10-K 1 e10k33102.txt FORM 10K 3/31/02 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934 For fiscal year ended MARCH 31, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For transition period from _______________ to _________________ Commission File Number 0-16594 MEDICAL TECHNOLOGY SYSTEMS, INC. (Exact Name of Registrant as Specified in Its Charter) Delaware 59-2740462 ---------------------------------- -------------------- (State or Other Jurisdiction (I.R.S. Employer of Incorporation or Organization) Identification No.) 12920 Automobile Boulevard, Clearwater, Florida 33762 ------------------------------------------------- -------------------- (Address of Principal Executive Offices) (Zip Code) (727) 576-6311 ------------------------------------------ (Registrant's Telephone Number, Including Area Code) Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Each Exchange on Which Registered ------------------ ------------------------------------------- NONE NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, PAR VALUE $.01 ------------------------------------- (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. |X| Yes [ ] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |X| Aggregate market value of voting Common Stock held by non-affiliates was $12,500,000 as of June 26, 2002. The number of shares outstanding of the Registrant's Common Stock, $.01 par value, was 4,361,690 as of June 26, 2002. Documents Incorporated by Reference Parts of the Company's definitive proxy statement, which will be filed by the Company within 120 days after the end of the Company's 2002 fiscal year end, are incorporated by reference into Part III of this Form. Total number of pages, including cover page - 41 (excluding exhibits) i. MEDICAL TECHNOLOGY SYSTEMS, INC. CLEARWATER, FLORIDA INDEX PART I PAGE ---- Item 1. Business.......................................................1 2. Properties.....................................................4 3. Legal Proceedings..............................................4 4. Submission of Matters to a Vote of Security Holders............4 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.......................................................5 6. Selected Financial Data........................................6 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.....................................7 7A. Quantitative and Qualitative Disclosure about Market Risk.....11 8. Financial Statements and Supplementary Data...................11 9. Changes In and Disagreements With Accountants On Accounting and Financial Disclosure.........................................11 PART III Item 10. Directors and Executive Officers of the Registrant............12 11. Executive Compensation........................................12 12. Security Ownership of Certain Beneficial Owners, Management and Related Stockholder Matters...................12 13. Certain Relationships and Related Transactions................12 PART IV Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K..................................................13 Index to Financial Statements.................................................16 Signatures ...................................................................40 1 PART I This Annual Report on Form 10-K (the "10-K") contains certain statements concerning the future that are subject to risks and uncertainties. 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. Such statements include, among other things, information concerning possible-future results of operations, capital expenditures, the elimination of losses under certain programs, financing needs or 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, and those accompanied by the words "anticipates," "estimates," "expects," "intends," "plans," or similar expressions. For those statements we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. You should specifically consider the various factors identified in this 10-K, including the matters set forth in "Item 1. Business", "Item 3. Legal Proceedings", "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Notes to Consolidated Financial Statements that could cause actual results to differ materially from those indicated in any forward-looking statements. 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 in this 10-K, which speak only as of the date hereof. The Company undertakes no obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unexpected events. ITEM 1. BUSINESS Introduction ------------ Medical Technology Systems, Inc.(TM), a Delaware corporation (the "Company"), was incorporated in March 1984. The Company is a holding company that historically operated through a number of separate subsidiaries, including MTS Packaging Systems, Inc.(TM)("MTS Packaging"), Medical Technology Laboratories, Inc. ("MTL") and LifeServ Technologies, Inc.(TM)("LifeServ"). The Company sold the assets of MTL and LifeServ in fiscal 2000. MTS Packaging primarily manufactures and sells disposable medication punch cards, packaging equipment and allied ancillary products throughout the United States. Its customers are predominantly pharmacies that supply nursing homes, assisted living and correctional facilities with prescription medications for their patients. MTS Packaging manufactures its proprietary disposable punch cards and packaging equipment in its own facilities. This manufacturing process uses integrated machinery for manufacturing the disposable medication punch cards. The disposable medication punch cards and packaging equipment are designed to provide a cost effective method for pharmacies to dispense medications. MTS Packaging's medication dispensing systems and products provide innovative methods for dispensing medications in disposable packages. Segments -------- The operation of the Company is composed of one operating segment, medication packaging and dispensing systems. MTS Packaging is the only subsidiary in this segment and is supported by corporate personnel and services. Continuing Operations --------------------- Products -------- MTS Packaging manufactures proprietary medication dispensing systems and related products for use by medication prescription service providers. These systems utilize disposable medication punch cards and specialized machines that automatically or semi-automatically assemble, fill and seal drugs into medication punch cards representing a weekly or monthly supply of a patient's medication. 2 MTS Packaging's machinery for dispensing medication in disposable packages automatically places tablets or capsules (the amount of medication required by a patient during one month) into a punch card. The use of these cards and machines provides a cost effective customized package at competitive prices. The punch card medication dispensing system can provide tamper evident packaging for products dispensed in the package. The retail price of MTS Packaging's machinery ranges from $1,100 to $580,000 depending upon the degree of automation and options requested by a customer. The punch cards typically retail from approximately $155 to $225 per 1,000 cards and blisters, depending upon the size, design and volume of cards ordered by a customer. MTS Packaging has placed approximately 1,865 medication dispensing systems with pharmacy clientele since the inception of the Company. MTS Packaging also sells prescription labels and ancillary supplies designed to complement sales of disposable medication punch cards. MTS Packaging had approximately $915,000 in unshipped orders as of June 20, 2002. Research and Development ------------------------ The Company expended approximately $87,000 on research and development activities during the fiscal year ended March 31, 2002. During the current fiscal year, the Company devoted the majority of its development resources to products that have been determined to be technologically feasible. Product Development ------------------- The Company is presently directing its product development efforts towards the following projects: o OnDemand(TM)packaging machines o Various products for the assisted living, home care and nutriceutical markets The Company expended approximately $853,000 on product development during the fiscal year ended March 31, 2002. The majority of these expenditures were made for the OnDemand machine project. Manufacturing Processes ----------------------- MTS Packaging has developed integrated punch card manufacturing equipment that will complete the various punch card manufacturing steps in a single-line, automated process. The Company believes that its advanced automation gives it certain speed, cost and flexibility advantages over conventional punch card manufacturers. MTS Packaging's equipment produces finished cards on a single in-line Flexographic press. This process takes the place of approximately five different processes using conventional offset printing methods. MTS Packaging has several machines capable of producing punch cards in this manner. In addition to the manufacturing of punch cards, MTS Packaging manufactures the machines that are sold to its customers to fill punch cards with medication. The majority of these machines are sold to customers; however, from time to time, customers are provided or rented machines in conjunction with an agreement to purchase certain quantities of punch cards over a specified period. MTS Packaging uses automated fabrication equipment to produce its medication packaging machinery. All essential components of the machines are designed and manufactured by the Company without reliance on outside vendors. MTS Packaging is dependent on a number of suppliers for the raw materials essential in the production of its products. The Company believes that relations are adequate with its existing vendors. However, there can be no assurance that such relations will be adequate in the future or that shortages of any of these raw materials will not arise, causing production delays. MTS Packaging believes it is necessary to maintain an inventory of materials and finished products that allows for customer orders to be shipped within the industry standard of 2-3 days. The inability to obtain raw materials on a timely basis and on acceptable terms may have a material adverse effect on the future financial performance of the Company. 3 Markets and Customers --------------------- MTS Packaging's products are sold primarily throughout the United States through its sales organization and independent sales representatives. MTS Packaging also participates in trade shows and training seminars. Sales to countries outside the U.S. represent less than ten percent (10%) of the total revenue. Ten customers comprise approximately sixty percent (60%) of MTS Packaging's annual revenue. Sales to PharMerica, Inc., Tampa, Florida and Omnicare, Inc., Covington, Kentucky each represented approximately 14% of MTS Packaging's revenue in the fiscal year ended March 31, 2002. The primary customers for MTS Packaging's proprietary packaging machinery and the related disposable punch cards, labels and ancillary supplies are pharmacies that supply prescription medication to nursing homes. These pharmacies serve from 250 to 34,000 nursing home beds per location and many serve the sub-acute, assisted living, correctional and home health care markets as well. Competition ----------- The pharmacy customers of MTS Packaging supply prescribed medications to nursing homes, which are the primary market for MTS Packaging's products. This market is highly competitive. There are several competitors that have developed machines that automate the packaging and sealing of solid medications into punch cards. The Company believes that products developed by the Company's competitors are not as efficient as the Company's systems because they are not as automated. The Company's method of dispensing medication replaces more traditional dispensing methods, such as prescription vials. The principal methods of competition in supplying medication dispensing systems to prescription service providers are product innovation, price, customization and product performance. Many of the Company's competitors have been in business longer and have substantially greater resources than the Company. There is no assurance that the Company will be able to compete effectively with competitive methods of dispensing medication or other punch card systems. The Company's primary competitors for punch card dispensing systems are Drug Package, Inc., Useful Products Inc. and RX Systems, Inc. The Company believes that its automated proprietary packaging machinery distinguishes MTS Packaging from its competitors' less automated systems. The Company's new automated packaging machinery can fill and seal over 900 disposable medication cards per hour. The Company believes that its production rates will meet the needs of its customers who are consolidating and require higher productivity to meet their growing market share. Proprietary Technology ---------------------- The Siegel Family QTIP Trust (the "Trust") is the holder of certain patents and other proprietary rights for the equipment and processes that MTS Packaging uses and sells. The Trust is the assignor of all such proprietary and patent rights used in the Company's business that were invented or developed by Harold B. Siegel, the founder of the Company. The Trust and the Company are parties to a license agreement whereby the Company is granted an exclusive and perpetual license from the Trust to use the know-how and patent rights in the manufacture and sale of the Company's medication dispensing systems. MTS Packaging is heavily dependent upon the continued use of the proprietary rights associated with these patents. The patents begin expiring in 2004 continuing through 2008. There are numerous patent applications and patent license agreements for products that have been sold and that have been in development within MTS Packaging, however, its business is not materially dependent upon the issuing or its ownership of any one patent that has been submitted to the Patent and Trademark Office. There is no assurance that any additional patents will be granted with respect to the Company's medication dispensing or information systems and products or that any patent issued, now or in the future, will provide meaningful protection from competition. Government Regulation --------------------- Certain subsidiaries of the Company are subject to various federal, state and local regulations with respect to their particular businesses. The Company believes that it currently complies with these regulations. 4 MTS Packaging's products are governed by federal regulations concerning components of packaging materials that are in contact with food and drugs. The Company has obtained assurances from its vendors that the packaging materials used by MTS Packaging are in conformity with such regulations. However, there is no assurance that significant changes in the regulations applicable to MTS Packaging's products will not occur in the foreseeable future. Any such changes could have a material adverse effect on the Company. The Company cannot predict the extent to which its operations will be effected under the laws and regulations described above or any new regulations that may be adopted by regulatory agencies. Discontinued Operations ----------------------- The Company sold two business segments in the fiscal year ending March 31, 2000, both of which were treated as discontinued operations for financial statement purposes. LifeServ was a health care information technology company that provided solutions for medication management and point-of-care electronic documentation for hospitals and other health care facilities. The assets of LifeServ were sold in May 1999 in exchange for the assumption of certain liabilities of approximately $5.0 million. MTL provided clinical laboratory testing services including analytical tests of blood tissues and other bodily fluids. The principal assets of MTL were sold in January 2000 in exchange for $1.0 million and the assumption of approximately $400,000 in liabilities. Employees --------- As of June 26, 2002, the Company employed 145 persons full time. None of the Company's employees are covered by a collective bargaining agreement. The Company considers its relationship with employees to be good. ITEM 2. PROPERTIES The Company leases a 73,600 square foot plant consisting of office space and air-conditioned manufacturing and warehousing space near the St. Petersburg/Clearwater International Airport at 12920 Automobile Boulevard. The Company's corporate administrative offices and the primary manufacturing facilities for MTS Packaging Systems, Inc. ("MTS Packaging") are at this location. The lease expires on June 30, 2005. The Company's current monthly lease payments are approximately $31,210. The premises are generally suited for light manufacturing and/or distribution. MTS Packaging leases approximately 5,200 square feet at approximately $3,034 per month for office and warehouse space at 21530 Drake Road, Cleveland, Ohio. The lease expires on March 31, 2004. ITEM 3. LEGAL PROCEEDINGS The Company is involved in certain claims and 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 are not expected to have a material adverse effect on the financial position, results of operations or liquidity of the Company. Certain creditors of LifeServ, a discontinued operation, have commenced legal action against the buyer of LifeServ seeking payment of liabilities assumed by the buyer pursuant to the asset purchase agreement. Several creditors have named LifeServ as a co-defendant in the legal action. The Company intends to vigorously defend these actions and seek appropriate remedies from the buyer. In November 1998, MTL, a discontinued operation, received a refund request in the amount of $1.8 million from Medicare Program Safeguards ("MPS"). MTL disputed the refund request in its response to MPS in December 1998. To date, MTL has not received any further correspondence from MPS regarding this matter. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 5 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Price Range of the Company's Securities --------------------------------------- The Company's Common Stock trades on the over-the-counter market. The table below sets forth the range of high and low bid information for the Company's common stock for the periods indicated, as reported by the NASD OTC Bulletin Board. The first, second and third quarter of fiscal 2001 amounts have been retroactively adjusted for the 1 for 2.5 reverse stock split that occurred in December 2000. Over-the-counter market quotations reflect inter-dealer prices, without retail markup, markdown or commission and may not necessarily represent actual transactions.
