for the first thirty (30)
days and 150% thereafter which have been used to fund
operating expenses of the laboratory in accordance with
this Agreement.
ARTICLE 9
GENERAL PROVISIONS
9.1 Time is of the Essence. In construing and applying the terms and
provisions of this Agreement, time shall be of the essence in each instance.
9.2 Execution. This Agreement shall be deemed to have been "Executed" when
the last party to sign this Agreement has affixed his, her or its signature at
the end of this Agreement. Notwithstanding the foregoing, the Effective Date of
this Agreement is the date first written above.
9.3 Good Faith. All parties to this Agreement specifically agree to act in
good faith in interpreting this Agreement and in carrying out their respective
duties and obligation hereunder.
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12
9.4 Florida Law. This Agreement shall be construed pursuant to the laws of
the State of Florida.
9.5 Binding Effect. This Agreement shall be binding upon and shall inure to
the benefit of the respective parties hereto, their legal representatives,
successors and assigns, provided, however, notwithstanding any provision of this
Agreement to the contrary, no party may assign any of its rights, obligations or
interest in this Agreement without the prior written consent of all parties to
this Agreement.
9.6 Further Assurances. Each party shall execute any reasonable additional
documents or instruments which are provided to the party by another party or
parties and which are reasonably necessary to (i) carry out or facilitate the
understanding represented by this Agreement or (ii) more clearly establish the
rights of one or more parties under this Agreement.
9.7 Paragraph Headings. Each paragraph heading contained in this Agreement
is used for convenience purposes only and is not intended to define, expound
upon or limit the provisions, which immediately follow such paragraph heading.
9.8 Singular and Plural. Any reference to a word in this Agreement shall
include the plural, singular, masculine, feminine and/or neuter, unless the
context in which the word appears clearly indicates to the contrary, in which
instance such context shall control interpretation of the word.
9.9 Multiple Counterparts. This Agreement may be executed in multiple
counterparts, each of which shall be considered an original, and all of which
shall constitute but a single agreement notwithstanding that each such
counterpart is executed on a different date.
9.10 Preparation of Agreement. Because each party has participated fully in
the drafting and preparation of this Agreement, the Agreement shall not be
construed more strongly against any party.
9.11 Representation by Independent Legal Counsel. Each party to this
Agreement hereby acknowledges and confirms that he, she or it has had an
opportunity to retain independent legal counsel to independently advise that
party of the legal consequences of the Agreement to that party. Each party to
the Agreement further acknowledges and confirms that each party to the Agreement
received the strong recommendation by all other parties to the Agreement that
each party should retain separate and independent legal counsel to advise each
party of the legal consequences of the Agreement to that party.
9.12 Costs and Attorneys= Fees. If the obligations of the party(s)
expressed in this Agreement are the subject of arbitration and/or litigation,
the prevailing party(s) in such arbitration and/or litigation shall be entitled
to recover from any other party(s) who loses to the prevailing party(s) in such
arbitration and/or litigation all reasonable costs and expenses of such
arbitration and/or litigation, including reasonable attorneys' fees and costs of
appeal. The authority presiding over such arbitration and/or litigation shall
determine which party(s), if any, is the prevailing party(s) and which party(s),
if any, is the losing party(s).
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13
9.13 Merger. All prior negotiations and oral agreements between the parties
with respect to the subject matter hereof hereby are merged and extinguished
into this Agreement. Notwithstanding the foregoing, the Letter of Intent shall
survive the execution of this Agreement and shall not be merged into this
Agreement.
9.14 Survival. Unless otherwise expressly provided in this Agreement, all
rights, obligations and other terms and conditions specifically stated in this
Agreement shall survive the execution of this Agreement.
9.15 Severability. If any one or more of the provisions contained in this
Agreement for any reason are held to be invalid, illegal, or unenforceable in
any respect, such invalidity, illegality or unenforceability shall not affect
any other provision hereof and this Agreement shall be construed as if such
invalid, illegal or unenforceable provision had never been contained herein.
9.16 Dispute Resolution. In the event of any dispute between the parties
arising out of this Agreement resulting in litigation, it is agreed that the
venue of any such litigation shall be in the Circuit Court of the 6th Judicial
Circuit in and for Pinellas County and that the prevailing party shall be
entitled to collect from the losing party all of its costs and expenses
including reasonable attorneys= fees.
9.17 Any notice that may be required under the terms of the Agreement shall
be made in writing and mailed by certified mail or overnight courier to the
parties at the following address.
If to LAB:
Todd Siegel
Medical Technology Laboratories, Inc.
12920 Automobile Boulevard
Clearwater, FL 33762
If to MANAGER:
Brittany Leigh, Inc.
Edwin B. Salmon, Jr.
112 Homeport Drive
Palm Harbor, FL 34683
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement
effective as of the date first set forth above.
BRITTANY LEIGH, INC. (MANAGER)
a Florida corporation
Attest: ____________________________ By: _______________________________
, Secretary
Its: ______________________________
MEDICAL TECHNOLOGY LABORATORIES, INC.
(LAB)
a Florida corporation
Attest: _____________________________ By: _______________________________
, Secretary
Its: ______________________________
