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 December 31, 1998 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 _____
10Q-1
<PAGE>
i
MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
Index
Part I - Financial Information
- ------------------------------
Item 1. Financial Statements
Consolidated Balance Sheets -
December 31, 1998 and March 31, 1998............................ 1
Consolidated Statements of Operations -
Three Months and Nine Months Ended December 31, 1998 and 1997.. 2
Consolidated Statements of Changes in Stockholders' Equity (Deficit) -
Nine Months Ended December 31, 1998............................ 3
Consolidated Statements of Cash Flow -
Nine Months Ended December 31, 1998 and 1997................... 4
Notes to Consolidated Financial Statements....................... 5 - 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 10 - 16
Part II - Other Information
- ---------------------------
Item 6. Exhibits and Reports on Form 8-K................................ 17
Signature....................................................... 17
<PAGE>
1
MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1998
Item 1. Financial Statements
PART I - FINANCIAL INFORMATION
MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
ASSETS
<TABLE>
<CAPTION>
December 31, March 31,
1998 1998
-------------- -------------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash $ 540 $ 324
Accounts Receivable, Net 6,163 5,277
Inventories 2,625 2,481
Prepaids and Other 324 206
-------------- --------------
Total Current Assets 9,652 8,288
Property and Equipment, Net 3,681 3,173
Other Assets, Net 5,304 4,301
-------------- --------------
Total Assets $ 18,637 $ 15,762
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current Maturities of Long-Term Debt $ 1,668 $ 625
Accounts Payable-Trade and Accrued Liabilities 6,288 4,811
-------------- --------------
Total Current Liabilities 7,956 5,436
Liabilities Subject to Compromise 0 826
Long-Term Debt, Less Current Maturities 17,754 15,613
-------------- --------------
Total Liabilities 25,710 21,875
-------------- --------------
Stockholders' Equity (Deficit):
Voting Preferred Stock 1 1
Common Stock 62 62
Capital in Excess of Par Value 8,588 8,588
Retained Earnings (Deficit) (15,393) (14,433)
Less: Treasury Stock (331) (331)
-------------- --------------
(7,073) (6,113)
-------------- --------------
Total Liabilities and Stockholders' Equity $ 18,637 $ 15,762
============== ==============
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
2
MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
1998 1997 1998 1997
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Revenue:
Net Sales and Services $ 10,028 $ 5,551 $ 25,467 $ 16,309
Costs and Expenses:
Cost of Sales and Services 5,128 3,085 13,828 8,889
Selling, General and Administrative 4,659 2,248 11,195 6,660
Depreciation and Amortization 390 387 1,115 1,134
Interest, Net 336 248 951 805
------------- -------------- ------------- --------------
Total Costs and Expenses 10,513 5,968 27,089 17,488
------------- -------------- ------------- --------------
Loss Before Income Taxes and Extraordinary Gain (485) (417) (1,622) (1,179)
Income Taxes Recovered 0 (270) 0 (270)
------------- -------------- ------------- --------------
Loss Before Extraordinary Gain (485) (147) (1,622) (909)
Extraordinary Gain on Forgiveness of Debt 0 0 662 0
------------- -------------- ------------- --------------
Net Loss $ (485) $ (147) $ (960) $ (909)
============= ============== ============= ==============
Earnings (Loss) Per Basic and Diluted Common Share:
Loss Before Extraordinary Gain $ (0.08) $ (0.02) $ (0.27) $ (0.15)
Extraordinary Gain On Debt Forgiveness 0.00 0.00 0.10 0.00
------------- -------------- ------------- --------------
Net Loss per Basic and Diluted Common Share $ (0.08) $ (0.02) $ (0.17) $ (0.15)
============= ============== ============= ==============
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
3
MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
NINE MONTHS ENDED DECEMBER 31, 1998
(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, 1998 6,129,673 $ 62 $ 8,588 $ (14,433) $ (331) $ (6,114)
Net Loss for Nine Months
