-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KoeQzDjggOv2geu3PJJlMpI5WniiquEYqPB5y41BUPEtVuDxPs6H1HXPIHp5H+Cb v+bkxDrlHQE8jibs59sVJw== 0000912057-96-014726.txt : 19960719 0000912057-96-014726.hdr.sgml : 19960719 ACCESSION NUMBER: 0000912057-96-014726 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960715 DATE AS OF CHANGE: 19960718 SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MEDICAL TECHNOLOGY SYSTEMS INC /DE/ CENTRAL INDEX KEY: 0000823560 STANDARD INDUSTRIAL CLASSIFICATION: 3841 IRS NUMBER: 592740462 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-16594 FILM NUMBER: 96595295 BUSINESS ADDRESS: STREET 1: 12920 AUTOMOBILE BLVD CITY: CLEARWATER STATE: FL ZIP: 34622-4734 BUSINESS PHONE: 8135766311 MAIL ADDRESS: STREET 1: 12920 AUTOMOBILE BLVD CITY: CLEARWATER STATE: FL ZIP: 34622-4734 10-K 1 10-K 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, 1996 -------------------------------- OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the 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 of (I.R.S. Employer incorporation or organization) Identification No.) 12920 AUTOMOBILE BOULEVARD, CLEARWATER, FLORIDA 34622 - - ----------------------------------------------- --------------- Registrant's telephone number, including area code (813) 576-6311 ---------------- 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) COMMON STOCK PURCHASE WARRANTS -------------------------------------------------------------------- (Title of Class) Indicate by check mark whether the registrant (1) has filed all required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or of such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Aggregate market value of voting common stock held by non-affiliates was $3,700,000 at July 1, 1996. The number of shares outstanding of the registrant's common stock, $.01 par value, was 5,444,335 at July 1, 1996. DOCUMENTS INCORPORATED BY REFERENCE ----------------------------------- Location in Form 10-K Incorporated Document - - --------------------- ------------------------------ Part III Registrant's definite proxy statement for 1996 annual meeting of shareholders. Total number of pages, including cover page - 42 (excluding the exhibits) MEDICAL TECHNOLOGY SYSTEMS, INC. CLEARWATER, FLORIDA I N D E X PAGE ---- PART I Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-7 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 3. Legal proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . 8 4. Submission of matters to a vote of security holders. . . . . . . . . 8 PART II 5. Market for registrant's common equity and related stockholder matters. . . . . . . . . . . . . . . . . . . . . . . .9-10 6. Selected financial data. . . . . . . . . . . . . . . . . . . . . 11-12 7. Management's discussion and analysis of financial condition and results of operations. . . . . . . . . . . . . . . 13-16 8. Financial statements and supplementary data. . . . . . . . . . . . .17 9. Changes in and disagreements with accountants on accounting and financial disclosure . . . . . . . . . . . . . . .17 PART III 10. Directors and executive officers of the Registrant . . . . . . . . .18 11. Executive compensation . . . . . . . . . . . . . . . . . . . . . . .18 12. Security ownership of certain beneficial owners and management . . .18 13. Certain relationships and related transactions . . . . . . . . . . .18 PART IV 14. Exhibits, financial statements, schedules and reports on Form 8-K. 42 SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .42 i PART I ITEM 1. BUSINESS INTRODUCTION Medical Technology Systems, Inc., a Delaware corporation, incorporated in March of 1984, provides products and services to pharmacies that dispense prescription pharmaceuticals to nursing homes, hospitals and other health assisted care facilities. The Company's principal businesses consist of the following product lines: (i) the core business of manufacturing and selling proprietary medication dispensing systems which include punch cards for use by pharmacies in dispensing prescription medicines; (ii) computerized pharmacy information and dispensing systems business which consists of the Performance hospital pharmacy management software and the MedServ-TM- mobile computerized medication dispensing systems for hospitals and nursing homes and (iii) the clinical laboratory service business of supplying diagnostic testing services to the medical profession. During the second quarter of 1996, the Company received notice from Creighton Pharmaceuticals Corporation, a wholly owned subsidiary of Sandoz Pharmaceuticals Corporation, that it intended to terminate its relationship with the Company in the Glasgow Pharmaceutical Corporation (GPC) joint venture which packaged and distributed pharmaceutical products. As a result of this termination, the Company recorded a $4.6 million dollar write-off of its investment in GPC. In addition to the terminated joint venture expense, the Company recorded a related valuation allowance in the amount of approximately $505,000 on inventory carried in its drug packaging subsidiary, which had been acquired for the joint venture. The GPC joint venture was created to provide the Company with a competitive price advantage in the acquisition cost of its pharmaceuticals as well as provide additional product lines. As a direct result of the joint venture termination, the Company re-evaluated its position in the medication packaging market. It was determined that the automated packaging equipment associated with the core packaging business should be more fully utilized in order to remain competitive. The early retirement of portions of the existing packaging equipment resulted in a $3.0 million charge. During the same quarter, the Company recorded other losses and write-downs which impacted its earnings. These adjustments included a $1.2 million charge relating to the obsolescence of an early version of its computerized medication dispensing product and an additional charge of approximately $500,000 relating to the valuation of certain inventory and project development costs. As a result of these significant losses in the second quarter of fiscal 1996, the Company was in violation of certain financial covenants in the borrowing agreements with its principal lenders. The Company was unable to reach an agreement with its lenders to amend or restructure the debt. The extended negotiations with the Company's lenders created substantial uncertainty which led to management's decision to file for protection under Chapter 11 for certain of its subsidiaries. During the fourth quarter of 1996, the Company filed voluntary petitions for relief under Chapter 11 ("Chapter 11") of Title 11 of the United States Bankruptcy Code in the Middle District of Florida, Tampa Division (the "Bankruptcy Court") for four of its subsidiaries (MTS debtors). The MTS debtors are presently operating their businesses as debtors-in-possession under the jurisdiction of the Bankruptcy Court and intend to reorganize pursuant to Chapter 11. As debtors-in-possession, these subsidiaries may engage in transactions within the ordinary course of business without approval of the Bankruptcy Court. Because of the events described above, the Company's working capital and borrowing capacity were extremely limited. The Company ultimately decided to suspend most project development activities, incurring substantial write-offs of the suspended project costs. Liabilities subject to compromise in the accompanying consolidated balance sheets represent the Company's estimate of liabilities as of the filing date subject to adjustment in the reorganization process. Under Chapter 11, actions to enforce certain claims against the MTS debtor subsidiaries are stayed if the claims arose, or are based on events that occurred, on or before the petition date. The ultimate terms of settlement of these liabilities and claims will be determined in accordance with a plan of reorganization which requires the approval of prepetition creditors and confirmation by the Bankruptcy Court. Other liabilities may arise or be subject to compromise as a result of rejection of executory contracts, including leases, or the Bankruptcy Court's resolution of claims for contingencies and other disputed amounts. The ultimate resolution of such liabilities will be part of a plan of reorganization. Claims secured by the debtor's assets ("secured claims") also are stayed, although the creditors of such claims have the right to move the court for relief from the stay. 1 The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company incurred losses during the current year of approximately $34.6 million and its total liabilities exceed its total assets by approximately $18.5 million as of March 31, 1996. The Company also had negative cash flows from operations during the current year of approximately $.9 million and loans in the amount of approximately $29 million are past due. In addition, the major operating subsidiaries of the Company have filed for protection under Chapter 11 of the U.S. Bankruptcy Code. These conditions raise substantial doubt as to the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties. A plan of reorganization could materially change the amounts reported in the accompanying consolidated financial statements, which do not give effect to adjustments to the carrying values of assets and liabilities which might be a consequence of a plan of reorganization. The ability of the Company to continue as a going concern is dependent on, among other things, confirmation of an acceptable plan of reorganization, future profitable operations, the ability to generate sufficient cash from operations, and the ability to obtain financing sources to meet future obligations. CHAPTER 11 REORGANIZATION UNDER THE BANKRUPTCY CODE Pursuant to Section 362 of the Bankruptcy Code, the commencement of the Chapter 11 proceedings provided an automatic stay of all judicial proceedings as of the petition dates. The Company, with Bankruptcy Court jurisdiction, is in possession of its property and assets and is maintaining and operating its business in the ordinary course. The Bankruptcy Code provides that all liabilities as of the petition date are subject to restructure under the terms of a plan of reorganization. RESOLUTION OF CLAIMS Schedules were filed with the Bankruptcy Court setting forth the assets and liabilities of the MTS debtors as of the petition date. The ultimate amount and settlement terms for any prepetition liabilities will be subject to a plan of reorganization (see "Plans of Reorganization" below), and accordingly, are not presently determinable. PLANS OF REORGANIZATION Plans of reorganization for MTS Packaging Systems, Inc. and Medical Technology Laboratories, Inc. were submitted to the Bankruptcy Court on May 16, 1996. A plan of reorganization was submitted for Vangard Labs, Inc. on July 5, 1996. A confirmation hearing is scheduled for September 4, 1996 for all MTS debtors. No assurance can be given that these plans will be confirmed by the Bankruptcy Court. Inherent in a successful plan of reorganization is a capital structure which permits a debtor to generate sufficient cash flow to meet its restructured obligations and fund its current obligations. Under the Bankruptcy Code, the rights of and ultimate payments to prepetition creditors and stockholders may be substantially altered. In connection with the filings of the MTS debtors, the Company entered into a Bankruptcy Court approved agreement with its lenders to permit continued use of cash collateral, primarily accounts receivables and inventories, to conduct its business. The Company believes that the Bankruptcy Court protection provided by the filings for the MTS debtors has allowed the resumption of normal business operations. At this time, it is not possible to predict the outcome of the filings in general, or the effects of the filings on the business of the Company and its subsidiaries, or the interests of the prepetition creditors and stockholders. Because of these and other contingencies, the value of the Company's common stock is uncertain. The uncertainty regarding the eventual outcome of the filings and the potential effects of other unknown adverse factors could threaten the Company's existence as a going concern. Trading of the Company's common stock on NASDAQ was discontinued on February 9, 1996 for failure to meet the requirements for continued inclusion in the NASDAQ. GENERAL The Company's MTS Packaging Systems, Inc. subsidiary primarily manufactures and sells disposable medication punch cards, packaging equipment and allied ancillary products. Its customers are predominantly pharmacies that supply nursing home and assisted living patients with prescription medications. This subsidiary manufactures its proprietary disposable punch cards and packaging equipment in its own facilities. This process utilizes technologically advanced integrated machinery for manufacturing the disposable medication punch cards. 