2003 Fiscal Year High Low ----------------------- ----------------- ---------------- First Quarter $ 2.92 $ 2.45 2002 Fiscal Year High Low ----------------------- ----------------- ---------------- First Quarter $ 2.85 $ 1.25 Second Quarter $ 2.55 $ 1.35 Third Quarter $ 2.95 $ 1.55 Fourth Quarter $ 3.00 $ 2.40 2001 Fiscal Year High Low ----------------------- ----------------- ---------------- First Quarter $ 1.58 $ .78 Second Quarter $ 1.73 $ 1.33 Third Quarter $ 1.40 $ .63 Fourth Quarter $ 2.25 $ .63
As of June 20, 2002, there were approximately 3,000 holders of record of the Company's common stock. The Company has not declared a dividend on its common stock and does not currently intend to declare a dividend. Furthermore, the Company is restricted from paying dividends pursuant to the terms of its secured loan agreements. The Company intends to reinvest its future earnings, if any, into the operations of its business. 6 ITEM 6. SELECTED FINANCIAL DATA The following tables set forth selected financial and operating data regarding the Company. This information should be read in conjunction with "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and the Company's Financial Statements and Notes thereto. See "FINANCIAL STATEMENTS."
YEARS ENDED MARCH 31, --------------------------------------------------------------------------- (In Thousands, Except Earnings Per Share Amounts) 2002 2001 2000 1999 1998 ------------ ------------ ------------ ------------- ------------ Income Statement Data: Net Sales $ 24,769 $ 21,457 $ 18,221 $ 16,017 $ 13,188 Cost of Sales and Other Expenses 21,561 19,406 17,007 15,684 13,558 ------------ ------------ ------------ ------------- ------------ Income (Loss) from Continuing Operations Before Income Taxes, Discontinued Operations and Extraordinary Gain 3,208 2,051 1,214 333 (370) Income Tax Benefit (Expense) (1,234) 5,570 0 (125) 270 (Loss) from Discontinued Operations 0 (227) (2,185) (3,764) (754) Gain on Forgiveness of Debt of Discontinued Operations 0 0 1,249 569 0 Gain (Loss) on Disposal of Discontinued Operations 0 0 2,221 (2,500) 0 ------------ ------------ ------------ ------------- ------------ Net Income (Loss) $ 1,974 $ 7,394 $ 2,499 $ (5,487) $ (854) ============ ============ ============ ============= ============ Net Earnings (Loss) Per Basic and Diluted Common Share: (Retroactively adjusted for the 1 for 2.5 reverse stock split in December 2000) Net Earnings (Loss) Per Basic Common Share: From Continuing Operations $ 0.46 $ 2.45 $ 0.47 $ 0.08 $ (0.04) Income (Loss) from Discontinued Operations 0.00 (0.07) 0.50 (2.27) (0.31) ------------ ------------ ------------ ------------- ------------ Net Earnings (Loss) Per Basic Common Share $ 0.46 $ 2.38 $ 0.97 $ (2.19) $ (0.35) ============ ============ ============ ============= ============ Net Earnings (Loss) Per Diluted Common Share: From Continuing Operations $ 0.44 $ 2.43 $ 0.47 $ 0.08 $ (0.04) Income (Loss) from Discontinued Operations 0.00 (0.07) 0.50 (2.27) (0.31) ------------ ------------ ------------ ------------- ------------ Net Earnings (Loss) Per Diluted Common Share $ 0.44 $ 2.36 $ 0.97 $ (2.19) $ (0.35) ============ ============ ============ ============= ============
See Note 2 to the audited financial statements.
AT MARCH 31, --------------------------------------------------------------------------- (In Thousands) 2002 2001 2000 1999 1998 ------------ ------------ ------------ ------------- ------------ Balance Sheet Data: Net Working Capital $ 3,274 $ 1,682 $ 1,702 $ 1,458 $ 1,592 Assets 15,515 14,791 7,866 8,511 11,532 Short-Term Debt 968 963 1,052 874 294 Long-Term Debt 10,812 11,887 13,111 14,915 14,892 Stockholders' Equity (Deficit) 468 (1,598) (9,037) (11,600) (6,113)
See Note 20 to the audited financial statements. 7 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview -------- The Company's core business, MTS Packaging Systems, Inc., experienced profitable growth in fiscal 2002. Revenue increased by 15.3% and net income before income taxes increased 56.4%. The Company continued to reinvest significant portions of its earnings in new capital equipment to meet production demands resulting from increased revenue and also made a substantial investment in the development of its new OnDemand(TM) packaging machine as well as additional disposable products for new markets. Fiscal Year 2002 Compared to Fiscal Year 2001 --------------------------------------------- Results of Operations --------------------- Net Sales --------- Net sales for the fiscal year ended March 31, 2002 increased 15.3% to $24.8 million from $21.5 million the prior fiscal year. Net sales increased in fiscal 2002 primarily as a result of an increase in disposable punch cards sold to existing customers and increases in the sales of packaging machinery. In addition, the Company added new customers during the year as a result of it marketing efforts that were directed towards smaller independent pharmacies throughout the United States and the United Kingdom. Selling prices for disposable products increased slightly compared to the prior year. The Company expects that selling prices may increase throughout the next fiscal year depending upon competitive factors. The volume of disposable products, as well as packaging machinery, is expected to increase as the Company obtains new customers in the U.S., successfully penetrates new markets such as in the United Kingdom, and sells more products to its existing customer base. In addition, the Company expects that the completion of a beta site testing of its new OnDemand machine will result in additional revenue from the sale of OnDemand machines to existing customers. Cost of Sales ------------- Cost of sales for the fiscal year ended March 31, 2002 increased 15.2% to $14.4 million from $12.5 million the prior year. Cost of sales as a percentage of net sales increased slightly to 58.2% from 58.1% for the prior year. The increase in cost of sales resulted from the costs associated with increased net sales. The slight increase in the cost of sales percentage resulted primarily from increases in raw material costs. Increased labor costs were generally offset by improvements in labor efficiencies. The Company expects that its raw material costs will increase throughout the next year. However, depending on competitive factors, the Company anticipates that its selling prices to customers will be increased in order to offset the increase in raw material costs. During the last two fiscal years, the Company made significant investments in new production machinery, which is anticipated to result in manufacturing efficiencies that will generally offset increases in labor costs. Selling, General and Administrative Expenses ("SG&A") ----------------------------------------------------- SG&A expenses for the fiscal year ended March 31, 2002 increased 4.0% to $5.2 million compared to $5.0 million the prior year. The increase resulted primarily from increases in sales and marketing expenses associated with increased net sales. In addition, administration expenses increased compared to the prior year primarily due to expenditures for investor relations, shareholder communications and investment banking services. The increase in SG&A expenses were partially offset by an adjustment of $180,000 in the Company reserve for bad debts. The Company expects SG&A expenses to increase during the next year as a result of increased sales and marketing efforts as well as the addition of several administrative personnel to accommodate the increased business activity. 8 Research and Development ("R & D") ---------------------------------- Research and development expenses decreased 26.9% to $87,000 from $119,000 the prior year. The decrease in R & D expenditures results from the Company's emphasis in developing new products (including the OnDemand product) for existing markets. Depreciation and Amortization ----------------------------- Depreciation and amortization expenses for the fiscal year ended March 31, 2002 increased 14.8% to $926,000 compared to $807,000 the prior year. The increase results primarily from the depreciation of manufacturing equipment that was placed in service during the second half of the prior fiscal year and throughout the fiscal year ended March 31, 2002. Interest Expense ---------------- Interest expense for the fiscal year ended March 31, 2002 decreased 6.3% to $919,000 from $981,000 the prior year. The decrease in interest expense resulted from the decrease in long-term debt outstanding that resulted from principal payments made throughout the year. Income Tax Expense ------------------ Income tax expense for the fiscal year ended March 31, 2002 was $1,234,000 compared to an income tax benefit of $5,570,000 the prior year. Income tax expense for the fiscal year ended March 31, 2002 represents taxes at the statutory federal and state rates. During the prior fiscal year, the Company recorded an income tax benefit of $5,719,000 resulting from the recognition of tax benefits, primarily net operating loss carryforwards, that had not previously been recognized. Fiscal Year 2001 Compared to Fiscal Year 2000 --------------------------------------------- Results of Continuing Operations -------------------------------- Net Sales --------- Net sales for the fiscal year ended March 31, 2001 increased 18.1% to $21.5 million from $18.2 million the prior fiscal year. Net Sales increased in fiscal 2001 primarily as a result of an increase in the amount of disposable punch cards sold to new and existing customers. Selling prices remained stable during the fiscal year ended March 31, 2001. Although the Company's customers continued to experience downward pressure on reimbursement amounts, the Company believes that the cost savings that are realized by its customers by utilizing its medication dispensing systems will allow it to continue to maintain selling prices at competitive levels. Cost of Sales ------------- Cost of sales for the year ended March 31, 2001 increased 20.2% to $12.5 million from $10.4 million in the prior year. Cost of sales as a percentage of sales increased to 58.1% from 57.1%. The increase in cost of sales resulted from the costs associated with the increased net sales. The increase in cost of sales as a percentage of sales resulted primarily from increases in the direct costs of raw material and labor. Direct costs are expected to continue to increase. The Company attempts to make corresponding adjustments to the prices of its products, however, there can be no assurance that competitive factors will allow for adjustments in selling prices in the future. Selling, General and Administrative Expenses ("SG&A") ----------------------------------------------------- SG&A expenses for the year ended March 31, 2001 increased 13.6% to $5.0 million compared to $4.4 million the prior year. Sales and marketing costs increased in Fiscal 2001 to accommodate increases in net sales generated by MTS Packaging. In addition, the Company incurred increased costs associated with its investor relations, shareholder communication and investment banking activities. 