Ended December 31, 1998 (960) (960)
---------------------------------------------------------------------------------------------
Balance, December 31, 1998 6,129,673 $ 62 $ 8,588 $ (15,393) $ (331) $ (7,074)
=========== ============= ============= ============== ============= =============
VOTING PREFERRED STOCK
---------------------------------------------------------------------------------------------
Numbers Par
of Value
Shares
----------- -----------
Balance, March 31, 1998 6,500,000 $ 1 $ 1
----------- ----------- ------------
Balance, December 31, 1998 6,500,000 $ 1 $ 1
----------- ----------- ------------
Total Stockholders' Equity
------------
(Deficit), December 31, 1998 $ (7,073)
============
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
4
MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
December 31,
1998 1997
------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Operating Activities:
Net Loss $ (960) $ (909)
Adjustments to Reconcile Net Income (Loss) to Net Cash
Provided by Operating Activities:
Depreciation and Amortization 1,115 1,134
Extraordinary Gain on Debt Forgiveness (662) 0
Legal Settlement 215 0
(Increase) Decrease in:
Accounts Receivable (886) (339)
Inventories (144) (360)
Prepaids and Other (113) 315
Loss On Early Retirement of Fixed Assets 22 46
Increase (Decrease) in:
Accounts Payable and Other Accrued Liabilities 1,710 540
---------------- ----------------
Total Adjustments 1,257 1,336
---------------- ----------------
Net Cash Provided by Operating Activities 297 427
---------------- ----------------
Investing Activities
Expended for Property and Equipment (325) (279)
Proceeds From Disposition of Property and Equipment 0 7
Acquisition, Net of Cash Acquired 0 (195)
Expended for Product Development (227) (273)
Expended for Other Assets (99) (106)
---------------- ----------------
Net Cash Used By Investing Activities (651) (846)
---------------- ----------------
Financing Activities
Payments on Notes Payable, Long-Term Debt (280) (303)
Proceeds from Borrowing on Notes Payable and Long-Term Debt 850 51
Issuance of Common Stock 0 157
---------------- ----------------
Net Cash Provided (Used) by Financing Activities 570 (95)
---------------- ----------------
Net Increase (Decrease) in Cash 216 (514)
Cash at Beginning of Period 324 616
---------------- ----------------
Cash at End of Period $ 540 $ 102
================ =================
Supplemental Disclosure of Cash Flow Information:
Cash Paid for Interest $ 906 $ 777
================ =================
</TABLE>
Non-Cash Investing and Financing Activities - The Company entered into an
asset acquisition agreement resulting in an increase in long-term debt of
$2,211,000 and corresponding increases in property equipment and goodwill.
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 nine-month period ended December 31,
1998 are not necessarily indicative of the results that may be expected for the
year ended March 31, 1999. 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, 1998.
NOTE B - INVENTORIES
The components of inventory consist of the following:
<TABLE>
<CAPTION>
December 31, March 31,
1998 1998
---------------- ----------------
(In Thousands)
<S> <C> <C>
Raw Materials $ 820 $ 531
Finished Goods and Work in Progress 2,074 2,219
Less: Inventory Valuation Allowance (269) (269)
================ ================
$ 2,625 $ 2,481
================ ================
Inventories are stated at the lower of cost (first-in, first-out) or
market.
</TABLE>
NOTE C - EARNINGS PER SHARE
Net income (loss) per common share is computed by dividing net income
(loss) by the basic and diluted weighted average number of shares of common
stock outstanding. For diluted weighted average shares outstanding, the Company
used the Treasury stock method to calculate the common stock equivalents that
stock options would represent. The effect of all options and warrants were not
included in the calculation of net income (loss) per diluted common share as the
effect would have been anti-dilutive.
NOTE D - LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31, March 31,
1998 1998
------------- --------------
(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.