2 The disposable medication punch cards and packaging equipment are designed to provide a cost effective and customized method for pharmacies dispensing medications at competitive prices. The Company's medication dispensing systems and products are relatively new and innovative for dispensing medications in disposable packages. Vangard Labs, Inc. now identified as a discontinued operation for reporting purposes, packages and sells oral solid unit-dose generic drugs to hospital and nursing home institutional pharmacies. The Company previously installed proprietary medication punch card packaging machinery at Vangard Labs, Inc. so that it could pre-fill the medication punch cards (manufactured by MTS Packaging Systems, Inc.) with oral solid generic and brand name drugs. The product is called MedCard-TM-. The MedCard product was the principal product of the GPC joint venture. The Company formed Medication Management Systems, Inc. (MMS) to expand its hospital pharmacy management software (Performance) which has been sold to approximately 120 hospitals throughout the United States. MMS has further developed its MedServ product line of mobile computerized medication dispensing systems to interface with the Performance Pharmacy System. The MedServ product line consists of MedServ FS-TM- (inventory control of floor stocked items) and MedServ EMAR-TM- (electronic charting of patients scheduled medications). The Company believes it has developed a comprehensive solution to enhanced documentation of medication use within the hospital environment. The Company is unaware of any other products that address this important healthcare need with the same level of system integration. As a result of the Company's current financial condition, the necessary capital to continue development of this product might not be available, and the Company is at risk of losing this unique business opportunity. Medical Technology Laboratories, Inc. ("MTL") was formed in 1992 for the purpose of acquiring Clearwater Medical Services, Inc. and Clinical Diagnostic Centers, Inc. MTL conducts clinical laboratory services and testing for hospitals, physicians and other health care providers in the State of Florida. During 1996, MTL purchased the rights and interests in certain clinical laboratory services of Tampa Pathology Laboratory. The principal executive offices and manufacturing facilities of the Company are located at 12920 Automobile Boulevard, Clearwater, Florida 34622, and its telephone number is (813) 576-6311. PRODUCTS/SERVICES The Company's MTS Packaging Systems, Inc. subsidiary 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 into medication punch cards: 30, 60, or 90 tablets or capsules, representing a 30 day supply of a patient's medication. The Company's machinery for dispensing medication in disposable packages automatically places tablets or capsules (the amount of medication required by a patient during one month) into a blistered punch card. The use of these cards and machines provides a cost effective customized package at competitive prices. The punch card medication dispensing system can provide tamper evident packaging for products dispensed in the Company's package. The retail price of the Company's medication packaging machinery ranges from $650 to $120,000 depending upon the degree of automation and options requested by a customer. The Company's punch cards typically sell from $155 to $225 per 1,000 cards, depending upon the size, design, quality and volume of cards ordered by a customer. To date, the Company has placed approximately 850 medication dispensing systems with pharmacy clientele. The Company's MTS Packaging Systems, Inc. subsidiary also sells prescription labels and medication carts. These products and ancillary supplies are designed to complement sales of disposable medication punch cards. Within its Medication Management Systems, Inc. ("MMS") subsidiary, the Company offers a proprietary computer-based pharmacy management system for hospitals called Performance Pharmacy System. The primary emphasis of this system is to provide the hospital pharmacist with a comprehensive collection of automated tools for completing day-to-day activities in an efficient manner. The system performs important medication management responsibilities and sophisticated drug therapy monitoring and documentation. The system also provides hospital pharmacists with the ability to process physician's medication orders quickly and accurately. The organization of screens, use of overlapping windows, in-process access to multiple files and other user friendly techniques makes the Performance Pharmacy System an attractive and functional hospital pharmacy software system. Performance Systems pricing starts at about $30,000 which includes hardware, software, training and pre-loaded drug files. To date, approximately 120 Performance Hospital Pharmacy Software Systems have been installed with users. The Company believes that the market for such systems is favorable. However, the Company has reduced the carrying value of such assets due to the lack of financing and other uncertainties that might preclude further development of the system. 3 Also within MMS, the Company has developed the MedServ product line which consists of MedServ FS (inventory control of floor stocked items) and MedServ EMAR (electronic charting of patients scheduled medications). The MedServ Medication Cart has been specifically designed for use in hospital and nursing home facilities. With its unique hardware and customized software programs, the MedServ system objective is to introduces controls and audit trails to reduce the likelihood of medication errors while helping to provide high levels of security within the hospital. This mobile computer based system automatically logs all activity and allows integration with existing information systems. As nurses make rounds, the MedServ Cart moves with them providing finger tip "touch screen" access to vital patient and prescription information. The benefits include accurate patient billing, reduced probability of missed dosages and medication errors, and adherence to pharmacy and nursing drug administration policies. Further benefits include improved drug accountability, curtailed pilferage and better inventory control through "proof-of-use" management. It also supports the clinical pharmacist's activities by identifying dosing compliance. Currently, the MedServ FS product has not been made widely available to the healthcare industry. MedServ FS has been installed in 14 hospitals, and the MedServ EMAR system is due to be installed in fiscal year 1997. The continued development of MedServ EMAR contemplates a successful reorganization of the Company and the availability of capital. Vangard Labs, Inc. now identified as a discontinued operation for financial reporting purposes, buys generic drugs (including analgesics, anti-arthritics, antibiotics, cardiovascular, laxatives, nutritionals and psychotropics) from leading manufacturers of generic drugs. The drugs are repackaged predominantly in a unit-dose format and sold to wholesalers. These pharmaceutical products are, in turn, resold to individual hospitals and nursing home pharmacies. Medical Technology Laboratories, Inc. provides clinical laboratory testing services. The analytical tests which it provides are typical of diagnostic laboratories and the facilities presently have no particular specialization in any of its testing procedures and services. This Company performs in-house over 95% of the testing routinely ordered by physicians for their patients, which typically includes chemistry, hematology, serology, urinalysis and bacteriology. GLASGOW PHARMACEUTICAL CORPORATION JOINT VENTURE The Company, through its Vangard Labs, Inc. subsidiary, has been a partner in a joint venture with Creighton Pharmaceuticals Corporation, a wholly owned subsidiary of Sandoz Pharmaceuticals, Inc. This joint venture, named Glasgow Pharmaceutical Corporation ("GPC") is fifty percent owned by each party. During fiscal year 1995, GPC began selling medication punch cards pre-filled with pharmaceuticals to customers of the Company in the long-term care market. MTS Packaging Systems, Inc. has provided medication punch cards to the Vangard Labs, Inc. facility where they have been packaged with pharmaceuticals and delivered to GPC for marketing and sales. On November 9, 1995, Creighton Pharmaceuticals, owner of a 50% interest in GPC notified the Company that it desired to terminate its involvement in the joint venture. The Company's interest in this joint venture has been treated as a discontinued operation for financial reporting purposes. MANUFACTURING PROCESSES The Company has developed an integrated punch card assembly machine which will accomplish the various punch card manufacturing steps in a single in-line, automated process. The Company believes that its advanced automation gives it certain speed, cost and flexibility advantages over conventional punch card manufacturers. The Company's equipment produces finished cards in one 8 hour shift which previously took one week using conventional methods. This represents a substantial reduction in time over conventional punch card manufacturing systems. The Company has two machines capable of producing punch cards in this manner. During 1996, the Company disposed of all production equipment and tooling it no longer was utilizing in its manufacturing processes due to the exclusive use of automated equipment resulting in a charge of $8.3 million. The machines that the Company's MTS Packaging Systems, Inc. subsidiary sells, leases or provides to its customers for use with the Company's medication punch cards are manufactured by the Company. The Company uses automated fabrication equipment to produce its medication packaging machinery. All essential components of the machines are manufactured by the Company without reliance on outside vendors. The MTS Packaging Systems, Inc. subsidiary is dependent upon a limited number of suppliers for the raw materials essential in the production of its products. The Company believes that relations are adequate with its existing vendors. However, there can be no assurance that such relations will be adequate in the future or that shortages of any of these raw materials will not arise, causing production delays. The inability to obtain raw materials on a timely basis and on acceptable terms may have an adverse impact on the future performance of the Company. 