9 Research and Development ("R & D") ---------------------------------- Research and development expenses decreased 42.5% in the year ended March 31, 2001 to $119,000 from $207,000 the prior year. The Company directed more of its development efforts to the completion of new products during the year ended March 31, 2001 compared to the prior year in which development efforts were directed towards the research of these new products. Depreciation and Amortization ----------------------------- Depreciation and amortization expense decreased 6.3% to $807,000 in fiscal 2001 from $861,000 the prior year. The decrease resulted from older assets becoming fully depreciated. Interest Expense ---------------- Interest expense for the year ended March 31, 2001 decreased 15.4% to $981,000 from $1,159,000 the prior year. The decrease resulted from a reduction in long-term debt outstanding. Income Tax ---------- During previous years, the Company had provided a 100% valuation allowance on its net deferred tax asset as it was not more likely than not that the related income tax benefit would be realized in the future. During the quarter ended December 31, 2000, the Company removed its valuation allowance, thereby recording an income tax benefit of $5,719,000 as the Company now believes that it is more likely than not that these income tax benefits will be realized in the future based in part on (1) the historical profitable operations of its core business; (2) expectations that its core business will continue to be profitable; (3) growth opportunities available for its core business; and (4) the length of time that the net operating loss carryforwards are available to offset future taxable income. The income tax benefit is comprised primarily of net operating loss carryforwards that are available to offset future taxable income. The carryforward losses expire beginning in fiscal year 2011 and ending in fiscal year 2020. Results of Discontinued Operations ---------------------------------- Loss from Operations of Discontinued Operations ----------------------------------------------- The operations of discontinued operations during the year ended March 31, 2001 were confined to the liquidation of certain assets of MTL, primarily accounts receivable. Since the date of sale, approximately $431,000 of accounts receivable were collected. The proceeds of the collection of accounts receivable were used to pay the ongoing cost of collection and to fund settlements with creditors of MTL. During fiscal 2001, the Company determined that the cost of collecting the remaining accounts receivable could equal or exceed the amount collected, and therefore, discontinued its collection efforts and reduced the carrying value of the accounts receivable to $0. Certain liabilities of MTL were compromised during fiscal 2001 as a result of settlements reached with creditors. In addition, the Company determined that certain liabilities were not payable, and therefore, reduced the carrying value of them to $0. Liquidity and Capital Resources ------------------------------- The operations of the Company provided $3.1 million in the fiscal year ended March 31, 2002 compared to $3.4 million the prior year. The decrease resulted primarily from the fact that accounts receivable increased approximately $900,000 and accounts payable and accrued liabilities decreased approximately $300,000 during the year. This increase in accounts receivable is due to increased sales and an increase in days sales in accounts receivable due to slower payments from several large customers and slow payments from new accounts in the United Kingdom. Investing activities used $1.7 million during the fiscal year ended March 31, 2002 compared to $2.0 million the prior year. The decrease resulted primarily from the fact that in the prior year the Company made a significant expenditure for new manufacturing equipment to accommodate the anticipated increase in net sales that was realized in the current year. 10 Financing activities used $1.0 million during the fiscal year ended March 31, 2002 compared to $1.5 million the prior year. The decrease results primarily from the fact that the Company made certain principal payments to its lender in the prior year pursuant to the excess cash flow provisions of its loan agreement. The Company had working capital of $3.3 million at March 31, 2002 and had no source of additional working capital at March 31, 2002 other than that which is generated from operations. In June 2002, the Company repaid the entire amount, $11,310,000, of its bank term loan with the proceeds of a new revolving line of credit, term loans, a subordinated note and convertible preferred stock. The revolving line of credit allows for borrowing of up to $5,000,000 based upon advance rates that are applied to the Company's eligible accounts receivable and inventory. Interest is payable on the revolving line of credit monthly based on the average unpaid balance at the prime rate plus 1.0%. One term loan in the amount of $700,000 is repayable in equal monthly installments over a five (5) year term, plus interest at the prime rate plus 1.25%. Another term loan in the amount of $2,000,000 is repayable in equal monthly installments over two (2) years plus interest at the prime rate plus 2.25% and is subject to an excess cash flow payment provision. The revolving line of credit and the term loans are secured by the Company's accounts receivable, inventory, machinery and equipment and all other assets of the Company. The subordinated note in the amount of $4,000,000 is repayable in five (5) years with interest only, at 14%, payable monthly until the maturity of the note. The subordinated note is secured by a second lien on all of the assets of the Company. In addition, the subordinated note holders were issued 566,517 warrants to purchase common stock exercisable for ten (10) years at $.01 per share. (Subject to certain antidilution provisions.) The Company issued 2,000 shares of convertible preferred stock at $1,000 per share. The holders of the convertible preferred stock are entitled to receive quarterly dividends at the rate of 11% per annum. The dividends are payable in cash or shares of convertible preferred stock, at the Company's option, and are cumulative. The preferred stock is convertible into 846,000 shares of the Company's common stock at $2.36 per share. (Subject to certain antidilution provisions.) The warrant agreement and the terms of the convertible preferred stock contain a make-whole provision that obligates the Company to pay certain amounts to the holders of the warrants and convertible preferred stock if they do not ultimately receive an amount equal to the price per share of the common stock on the date they exercise their right to purchase the common shares that underlie the warrants and the convertible preferred stock. The warrant agreement also contains a provision that may obligate the Company to pay certain amounts to the holders of the warrants in the event that there is a change in control of the voting common stock of the Company, or if there is a sale of the Company or a public offering of the Company's common stock. In the event that the Company is required to make payments to the holders of the warrants and/or preferred stock, it may elect to issue additional warrants and/or preferred stock in lieu of a cash payment. Although the make-whole provision and other provisions of the warrant agreement and convertible preferred stock agreement provide for a maximum of 12,500,000 shares that may be issued pursuant to those provisions, based upon current conditions, the Company believes it is unlikely that the maximum number of shares would be issued. The Company also issued, to its financial advisors, 125,000 warrants to purchase common stock as part of a success fee related to the above referenced financing. The warrants are exercisable for five (5) years at $1.50 per share. 11 The revolving line of credit, the term loans and the subordinated notes each contain certain financial covenants that, among other things, requires the maintenance of certain financial ratios, limits the amount of capital expenditures and requires the Company to obtain the lenders approval for certain matters. 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 net sales may result in corresponding increases in accounts receivable. Cash flow from operations and borrowing availability on the revolving line of credit 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 the cash generated from operations during the next fiscal year is expected be sufficient to meet its capital expenditures, product development, working capital needs and the principal payments required by its loan agreements. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company does not have any material market risk sensitive financial instruments. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements required by this item are contained at the end of this report. ITEM 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE NONE 12 PART III ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item is incorporated herein by reference to the information included in the Company's definitive proxy statement, which will be filed by the Company within 120 days after the end of the Company's 2002 fiscal year. ITEM 11: EXECUTIVE COMPENSATION The information required by this item is incorporated herein by reference to the information included in the Company's definitive proxy statement, which will be filed by the Company within 120 days after the end of the Company's 2002 fiscal year. ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated herein by reference to the information included in the Company's definitive proxy statement, which will be filed by the Company within 120 days after the end of the Company's 2002 fiscal year. ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated herein by reference to the information included in the Company's definitive proxy statement, which will be filed by the Company within 120 days after the end of the Company's 2002 fiscal year. 13 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report: 1. and 2. The Financial Statements and schedule filed as part of this report are listed separately in the Index to Financial Statements beginning on page 24 of this report 3. For Exhibits, see Item 14(c) below. Each management contract or compensatory plan or arrangement required to be filed as an Exhibit hereto is listed in Exhibit Nos. 10.20, 10.21, 10.22, 10.23, 10.24 and 10.25 of Item 14(c) below. (c) List of Exhibits **3.1 Articles of Incorporation and Amendments thereto *3.1(a) Amendment to Articles of Incorporation increasing authorized Common Stock to 25,000,000 from 15,000,000 shares **3.2 Bylaws of the Company **4.2 Certificate of Designation of the Powers, Designation Preferences of Rights of the Series A Preferred Stock. **10.2 Siegel Family Revocable Trust Agreement 10.2(a) (8) Amendment and Restated Siegel Family Revocable Trust Agreement 10.2(b) (8) Siegel Family Limited Partnership Agreement **10.3(a) Agreements and Assignments of Patent Rights between Harold B. Siegel and the Siegel Family Revocable Trust **10.3(b) License Agreement between the Company and the Siegel Family Revocable Trust 10.18(7) Addendum to Lease dated September 30, 1993 with Leslie A. Rubin for facilities located at 12920 and 12910 Automobile Boulevard, Clearwater, Florida 10.19(7) Lease effective August 2, 1993 by and between C & C Park Building and Medical Technology Systems, Inc. for property located at 21540 Drake Road, Strongsville, Ohio 10.22(7) Form of Executive Stock Appreciation Rights and Non-Qualified Stock Option Agreement 10.23(7) Form of Director's Stock Option Agreement 10.24(7) Form of Directors' Consulting Agreement 10.25(7) Form of Director/Officer Indemnification Agreement 10.29(10) Stock Option Plan dated March 4, 1997 10.42(14) Form of Warrant dated May 13, 1998, between Stanley D. Estrin Irrevocable Trust dtd March 16, 1993, Judith C. Estrin, Trustee and Medical Technology Systems, Inc. 10.43(14) Form of Warrant dated May 13, 1998, between Stanley D. Estrin Irrevocable Trust dtd March 16, 1993, Judith C. Estrin, Trustee and Medical Technology Systems, Inc. 10.45(14) Form of Warrant dated August 7, 1998, between Sally Siegel and Medical Technology Systems, Inc. 10.46(14) Form of Warrant dated August 7, 1998, between Sally Siegel and Medical Technology Systems, Inc. 10.48(14) Form of Warrant dated August 18, 1998, between Todd and Shelia Siegel and Medical Technology Systems, Inc. 10.49(14) Form of Warrant dated August 18, 1998, between Todd and Shelia Siegel and Medical Technology Systems, Inc. 10.52(16) Form of Warrant dated October 16, 1998, between Joan L. Fitterling, as Trustee, or her successor in Trust of the Joan L. Fitterling Revocable Trust dated August 15, 1995 and Medical Technology Systems, Inc. 10.53(16) Form of Warrant dated October 16, 1998, between Joan L. Fitterling, as Trustee, or her successor in Trust of the Joan L. Fitterling Revocable Trust dated August 15, 1995 and Medical Technology Systems, Inc. 10.53(16) Form of Warrant dated October 16, 1998, between Joan L. Fitterling, as Trustee, or her successor in Trust of the Joan L. Fitterling Revocable Trust dated August 15, 1995 and Medical Technology Systems, Inc. 10.59(22) Form of Warrant dated September 24, 1999 between Andrew G. Burch and Medical Technology Systems, Inc. 10.60(22) Form of Warrant dated September 24, 1999 between IFM Venture Group and Medical Technology Systems, Inc. 10.62(23) Employment Agreement between Medical Technology Systems, Inc. and Todd E. Siegel dated September 1, 1999.