$ 14,893 $ 15,000
</TABLE>
<PAGE>
6
NOTE D - LONG-TERM DEBT (continued)
<TABLE>
<CAPTION>
December 31, March 31,
1998 1998
------------- --------------
(In Thousands)
<S> <C> <C>
Note Payable; interest at 12% payable $20,026 per month including interest
maturing September 1, 2002. Secured by equipment at a customer site and
the payments from a lease contract receivable. 547 688
Demand note past due at December 31, 1998 plus interest at 10%. 489 0
Seller Financing Under Tampa Pathology Acquisition Agreement, face value of
$487,628 discounted at 10%, with variable monthly payments until
satisfied. 234 234
Unsecured Notes Payable; interest 12%, payable within 6 months of borrowing
date. 350 0
Unsecured Note Payable; interest at 3%, payable in monthly installments of
$2,394 through September 2006. 215 0
Unsecured Note Payable under settlement agreement with State of Florida
Department of Revenue, payable in monthly installments of $2,500-$3,500
over a period of four to eight years. 282 0
Seller Financing under Community Clinical Laboratory (CCL) Acquisition
Agreement, maximum face amount of $2.5 million discounted at 10% with
variable quarterly payments based upon 9% of cash collections from tests
performed for customers acquired pursuant to the acquisition agreement
until satisfied or for 5 years, whichever comes first. 1,961 0
Capital Lease obligation for equipment acquired from CCL; interest and
principal payable monthly at various amounts through May 2001. 151 0
Other Notes and Agreements; interest and principal payable monthly and
annually at various amounts through March 2000. 300 316
------------ -------------
Total Long -Term Debt 19,422 16,238
Less Current Portion (1,668) (625)
------------ -------------
LONG-TERM DEBT DUE AFTER 1 YEAR $ 17,754 $ 15,613
============ =============
</TABLE>
At December 31, 1998, the Company was in violation of certain covenants of
the bank term loan agreement. The Company requested a waiver of certain
defaults, which may have occurred under the loan agreement as a result of these
violations. The lenders have acknowledged the receipt of the Company's request,
however, to date, no waivers have been provided.
LifeServ Technologies, Inc.(TM) ("LifeServ"), a subsidiary of the Company,
is in default for non-payment of its obligations pursuant to a $500,000 loan
that matured on October 31, 1998. As a result of the default, the lender may
exercise certain rights including, but not limited to, enforcement of its
security interest in the assets of LifeServ. The Company is currently
negotiating revised terms with the lender; however, to date, no agreement has
been reached.
<PAGE>
7
In August 1998, the Company borrowed $150,000 from three individuals,
including $100,000 from the Chairman and C.E.O. to support the operations of
Medical Technology Laboratories, Inc. ("MTL"). The terms and conditions of these
obligations provide for repayment within six months from the borrowing date
including interest payable at 12% per annum. In addition, the notes provide the
lenders with warrants to purchase 75,000 shares of common stock of the Company
at $.75 per share for a period of ten (10) years. In addition, in the event that
the repayment of these amounts are not made on the maturity dates, the lenders
may receive additional warrants to purchase up to 13,500 shares of common stock
at $.75 per share for a period of ten (10) years.
In October 1998, the Company borrowed $200,000 from an individual to
support the operations of MTL. The terms and conditions of this obligation
include repayment within nine months from the borrowing date including interest
at 12% per annum. The notes provide the lenders with warrants to purchase
100,000 shares of common stock of the company at $.75 per share for a period of
ten (10) years. In addition, in the event that repayment of the amount due on
the maturity date is not made, the lender may receive additional warrants to
purchase up to 18,000 shares of common stock at $.75 per share for ten (10)
years. In the event that the Company defaults on its obligations under the
promissory note, the lender is entitled to receive warrants to purchase up to
800,000 shares of common stock at $.05 per share for a period of ten (10) years.
NOTE E - SEGMENT INFORMATION
The Company is a holding company operating through a number of separate
subsidiaries. The operations of these subsidiaries are comprised of three
business segments; (1) the Medication Packaging and Dispensing Systems segment,
which manufactures and distributes equipment, systems and supplies to pharmacies
who service nursing homes and hospitals; (2) the Health Care Information Systems
segment, which provides software systems for medication management and
point-of-care electronic documentation for hospitals and other health care
facilities; and (3) the Clinical Laboratory Services segment, which provides
diagnostic laboratory services to physicians.