4 Medication Management Systems, Inc. integrates computer hardware into its MedServ mobile medication carts and then installs its proprietary software. All hardware is purchased from outside vendors but is common to many suppliers. The Company believes its proprietary software adds substantial value to the product, primarily because of the Company's extensive knowledge of hospital pharmacy management practices derived from the more than 120 installations of its Performance Pharmacy Systems. The Medical Technology Laboratories, Inc. subsidiary primarily relies upon sophisticated diagnostic testing equipment to evaluate bodily fluid samples. The Company has upgraded its laboratory equipment through the acquisition of automated analyzers. Each analyzer is capable of performing 36 different tests on up to 160 patients per hour. The testing categories performed by such machinery includes bacteriology, chemistry, hematology, serology and urinalysis. MARKETS AND CUSTOMERS The MTS Packaging Systems, Inc. products are sold throughout the United States, primarily through its sales organization and independent sales representatives. The Company also participates in trade shows and training seminars. Although the Company has been able to market its products, there is no assurance that its sales efforts will continue to be successful, particularly in light of the bankruptcy filings for its three principal subsidiaries. The primary customers for the MTS Packaging Systems, Inc. proprietary packaging machinery and the related disposable punch cards, labels and ancillary supplies are pharmacies that supply prescription medication to nursing homes. Such pharmacies generally serve from 250 to 5,000 nursing home beds per location, and many serve the home health care marketplace as well. The Company has begun commercializing its MedServ product line, which is a mobile computerized medication dispensing system, to hospitals throughout the United States. This technology is attractive to hospitals because it provides the opportunity for the hospital to reduce medication dispensing and administration errors. Approximately 2,000 of the more than 6,000 acute care and specialty care hospitals throughout the United States currently have computerized medication dispensing systems. Most of those 2,000 hospitals utilize floor stock systems for inventory control in primarily the emergency room, operating room, or in areas where narcotic floor stock was previously stored. Thus, an opportunity within most of those 2,000 hospitals is provided for systems, such as the Company's MedServ EMAR, that can adequately handle a patient's regularly scheduled medications. The systems that have been installed are primarily justified by reducing inventory shortages and decreasing "lost billings" rather than reducing or eliminating medication errors. As of July 1, 1996, the Company had 14 MedServ hospital installations within the U.S. The Company anticipates that pricing for MedServ products will range from $25,000 to $500,000 for a hospital installation depending on the number of beds and service level requirements. The Company believes that the market for such systems is favorable. However, the Company has reduced the carrying value of such assets due to the lack of financing and other uncertainties that might preclude further development of the product line. The Company believes that as more nursing home and hospital pharmacy providers learn of the cost effectiveness of the Company's medication dispensing and information systems, the number of nursing home and hospital pharmacies using these systems will continue to increase, although there can be no assurance of any such increase. The additional markets for other assisted care facilities, such as sub- acute care and assisted living facilities, are relatively new. Although the Company has no specific data for these markets, it believes that the extension of the health care market from nursing homes and hospitals into sub-acute care, assisted living facilities and other health care facilities represents a potential to expand the customer base for its products. Although the Company is optimistic that it will be able to generate additional revenues from the growing assisted care facilities market, there is no assurance that it can significantly penetrate such markets. The primary market and customers for the services offered by the Medical Technology Laboratory, Inc. subsidiary are doctors and hospitals in the State of Florida. The Company presently has no customers which account for greater than 10% of its consolidated sales. COMPETITION The pharmacies which supply prescription medicines to nursing homes and hospitals are the primary market for the Company's products. This market is highly competitive. There are several competitors that presently market other systems utilizing punch cards. The Company believes it is the industry leader in the automation of packaging and sealing of solid medications into punch cards. The products developed by the Company's competitors are not as efficient as the 5 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 price, customization, and product performance. Many of the Company's competitors have been in business longer and have substantially greater resources than the Company. The Company's medication dispensing systems are relatively new and there is no assurance that the Company will be able to compete effectively with traditional methods of dispensing medication or other punch card systems. The Company's primary competitors for medication dispensing systems are Drug Package, PCI and RX Systems. The Company believes that its automated proprietary packaging machinery distinguishes MTS Packaging Systems, Inc. from its competitors' manual systems which are capable of only filling and sealing 30-45 disposable medication punch cards per hour. The Company's new automated packaging machinery can fill and seal up to 600 disposable medication cards per hour. Vangard Labs, Inc. which has been identified as a discontinued business unit held for sale, has faced competition from numerous packagers of generic oral solid unit dose medications for hospitals and nursing homes. This market is highly competitive and includes companies such as Schein, UDL, Goldline, Roxanne and Medirex. The principal methods of competition for unit dose repackagers are price, quality of product and reputation. Vangard Labs, Inc. has numerous competitors who have been in business longer and have greater financial and marketing resources. Medication Management Systems, Inc. faces intense competition within the hospital marketplace for both its Performance Pharmacy management systems and its MedServ products. For pharmacy management systems, competitors include dominant hospital information system vendors such as HBOC, SMS, MediTech, and other such major corporations. Also included are pharmacy management systems providers such as Megasource, Cerner, Continental and HCS. Among suppliers of automated dispensing systems to hospitals, the Company will be competing with such major companies as Pyxis, Baxter, Diebold, and others for its new MedServ product line. Although the Company believes it provides superior technological systems, there is no assurance that it will be able to effectively compete with companies that have more financial resources or established market distribution channels. The Medical Technology Laboratories, Inc. subsidiary conducts its business in a very competitive marketplace. There are a number of diagnostics laboratories in the Tampa Bay area which compete with the Company's facilities. In addition, hospitals are offering their own diagnostic clinical laboratory services which places additional competitive pressure on the Company. Although management of the Company's MTL subsidiary believes it provides a high level of service and quality, there can be no assurance that competitors, governmental regulations, or reductions in Medicare reimbursement rates will not erode its business prospects. PROPRIETARY TECHNOLOGY The Siegel Family QTIP Trust (the "Trust") is the holder of certain patents and other proprietary rights for the equipment and processes which the Company's MTS Packaging Systems, Inc. subsidiary uses and sells. The Trust is the assignee of all such proprietary and patent rights used in the Company's business which was invented or developed by Mr. Harold B. Siegel, the founder of the Company. The Trust and the Company are parties to a license agreement whereby the Company is granted an exclusive and perpetual license from the Trust to utilize the know-how and patent rights in the manufacture and sale of the Company's medication dispensing systems. There are numerous patent applications and patent license agreements for products sold and that have been in development within the Medication Management Systems, Inc. subsidiary. 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, or that may be issued in the future, will ultimately provide meaningful protection from competition. The MTL subsidiary does not presently benefit from any proprietary technology. The Company has completed a program to upgrade to more technologically advanced equipment for its analytical services and the delivery of diagnostic information to its customers. REGULATION The Company's MTS Packaging Systems, Inc. subsidiary's products are governed by federal regulations concerning components of packaging materials which are in contact with food. The Company has obtained assurances from its vendors that the packaging materials used by the Company are in conformity with such regulations. However, there 6 can be no assurance that significant changes in the regulations applicable to the MTS Packaging Systems, Inc. subsidiary's products will not occur in the foreseeable future. Any such changes could have an adverse effect on the Company. The operations of the MTL subsidiary are subject to extensive federal, state and local regulation. Specifically, the Company's MTL subsidiary are licensed by the State of Florida Department of Health and Rehabilitation Services (HRS) and are certified by the Health Care Financial Administration (HCFA), a federal governmental agency. The Company believes its MTL subsidiary is operated in compliance with HRS and HCFA licensing and certification requirements. The operations of the MTL subsidiary are subject to Medicare reimbursement requirements and restrictions imposed by the Social Security Act as administered by HCFA. Recent regulatory changes directly affect the way Medicare reimburses for laboratory services. Commencing September 1, 1992, Medicare no longer paid for laboratory services unless the lab facility was certified under the Clinical Laboratory Improvement Act of 1988. The Company's operation of its MTL subsidiary complies with this federal legislation. Most clinical laboratory procedures are paid from laboratory fee schedules issued by individual Medicare carriers or intermediaries. Since January 1, 1992, laboratory services are paid based upon a national fee schedule modified by local economic factors. Medicare carriers pay laboratory claims on a reasonable fee basis. In the case of laboratory tests, the recommended fee is the lesser of the fee schedule, or the national caps on the actual billed amounts. Most laboratory tests must be billed on an assigned basis. This means that the provider must accept the Medicare reimbursement as payment in full for a laboratory test. Medicare patients are not billed for the additional amount. In addition, the State of Florida has adopted legislation which limits billing for laboratory services to 120% of the allowable Medicare reimbursement. The operations of Vangard Labs, Inc. (treated as discontinued for reporting purposes) are subject to the Good Manufacturing Practice regulations promulgated by the FDA as codified in 21CFR Parts 210 and 211. The operations of Vangard Labs, Inc. are also subject to field inspections by regional offices of the FDA and DEA