14 10.63(23) Amendment One to Executive Stock Appreciation Rights and Non-Qualified Stock Option Agreement dated October 28, 2000 between Medical Technology Systems, Inc. and Todd E. Siegel. 10.64(24) Registration Statement regarding the Medical Technology Systems, Inc. 1997 Stock Option Plan dated February 27, 2001. 10.65(25) Employment Agreement between Medical Technology Systems, Inc. and Michael P. Conroy dated March 2, 2001. 10.66(26) Subordination Agreement between Eureka I, L.P., LaSalle Business Credit, Inc., Medical Technology Systems, Inc., MTS Packaging Systems, Inc. dated June 26, 2002. 10.67(26) Securities Purchase Agreement between Eureka I, L.P. and Medical Technology Systems, Inc. dated June 26, 2002. 10.66(26) Senior Subordinated Note between Eureka I, L.P. and Medical Technology Systems, Inc. dated June 26, 2002. 10.68(26) Registration Rights Agreement between Eureka I, L.P. and Medical Technology Systems, Inc. dated June 26, 2002. 10.69(26) Tag-Along Agreement between Eureka I, L.P., Medical Technology Systems, Inc. and JADE Partners dated June 26, 2002. 10.70(26) Tag-Along Agreement between Eureka I, L.P., Medical Technology Systems, Inc. and Todd E, Siegel dated June 26, 2002. 10.71(26) Guarantor Security Agreement between Eureka I, L.P., MTS Packaging Systems, Inc., Medication Management Technology, Inc., Clearwater Medical Services, Inc., Medical Technology Laboratories, Inc., Medication Management Systems, Inc., Systems Professionals, Inc., Cart-Ware, Inc., Vangard Pharmaceutical Packaging, Inc. LifeServ Technologies, Inc., Performance Pharmacy Systems, Inc., and MTS Sales & Marketing dated June 26, 2002. 10.72(26) Guaranty Agreement between Eureka I, L.P. Medical Technology Systems, Inc. dated June 26, 2002. 10.73(26) Securities Pledge Agreement between Eureka I, L.P., Medical Technology Systems, Inc. and LifeServ Technologies, Inc. dated June 26, 2002 10.74(26) Security Agreement between Eureka I, L.P., Medical Technology Systems, Inc. date June 26, 2002. 10.75(26) Trademark Security Agreement between Eureka I, L.P. and Medical Technology Systems, Inc. dated June 26, 2002. 10.76(26) Trademark Security Agreement between Eureka I, L.P. and MTS Packaging Systems, Inc. dated June 26, 2002. 10.77(26) Patent Security Agreement between Eureka I, L.P. and MTS Packaging Systems, Inc. dated June 26, 2002. 10.78(26) Patent Security Agreement between Eureka I, L.P. and The Siegel Family Revocable Trust dated June 26, 2002. 10.79(26) Patent Security Agreement between Eureka I, L.P. and Medical Technology Systems, Inc. dated June 26, 2002. 10.80(26) Warrant Agreement between Eureka I, L.P. and Medical Technology Systems, Inc. dated June 26, 2002. 10.81(26) Warrant Agreement between Westminster Securities Corporation and Medical Technology Systems, Inc. dated June 26, 2002. 10.82(26) Loan and Security Agreement between LaSalle Business Credit, Inc. as Agent, Standard Federal Bank National Association Inc. as Lender and Medical Technology Systems, Inc. and MTS Packaging Systems, Inc. dated June 26, 2002. 10.83(26) Term Note A between LaSalle Business Credit, Inc. as Agent, Standard Federal Bank National Association Inc. as Lender and Medical Technology Systems, Inc. and MTS Packaging Systems, Inc. dated June 26, 2002. 10.84(26) Term Note B between LaSalle Business Credit, Inc. as Agent, Standard Federal Bank National Association Inc. as Lender and Medical Technology Systems, Inc. and MTS Packaging Systems, Inc. dated June 26, 2002 10.85(26) Revolving Credit Note between LaSalle Business Credit, Inc. as Agent, Standard Federal Bank National Association Inc. as Lender and Medical Technology Systems, Inc. and MTS Packaging Systems, Inc. dated June 26, 2002 10.86(26) Capex Note between LaSalle Business Credit, Inc. as Agent, Standard Federal Bank National Association Inc. as Lender and Medical Technology Systems, Inc. and MTS Packaging Systems, Inc. dated June 26, 2002. 10.87(26) Continuing Unconditional Guaranty between LaSalle Business Credit, Inc. as Agent, Standard Federal Bank National Association Inc. as Lender and Medical Technology Systems, Inc. and MTS Packaging Systems, Inc. dated June 26, 2002.
15 10.88(26) Securities Pledge Agreement between LaSalle Business Credit, Inc. as Agent, Standard Federal Bank National Association Inc. as Lender and Medical Technology Systems, Inc. and MTS Packaging Systems, Inc. dated June 26, 2002. 10.89(26) Guarantor Security Agreement between LaSalle Business Credit, Inc. as Agent, Standard Federal Bank National Association Inc. as Lender, Medication Management Technologies, Inc., Clearwater Medical Services, Inc., Medical Technology Laboratories, Inc., Medication Management Systems, Inc., Systems Professionals, Inc., Cart-Ware, Inc., Vangard Pharmaceutical Packaging, Inc. LifeServ Technologies, Inc., Performance Pharmacy Systems, Inc., and MTS Sales & Marketing, Inc. dated June 26, 2002. 10.90(26) Trademark Security Agreement between LaSalle Business Credit, Inc. as Agent, Standard Federal Bank National Association Inc. as Lender and MTS Packaging Systems, Inc. dated June 26, 2002. 10.91(26) Trademark Security Agreement between LaSalle Business Credit, Inc. as Agent, Standard Federal Bank National Association Inc. as Lender and Medical Technology Systems, Inc. dated June 26, 2002. 10.92(26) Patent Security Agreement between LaSalle Business Credit, Inc. as Agent, Standard Federal Bank National Association Inc. as Lender and Medical Technology Systems, Inc. dated June 26, 2002. 10.93(26) Patent Security Agreement between LaSalle Business Credit, Inc. as Agent, Standard Federal Bank National Association Inc. as Lender and The Siegel Family Revocable Trust dated June 26, 2002. 10.94(26) Patent Security Agreement between LaSalle Business Credit, Inc. as Agent, Standard Federal Bank National Association Inc. as Lender and MTS Packaging Systems, Inc. dated June 26, 2002. * Incorporated herein by reference to same Exhibit(s), respectively, Registration Statement No. 33-40678 filed with the Commission on May 17, 1991 ** Incorporated herein by reference to same Exhibit(s), respectively, Registration Statement (SEC File No. 33-17852) (10) Incorporated herein by reference to Form 10-K for the year ended March 31, 1997 (11) Incorporated herein by reference to Form 8-K dated May 2, 1997 (12) Incorporated herein by reference to Form 10-Q dated February 13, 1998 for the quarter ended December 31, 1997 (13) Incorporated herein by reference to Form 10-K for the year ended March 31, 1998 (14) Incorporated herein by reference to Form 10Q filed November 12, 1998 for quarter ending September 30, 1998 (15) Incorporated herein by reference to Form 8K filed on June 9, 1999 for event dated May 25, 1999 (16) Incorporated herein by reference to Form 10-K for year ended March 31, 1999 (17) Incorporated herein by reference to Form 8-K filed July 16, 1999 (18) Incorporated herein by reference to Form 10-Q dated November 12, 1999 for the quarter ending September 30, 1999 (19) Incorporated herein by reference to Form 8-K filed January 18, 1999 (20) Incorporated herein by reference to Form 10-K for year ending March 31, 2000 (21) Incorporated herein by reference to Form 8-K filed July 17, 2000 (22) Incorporated herein by reference to Form 10-Q filed November 7, 2000 for quarter ending September 30, 2000 (23) Incorporated herein by reference to Form 10-Q filed February 6, 2001 for quarter ending December 31, 2000 (24) Incorporated herein by reference to Form S-8 filed February 27, 2001. (25) Incorporated herein by reference to Form 10-K for year ending March 31, 2001 (26) Filed herein
16 MEDICAL TECHNOLOGY SYSTEMS, INC. INDEX TO FINANCIAL STATEMENTS Page REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS............................17 CONSOLIDATED FINANCIAL STATEMENTS Consolidated Balance Sheets as of March 31, 2002 and 2001...............18 Consolidated Statements of Operations for the years ended March 31, 2002, 2001 and 2000.........................................................19 Consolidated Statement of Changes in Stockholders' Equity (Deficit) for the years ended March 31, 2002, 2001 and 2000.........................20 Consolidated Statements of Cash Flows for the years ended March 31, 2002, 2001 and 2000........................................21 Notes to Consolidated Financial Statements...........................22-39 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE...................................................41 FINANCIAL STATEMENT SCHEDULE Schedule II - Valuation and Qualifying Accounts........................S-1 All other schedules are omitted since the required information is not present in amount sufficient to require submission of the schedule or because the information required is included in the financial statements and notes thereto. 17 Report of Independent Certified Public Accountants Board of Directors Medical Technology Systems, Inc. and Subsidiaries Clearwater, Florida We have audited the accompanying consolidated balance sheets of Medical Technology Systems, Inc. and Subsidiaries as of March 31, 2002 and 2001 and the related consolidated statements of operations, changes in stockholders' equity (deficit) and cash flows for each of the three years in the period ended March 31, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Medical Technology Systems, Inc. and Subsidiaries as of March 31, 2002 and 2001, and the consolidated results of operations and cash flows for each of the three years in the period ended March 31, 2002 in conformity with accounting principles generally accepted in the United States of America. GRANT THORNTON LLP Tampa, Florida June 11, 2002, except for Note 19 as to which the date is June 26, 2002 18 MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS MARCH 31, 2002 AND 2001 (In Thousands) ASSETS
2002 2001 --------------- --------------- Current Assets: Cash $ 410 $ 92 Accounts Receivable, Net 3,456 2,567 Inventories, Net 2,212 2,311 Prepaids and Other 199 129 Deferred Tax Benefits 1,232 1,085 --------------- --------------- Total Current Assets 7,509 6,184 Property and Equipment, Net 2,425 2,350 Other Assets, Net 2,477 1,772 Deferred Tax Benefits 3,104 4,485 --------------- --------------- Total Assets $ 15,515 $ 14,791 =============== =============== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current Liabilities: Current Maturities of Long-Term Debt $ 968 $ 963 Accounts Payable and Accrued Liabilities 3,267 3,539 --------------- --------------- Total Current Liabilities 4,235 4,502 Long-Term Debt, Less Current Maturities 10,812 11,887 --------------- --------------- Total Liabilities 15,047 16,389 --------------- --------------- Stockholders' Equity (Deficit): Common Stock 43 42 Capital In Excess of Par Value 8,806 8,715 Accumulated Deficit (8,053) (10,027) Treasury Stock (328) (328) --------------- --------------- Total Stockholders' Equity (Deficit) 468 (1,598) --------------- --------------- Total Liabilities and Stockholders' Equity (Deficit) $ 15,515 $ 14,791 =============== ===============
The accompanying notes are an integral part of these financial statements. 19 MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED MARCH 31, 2002, 2001 AND 2000 (In Thousands; Except Earnings Per Share Amounts)
2002 2001 2000 -------------- -------------- -------------- Net Sales $ 24,769 $ 21,457 $ 18,221 Costs and Expenses: Cost of Sales 14,418 12,490 10,410 Selling, General and Administrative 5,211 5,009 4,370 Research and Development 87 119 207 Depreciation and Amortization 926 807 861 Interest 919 981 1,159 -------------- -------------- -------------- Total Costs and Expenses 21,561 19,406 17,007 -------------- -------------- -------------- Income from Continuing Operations Before Income Taxes, Discontinued Operations and Extraordinary Gain 3,208 2,051 1,214 Income Tax Benefit (Expense) (1,234) 5,570 0 -------------- -------------- -------------- Income from Continuing Operations Before Discontinued Operations and Extraordinary Gain 1,974 7,621 1,214 Loss from Operations of Discontinued Operations, Net of Tax 0 (227) (2,185) Gain on Forgiveness of Debt of Discontinued Operations 0 0 1,249 Gain on Disposal of Discontinued Operations 0 0 2,221 -------------- -------------- -------------- Net Income $ 1,974 $ 7,394 $ 2,499 ============== ============== ============== Net Income per Basic Common Share: Income from Continuing Operations $ 0.46 $ 2.45 $ 0.47 Income (Loss) from Discontinued Operations 0.00 (0.07) 0.50 -------------- -------------- -------------- Net Income per Basic Common Share $ 0.46 $ 2.38 $ 0.97 ============== ============== ============== Net Income per Diluted Common Share: Income from Continuing Operations $ 0.44 $ 2.43 $ 0.47 Income (Loss) from Discontinued Operations 0.00 (0.07) 0.50 -------------- -------------- -------------- Net Income per Diluted Common Share $ 0.44 $ 2.36 $ 0.97 ============== ============== ==============
The accompanying notes are an integral part of these financial statements. 20 MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) YEARS ENDED MARCH 31, 2002, 2001 AND 2000 (In Thousands; Except Share Data)