The following is operating information for these business segments for the
three and nine months ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------------- -----------------------------
December 31, December 31,
1998 1997 1998 1997
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Revenue:
Reportable Segments
Medication Packaging and Dispensing Systems $ 3,800 $ 3,122 $ 10,777 $ 9,162
Health Care Information Systems 1,079 593 4,333 1,932
Clinical Laboratory Services 5,149 1,836 10,357 5,215
------------- ------------ ------------- ------------
Total Consolidated Revenue $ 10,028 $ 5,551 $ 25,467 $ 16,309
============= ============ ============= ============
Depreciation and Amortization:
Reportable Segments
Medication Packaging and Dispensing Systems $ 161 $ 136 $ 479 $ 408
Health Care Information Systems 84 72 220 189
Clinical Laboratory Services 71 61 174 183
Corporate 74 118 242 354
------------- ------------ ------------- ------------
Total Consolidated Depreciation and Amortization $ 390 $ 387 $ 1,115 $ 1,134
============= ============ ============= ============
</TABLE>
<PAGE>
8
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------------- -----------------------------
December 31 December 31
1998 1997 1998 1997
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Interest Expense:
Reportable Segments
Medication Packaging and Dispensing Systems $ 0 $ 0 $ 1 $ 1
Health Care Information Systems 31 6 75 17
Clinical Laboratory Services 5 12 6 17
------------- ------------ ------------- ------------
36 18 82 35
Unallocated Debts 300 230 869 770
------------- ------------ ------------- ------------
Total Consolidated Interest Expense $ 336 $ 248 $ 951 $ 805
============= ============ ============= ============
Operating Profit (Loss):
Reportable Segments
Medication Packaging and Dispensing Systems $ 996 $ 790 $ 2,609 $ 2,247
Health Care Information Systems (1,052) (510) (1,966) (1,302)
Clinical Laboratory Services 392 85 207 328
Corporate and Interest (821) (782) (2,472) (2,452)
------------- ------------ ------------- ------------
Total Consolidated Operating Loss $ (485) $ (417) $ (1,622) $ (1,179)
============= ============ ============= ============
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
December 31,
1998 1997
------------- ------------
<S> <C> <C>
Identifiable Assets :
Reportable Segments
Medication Packaging and Dispensing Systems $ 6,108 $ 5,379
Health Care Information Systems 3,780 2,817
Clinical Laboratory Services 6,355 2,732
Corporate 2,394 2,387
------------- ------------
Total Consolidated Identifiable Assets $ 18,637 $ 13,315
============= ============
Identifiable Liabilities:
Reportable Segments
Medication Packaging and Dispensing Systems $ 1,185 $ 410
Health Care Information Systems 3,663 1,642
Clinical Laboratory Services 3,892 947
Corporate 16,970 16,484
------------- ------------
Total Consolidated Identifiable Liabilities $ 25,710 $ 19,483
============= ============
Capital Expenditures:
Reportable Segments
Medication Packaging and Dispensing Systems $ 181 $ 85
Health Care Information Systems 90 105
Clinical Laboratory Services 33 59
Corporate 21 30
------------- ------------
Total Consolidated Capital Expenditures $ 325 $ 279
============= ============
</TABLE>
<PAGE>
9
NOTE F - BUSINESS ACQUISITIONS
In April 1998, the Company through its subsidiary LifeServ entered into an
agreement to purchase certain assets of Peritronics Medical, Inc.
("Peritronics"), a California company that distributes obstetrical information
systems. The agreement provided for the Company to pay Peritronics shareholders
$350,000 in cash, 250,000 shares of the Company's common stock and assume
certain liabilities in the amount of approximately $330,000. On August 12, 1998,
the terms of the agreement were modified to provide for the Company to pay
Peritronics' shareholders $410,000 in cash and assume certain liabilities in the
amount of $330,000. In addition, the modification allows LifeServ to manage the
business of Peritronics until the closing. The purchase currently is anticipated
to close in April 1999; however, there are no assurances that such closing will
occur.
On August 4, 1998, the Company through its subsidiary, MTL, entered into an
agreement to purchase certain assets of Community Clinical Laboratories, Inc.