for compliance with regulations dealing with drug manufacturers. The Company believes it has instituted sufficient quality control procedures and has taken such other steps so as to be in compliance with FDA and DEA regulations and requirements as currently in effect. The Company is currently in compliance with applicable FDA and DEA regulations. Regulations regarding the "stability" of repackaged drugs and the expiration dating of repackaged products are extremely important to the operations of Vangard Labs, Inc. Changes in the methods employed by Vangard Labs, Inc. in repackaging drugs require additional stability studies. Unfavorable results could adversely effect Vangard's product lines. It is impossible for the Company to predict the extent to which its operations will be effected under the laws and regulations described above or any new regulations which may be adopted by regulatory agencies. EMPLOYEES As of July 1, 1996, the Company employed 197 including 30 at Vangard Labs, Inc., persons full time. None of the Company's employees are covered by a collective bargaining agreement. ITEM 2. PROPERTIES The Company leases a 62,000 square foot plant consisting of office space and air-conditioned manufacturing and warehousing space near the Clearwater/St. Petersburg International Airport at 12920 Automobile Boulevard. The Company's corporate administrative and marketing offices, its MMS subsidiary, and the manufacturing facilities for the MTS Packaging Systems, Inc. subsidiary are located at this address. The lease had an initial term of five years commencing on April 1, 1987 and now expires on April 15, 1999. The Company's current monthly lease payments are approximately $21,000. The Company leases approximately 5,200 square feet at approximately $2500 per month for office and warehouse space at 21530 Drake Road, Cleveland, Ohio. This space is used by the Ohio Label business acquired by the Company in 1989. This business is now part of MTS Packaging Systems, Inc. The Company leases approximately 3,300 square feet of space for its MTL subsidiary located in Pinellas County, Florida. This lease expires on April 1, 1997, with monthly rents not in excess of $5,046. 7 In connection with the ownership of Vangard Labs, Inc. the Company owns two buildings in Glasgow, Kentucky used for administration and warehousing. These facilities, together with a leased building used for manufacturing, contain approximately 46,000 square feet. The monthly payments for the Vangard Labs, Inc. leased facilities are approximately $3,950. The Company agreed to assume certain obligations related to this property including a promissory note with an unpaid balance of approximately $204,000, with a 3% interest rate and monthly payments of approximately $2,400. As security for this note, the Company granted a first mortgage on the Vangard real estate. ITEM 3. LEGAL PROCEEDINGS The Company was not involved in any litigation which, in the opinion of management, would have a material adverse effect on the Company's financial position. As more fully described in the last paragraph of the Note 14 to the consolidated financial statements, the Company is disputing a proposed assessment by the State of Florida, Department of Revenue. On January 3, 1996, three of the Company's subsidiaries, MTS Packaging Systems, Inc., Medical Technology Laboratories, Inc. and MTS Sales & Marketing, Inc. filed voluntary petitions for relief under Chapter 11 of Title 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Middle District of Florida, Tampa Division. On February 22, 1996, the Company's subsidiary, Vangard Labs, Inc. filed a voluntary petition for relief under Chapter 11 of Title 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Middle District of Florida, Tampa Division. The Company and the MTS debtors are in possession of their respective properties and assets and the subsidiaries are operating their respective businesses as debtors-in-possession pursuant to provisions of the Bankruptcy Code. With the exception of Vangard Labs, Inc. the Company intends to continue the operation of its businesses and the management of its operations and has proposed plans of reorganization for these entities pursuant to Chapter 11 of the Bankruptcy Code (see "Business" for further information regarding Chapter 11 filings). Vangard Labs, Inc. has been identified as a discontinued operation and the Company plans to dispose of Vangard Labs, Inc. within the current year. Under Chapter 11, actions against the Company's filed subsidiaries are automatically stayed if a claim arose or is based upon events that occurred on or before the petition dates. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 8 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The authorized capital stock consists of 25,000,000 shares of Common Stock, $.01 par value ("Common Stock"), and 7,500,000 shares of Preferred Stock, $0.0001 par value ("Voting Preferred Stock"), issuable in series. On January 6, 1992 the Company declared a reverse 1 for 4 split of its Common Stock to obtain entry to the NASDAQ-NMS. Trading of the Company's common stock on NASDAQ was discontinued on February 9, 1996 for failure to meet the requirements for continued inclusion in the NASDAQ. COMMON STOCK Holders of shares of Common Stock are entitled to one vote per share on all matters to be voted on by stockholders, including the election of directors. There is no right to cumulate votes in the election of directors. However, Todd E. Siegel through the JADE Partnership ("Partnership") and the Trust which maintains ownership of the Voting Preferred Stock, controls the affairs of the Company, including the election of directors. The holders of Common Stock are entitled, upon liquidation or dissolution of the Company, to receive pro rata all assets remaining available for distribution to stockholders after payment of $10,000 to the holders of the Preferred Stock. The Common Stock has no preemptive or other subscription rights, and there are no conversion rights or redemption or sinking fund provisions with respect to such shares. All the outstanding shares of Common Stock, are validly issued, fully paid and non-assessable. The holders of Common Stock are entitled to receive such dividends, if any, as may be declared from time to time by the Board of Directors, in its discretion, from such funds as are legally available. The Company's financing agreements include restrictions on the payment of dividends. The Company has never paid cash dividends on its Common Stock, however, and it currently intends to retain all earnings for use in its business. Accordingly, it is anticipated that no dividends will be paid in the foreseeable future. During 1996, an Employee Stock Purchase Plan was initiated which provided approximately $400,000 in equity with a corresponding expense in exchange for the issuance of approximately 1.4 million of the 2 million shares of common stock reserved for this plan. As of July 1, 1996, there were approximately 1,300 registered holders of the common shares of the Company's outstanding Common Stock. PREFERRED STOCK The Company has outstanding 6,500,000 shares of Voting Preferred Stock, all of which are held by the JADE Partnership. The Voting Preferred Stock has the right to cast two votes per share on each and any matter on which the Common Stock is entitled to vote. In addition to preferential voting rights, the Voting Preferred Stock is entitled to receive upon dissolution or liquidation of the Company, the first $10,000 of proceeds distributed to stockholders of the Company upon such events. Thereafter, the Voting Preferred Stock is entitled to no additional amounts upon dissolution or liquidation of the Company. The Voting Preferred Stock has no dividend rights, redemption provisions, sinking fund provisions or conversion, or preemptive or exchange rights. The Voting Preferred Stock issued to the Partnership is not subject to further calls or assessments by the Company. OPTIONS Four hundred thousand (400,000) shares of common stock are reserved for issuance to employees under the Company's Employee Stock Option Plan. Eighty thousand, four hundred eighty four (80,484) of these options, at various prices which range from $4.00 to $10.00 per share, were outstanding at March 31, 1996. During fiscal 1996, options to acquire 59,000 shares of common stock at an exercise price of $1.63 were issued to certain officers, directors, and former directors of the Company. As of March 31, 1996, approximately 320,250 options, at $1.63 per share, were outstanding and held by certain officers, directors, and former directors of the Company. The options currently outstanding expire on various dates commencing April 1998 and ending March 2006. 9 WARRANTS The Company has 1,200,000 outstanding warrants exercisable to purchase one share of Common Stock at $7.00 per share, which were issued in connection with its July 1991 public offering. In addition, the Company has 120,000 outstanding warrants, which were issued to the underwriter of the July 1991 offering, exercisable to purchase one share of Common Stock at $7.00 per share. These warrants were originally to expire on July 9, 1996, but have been extended to July 17, 1997. These warrants are callable by the Company, upon 30 days written notice, at $.05 per warrant. The above warrants contain anti-dilution provisions providing for adjustment of the exercise price upon the occurrence of certain events, including the issuance of any Common Stock or other securities convertible into or exercisable for Common Stock at a price per share less than the exercise price, or in the event of any recapitalization, reclassification, stock dividend, stock split, stock combination or similar transaction. The outstanding warrants do not confer upon the holders thereof any voting preemptive rights, or any other rights of the shareholders of the Company. REPORTS TO STOCKHOLDERS The Company will furnish its stockholders with annual reports containing audited financial statements that have been examined and reported on by independent certified public accountants and quarterly reports for the first three quarters of each fiscal year containing unaudited financial statements. TRANSFER AGENT AND WARRANT AGENT Continental Stock Transfer & Trust Company, New York, New York is the registrar and transfer agent for all of the Company's securities. PRICE RANGE OF THE COMPANY'S SECURITIES Previous to February 9, 1996, the Company's Common shares traded on NASDAQ National Market. Trading of the Company's common stock on NASDAQ was discontinued on February 9, 1996 for failure to meet the requirements for continued inclusion in the NASDAQ. Since that time, the Company's common stock has traded on the over-the-counter market. The table below sets forth the range of high and low sale prices for the Company's Common Shares for the period indicated. High Low 1995 Fiscal Year ----- ----- First Quarter 9 1/4 7 5/8 Second Quarter 8 1/8 6 5/8 Third Quarter 7 3/8 5 1/2 Fourth Quarter 7 3/4 5 1/8 1996 Fiscal Year First Quarter 9 1/8 4 5/8 Second Quarter 6 1/16 4 5/8 Third Quarter 6 3/4 Fourth Quarter 1 3/16 3/16 The table below sets forth the range of high and low sales prices for the Company's warrants for the period indicated. 1995 Fiscal Year First Quarter 3 5/16 2 1/4 Second Quarter 2 5/8 1 11/16 Third Quarter 2 1/4 1 1/4 Fourth Quarter 2 1/2 1 5/16 1996 Fiscal Year First Quarter 3 7/8 Second Quarter 1 1/2 11/16 Third Quarter 1 1/8 1/32 Fourth Quarter 1/32 1/32 10 ITEM 6. SELECTED FINANCIAL DATA The following table sets forth selected financial and operating data regarding the Company. This information should be read in conjunction with "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and the Company's Financial Statements and Notes thereto. See "FINANCIAL STATEMENTS."