COMMON STOCK -------------------------------------------------------------------------------------- Number 0.01 Capital in Retained Treasury of Par Excess of Earnings Stock Total Shares Value Par Value (Deficit) ----------- ----------- ----------- ------------ ------------ ----------- Balance, March 31, 1999 6,406,191 $ 64 $ 8,583 $ (19,920) $ (328) $(11,601) Stock Issued 136,430 1 38 39 Debt Conversion 25 25 Net Income for Year Ended March 31, 2000 2,499 2,499 -------------------------------------------------------------------------------------- Balance, March 31, 2000 6,542,621 $ 65 $ 8,646 $ (17,421) $ (328) $ (9,038) Issuance of Stock Options 45 45 Exchange of Preferred Stock for Common Stock 4,000,000 40 (39) 1 Reverse Stock Split (6,325,593) (63) 63 Net Income for Year Ended March 31, 2001 7,394 7,394 -------------------------------------------------------------------------------------- Balance March 31, 2001 4,217,028 $ 42 $ 8,715 $ (10,027) $ (328) $ (1,598) Issuance of Stock Options 49 49 Warrants and Options Exercised 64,133 1 23 24 Stock Issued 50,000 19 19 Net Income for Year Ended March 31, 2002 1,974 1,974 -------------------------------------------------------------------------------------- Balance March 31, 2002 4,331,161 $ 43 $ 8,806 $ (8,053) $ (328) $ 468 =========== =========== =========== ============ ============ =========== VOTING PREFERRED STOCK -------------------------------------------------------------------------------------- Number $0001. of Par Shares Value ----------- ----------- Balance, March 31, 2000 6,500,000 $ 1 $ 1 ----------- ----------- ----------- Exchange of Preferred Stock for Common Stock (6,500,000) $ (1) $ (1) ----------- ----------- ----------- Balance, March 31, 2001 0 $ 0 $ 0 ----------- ----------- ----------- Balance, March 31, 2002 0 $ 0 $ 0 ----------- ----------- ----------- Total Stockholders' (Deficit) March 31, 2002 $ 468 ===========
The accompanying notes are an integral part of these financial statements. 21 MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED MARCH 31, 2002, 2001 AND 2000 (In Thousands)
2002 2001 2000 -------------- -------------- -------------- Operating Activities Income from Continuing Operations $ 1,974 $ 7,621 $ 1,214 -------------- -------------- -------------- Adjustments to Reconcile to Net Cash Provided by Continuing Operations Issuance of Stock for Services 19 0 24 Deferred Compensation 49 45 0 Depreciation and Amortization 926 807 861 Deferred Income Tax Expense (Benefit) 1,234 (5,570) 0 (Increase) Decrease in: Accounts Receivable (889) 34 (128) Inventories 99 (281) (40) Prepaids and Other (70) (43) (17) Increase (Decrease) in: Accounts Payable and Other Accrued Liabilities (275) 763 (108) -------------- -------------- -------------- Total Adjustments 1,093 (4,245) 592 -------------- -------------- -------------- Net Cash Provided by Operating Activities of Continuing Operations 3,067 3,376 1,806 -------------- -------------- -------------- Investing Activities Expended for Property and Equipment (809) (1,063) (494) Expended for Product Development (853) (798) (112) Expended for Patents and Other Assets (42) (91) (18) -------------- -------------- -------------- Net Cash Used by Investing Activities of Continuing Operations (1,704) (1,952) (624) -------------- -------------- -------------- Financing Activities Payments on Notes Payable and Long-Term Debt (1,096) (1,313) (1,601) Advances from (to) Affiliates - Discontinued Operations 0 (191) 386 Exercise of Stock Options 24 0 0 Proceeds from Borrowing on Notes Payable and Long-Term Debt 27 0 0 -------------- -------------- -------------- Net Cash Used by Financing Activities of Continuing Operations (1,045) (1,504) (1,215) -------------- -------------- -------------- Net Increase (Decrease) in Cash - Continuing Operations 318 (80) (33) Cash at Beginning of Period - Continuing Operations 92 172 205 -------------- -------------- -------------- Cash at End of Period - Continuing Operations $ 410 $ 92 $ 172 ============== ============== ==============
See Note 17 for supplemental disclosures of other cash flow information. The accompanying notes are an integral part of these financial statements. 22 MEDICAL TECHNOLOGY SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2002 2001 AND 2000 NOTE 1 - BACKGROUND INFORMATION Medical Technology Systems, Inc.(TM), a Delaware corporation (the "Company"), was incorporated in March 1984. The Company is a holding company that historically operated through a number of separate subsidiaries, including MTS Packaging Systems, Inc.(TM)("MTS Packaging"), Medical Technology Laboratories, Inc. ("MTL") and LifeServ Technologies, Inc.(TM)("LifeServ"). MTS Packaging primarily manufactures and sells disposable medication punch cards, packaging equipment and allied ancillary products throughout the United States. Its customers are predominantly pharmacies that supply nursing homes, assisted living and correctional facilities with prescription medications for their patients. MTS Packaging manufactures its proprietary disposable punch cards and packaging equipment in its own facilities. This manufacturing process uses integrated machinery for manufacturing the disposable medication punch cards. The disposable medication punch cards and packaging equipment are designed to provide a cost effective method for pharmacies to dispense medications. The Company's medication dispensing systems and products provide innovative methods for dispensing medications in disposable packages. The Company sold the assets of MTL and LifeServ in fiscal 2000 and treated the operations of these subsidiaries as discontinued operations in fiscal 2000 and 2001. The Company's continuing operations have been conducted through one business segment since fiscal 1999 (see Note 20). NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Consolidation ------------- The consolidated financial statements include the accounts of the Company and its subsidiaries, MTS Packaging, MTL and LifeServ. The results of operations of these discontinued segments for 2001 and 2000 have been excluded from the components of "Income from Continuing Operations" and shown under the caption "Loss from Operations of Discontinued Operations" in the Statements of Operations. All significant inter-company accounts and transactions have been eliminated in consolidation. Use of Estimates ---------------- The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Cash ---- For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. There were no cash equivalents for all periods presented. Inventories ----------- Inventories are stated at the lower of cost or market. Cost is determined by the first-in, first-out ("FIFO") method. As of March 31, 2002 and 2001, the Company has established an inventory valuation allowance of $40,000 to account for the estimated loss in value of inventory due to obsolescence. The Company will continue to evaluate the inventory and review the valuation allowance if deemed necessary. 23 Revenue Recognition ------------------- The Company recognizes revenue when products are shipped and title transfers. Revenue includes certain amounts invoiced to customers for freight and handling charges. Effective with the fiscal year ended March 31, 2002, the Company excludes the actual cost of freight and handling incurred from net sales. As a result of this change, the Company has increased its net sales and its cost of sales for the fiscal year ended March 31, 2001 and 2000 by $1,304,000 and $1,240,000 respectively. Property and Equipment ---------------------- Property and equipment are recorded at cost. Additions to, and major improvements of, property and equipment are capitalized. Maintenance and repair expenditures are charged to expense as incurred. As property and equipment is sold or retired, the applicable cost and accumulated depreciation is eliminated from the accounts and any gain or loss recorded. Depreciation and amortization are calculated using the straight-line method based upon the assets' estimated useful lives as follows: Years Property and Equipment.................. 3-7 Leasehold Improvements.................. 5 The Company uses accelerated methods of depreciation for tax purposes. Research and Development and Product Development Costs ------------------------------------------------------ The Company expenses research and development costs as incurred. The Company incurred approximately $87,000, $119,000 and $207,000 in research and development costs during fiscal 2002, 2001 and 2000 respectively. All costs associated with product development from the point of technological feasibility to its general distribution to customers are capitalized and subsequently amortized. Annually, the Company re-examines its amortization policy relating to its product development costs. The Company has determined that a five-year period is appropriate. Capitalized product development costs totaled approximately $853,000, $798,000 and $112,000 for the years ended March 31, 2002, 2001 and 2000 respectively. Other Assets ------------ Other assets are carried at cost less accumulated amortization. Amortization is being calculated on a straight-line basis over a five to seventeen year period. Long-lived assets and certain identifiable intangibles that are held and used by the Company are reviewed for impairment whenever events or changes in circumstance indicate that the carrying amount of these assets may not be recoverable. In performing the review for recoverability, the Company estimates the future cash flows expected to result from the use of the assets and their eventual disposition. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the assets, an impairment loss is recognized. Long-lived assets and certain identifiable intangibles to be disposed of are to be reported at the lower of the carrying amount or the fair value less cost to sell, except for assets that are related to discontinued operations, which are reported at the lower of carrying value or net realizable value. There were no impairment losses in 2002, 2001 or 2000. Earnings Per Share ------------------ Earnings per share are computed using the basic and diluted calculations on the face of the statement of operations. Basic earnings per share is calculated by dividing net income by the weighted average number of shares of common stock outstanding for the period. Diluted earnings per share is calculated by dividing net income by the weighted average number of shares of common stock outstanding for the period, adjusted for the dilutive effect of common stock equivalents, using the treasury stock method (see Note 15). All earnings per share amounts have been retroactively adjusted for the 1 for 2.5 reverse stock split in fiscal 2001. 24 Income Taxes ------------ Income taxes are provided for under the liability method in accordance with FASB No. 109, "Accounting for Income Taxes", whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Treasury Stock The Company records its treasury stock at cost. Stock-Based Employee Compensation --------------------------------- The Company accounts for its stock options granted to employees in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. As such, compensation expense would be recorded on the date of granting the stock options only if the current market price of the underlying stock exceeded the exercise price. As permitted by SFAS No. 123, Accounting for Stock-Based Compensation, the Company also provides certain pro forma disclosure provisions of Statement 123 (see Note 14) Fair Value of Financial Instruments ----------------------------------- The carrying amounts of cash, receivables, accounts payable and accrued liabilities approximate fair value because of the short-term nature of the items. The carrying amount of current and long-term portions of long-term debt approximates fair value since the interest rates approximate current prevailing market rates. Reclassifications ----------------- Certain reclassifications were made to the 2001 and 2000 financial statement amounts to conform to 2002 presentation. Recent Accounting Pronouncements -------------------------------- On July 20, 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 141, Business Combinations, and SFAS 142, Goodwill and Intangible Assets. SFAS 141 is effective for all business combinations completed after June 30, 2001. SFAS 142 is effective for the fiscal year beginning April 1, 2002; however, certain provisions of that Statement apply to goodwill and other intangible assets acquired between July 1, 2001 and the effective date of SFAS 142. The Company has not yet analyzed the effect, if any, of these new standards; accordingly, the Company is unable at present to state what effect, if any, the adoption of these standards will have on the Company's financial statements. In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. The provisions of the statement are effective for financial statements for the fiscal year beginning April 1, 2002. The Company is evaluating the impact of the adoption of this standard and has not yet determined the effect of adoption on its financial position and results of operations. NOTE 3 - ACCOUNTS RECEIVABLE 25 The Company maintains an allowance for potential losses on individual and commercial accounts receivable, which are unsecured. Management performs periodic collectibility reviews of its accounts receivable that considers aging and other factors. As a result of these reviews, the Company reduced the bad debt reserve by approximately $180,000 during the fiscal year ended March 31, 2002. Accounts Receivable consist of the following:
March 31, March 31, 2002 2001 ------------- -------------- (In Thousands) Accounts Receivable $ 3,557 $ 2,857 Less: Allowance for Doubtful Accounts (101) (290) ------------- -------------- $ 3,456 $ 2,567 ============= ==============
All of the Company's accounts receivable are pledged as collateral on bank notes. The geographic sales of the Company are primarily in the United States. There were 2, 2 and 1 customer(s) whose sales exceeded 10% of revenue for 2002, 2001 and 2000 respectively. NOTE 4 - INVENTORIES Inventories consist of the following:
March 31, March 31, 2002 2001 ------------- -------------- (In Thousands) Raw Material $ 964 $ 1,053 Finished Goods and Work in Process 1,288 1,298 Less: Inventory Valuation Allowance (40) (40) ------------- -------------- $ 2,212 $ 2,311 ============= ==============
All of the Company's inventories are pledged as collateral on bank notes. NOTE 5 - PROPERTY AND EQUIPMENT Property and equipment consists of the following:
March 31, March 31, 2002 2001 ------------- -------------- (In Thousands) Property and Equipment $ 7,953 $ 7,328 Leasehold Improvements 638 453 ------------- -------------- 8,591 7,781 Less: Accumulated Depreciation and Amortization (6,166) (5,431) ------------- -------------- $ 2,425 $ 2,350 ============= ==============
Substantially all of the Company's property and equipment are pledged as collateral on bank notes. 26 Depreciation of property and equipment and amortization of leasehold improvements total approximately $732,000, $617,000 and $684,000 for fiscal years ending March 31, 2002, 2001 and 2000 respectively. NOTE 6 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES Accounts payable and accrued liabilities are comprised of the following:
March 31, March 31, 2002 2001 -------------- -------------- (In Thousands) Accounts Payable/Trade $ 1,833 $ 2,221 Accrued Liabilities: Salaries, Commissions and Employee Benefits 804 696 Medical Claims 102 107 Interest 0 83 State Taxes 34 50 Royalties 494 382 -------------- -------------- $ 3,267 $ 3,539 ============== ==============
NOTE 7 - OTHER ASSETS Other assets consists of the following:
March 31, March 31, 2002 2001 -------------- -------------- (In Thousands) Product Development $ 2,202 $ 1,349 Less: Accumulated Amortization (315) (237) -------------- -------------- $ 1,887 $ 1,112 -------------- -------------- Patents $ 1,196 $ 1,160 Less: Accumulated Amortization (725) (643) -------------- -------------- $ 471 $ 517 -------------- -------------- Other 190 183 Less: Accumulated Amortization (71) (40) -------------- -------------- $ 119 $ 143 -------------- -------------- Total Other Assets, Net $ 2,477 $ 1,772 ============== ==============
Expenditures for product development in the fiscal year ended March 31, 2002 were primarily dedicated to the development of the Company's new OnDemand(TM) machine. The Company has capitalized approximately $1,314,000 to date on the development of the OnDemand machine and estimates that it will capitalize an additional $500,000 to complete the project. Substantially all of the Company's intangible assets are pledged as collateral on bank notes. 27 NOTE 8 - LONG-TERM DEBT Long-term debt consists of the following:
March 31, March 31, 2002 2001 ------------ ------------- (In Thousands) 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 $7.1 million on that date secured by all tangible and intangible assets of the Company. $ 11,449 $ 12,406 Unsecured Notes Payable due September 2001 plus interest at 13%. 0 45 Unsecured Note Payable plus interest at 3%, payable in monthly installments of $2,394 through September 2006. 122 146 Unsecured Note Payable under settlement agreement with State of Florida Department of Revenue, payable in monthly installments of $3,500 over a period of four years. 171 219 Other Notes and Agreements 38 34 ------------ ------------- Total Long -Term Debt 11,780 12,850 Less Current Portion (968) (963) ------------ ------------- LONG-TERM DEBT DUE AFTER 1 YEAR $ 10,812 $ 11,887 ============ =============
The bank notes payable are collateralized by the Company's accounts receivables, inventory, equipment and intangibles. The Company made principal payments of approximately $102,000 during fiscal year ended 2002 pursuant to the excess cash flow payment provisions of its loan agreement. During fiscal year ended 2002, the Company exceeded the amount of capital expenditures allowed in certain covenants of its loan agreement and requested the lender's consent to an increase in the annual limit on these expenditures and waive any defaults that may have occurred. In addition, the lender advised the Company that they believed that certain excess cash flow principal payments were not made in accordance with the loan agreement. The Company believed that it consistently calculated the excess cash flow principal payments in accordance with its interpretation of certain provisions of the loan agreement. As a result, the Company entered into discussions with the lender to reach a compromise on the excess cash flow principal payments. Subsequent to March 31, 2002, the Company repaid the entire amount of the bank term loan (see Note 19 - Subsequent Event). The following is a schedule by year of the principal payments required on these notes payable and long-term debts as of March 31, 2002: (In Thousands) 2003.................................... $ 968 2004 ................................... $ 1,016 2005.................................... $ 1,079 2006.................................... $ 1,158 2007.................................... $ 7,559 Thereafter.............................. $ 0 Interest expense for the years 2002, 2001 and 2000 amounted to $919,000, $981,000 and $1,159,000 respectively. 28 NOTE 9 - LEASE COMMITMENTS The following is a schedule by year of future minimum rental payments required under operating leases, primarily facility leases, that have an initial or remaining non-cancelable lease term in excess of one year as of March 31, 2002. (In Thousands) 2003.................................... $ 460 2004.................................... $ 445 2005.................................... $ 402 2006.................................... $ 103 2007.................................... $ 3 Thereafter.............................. $ 0 Rent expense amounted to $393,000, $350,000 and $312,000 for the years ended March 31, 2002, 2001 and 2000 respectively. NOTE 10 - 401(K) PROFIT SHARING PLAN The Company has a 401(K) Profit Sharing Plan. The Plan covers substantially all of its employees. Contributions are at the employees' discretion and may be matched by the Company up to certain limits. For the years ended March 31, 2002, 2001 and 2000, the Company contributed $30,000, $16,000 and $19,000 respectively, to the plan. NOTE 11 - SELF INSURANCE PLAN The Company has a Medical Health Benefit Self-insurance Plan, which covers substantially all of its employees. During the year ended March 31, 2002, the Company was reinsured for claims that exceed $25,000 per participant and an annual maximum aggregate limit of approximately $342,000. Specific and aggregate reinsurance limits for fiscal year 2003 were increased to $50,000 and $500,000 respectively. Reinsurance limits for subsequent fiscal years may change. Future claims experience may effect the reinsurance limits that may available to the Company in subsequent fiscal years. Although claims incurred during the current fiscal year for certain individuals relate to serious illnesses, the Company believes that reinsurance limits currently in effect provide adequate insurance coverage for these individuals should the serious illness continue or reoccur. The Company has established a reserve of $102,000 at March 31, 2002 for all unpaid claims incurred during fiscal year 2002 and an estimate of claims incurred during fiscal year 2002 that have not been reported as of March 31, 2002. NOTE 12 - RELATED PARTY TRANSACTIONS Todd E. Siegel ("Siegel") is the Trustee of the Siegel Family QTIP Trust (the "Trust"), which is the general partner in JADE Partners, a significant shareholder of the Company. The Trust has entered into an exclusive Technology and Patent Licensing Agreement with the Company for certain technologies and patents on machine and product designs. Under the terms of the amended agreement, the Company is required to pay to the Trust royalties of one percent of sales on licensed products. In addition, the agreement states that there are no minimum royalty payments due and the agreement would expire if the Company abandons or ceases to use the technologies. Royalty payments were $62,400, $50,000 and $50,000 in the years ended March 31, 2002, 2001 and 2000 respectively. Accrued royalty payments due as of March 31, 2002, 2001 and 2000 total approximately $494,000, $382,000 and $266,000 respectively. 29 Siegel, through his beneficial interest in the Trust, owns approximately 42% of the outstanding Common Stock of the Company. NOTE 13 - TAXES The components of income tax expense (benefit) from continuing operations is as follows:
Years Ended March 31, -------------------------------------------------- 2002 2001 2000 ------------ ------------- ------------- (In Thousands) Current Income Taxes $ 0 $ 0 $ 0 Deferred Income Taxes 1,234 632 0 Change in Deferred Tax Valuation Allowance 0 (6,202) 0 ------------ ------------- ------------ Income Tax Expense (Benefit) $ 1,234 $ (5,570) $ 0 ============ ============= ============
Total income tax (benefit) expense for 2002, 2001 and 2000 from continuing operations resulted in effective tax rates of 38.5%, (271.6%) and 0% respectively. The reasons for the differences between these effective tax rates and the U.S. statutory rate of 34.0% - 35.0% on the continuing operations are as follows:
Years Ended March 31, --------------------------------------------------- 2002 2001 2000 ------------- -------------- -------------- (In Thousands) Tax Expense at U.S. statutory rate $ 1,118 $ 697 $ 413 State Income Tax, Net 116 72 42 Net Operating Loss Carryforward 0 (769) (455) Net Deferred Tax Asset Recognized 0 (5,570) 0 ------------- -------------- ------------- $ 1,234 $ (5,570) $ 0 ============= ============== =============
Deferred taxes for continuing operations consist of the following:
March 31, 2002 March 31, 2001 ---------------- ---------------- (In Thousands) Deferred Tax Assets: Depreciation/Amortization Temporary Difference $ (163) $ (188) Allowance for Doubtful Accounts 38 108 Inventory Valuation Allowance 15 15 Tax Loss Carry Forward 4,043 5,225 Reserves and Provisions 403 410 ---------------- ---------------- Deferred Income Taxes $ 4,336 $ 5,570 ================ ================
30 The Company's deferred tax asset at March 31, 2002 is broken down to its current and long-term portions as follows: Current $ 1,232,000 Long-Term 3,104,000 ---------------- $ 4,336,000 ================ Prior to fiscal year ended 2001, the Company had provided a 100% valuation allowance on its net deferred tax asset as it was not more likely than not that the related income tax benefit would be realized in the future. During fiscal year ended 2001, the Company removed its valuation allowance, thereby recording an income tax benefit of $5,719,000 because the Company believed that it is more likely than not that these income tax benefits will be realized in the future based in part on (1) the historical profitable operations of its core business; (2) expectations that its core business will continue to be profitable; (3) growth opportunities available for its core business; and (4) the length of time that the net operating loss carryforwards are available to offset future taxable income. The income tax benefit is comprised primarily of net operating loss carryforwards that are available to offset future taxable income. The carryforward losses expire beginning in fiscal year 2011 and ending in fiscal year 2020. In order for the Company to fully utilize the benefits of its net operating loss carryforwards in the future, its average future annual taxable income beginning with fiscal year 2003 and ending with fiscal year 2020 would have to be approximately $600,000. During fiscal year 2002, the Company's taxable income, exclusive of utilization of net operating losses, was approximately $2,800,000. NOTE 14 - STOCKHOLDERS' EQUITY (DEFICIT) Stockholders' Equity (Deficit) consists of the following:
March 31, March 31, March 31, 2002 2001 2000 ---------------- ---------------- ----------------- Voting Preferred Stock: Par Value $.0001 Per Share Authorized Shares 7,500,000 7,500,000 7,500,000 Issued Shares 0 0 6,500,000 Outstanding Shares 0 0 6,500,000 Common Stock (Retroactively adjusted for 1 for 2.5 reverse stock split in fiscal 2001): Par Value $.01 Per Share Authorized Shares 25,000,000 25,000,000 25,000,000 Outstanding Shares 4,312,281 4,198,148 2,598,168 Issued Shares 4,331,161 4,217,028 2,617,048