("CCL"), a Clearwater, Florida company that provides clinical laboratory testing
services to patients referred by physicians. The agreement provides for MTL to
pay CCL a percentage of the payments received from clients serviced by MTL for a
period of five years or until a maximum of $2,500,000 is paid. The purchase was
closed on September 11, 1998.
NOTE G - BANKRUPTCY MATTERS
On June 12, 1998, a Plan of Reorganization for Medication Management
Technologies, Inc. was confirmed by the bankruptcy court. As a result of the
confirmation of the Plan, the holders of trade and miscellaneous claims will
receive payment of 15% of their claims over a three-year period. The amount of
liabilities that were compromised as part of the Plan was approximately
$662,000. This amount has been classified as an extraordinary gain in the
Company's consolidated Statement of Operations and Statements of Cash Flow for
the nine months ended December 31, 1998.
On August 14, 1998, the Company completed a settlement agreement in
litigation that it had commenced in the Vangard Labs, Inc. Chapter 11 case in
the U.S. Bankruptcy Court. As part of the settlement, the Company recovered
$175,000 from the defendant. In addition, pursuant to the Vangard Labs, Inc.
Plan of Reorganization, the Company was responsible for the payment of a
promissory note that it had guaranteed on behalf of Vangard Labs, Inc in the
amount of approximately $215,000. The Company and the City of Glasgow have
agreed to the repayment terms of this obligation (see Note D).
NOTE H - CONTINGENCIES
On November 19, 1998, MTL received a refund request in the amount of $1.8
million from Medicare Program Safeguards ("MPS"). 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 effect on the Company's financial condition and results
of operation.
<PAGE>
10
<PAGE>
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 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 December 31, 1998 and 1997
- ---------------------------------------------
Net sales and services for the three months ended December 31, 1998
increased 78.6% to $10.0 million from $5.6 million during the same period the
prior year.
Net sales and services for each business segment increased as follows:
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------------------
December 31, December 31, 1997
1998 % Increase
--------------- ---------------- ---------------
<S> <C> <C> <C>
Medication Packaging and Dispensing Systems $3.8 Million $3.1 Million 22.6%
Health Care Information Systems $1.1 Million $0.6 Million 83.3%
Clinical Laboratory Services $5.1 Million $1.9 Million 168.4%
</TABLE>
<PAGE>
11
Net sales in the Medication Packaging and Dispensing Systems segment
increased primarily as a result of a greater number of punch cards and packaging
machines sold to pharmacies. MTS Packaging Systems, Inc.'s ("MTS Packaging")
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.
Net sales and services in the Health Care Information Systems segment
increased primarily due to a increase in the number of systems that were sold
and installed at hospitals.
Net services in the Clinical Laboratory Services segment increased
primarily as a result of the increase in the number of physician's serviced in
conjunction with the Asset Acquisition Agreement MTL entered into with Community
Clinical Laboratories in August 1998.
Cost of sales and services for the three months ended December 31, 1998
increased 64.5% to $5.1 million from $3.1 million during the same period the
prior year. Cost of sales and services as a percentage of sales decreased to
51.0% from 55.4% during the same period the prior year. The increase in cost of
sales and services resulted primarily from the increase in sales for each
business segment. Cost of sales and services as a percentage of sales for each
business segment is outlined below:
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------
December 31, 1998 December 31, 1997
---------------- -----------------
<S> <C> <C>
Medication Packaging and Dispensing Systems 55.3% 54.8%
Health Care Information Systems 81.8% 50.0%
Clinical Laboratory Services 41.2% 57.9%
</TABLE>
Cost of sales in the Medication Packaging and Dispensing Systems segment
increased as a percentage of sales primarily as a result of price reductions on
punch cards sold by MTS Packaging. The price reductions have resulted, in part,
from the consolidation of pharmacies, which has allowed individual customers to
take advantage of volume pricing discounts.
Cost of sales as a percentage of sales in the Health Care Information
segment increased primarily as a result of a higher portion of revenue
associated with hardware components of systems sold. The profit margin realized
in hardware components is lower than the software components. In addition,
revenue from providing ongoing maintenance and support declined while the cost
of providing those services remained relatively fixed.