YEARS ENDED MARCH 31, ------------------------------------------------- (In Thousands, Except Earnings Per Share Amounts) Income Statement Data: 1996 1995 1994 1993 1992 - - ---------------------- -------- -------- ------- ------- --------- Sales $17,052 $14,830 $12,301 $10,858 $ 7,500 Cost of Sales and Other Expenses 41,669 16,946 9,367 8,052 5,185 Income (Loss) from Continuing Operations Before Cumulative Effect of Accounting Change (22,717) (1,272) 1,856 1,740 1,476 Income (Loss) from Discontinued Operations (6,634) 16 762 552 -0- Estimated Loss on Disposal of Discontinued Operations (5,229) -0- -0- -0- -0- Cumulative Effect of Accounting Change for FASB No. 109 -0- -0- 543 -0- -0- Net Income (Loss) (34,580) (1,256) 3,161 2,292 1,476 Primary Net Earnings (Loss) Per Share: From Continuing Operations (5.60) (.32) .48 .46 .45 Income (Loss) from Discontinued Operations (2.92) .00 .20 .15 .00 Cumulative Effect of Accounting Change For FASB No. 109 .00 .00 .14 .00 .00 -------- ------- ------- ------- ------- Net Earnings (Loss) Per Share $ (8.52) $ (0.32) $ .82 $ .61 $ .45 -------- ------- ------- ------- ------- -------- ------- ------- ------- ------- Average Common Shares and Common Share Equivalents Outstanding* 4,059 3,974 3,879 3,789 3,306
*No dividends were declared or paid during periods presented. 11
AT MARCH 31, ------------------------------------------------- (In Thousands) Balance Sheet Data: 1996 1995 1994 1993 1992 - - ------------------- --------- -------- --------- -------- -------- Net Working Capital* $5,406 $ 5,410 $ 1,695 $ 1,899 $ 513 Assets 14,669 44,243 33,018 25,527 17,217 Short-Term Debt* 168 1,165 979 654 1,658 Long-Term Debt* 350 23,224 10,588 7,227 1,541 Stockholders' Equity (Deficit) (18,546) 15,640 16,853 13,655 10,487
*Excluding Liabilities Subject to Compromise of $30,457 in 1996. 12 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW During Fiscal 1996, operating losses and limited working capital necessitated a thorough review of all operations and an assessment of the carrying value of all assets. Stringent measures were taken in the fourth quarter to preserve the Company's assets and core businesses. Management believes that the ultimate result will be a profitable and growing company refocused on its core businesses. As described below, during the fourth quarter the Company's principal operating subsidiaries filed voluntary petitions under Chapter 11 of the United States Bankruptcy Code. The Company's intent in such filings was a reorganization of its underlying businesses, the restructuring of indebtedness with its principal lenders and protection of interests of its stockholders. The Company has recently filed reorganization plans that await approval by its creditors and the Bankruptcy Court. CHAPTER 11 REORGANIZATION During fiscal 1996, the Company experienced disappointing operating results from its new MedServ product and operating losses at Vangard Labs, Inc. On January 4, 1996, the Company received notice from its lenders that its failure to make a scheduled mandatory principal amortization and interest payment of approximately $307,000 on December 5, 1995 was an event of default under its credit agreement. On January 3, 1996, three of the Company's subsidiaries, MTS Packaging Systems, Inc., Medical Technology Laboratories, Inc. and MTS Sales & Marketing, Inc. filed voluntary petitions under Chapter 11 of Title 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Middle District of Florida, Tampa Division. At that time, the Company also suspended production operations at Vangard Labs, Inc. to avert further operating losses. On February 22, 1996, a voluntary petition under Chapter 11 of Title 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Middle District of Florida, Tampa Division was filed for Vangard Labs, Inc. Vangard Labs, Inc. is presented as a discontinued operation in the consolidated financial statements of the Company. It is the intent of management, with the cooperation of its lenders, to sell the Vangard Labs, Inc. assets and use the proceeds to retire debt. The Glasgow Pharmaceutical Corporation joint venture is highly dependent upon Vangard Labs, Inc. production capability to manufacture, package and distribute medication cards filled with pharmaceuticals to long-term care pharmacy and other health care facilities. MedCard is the pre-filled medication card provided through this joint venture with Creighton Pharmaceuticals Corporation, a wholly owned subsidiary of Sandoz Pharmaceuticals Corporation. The marketing and distribution of MedCard to the long-term care industry began in fiscal 1995. The significant expansion anticipated in 1996 did not materialize when Creighton withdrew its support from this joint venture. This event necessitated a reappraisal of the carrying costs of this venture and an assessment of its viability. Divesting Vangard Labs, Inc. makes the viability of GPC tenuous, accordingly, it also is treated as a discontinued operation. The Company determined that it was prudent to consider the impact of the bankruptcy filings and the unavailability of additional funding on the realization of the carrying values of its assets. Management has decided to reduce the carrying value of its joint venture, inventory, goodwill, project development and fixed assets. Such an undertaking was also required by the recently implemented FASB No. 121. The result was a write-off of more than $23.5 million which included a $5.2 million investment in joint ventures and Vangard Labs, Inc. $4.6 million in project development costs, $8.3 million in fixed asset revaluations, $2.9 million in goodwill, $1.5 million in inventory revaluation to the lower of cost or market, and $1.0 million in other charges. These substantial adjustments had a significant negative impact on the Company's operating results for the fiscal year ended March 31, 1996. RESULTS OF OPERATIONS FISCAL YEAR 1996 COMPARED TO FISCAL 1995 The consolidated financial statements have been presented on the basis that the Company is a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As a result of the Chapter 11 filings for the Company's principal operating subsidiaries and related circumstances, realization of assets and satisfaction of liabilities in the normal course of business is uncertain. A plan of reorganization could further materially change the amounts reported in the accompanying consolidated financial statements. The ability of the Company to continue as a going concern is dependent upon, among other things, confirmation of plans of reorganization, future profitable operations, and compliance with future loan agreements. 13 REVENUES Net sales for continuing operations for the fiscal year ending March 31, 1996 increased 15% to $17.1 million from $14.8 million in the prior fiscal year primarily due to higher sales from the Company's Medical Technology Laboratories, Inc. subsidiary which experienced a 44% increase in revenues. Additionally, the Company's MTS Packaging Systems, Inc. subsidiary had a 9% increase in revenues. GROSS PROFIT Cost of sales for the fiscal year ending March 31, 1996 increased 37% to $10.7 million from $7.8 million in the prior year. Consequently, gross profit in the fiscal year ending March 31, 1996 decreased to 37% from 48% in the prior year. This decrease in gross profit was primarily due to lower margins on revenue in the Company's Medical Technology Laboratories, Inc. subsidiary, as well as inventory revaluations. SALES, GENERAL AND ADMINISTRATIVE EXPENSES (SG & A) SG&A for the year ended March 31, 1996 increased to $9.2 million from $2.4 million in the prior year. The increase primarily resulted from increased selling and marketing expenses related to the increase in revenue. In addition, the Company increased its administrative staff during the first and second quarters of 1996 in anticipation of the revenue increases in MedServ product line and GPC operations. Also, certain one-time charges were incurred during the year including expenses relating to employee severance costs, and bad debts. PRODUCT DEVELOPMENT The Company expensed product development and software costs previously capitalized in the amount of $4.6 million. Of this, $3.7 million related to all computerized medication dispensing systems marketing development and pharmacy software costs for Medication Management Systems, Inc. and Performance Pharmacy Systems. The current financial condition of the Company, as well as other uncertainties, have impaired the Company's ability to complete the development of these products. In addition, there were other charges in the total amount of $0.9 million related to project development and software costs previously capitalized by MTS Packaging Systems, Inc. and Medical Technology Laboratories, Inc. RESTRUCTURING CHARGES Within the fiscal year ending March 31, 1996, the Company recognized a charge of approximately $17.9 million for the impairment of certain of its investments in part due to the restructuring of its businesses. This amount includes an estimated charge of $5.2 million related to the anticipated disposal of Vangard Labs, Inc., a loss on obsolete fixed assets of $8.3 million, inventory revaluation of $1.5 million and a goodwill write-off of $2.9 million. The above charges resulted, in part, from actions taken after a comprehensive examination of all of the Company's business operations. Because of the numerous development projects that the Company had underway, and the limited opportunity that now exists for completion of these projects, the Company evaluated the carrying value of certain assets and adjusted them downward to reflect their estimated value. DEPRECIATION AND AMORTIZATION Depreciation and amortization expense increased $1.6 million (153%) in 1996. The increase resulted from the fact that the Company reduced the estimated useful lives of its property and equipment to reflect technological changes. These changes resulted in additional depreciation expense in 1996 in the amount of $589,000. In addition, depreciation and amortization increased due to the acquisition of equipment and other assets in 1995. In accordance with the Company's policy, these assets were depreciated or amortized for one- half year in 1995 and a full year in 1996. LOSS FROM DISCONTINUED OPERATIONS The company has elected to treat its Vangard Labs, Inc. subsidiary as a discontinued operation because of management's decision to dispose of the business. The loss incurred by Vangard Labs, Inc. was $6.6 million 1996. 