Common Stock During fiscal year end 2002, the Company issued 50,000 shares of common stock to an officer and director in lieu of $18,750 of cash compensation that is payable pursuant to an employment agreement. 31 During fiscal 2001, the Company exchanged 4,000,000 shares of common stock for 6,500,000 shares of voting preferred stock and also effected a reverse stock split of 1 share of common stock for 2.5 shares of common stock after the exchange of common for preferred stock. During fiscal 2000, the Company issued 20,000 shares of common stock to an officer and director in lieu of cash compensation of $4,750 and 18,536 shares of common stock to outside directors in lieu of cash compensation of $18,500 earned for attendance at meetings of the Board of Directors. In addition, the Company issued 16,000 shares of common stock to two individuals pursuant to an agreement to redeem the minority interest held by these individuals in a subsidiary of LifeServ. Preferred Stock JADE Partners ("Partnership") was the holder of 6,500,000 shares of Voting Preferred Stock. The Siegel Family QTIP Trust, established pursuant to the terms of the Siegel Family Revocable Trust (the "Trust"), which originally acquired the shares of Voting Preferred Stock in 1986 for the aggregate par value of the shares ($650.00), transferred the shares to the Siegel Family Limited Partnership in 1993. The Siegel Family Limited Partnership transferred the shares to the Partnership in 1994. The Company's CEO is the trustee of the Trust, which is the managing general partner of the Partnership, and accordingly, controls the shares held by the Partnership. The Voting Preferred Stock had two votes per share on all matters submitted to a vote of other holders of Common Stock. In addition to preferential voting rights, the Voting Preferred Stock was entitled to receive upon dissolution or liquidation of the Company, the first $10,000 of proceeds distributed to stockholders of the Company upon such events. Thereafter, the Voting Preferred Stock was entitled to no additional amounts upon dissolution or liquidation of the Company. The Voting Preferred Stock had no dividend rights, redemption provisions, sinking fund provisions or conversion, preemptive or exchange rights. The Voting Preferred Stock was not subject to further calls or assessments by the Company. In December 2000, the Siegel Family Limited Partnership exchanged 6,500,000 shares of voting preferred stock for 4,000,000 shares of common stock of the Company. The exchange of preferred for common shares was approved by the common shareholders of the Company. Stock Options The Company has adopted only the disclosure provisions of Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation," as it relates to employment awards. It applies APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its plans and does not recognize compensation expense based upon the fair value at the grant date for awards under these plans consistent with the methodology prescribed by SFAS 123, the Company's net income and earnings per share would be reduced to the proforma amounts indicated below (retroactively adjusted for the 1 for 2.5 reverse stock split in fiscal 2001):
2002 2001 2000 ------------ ------------ ------------ Net Income As Reported $ 1,974 $ 7,394 $ 2,499 ProForma $ 1,579 $ 7,376 $ 2,470 Earnings Per Common Share Basic As Reported $ .46 $ 2.38 $ 0.97 Basic ProForma $ .37 $ 2.37 $ 0.96 Earnings Per Common Share Diluted As Reported $ .44 $ 2.36 $ 0.97 Diluted ProForma $ .35 $ 2.36 $ 0.96
32 The fair value of each option grant is estimated on the date of grant using the Binominal options-pricing model with the following weighted-average assumptions used for grants in 2002, 2001 and 2000 respectively, no dividend yield for all years, expected volatility of 148, 133 and 130 percent; risk-free interest rates of 3.7, 6.1 and 6.3 percent, and 3.0 year expected lives for all years. Activity related to options is as follows (Retroactively adjusted for 1 for 2.5 reverse stock split in fiscal 2001):
Number of Shares Weighted Average Exercise Price per Share ---------------------- ------------------------- Outstanding at March 31, 1999 630,973 $3.13 Granted in Fiscal 2000 Officers and Directors 4,800 $2.50 Employees 0 $0 Options Expired (199,266) $2.63 ---------------------- ------------------------- Outstanding at March 31, 2000 436,507 $3.35 Granted in Fiscal 2001: Officers and Directors 120,000 $1.88 Employees 0 0 Options Expired (53,301) $2.84 ---------------------- ------------------------- Outstanding at March 31, 2001 503,206 $3.05 Granted in Fiscal 2002 Officers and Directors 591,000 $1.51 Employees 376,500 $1.59 Options Exercised (9,000) $1.50 Options Expired (11,900) $4.20 ---------------------- ------------------------- Outstanding at March 31, 2002 1,449,806 $2.04 ====================== =========================
Outstanding Shares
Range of Number Weighted Average Weighted Average Remaining Contractual Exercise Prices Life Outstanding (Years) Exercise Price ------------------------ ------------------- ---------------------- -------------------- $0.48 - $2.35 1,018,500 8.9 $1.56 $2.50 - $5.00 420,658 3.4 $2.65 $15.00 - $25.00 10,648 2.0 $18.93
Exercisable Shares
Weighted Average Range of Remaining Contractual Exercise Prices Number Life Weighted Average Outstanding (Years) Exercise Price ------------------------ ------------------- ---------------------- -------------------- $0.48 - $2.35 522,664 8.9 $1.54 $2.50 - $5.00 406,158 3.3 $2.65 $15.00 - $25.00 10,648 2.0 $18.93
33 The options outstanding at March 31, 2002 expire on various dates commencing in June 2002 and ending in March 2012. The weighted average grant date fair value of options during fiscal year 2002, 2001 and 2000 was $1.25, $.52 and $.33 respectively. At March 31, 2001 and 2000, exercisable options totaled 423,206 and 367,766 at weighted average exercise prices of $3.29 and $3.51 respectively. Warrants -------- Activity related to warrants is as follows (Retroactively adjusted for fiscal 2001 1 for 2.5 reverse stock split in fiscal 2001):
Number of Shares Weighted Average Price Per Share -------------------- ------------------ Outstanding at March 31, 1999 and 2000 628,600 $15.38 Granted in Fiscal 2001 105,000 $1.05 Warrants Expired (528,000) $17.52 -------------------- ------------------ Outstanding at March 31, 2001 205,600 $1.37 Granted in Fiscal 2002 0 $ 0 Warrants Expired 0 $ 0 Warrants Exercised (76,000) $ .97 -------------------- ------------------ Outstanding at March 31, 2002 129,600 $1.60 ==================== ==================
The warrants expire on various dates commencing September 2002 ending August 2009. All warrants are 100% vested at March 31, 2002. The weighted average grant date fair value of warrants during fiscal year 2001 and 2000 was $.90 and $.10 respectively. During fiscal year 2001, the Company entered into a financial advisory agreement with National Securities Corporation ("NSC"). The terms of the agreement provided for the issuance of 105,000 warrants to NSC as part of the compensation for their services. The warrants were exercisable at an average price of $1.00 and expire in 2006. Compensation expense related to these warrants totaled $49,000 and $45,000 for the years ended March 31, 2002 and 2001 respectively. In addition, NSC may receive an additional 125,000 warrants exercisable at $1.50 based upon the successful completion of certain financing transactions. During fiscal year 2002, NSC exercised their rights to acquire 45,133 shares of common stock pursuant to the cashless exercise rights provision contained in the warrant agreement representing 66,000 shares. The warrants were exercisable at prices ranging from $.85 to $1.50. In addition, certain holders of warrants elected to exercise their rights to acquire 10,000 shares of common stock. The warrants were exercisable at prices ranging from $1.13 to $1.50. The Company entered into a stock appreciation rights agreement with its Chief Executive Officer in 1995. The agreement, which is for a term of 10 years, calls for additional compensation payable annually equal to 3.25% of the total of the incremental increase in the value of the Company's outstanding stock. Additional compensation expense for the years ended March 31, 2002, 2001 and 2000 totaled $143,000, $131,000 and $27,000 respectively. 34 NOTE 15 - EARNINGS PER SHARE Income from continuing operations per common share is computed by dividing income from continuing operations 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 the stock options would represent. The number of shares outstanding have been retroactively adjusted for the 1 share for 2.5 shares reverse stock split that occurred in December 2000. The following table sets forth the computation of income from continuing operations per basic and diluted common share:
Year Ended March Year Ended March Year Ended March 31, 2002 31, 2001 31, 2000 ----------------- ---------------- ---------------- Numerator: Income from Continuing Operations $ 1,974,000 $ 7,621,000 $ 1,214,000 =============== =============== =============== Denominator: Weighted average shares outstanding - Basic 4,299,000 3,112,000 2,579,000 Add: Effect of dilutive warrants 218,000 18,000 0 --------------- ---------------- --------------- Weighted average shares outstanding - Diluted 4,517,000 3,130,000 2,579,000 =============== =============== =============== Income from Continuing Operations Per Common Share - Basic $ .46 $ 2.45 $ .47 =============== =============== =============== Income from Continuing Operations per Common Share - Diluted $ .44 $ 2.43 $ .47 =============== =============== ===============
The effect of 440,806 and 239,806 options and warrants were not included in the calculation of net income per diluted common share for 2002 and 2001 respectively, as the effect would have been anti-dilutive. The effect of all options and warrants (see Note 14) for 2000 were not included in the calculation of income from continuing operations per diluted common share as the effect would have been anti-dilutive. NOTE 16 - CONTINGENCIES The Company sold the assets of subsidiaries LifeServ and MTL during fiscal 2000. The buyers assumed certain liabilities of these subsidiaries including a certain long-term obligation totaling approximately $120,000, as of March 31, 2002, payable to a financial institution and secured by equipment at a customer site and a contract receivable. The Company was a guarantor of the obligation at the time the obligation originated and continues as a guarantor. In November 1998, MTL, a discontinued operation, received a refund request in the amount of $1.8 million from Medicare Program Safeguards ("MPS"). MTL disputed the refund request in its response to MPS in December 1998. To date, MTL has not received any further correspondence from MPS regarding this matter. Certain creditors of LifeServ, a discontinued operation, have commenced legal actions against LifeServ seeking payment of liabilities assumed by the buyers of LifeServ. The Company intends to vigorously defend these actions and seek appropriate remedies from the buyers. 35 The Company is involved in certain claims and legal actions arising in the ordinary course of business including the matters referred to above. 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 are not expected to have a material adverse effect on the financial position, results of operations or liquidity of the Company. NOTE 17 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
2002 2001 2000 ---------- ---------- ---------- Supplemental Disclosure of Cash flow Information: Cash Paid for Interest $ 1,001 $ 989 $ 1,159 Cash Paid for Income Taxes 0 0 0 Supplemental Cash Flow Information for Discontinued Operations: Operating Activities: Net Cash Provided by Discontinued Operations 0 230 400 Investing Activities: Net Cash Provided by Investing Activities of Discontinued Operations 0 0 90 Financing Activities: Net Cash Used by Financing Activities of Discontinued Operations 0 (305) (475) ---------- ---------- ---------- Net Increase (Decrease) in Cash - Discontinued Operations 0 (75) 15 Cash at Beginning of Period - Discontinued Operations 0 76 61 ---------- ---------- ---------- Cash at End of Period - Discontinued Operations $ 0 $ 1 $ 76 ========== =========== ==========
Continuing Operations --------------------- During fiscal year 2000, the Company recorded a prior year equity transaction that was deemed insignificant pertaining to the forgiveness of $25,000 of debt to a former officer of the Company in exchange for a reduction in the exercise price of options previously granted to him from $4.00 and $1.63 per option to $1.00 per option. The new exercise price was greater than the market price of the Company's common stock at that time. In addition, the Company issued common stock in exchange for an accrued liability reduction of $15,000 and transferred approximately $90,000 of other assets to fixed assets. 36 NOTE 18 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) The information set forth below represents unaudited selected quarterly financial data for the fiscal years ended March 31, 2002 and 2001.