Cost of services as a percentage of services in the Clinical Laboratory
segment decreased primarily as a result of efficiencies realized from the
combination of MTL and CCL operations.
Selling, general and administration expenses for the three months ended
December 31, 1998 increased 113.6% to $4.7 million from $2.2 million during the
same period the prior year. The increase resulted primarily from an increase in
personnel costs in each business segment that resulted from the addition of
personnel to accommodate increased sales and services. In addition, the Company
has significantly increased its reserve for bad debts in the Clinical Laboratory
segment. The corresponding increase in bad debt expense results primarily from
the payment history by non-third party payors as well as difficulties in
obtaining complete patient information from referring physicians.
<PAGE>
12
Selling, general and administrative expenses for each business segment
increased as follows:
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------------------
December 31, 1998 December 31, 1997 % Increase
---------------- ---------------- ---------------
<S> <C> <C> <C>
Medication Packaging and Dispensing Systems $0.6 Million $0.5 Million 20.0%
Health Care Information Systems $1.2 Million $0.7 Million 71.4%
Clinical Laboratory Services $2.5 Million $0.6 Million 316.7%
Corporate $0.4 Million $0.4 Million 0%
</TABLE>
Depreciation and amortization expenses for the three months ended December
31, 1998 increased 0.8% to $390,000 from $387,000 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 December 31, 1998 increased
35.5% to $336,000 from $248,000 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 and during the first half of the
current fiscal year.
Nine months Ended December 31, 1998 and 1997
Net sales and services for the nine months ended December 31, 1998
increased 56.4% to $25.5 million from $16.3 million during the same period the
prior year.
Net sales and services for each business segment increased as follows:
<TABLE>
<CAPTION>
Nine Months Ended
---------------------------------------------------------
December 31, 1998 December 31, 1997 % Increase
---------------- ---------------- ---------------
<S> <C> <C> <C>
Medication Packaging and Dispensing Systems $10.8 Million $9.2 Million 17.4%
Health Care Information Systems $4.3 Million $1.9 Million 126.3%
Clinical Laboratory Services $10.4 Million $5.2 Million 100.0%
</TABLE>
Net sales in the Medication Packaging and Dispensing Systems segment
increased primarily as a result of a greater number of punch cards and packaging
machines sold to pharmacies. MTS Packaging's customer base continues to
consolidate as a result of acquisitions that have increased the number of
pharmacies serviced by MTS Packaging. This consolidation had a favorable impact
on the volume of product MTS Packaging sells to its existing customers.
Net sales and services in the Health Care Information Systems segment
increased primarily due to an increase in the number of systems that were
installed and an increase in the number of customers that LifeServ services with
long-term maintenance contracts.
Net services in the Clinical Laboratory Segment increased primarily as a
result of the increase in the number of physician's serviced in conjunction with
the Asset Acquisition Agreement that MTL entered into with CCL in August 1998.
<PAGE>
13
Cost of sales and services for the nine months ended December 31, 1998
increased 55.2% to $13.8 million from $8.9 million during the same period the
prior year. Cost of sales and services as a percentage of sales decreased to
54.2% from 54.6% during the same period the prior year.
Cost of sales and services as a percentage of sales for each business
segment is outlined below:
<TABLE>
<CAPTION>
Nine Months Ended
--------------------------------------
December 31, 1998 December 31, 1997
---------------- ----------------
<S> <C> <C>
Medication Packaging and Dispensing Systems 56.5% 55.4%
Health Care Information Systems 55.8% 47.4%
Clinical Laboratory Services 51.1% 55.8%
</TABLE>
Cost of sales in the Medication Packaging and Dispensing Systems segment
increased as a percentage of sales primarily as a result of price reductions on
punch cards sold by MTS Packaging. The price reductions have resulted, in part,
from the consolidation of pharmacies, which has allowed individual customers to
take advantage of volume pricing discounts
Cost of sales as a percentage of sales in the Health Care Information
segment increased primarily as a result of a higher portion of revenue
associated with hardware components of systems sold. The profit margin realized
on hardware components is lower than the software components.