14 INTEREST EXPENSE Interest expense for the fiscal year ending March 31, 1996 increased 22% to approximately $1.7 million from $1.4 million in the prior year. The increase primarily resulted from an increase in debt. The Company discontinued accruing interest on its secured debt effective January 3, 1996 due to Chapter 11. The amount of interest which was not accrued was $609,000. INCOME TAXES The Company realized an income tax benefit of $1.9 million for the year ended March 31, 1996, primarily as a result of the net operating loss. A portion of this loss has been carried back to recover taxes paid in previous years. In addition, the unused portion of $17.8 million will be carried forward to offset future taxable income. The Company recorded a valuation allowance in the amount of approximately $6.9 million to offset entirely the deferred tax asset related to the net operating loss carryforward. LIQUIDITY, CAPITAL RESOURCES AND CASH FLOW The Company incurred a net loss from continuing operations for the fiscal year ended March 31, 1996 of $22.7 million versus $1.3 million in 1995. Cash used by operating activities during the fiscal year ended March 31, 1996 was $0.9 million versus $0.4 million provided in 1995. The increase in the cash used by operating activities resulted primarily from the operating loss incurred in 1996. Investing activities utilized $2.9 million for the year ended March 31, 1996 versus $9.8 million in 1995. The decrease resulted primarily from the fact that the Company significantly reduced its capital equipment and project development activities in 1996. Financing activities provided $4.2 million for the year ended March 31, 1996 versus $12.8 million in 1995. The decrease resulted primarily from the fact that the Company significantly reduced its capital equipment and project development activities which had been funded in 1995 primarily with long-term debt. The Company had working capital as of March 31, 1996 and March 31, 1995 of $5.4 million. Current liabilities do not include $30 million of liabilities subject to compromise in connection with the plans of reorganization for the MTS debtors. No assurances can be given that additional equity capital will be made available to the Company. In the event the Company is able to raise additional equity, the raising of such equity will likely dilute the interests of existing stockholders. There can be no assurance that the Company will be able to secure such additional equity capital or that the Company will be successful in reorganizing its affairs within the Chapter 11 bankruptcy proceedings. The Company's lender has a first security interest in and lien upon substantially all of the Company's assets. The Company has not filed a bankruptcy petition for the parent corporation. If it were to become necessary for the Company to take such action, the interests of the Company's stockholders would very likely be impaired. Other then cash flow from operations, the Company does not currently have any other source of liquidity. RESULTS OF OPERATIONS FISCAL YEAR 1995 COMPARED TO FISCAL YEAR 1994 REVENUES Net revenues for the year ended March 31, 1995 increased to approximately $14.8 million, a 20% increase over fiscal year 1994 revenues of $12.3 million. This revenue growth primarily resulted from the continued growth in the medication dispensing product business of the Company. GROSS PROFIT During fiscal year 1995, cost of sales increased to $7.8 million from $5.5 million in the prior year, a 41% increase. Gross profit margin decreased to 47% from the prior year's 55% primarily as a result of the increases in raw 15 material costs which the Company was not able to recover in pricing its products. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (SG & A) SG & A expenses were constant at about $2.4 million in fiscal year 1995 which was 6% lower than the prior fiscal year. As a percentage of revenues, these expenses were 16% and 21% for fiscal years 1995 and 1994, respectively. The reduction of these expenses as a percentage of revenues is primarily attributed to the decline of fixed expenses as a percentage of revenues on higher sales recorded. INTEREST EXPENSE Net interest expense increased to approximately $1.4 million as compared to approximately $0.4 million in the prior year due to the increased debt incurred primarily for expenditures for development projects, acquisition of fixed assets and the higher interest rates in effect this fiscal year. OTHER ITEMS In this period, the Company had increased depreciation and amortization expenses of approximately $1.1 million as compared to approximately $0.8 million in the prior fiscal year, while project and development expenses increased to approximately $4.3 million compared to no charge in the prior fiscal year, as a result of management's decision to focus its resources to better realize the potential of its new MedServ product line of computerized medication dispensing carts. As a consequence, the Company elected to expense all other project and product development costs except those related to MedServ. NET LOSS The Company incurred a loss of approximately $1.3 million for fiscal year ending March 31, 1995 compared to net income of approximately $3.2 million in the previous year. This loss is attributed to increased interest expense as described above, the write-off of certain project and product development costs and increased depreciation and amortization expense. During the prior fiscal year, an accounting change benefited income by $.5 million as a result of the cumulative effect of the adoption of FASB No. 109 for income taxes. On a per share basis, net loss for the period was $0.32 compared to a net profit of $0.82 for the same period last year. INCOME TAXES As a result of the loss the Company had a tax benefit of approximately $0.8 million which the Company carried forward to offset future taxes compared to the provision for taxes of $1.1 million for fiscal 1994. During fiscal 1994, the applied tax rate was 37%. The application of such a tax rate was appropriate for that year and included provisions for both Federal and State taxes. 16 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See the audited financial statements of the Company and related supplementary data attached at the end of this Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None 17 PART III ITEMS 10, 11, 12 and 13 are incorporated by reference from the Company's Proxy Statement for its 1996 Annual Meeting of Shareholders. [BALANCE OF PAGE INTENTIONALLY LEFT BLANK] 18 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K (a)1. Financial Statements - See attached 2. Financial Schedules - See attached 3. Exhibits - See Index attached and Exhibits included, as appropriate (b) The following reports on Form 8-K have been filed during the quarter ended March 31, 1996: 1. 8K - Dated January 3, 1996, relating to filing of Chapter 11. 2. Dated March 14, 1996, relating to issuance of stock to Employee Stock Purchase Plan. (c) Exhibits required by Item 601 are attached. *1.1 Form of Underwriting Agreement *1.1(a) Form of Agreement between Underwriters *1.3 Form of Representative's Warrant *1.4 Form of Warrant Agent Agreement **2.1 Agreement and Plan of Reorganization between Southwest Resources, Inc. and DRG Consultants, Inc. **3.1 Articles of Incorporation and Amendments thereto *3.1(a) Amendment to Articles of Incorporation increasing authorized Common Stock to 25,000,000 from 15,000,000 shares **3.2 Bylaws of the Company *4.1 Form of Warrant from July, 1992 Offering **4.1(a) Form of Initial Offering Warrant from January, 1988 Offering **4.2 Designation of Rights, Preferences and Limitations of Voting Preferred Stock **10.1 Business Lease between Leslie A. Rubin, Limited, as Lessor and the Company as Lessee dated March, 1987 **10.2 Agreement between Ascot Pharmaceuticals, Inc., Travenol Laboratories, Inc. and DRG Consultants, Inc. (expired) **10.3 Sales Representation Agreement between DRG Consultants, Inc. and Euclid Medical Systems, Inc. (expired) **10.4 Line of Credit Agreement (paid) **10.5 Equipment Loan Agreement (paid) **10.6 Siegel Family Revocable Trust Agreement (8)10.6(a) Amended and Restated Siegel Family Revocable Trust Agreement (8)10.6(b) Siegel Family Limited Partnership Agreement **10.7(a) Agreements and Assignments of Patent Rights between Harold B. Siegel and the Siegel Family Revocable Trust **10.7(b) License Agreement between the Company and the Siegel Family Revocable Trust 19 **10.7(c) Assignment of Trade Names, Licenses, and Accounts Receivable from DRG Consultants, Inc. to the Company. **10.8 [RESERVED] **10.9 Promissory Note to Lawrence E. Steinberg