Fiscal Year Ended March 31, 2002 ------------------------------------------------------------------ For The Three Months Ended ------------------------------------------------------------------ (In Thousands, Except Earnings Per Share Amounts) June 30, September 30, December 31, March 31, 2001 2001 2001 2002 ------------- ------------- ------------- ------------- Income Statement Data: Net Sales $ 5,876 $ 5,991 $ 6,192 $ 6,710 Gross Profit 2,396 2,496 2,506 2,953 Income Before Income Taxes 662 676 854 1,016 Income Tax Expense 239 237 320 438 ------------- ------------- ------------- ------------- Net Income $ 383 $ 439 $ 534 $ 618 ============= ============= ============= ============= Net Earnings Per Basic Common Share $ 0.09 $ 0.10 $ 0.12 $ 0.15 ============= ============= ============= ============= Net Earnings Per Diluted Common Share $ 0.09 $ 0.10 $ 0.12 $ 0.13 ============= ============= ============= =============
Fiscal Year Ended March 31, 2001 ------------------------------------------------------------------------- For The Three Months Ended ------------------------------------------------------------------------- (In Thousands, Except Earnings Per Share Amounts) June 30, September 30, December 31, March 31, 2000 2000 2000 2001 ------------- -------------- -------------- ------------- Income Statement Data: Net Sales $ 4,983 $ 5,189 $ 5,395 $ 5,890 Gross Profit 1,986 2,131 2,488 2,362 Income from Continuing Operations Before Income Taxes and Discontinued Operations 374 467 652 558 Income Tax Benefit (Expense) 0 0 5,719 (149) Income (Loss) from Discontinued Operations 29 (7) (212) (37) ------------- -------------- -------------- ------------- Net Income $ 403 $ 460 $ 6,159 $ 372 ============= ============== ============== ============= Net Earnings (Loss) Per Basic and Diluted Common Share: (Retroactively adjusted for the 1 for 2.5 reverse stock split in December 2000) From Continuing Operations $ 0.14 $ 0.18 $ 2.11 $ 0.10 Income (Loss) from Discontinued Operations 0.01 0.00 (0.07) (0.01) ------------- -------------- -------------- ------------- Net Earnings Per Basic and Diluted Common Share $ 0.15 $ 0.18 $ 2.04 $ 0.09 ============= ============== ============== =============
37 NOTE 19 - SUBSEQUENT EVENT (Unaudited) In June 2002, the Company repaid the entire amount, $11,310,000, of its bank term loan with the proceeds of a new revolving line of credit, term loans, a subordinated note and convertible preferred stock. The revolving line of credit allows for borrowing of up to $5,000,000 based upon advance rates that are applied to the Company's eligible accounts receivable and inventory. Interest is payable on the revolving line of credit monthly based on the average unpaid balance at the prime rate plus 1.0%. One term loan in the amount of $700,000 is repayable in equal monthly installments over a five (5) year term, plus interest at the prime rate plus 1.25%. Another term loan in the amount of $2,000,000 is repayable in equal monthly installments over two (2) years plus interest at the prime rate plus 2.25% and is subject to an excess cash flow payment provision. The revolving line of credit and the term loans are secured by the Company's accounts receivable, inventory, machinery and equipment and all other assets of the Company. The subordinated note in the amount of $4,000,000 is repayable in five (5) years with interest only, at 14%, payable monthly until the maturity of the note. The subordinated note is secured by a second lien on all of the assets of the Company. In addition, the subordinated note holders were issued 566,517 warrants to purchase common stock exercisable for ten (10) years at $.01 per share. (Subject to certain antidilution provisions.) The Company issued 2,000 shares of convertible preferred stock at $1,000 per share. The holders of the convertible preferred stock are entitled to receive quarterly dividends at the rate of 11% per annum. The dividends are payable in cash or shares of convertible preferred stock, at the Company's option, and are cumulative. The preferred stock is convertible into 846,000 shares of the Company's common stock at $2.36 per share. (Subject to certain antidilution provisions.) The warrant agreement and the terms of the convertible preferred stock contain a make-whole provision that obligates the Company to pay certain amounts to the holders of the warrants and convertible preferred stock if they do not ultimately receive an amount equal to the price per share of the common stock on the date they exercise their right to purchase the common shares that underlie the warrants and the convertible preferred stock. The warrant agreement also contains a provision that may obligate the Company to pay certain amounts to the holders of the warrants in the event that there is a change in control of the voting common stock of the Company, or if there is a sale of the Company or a public offering of the Company's common stock. In the event that the Company is required to make payments to the holders of the warrants and/or preferred stock, it may elect to issue additional warrants and/or preferred stock in lieu of a cash payment. Although the make-whole provision and other provisions of the warrant agreement and convertible preferred stock agreement provide for a maximum of 12,500,000 shares that may be issued pursuant to those provisions, based upon current conditions, the Company believes it is unlikely that the maximum number of shares would be issued. The Company also issued, to its financial advisors, 125,000 warrants to purchase common stock as part of a success fee related to the above referenced financing. The warrants are exercisable for five (5) years at $1.50 per share. The revolving line of credit, the term loans and the subordinated notes each contain certain financial covenants that, among other things, requires the maintenance of certain financial ratios, limits the amount of capital expenditures and requires the Company to obtain the lenders approval for certain matters. 38 If the Company had repaid the entire amount of its bank term loan at March 31, 2002, the balance sheet as of that date would have been as follows: (Unaudited) Proforma Balance Sheet March 31, 2002 (In Thousands) Assets Current Assets Cash $ 0 Accounts Receivable, Net 3,456 Inventories 2,212 Prepaids and Other 199 Deferred Tax Benefits 1,232 ---------------- Total Current Assets 7,099 Property and Equipment, Net 2,425 Other Assets, Net 2,477 Deferred Tax Benefits 3,104 ---------------- Total Assets $ 15,105 ================ Liabilities And Stockholders' Equity Current Liabilities: Current Maturities of Long-Term Debt $ 1,235 Accounts Payable and Accrued Liabilities 3,307 ---------------- Total Current Liabilities 4,542 Revolving Line of Credit 3,374 Long-Term Debt, Less Current Maturities 3,176 ---------------- Total Liabilities 11,092 ---------------- Stockholders' Equity: Convertible Preferred Stock 2,000 Common Stock 43 Warrants* 1,545 Capital In Excess of Par Value 8,806 Accumulated Deficit (8,053) Treasury Stock (328) ---------------- Total Stockholders' Equity 4,013 ---------------- Total Liabilities and Stockholders' Equity $ 15,105 =================
*The Company has estimated the value of the warrants issued to the holder of the subordinated notes. The ultimate valuation of these warrants may change the respective values of the subordinated notes and the warrants. NOTE 20 - DISCONTINUED OPERATIONS 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 of the assumption of certain stated liabilities of approximately $5 million. Revenue from the operations of LifeServ during fiscal 2001, 2000 and 1999 were $0, $454,000 and $5.2 million respectively. The operations of LifeServ during fiscal 2000 resulted in a loss of approximately $524,000 and a gain on disposal of $1.8 million. 39 In January 2000, the Company sold the principal assets of MTL. MTL received $1,000,000 for the assets that were comprised of equipment, goodwill and certain accounts receivable. In addition, the buyer assumed approximately $400,000 in liabilities of MTL. Revenue from the operations of MTL during fiscal 2001, 2000 and 1999 were $0, $7.9 million and $14.0 million respectively. The operations of MTL during fiscal 2000 resulted in a loss of $2,225,000 of which $500,000 was estimated and recorded in fiscal 1999. In addition, a gain on disposal of $399,000 was realized in fiscal 2000 and a gain on debt forgiveness of $1,249,000 was realized as a result of settlements that were reached with several creditors of MTL. In fiscal 1999, the Company estimated that the disposal of MTL would result in a loss of $2,500,000 and recorded a charge in that amount. During the second quarter of fiscal 2000, a buyer for MTL was identified and the business was sold during the fourth quarter of fiscal 2000. The length of time that elapsed between the date that the buyer was identified and the date the sale concluded resulted in a loss from operations of the business in fiscal 2000 that was greater than the loss from operations that was estimated in fiscal 1999. However, the terms of the sale of the business were more favorable than the Company estimated in fiscal 1999. Certain accounts receivable of MTL were not sold in January 2000. The operations of MTL during fiscal 2001 were confined to the collection of these accounts receivable. The Company estimated the realizable value of the accounts receivable at the end of fiscal 2000 to be $1,000,000. Since the date of sale, approximately $431,000 of accounts receivable were collected. The proceeds of the collection of accounts receivable were used to pay the ongoing cost of collection and to fund settlements with creditors of MTL. During fiscal 2001, the Company determined that the cost of collecting the remaining accounts receivable could equal or exceed the amount collected, and therefore, discontinued its collection efforts and reduced the carrying value of the accounts receivable to $0. The carrying value of the net assets of discontinued operations at March 31, 2001 was comprised of the following.
LifeServ MTL Total Discontinued Operations ------------- ------------- ------------- 2001 2001 2001 ------------- ------------- ------------- Current Assets $ 0 $ 1 $ 1 Other Assets 0 0 0 ------------- ------------- ------------- Total Assets $ 0 $ 1 $ 1 ------------- ------------- ------------- Current Liabilities $ 0 $ 642 $ 642 Long-Term Liabilities 0 0 0 ------------- ------------- ------------- Total Liabilities $ 0 $ 642 $ 642 ------------- ------------- ------------- Net Assets (Liabilities) of Discontinued Operations $ 0 $ (641) $ (641) ============= ============= =============
The liabilities of MTL at March 31, 2001 were comprised of trade accounts payable, accrued state taxes and approximately $140,000 of other liabilities that have been guaranteed by the Company. Certain liabilities of MTL were compromised during fiscal 2001 as a result of settlements reached with creditors. In addition, the Company determined that certain liabilities were not payable, and therefore, reduced the carrying value of them to 0. As a result of payments made in fiscal year 2002, the remaining liabilities of discontinued operations were reduced to approximately $475,000 at March 31, 2002. For balance sheet presentation purposes, the net liabilities of discontinued operations at March 31, 2002 and 2001 have been included in accounts payable and accrued liabilities since these liabilities, if satisfied, will be paid by the continuing operation of the Company. 40 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: July 1, 2002 MEDICAL TECHNOLOGY SYSTEMS, INC. By: /s/ Todd E. Siegel ______________________________________ Todd E. Siegel, Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date ------------------------ ---------------------- -------------- /s/ Todd E. Siegel Chairman of the Board of Directors, July 1, 2002 ----------------------- President and Chief Executive Officer Todd E. Siegel /s/ David W. Kazarian Director July 1, 2002 ----------------------- David W. Kazarian /s/ Michael P. Conroy Director, Chief Financial Officer July 1, 2002 ----------------------- and Vice President Michael P. Conroy /s/ John Stanton Director and Vice Chairman of the July 1, 2002 ------------------------ Board of Directors John Stanton /s/ Michael Stevenson Chief Operating Officer July 1, 2002 ------------------------ Michael Stevenson /s/ Mark J. Connolly Principal Accounting Officer July 1, 2002 ----------------------- and Controller Mark J. Connolly 41 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE Board of Directors Medical Technology Systems, Inc. In connection with our audit of the consolidated financial statements of Medical Technology Systems, Inc. and Subsidiaries referred to in our report dated June 11, 2002, which is included in the Company's Annual Report on SEC Form 10-K as of and for the year ended March 31, 2002, we have also audited Schedule II for the years ended March 31, 2002, 2001 and 2000. In our opinion, this schedule presents fairly in all material respects, the information required to be set forth herein. GRANT THORNTON LLP Tampa, Florida June 11, 2002 S-1 SCHEDULE II MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS For the Years Ended March 31, 2000, 2001 AND 2002
Column A Column B Column C Column D Column E ----------------------------------------- -------------- -------------- -------------- -------------- Balance at Charged to Accounts Balance at Begining of Costs and Written Off, End of Year Expenses Net Year -------------- -------------- -------------- -------------- (1) Deferred Tax Valuation Allowance: Year Ended March 31, 2000 $ 5,805 $ (397) $ 0 $ 6,202 Year Ended March 31, 2001 $ 6,202 $ 6,202 $ 0 $ 0 Year Ended March 31, 2002 $ 0 $ 0 $ 0 $ 0 (1) Inventory Valuation Allowance: Year Ended March 31, 2000 $ 140 $ 100 $ 0 $ 40 Year Ended March 31, 2001 $ 40 $ 0 $ 0 $ 40 Year Ended March 31, 2002 $ 40 $ 0 $ 0 $ 40 (1) Self Insured Medical Claims Valuation Allowance: Year Ended March 31, 2000 $ 100 $ 297 $ 325 $ 72 Year Ended March 31, 2001 $ 72 $ 210 $ 175 $ 107 Year Ended March 31, 2002 $ 107 $ 324 $ 329 $ 102 (1) Allowance for Doubtful Accounts Year Ended March 31, 2000 $ 211 $ 67 $ 4 $ 274 Year Ended March 31, 2001 $ 274 $ 120 $ 104 $ 290 Year Ended March 31, 2002 $ 290 $ (180) $ 9 $ 101 (1) Amounts reflect continuing operations only.