Cost of services as a percentage of services in the Clinical Laboratory
segment decreased primarily as a result of operating efficiencies gained from
the Asset Acquisition Agreement MTL entered into with CCL in August 1998.
Selling, general and administration expenses for the nine months ended
December 31, 1998 increased 67.2% to $11.2 million from $6.7 million during the
same period the prior year. The increase resulted primarily from an increase in
personnel costs in each business segment that resulted from the addition of
personnel to accommodate increased sales and services. In addition, the Company
has significantly increased its reserve for bad debts in the Clinical Laboratory
segment. The corresponding increase in bad debt expense results primarily from
the payment history by non-third party payors as well as difficulties in
obtaining complete patient information from referring physicians.
Selling, general and administrative expenses for each business segment
increased as follows:
<TABLE>
<CAPTION>
Nine Months Ended
----------------------------------------------------------
December 31, 1998 December 31, 1997 % Increase
---------------- ------------------ ---------------
<S> <C> <C> <C>
Medication Packaging and Dispensing Systems $1.6 Million $1.4 Million 14.3%
Health Care Information Systems $3.6 Million $2.1 Million 71.4%
Clinical Laboratory Services $4.6 Million $1.8 Million 155.6%
Corporate $1.4 Million $1.4 Million 0%
</TABLE>
Depreciation and amortization expenses for the nine months ended December
31, 1998 decreased 1.7% to $1,115,000 from $1,134,000 during the same period the
prior year. The decrease results primarily from certain corporate assets
becoming fully depreciated.
<PAGE>
14
Interest expense for the nine months ended December 31, 1998 increased
18.1% to $951,000 from $805,000 during the same period the prior year. The
increase results from additional debt that the Company incurred during the
fourth quarter of the previous fiscal year and during the first three quarters
of the current 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.
Plan to Address Y2K Compliance
In December 1998, the Company formed a Y2K compliance project team to
develop an overall plan to address Y2K readiness issues. The plan is being
developed in phases.
o Phase I
a) Identify all internal hardware and software systems that
must be compliant.
b) Appoint individuals within the Company to be responsible for
communication with third party businesses regarding Y2K
readiness.
c) Appoint individuals within the Company to be responsible for
evaluation of product liability issues that may exist
regarding products sold by the Company.
o Phase II - Identify Y2K problems that may exist in each risk area.
o Phase III - Repair, modify or replace systems that are determined to
be non-compliant.
o Phase IV - Test systems to confirm that any repairs, modification or
replacements have resulted in compliance.
State of Readiness
Internal Systems
- ----------------
The Company has determined that the internal information systems in its
Medication Packaging and Dispensing System business segment are in a state of
Y2K readiness.
The internal information systems utilized in the Company's Clinical
Laboratory business are not Y2K compliant. The Company is currently evaluating
replacement systems and anticipates that a decision on replacement alternatives
will be made before June 30, 1999; the Company expects these to be fully
operational before December 31, 1999.
The internal systems utilized by the Company's Health Care Information
Systems business to develop software products for resale are not currently Y2K
compliant. The Company expects to determine the extent of modifications and/or
replacements that are necessary prior to June 30, 1999 and make the necessary
modifications and/or replacements prior to September 30, 1999.
<PAGE>
15
Material Third Party Readiness
- ------------------------------
Individuals within the Company who have been assigned responsibility for
communicating with material third party businesses with whom the Company has
business relationships will begin a survey process prior to March 31, 1999. The
Company will determine the readiness of third parties prior to September 30,
1999.
Product Liability
The products sold by the Company's Medication Packaging and Dispensing
System business do not have Y2K issues associated with them.
The Services rendered by the Company's Clinical Laboratory business are
directly effected by the internal information systems utilized to perform
analytical laboratory tests. If the Company is not successful in implementing
Y2K compliant internal information systems in its Clinical Laboratory Business,
it could adversely effect that business' ability to perform diagnostic tests and
provide the results of those test to its client physicians, which could
adversely impact the Company's results of operations.