dated April 27, 1987, in the amount of $50,000 (paid) **10.10 [RESERVED] **10.11 Promissory Note to Overseas Group dated May 8, 1987, in the amount of $75,000 (paid) **10.12 Agreement for Sale of Stock between Lawrence E. Steinberg and the Company dated April 27, 1987 **10.13 Warrant Agreement between Lawrence E. Steinberg and the Company dated April 27,1987 **10.14 Warrant Agreement between Overseas Group and the Company dated May 8, 1987 **10.15 Modification of Promissory Note and Warrant Agreement between Overseas Group and the Company dated December 19, 1987 (paid) **10.16 Modification of Promissory Note and Warrant Agreement between Lawrence E. Steinberg and the Company dated December 18, 1987 (paid) **10.17 Option Agreement between the Siegel Family Revocable Trust and Lawrence E. Steinberg dated December 18, 1987 **10.18 Promissory Note dated November 30, 1987 in the amount of $31,850.00 (paid) **10.19 Promissory Note dated November 30, 1987 in the amount of $50,000.00 (paid) **10.20 Convertible Subordinate Notes issued to unaffiliated investors (paid) **10.21 Letter Agreement between Gerald L. Couture and the Company (expired) **10.22 $450,000.00 Commitment Letter from Florida National Bank (paid) **10.23 Agreements with Vendor Funding for Sale/Leaseback of Equipment (paid) **10.24 First Florida Bank $450,000 Revolving Line and $150,000 Equipment Line, Loan Commitment (paid) ***10.25 Pilot Project and Option Agreement between Sandoz and the Company ****10.26 Documents relating to the acquisition of the business of Ohio Label & Packaging Inc. dated November 3, 1989 *****10.27 Loan Agreement and other related documents between the Company and Southeast Bank, N.A. for $3,195,000 credit facility dated March 26, 1990 (paid) *10.28 Loan Agreement and other related documents related to First Florida Bank, N.A. borrowing dated November 7, 1990 (paid) *10.30 Agreement among Company, Trust and Harold B. Siegel regarding modification to royalty arrangements and issuance of Common Stock and retirement of preferred stock dated September 2, 1990 (1)10.31 Acquisition and financing documents relating to Clearwater Medical Services, Inc. (2)10.32 Acquisition and financing documents relating to Clearwater Diagnostic Center, Inc. (3)10.33 Stock Purchase Agreement for Vangard Labs, Inc. (4)10.34 Amendment No. 4 to Amended and Restated Loan Agreement with First Florida Bank, N.A. relating to the acquisition of Vangard Labs, Inc. (paid) (5)10.35 Warrant Agreement between Ladenburg Thalman & Co. and the Company 20 (6)10.36 Loan and Security Agreement dated December 1, 1992 with Daiwa Bank, Limited (7)10.37 Amended and Restated Loan and Security Agreement dated September 28, 1993 with SouthTrust Bank of Alabama (8)10.38 First Amendment to Amended and Restated Loan and Security Agreement dated April 25, 1994 with SouthTrust Bank of Alabama (8)10.39 Addendum to Lease dated September 30, 1993 with Leslie A. Rubin for facilities located at 12920 and 12900 Automobile Boulevard, Clearwater, Florida (8)10.40 Lease dated August 1, 1993 between Vangard Labs, Inc. and E.P. Vann and Daryl B. Vann for Glasgow Kentucky facilities (8)10.41 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 (8)10.42 Form of 1994 Stock Option Plan (8)10.43 Form of Employment Agreement for Todd Siegel and Gerald Couture (8)10.44 Form of Executive Stock Appreciation Rights and Non- Qualified Stock Option Agreement (8)10.45 Form of Directors' Stock Option Agreement (8)10.46 Form of Directors' Consulting Agreement (8)10.47 Form of Director / Officer Indemnification Agreement (8)10.48 Joint Venture Agreement between MedVantage, Inc. and the Company dated January 5,1995 (8)10.49 Third Amendment to Amended and Restated Loan and Security Agreement effective March 28, 1995 (9) 11. Computation of Earnings Per Share (9) 22. List of Subsidiaries (9) 23. Form of Executive Director's Agreement for Gerald Couture * Incorporated herein by reference to same Exhibit(s), respectively, Registration Statement No. 33-40678 filed with the Commission on May 17 1991 ** Incorporated herein by reference to same Exhibit(s), respectively, Registration Statement (SEC File No. 33-17852) *** Incorporated herein by reference to Form 8-K filed on November 18, 1988 **** Incorporated herein by reference to Form 8-K filed on November 16, 1989 ***** Incorporated herein by reference to Form 10-K for fiscal year end March 31, 1990 (1) Incorporated herein by reference to Form 8-K for event dated November 8, 1991 (2) Incorporated herein by reference to Form 8-K for event dated November 14, 1991 (3) Incorporated herein by reference to Form 8-K for event dated May 27, 1991 (4) Incorporated herein by reference to Form 10-K for year ended March 31, 1992 (5) Incorporated herein by reference to Form S-3 filed April 16, 1993 (6) Incorporated herein by reference to Form 10-K for year ended March 31, 1993 (7) Incorporated herein by reference to Post Effective Amendment No. 1 to From S-1 (File No. 33-40678) dated October 14, 1993 (8) Incorporated herein by reference to Form 10-K for year ended March 31, 1995 (9) Filed herewith 21 Independent Auditors' Report 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, 1996, 1995, and 1994 and the related consolidated statements of operations, changes in stockholders' deficit, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the management of the Company. Our responsibility is to express an opinion on these consolidated financial statements based upon our audits. We conducted our audits in accordance with generally accepted auditing standards. These standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the 1996, 1995, and 1994 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Medical Technology Systems, Inc. and Subsidiaries as of March 31, 1996, 1995, and 1994 and the results of its operations and cash flows for the years then ended in conformity with generally accepted accounting principles. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As more fully discussed in Note 1, the Company incurred losses during the current year of approximately $34.6 million and its total liabilities exceed its total assets by approximately $18.5 million as of March 31, 1996. The Company also had negative cash flows from operations during the current year of approximately $.9 million and loans in the amount of approximately $29 million are past due. In addition, the major operating subsidiaries of the Company have filed for protection under Chapter 11 of the U.S. Bankruptcy Code. These conditions raise substantial doubt as to the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties. Pender Newkirk & Company Certified Public Accountants June 20, 1996 22 MEDICAL TECHNOLOGY SYSTEMS INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS MARCH 31, 1996, 1995 AND 1994 (In Thousands) ASSETS
1996 1995 1994 ---- ---- ---- Current Assets: Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 965 $ 613 $ 473 Accounts Receivable, Net . . . . . . . . . . . . . . . . . . . . . 3,260 3,575 2,676 Income Taxes Receivable. . . . . . . . . . . . . . . . . . . . . . 880 808 -0- Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,445 4,252 2,710 Prepaids and Other . . . . . . . . . . . . . . . . . . . . . . . . 264 164 102 -------- -------- -------- Total Current Assets . . . . . . . . . . . . . . . . . . . . . . . 7,814 9,412 5,961 Property and Equipment, Net. . . . . . . . . . . . . . . . . . . . 4,917 13,876 11,645 Other Assets: Software Development Costs, Net. . . . . . . . . . . . . . . . . . - 0 - 1,306 1,253 Goodwill, Net. . . . . . . . . . . . . . . . . . . . . . . . . . . 971 2,613 2,640 Product Development, Net . . . . . . . . . . . . . . . . . . . . . -0- -0- 1,517 MedServ Development and Related Software, Net. . . . . . . . . . . 170 3,012 1,043 Development Costs of Joint Ventures. . . . . . . . . . . . . . . . -0- 463 -0- Patents, Net . . . . . . . . . . . . . . . . . . . . . . . . . . . 565 760 352 Net Assets of Discontinued Operations. . . . . . . . . . . . . . . -0- 11,745 8,425 Other, Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . 232 1,056 182 -------- -------- -------- Total Other Assets . . . . . . . . . . . . . . . . . . . . . . . . 1,938 20,955 15,412 -------- -------- -------- Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14,669 $ 44,243 $ 33,018 -------- -------- -------- -------- -------- -------- LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Current Maturities of Long-Term Debt . . . . . . . . . . . . . . . $ 168 $ 1,165 $ 979 Accounts Payable-Trade and Accrued Liabilities . . . . . . . . . . 2,240 2,837 2,076 Income Taxes Payable . . . . . . . . . . . . . . . . . . . . . . . -0- -0- 1,211 -------- -------- -------- Total Current Liabilities. . . . . . . . . . . . . . . . . . . . . 2,408 4,002 4,266 Liabilities Subject to Compromise. . . . . . . . . . . . . . . . . . 30,457 -0- -0- Long-Term Debt, Less Current Maturities. . . . . . . . . . . . . . . 350 23,224 10,588 Deferred Income Taxes. . . . . . . . . . . . . . . . . . . . . . . . -0- 1,377 1,311 -------- -------- -------- Total Liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . 33,215 28,603 16,165 -------- -------- -------- Stockholders' Equity (Deficit): Voting Preferred Stock . . . . . . . . . . . . . . . . . . . . . . 1 1 1 Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 40 40 Capital in Excess of Par Value . . . . . . . . . . . . . . . . . . 8,320 7,941 7,898 Retained Earnings (Deficit). . . . . . . . . . . . . . . . . . . . ( 26,591) 7,989 9,245 Less: Treasury Stock . . . . . . . . . . . . . . . . . . . . . . . ( 331) ( 331) ( 331) -------- -------- -------- Total Stockholders' Equity (Deficit) . . . . . . . . . . . . . . ( 18,546) 15,640 16,853 -------- -------- -------- Total Liabilities and Stockholders' Equity . . . . . . . . . . . . . $ 14,669 $ 44,243 $ 33,018 -------- -------- -------- -------- -------- -------- a) Liabilities Subject to Compromise consist of the following: Secured Debt . . . . . . . . . . . . . . . . . . . . . . . $28,158 Trade and Other Miscellaneous Claims . . . . . . . . . . . $ 2,299 ------- $30,457 ------- -------