The Company believes the products sold by its Health Care Information
System business are all Y2K compliant except for the Performance Pharmacy
software system. The Company anticipates that a Y2K upgrade for this system will
be fully developed prior to March 31, 1999.
Cost of Project
The overall cost of the Company's Y2K compliance effort cannot be
accurately estimated until Phases I and II of the compliance plan are completed.
Expenditures to date on Y2K compliance have not been material to the Company's
operation or financial condition.
LIQUIDITY AND CAPITAL RESOURCES
During the first three quarters of the current fiscal year, the Company
incurred a net loss of $960,000 compared to a net loss of $909,000 the prior
year. Cash provided by operating activities was $297,000 during the nine months
ended December 31, 1998 compared to $427,000 provided in the prior year. The
Company had working capital of $1,696,000 at December 31, 1998.
Cash was provided by operating activities during the nine months ended
December 31, 1998 primarily due to increases in accounts payable and accrued
liabilities offset by net operating losses and increases in accounts receivable.
Investing activities used $651,000 during nine months ended December 31,
1998 as a result of expenditures for capital equipment in each business segment
and product development in the Medication Packaging and Dispensing Systems and
Health Care Information Systems segments .
Financing activities provided $570,000 during the nine months ended
December 31, 1998. The Company borrowed $500,000 from an individual to support
the operations of LifeServ. This promissory note matured on October 31, 1998.
The Company does not currently have sufficient funds to repay the note; however,
discussions with the lender regarding repayment of the note are currently in
progress. In addition, the Company borrowed $350,000 from several individuals,
including $100,000 from the Chairman and Chief Executive Officer to support the
operations of MTL. These amounts are repayable in February 1999 ($150,000) and
June 1999 ($200,000).
<PAGE>
16
The Company believes that cash generated from the Medication Packaging and
Dispensing Systems and Clinical Laboratory Services business segments will be
sufficient to meet the working capital and capital expenditure needs of these
segments as well as service the consolidated debt of the Company for the
foreseeable future.
LifeServ relies solely on cash flow generated from its operations and
additional debt and equity, which it is permitted to obtain in accordance with
the loan agreement with the primary lenders of the Company. There are no
assurances that LifeServ will generate sufficient cash flow from operations to
fund its operations or be successful in obtaining debt or raising equity
capital. Management believes that the results of operation of LifeServ will not
adversely effect the overall liquidity of the Company.
In August 1998, the Company, through its subsidiary MTL, entered into an
agreement with another clinical laboratory to acquire certain assets. The
acquisition has increased the amount of testing services performed by MTL and as
a result has required additional funds to support these activities. To date the
Company has been successful in obtaining capital in the form of unsecured debt
to supplement cash generated from operations to meet the working capital needs
of MTL.
During fiscal 1998 and 1999, MTL experienced deterioration in the
timeliness of cash collections and a corresponding increase in accounts
receivable. The primary causes of this situation were the increased medical
necessity and related diagnosis code requirements from third party payors and
the complexities in the billing process. Although MTL continues to work towards
reducing the overall number of days to collect its accounts receivable,
additional changes in requirements of third party payors could increase the
difficulty in collections. There can be no assurance that MTL will be successful
in improving the timeliness of cash collections. In addition, MTL has
experienced an increase in bad debts arising from non-third party payors. MTL is
in the process of developing new credit policies to reduce non-third party bad
debts.
On November 19, 1998, MTL received a refund request in the amount of $1.8
million from Medicare Program Safeguards ("MPS"). 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 effect on the Company's financial condition and results
of operations.
<PAGE>
17
PART II - OTHER INFORMATION
- -----------------------------
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
None
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: February 16, 1999 By: /s/ Michael P. Conroy
- ------------------------- -----------------------------------------
Michael P. Conroy
Vice President & Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED FINANCIAL STATEMENTS OF MEDICAL TECHNOLOGY SYSTEMS, INC. FOR THE NINE
MONTHS ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000823560
<NAME> Medical Technology Systems, Inc.
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<PERIOD-START> Apr-1-1998
<PERIOD-END> Dec-31-1998
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<CASH> 540
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</TABLE>