The accompanying notes are an integral part of these financial statements. 23 MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED MARCH 31, 1996, 1995 AND 1994 (In Thousands; except Earnings Per Share Amounts)
1996 1995 1994 ---- ---- ---- Revenue: Net Sales and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $17,052 $14,830 $12,301 Costs and Expenses: Cost of Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,665 7,756 5,548 Selling, General and Administrative. . . . . . . . . . . . . . . . . . . . . . . . 9,202 2,429 2,577 Product Development and Software Costs . . . . . . . . . . . . . . . . . . . . . . 4,605 4,271 -0- Loss on Early Retirement of Fixed Assets . . . . . . . . . . . . . . . . . . . . . 8,329 -0- -0- Loss on Inventory Revaluation. . . . . . . . . . . . . . . . . . . . . . . . . . . 1,510 -0- -0- Goodwill Write Down. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,937 -0- -0- Depreciation and Amortization. . . . . . . . . . . . . . . . . . . . . . . . . . . 2,682 1,060 818 Interest, Net (Contractual Interest $2,348). . . . . . . . . . . . . . . . . . . . 1,739 1,430 424 ------- ------- ------- Total Costs and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . 41,669 16,946 9,367 ------- ------- ------- Income (Loss) from Continuing Operations Before Income Taxes, Discontinued Operations and Cumulative Effect of Accounting Change . . . . . . . . (24,617) (2,116) 2,934 Income Tax (Benefit) Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 1,900) ( 844) 1,078 ------- ------- ------- Income (Loss) from Continuing Operations Before Discontinued Operations and Cumulative Effect of Accounting Change . . . . . . . . . . . . . . . . . . . . . . (22,717) (1,272) 1,856 Income (Loss) from Discontinued Operations, Net of Income Tax. . . . . . . . . . . (6,634) 16 762 Estimated (Loss) on Disposal of Discontinued Operations. . . . . . . . . . . . . . (5,229) -0- -0- ------- ------- ------- Income (Loss) Before Cumulative Effect of Accounting Change. . . . . . . . . . . . . (34,580) (1,256) 2,618 Cumulative Effect of Accounting Change for Adoption of FASB No. 109 on Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . -0- -0- 543 ------- ------- ------- Net Income (Loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(34,580) $( 1,256) $ 3,161 ------- ------- ------- ------- ------- ------- Primary Net Earnings (Loss) per Common Share: Income (Loss) from Continuing Operations . . . . . . . . . . . . . . . . . . . . . $( 5.60) $( . 32) $ .48 Income (Loss) from Discontinued Operations . . . . . . . . . . . . . . . . . . . . ( 2 .92) .00 .20 Cumulative Effect of FASB No. 109 Accounting Change. . . . . . . . . . . . . . . . .00 .00 .14 ------- ------- ------- Net Income (Loss) Per Common Share . . . . . . . . . . . . . . . . . . . . . . . . $( 8 .52) $( .32) $ .82 ------- ------- ------- ------- ------- ------- Weighted average Common Shares outstanding, Primary. . . . . . . . . . . . . . . . 4,059 3,974 3,879 ------- ------- ------- ------- ------- ------- Assuming Fully Diluted Net Earnings (Loss) per Common Share: Income (Loss) from Continuing Operations . . . . . . . . . . . . . . . . . . . . . $( 5.60) $( .32) $ .43 Income (Loss) from Discontinued Operations . . . . . . . . . . . . . . . . . . . . ( 2.92) .00 .17 Cumulative Effect of FASB No. #109 Accounting Change . . . . . . . . . . . . . . . .00 .00 .12 ------- ------- ------- ------- ------- ------- Net Income (Loss) Per Common Share . . . . . . . . . . . . . . . . . . . . . . . . $( 8.52) $( .32) $ .72 ------- ------- ------- ------- ------- ------- Weighted average Common Shares outstanding, Assuming Fully Diluted . . . . . . . . 4,059 3,974 4,595 ------- ------- ------- ------- ------- -------
The accompanying notes are an integral part of these financial statements. 24 MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) YEARS ENDED MARCH 31, 1996, 1995 AND 1994 (in Thousands Except Share Data)
COMMON STOCK ----------------------------------------------------------------------------------- Number $.01 Capital in of Par Excess of Retained Treasury Shares Value Par Value Earnings Stock Total ------ ----- --------- -------- ----- ----- Balance, March 31,1993 . . . . . . . . 3,896,519 $ 39 $7,862 $ 6,084 $(331) $13,654 Exercise of Common Stock Warrants . . . . . . . . . . . . . . 111,813 1 36 37 Net Income for Year Ended March 31, 1994 . . . . . . . . . . . 3,161 3,161 ----------------------------------------------------------------------------------- Balance, March 31, 1994. . . . . . . . 4,008,332 40 7,898 9,245 $(331) 16,852 Stock Issued . . . . . . . . . . . . 18,500 43 43 Net Loss For Year Ended March 31, 1995 . . . . . . . . . . . (1,256) (1,256) ----------------------------------------------------------------------------------- Balance, March 31, 1995. . . . . . . . 4,026,832 40 7,941 7,989 (331) 15,639 Stock Issued . . . . . . . . . . . . . 1,458,503 15 379 394 Net Loss for Year Ended March 31, 1996 . . . . . . . . . . . (34,580) (34,580) ----------------------------------------------------------------------------------- Balance, March 31, 1996. . . . . . . . 5,485,335 $ 55 $ 8,320 $(26,591) $(331) $(18,547) ----------------------------------------------------------------------------------- ----------------------------------------------------------------------------------- VOTING PREFERRED STOCK ----------------------------------------------------------------------------------- Number $.0001 of Par Shares Value ------ ----- Balance, March 31, 1994 6,500,000 $ 1 $ 1 --------- ----- --- Balance, March 31, 1995 6,500,000 $ 1 $ 1 --------- ----- --- Balance, March 31, 1996 6,500,000 $ 1 $ 1 --------- ----- --- Total Stockholders' Equity (Deficit), March 31, 1996 $(18,546) -------- --------
The accompanying notes are an integral part of these financial statements. 25 MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW YEARS ENDED MARCH 31, 1996, 1995 AND 1994 (In Thousands)
1996 1995 1994 ---- ---- ---- OPERATING ACTIVITIES Income (Loss) from Continuing Operations . . . . . . . . . . . . . . . . $(22,717) $(1,272) $ 2,399 -------- ------- -------- Adjustments to Reconcile Net Income (Loss) to Net Cash Provided (Used) by Operating Activities: . . . . . . . . . . . . . . Depreciation and Amortization. . . . . . . . . . . . . . . . . . . . . 2,682 1,060 818 Product Development and Software Cost. . . . . . . . . . . . . . . . . 4,605 4,271 -0- Goodwill Writedown . . . . . . . . . . . . . . . . . . . . . . . . . . 2,937 -0- -0- Loss on Early Retirement of Fixed Assets . . . . . . . . . . . . . . . 8,329 -0- -0- Loss on Inventory Revaluation. . . . . . . . . . . . . . . . . . . . . 1,510 -0- -0- Write-off of Accounts Receivable and Other Assets. . . . . . . . . . . 1,323 -0- -0- Stock Issued from Stock Compensation Plan. . . . . . . . . . . . . . . 388 -0- -0- (Increase) Decrease in: Accounts Receivable. . . . . . . . . . . . . . . . . . . . . . . . . (458) (899) (288) Income Taxes Receivable. . . . . . . . . . . . . . . . . . . . . . . (72) (808) -0- Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 297 (1,542) (305) Prepaid Expenses and Other Assets. . . . . . . . . . . . . . . . . . (100) (62) (10) Increase (decrease) in: Accounts Payable and Other Accrued Liabilities . . . . . . . . . . . 1,724 761 743 Income Taxes Payable and Deferred Taxes. . . . . . . . . . . . . . . (1,347) (1,145) (175) -------- ------- -------- Total Adjustments. . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,818 1,636 783 -------- ------- -------- Net Cash Provided (used) by Continuing Operations. . . . . . . . . . . . (899) 364 3,182 -------- ------- -------- Net Cash used by Discontinued Operations . . . . . . . . . . . . . . . . (117) (3,304) (2,085) -------- ------- -------- INVESTING ACTIVITIES Expended for Property and Equipment. . . . . . . . . . . . . . . . . . . (797) (3,003) (3,023) Expended for Software Development. . . . . . . . . . . . . . . . . . . . (30) (201) (505) Expended for Product Development . . . . . . . . . . . . . . . . . . . . (484) (4,739) (1,241) Expended for Patents and Other Assets. . . . . . . . . . . . . . . . . . (109) (1,127) -0- Expended for Acquisition . . . . . . . . . . . . . . . . . . . . . . . . (1,453) (682) -0- -------- ------- -------- Net Cash Used by Investing Activities. . . . . . . . . . . . . . . . . . (2,873) (9,752) (4,769) -------- ------- -------- FINANCING ACTIVITIES Payments on Notes Payable, Long-Term Debt. . . . . . . . . . . . . . . . (947) (1,048) (10,057) Net Proceeds from Line of Credit . . . . . . . . . . . . . . . . . . . . 2,162 12,183 4,225 Issuance of Common Stock . . . . . . . . . . . . . . . . . . . . . . . . 5 10 38 Proceeds from Borrowing on Notes Payable and Long-Term Debt. . . . . . . 3,021 1,687 9,558 -------- ------- -------- Net cash Provided by Financing Activities. . . . . . . . . . . . . . . . 4,241 12,832 3,764 -------- ------- -------- NET INCREASE IN CASH . . . . . . . . . . . . . . . . . . . . . . . . . . . 352 140 92 CASH AT BEGINNING OF PERIOD. . . . . . . . . . . . . . . . . . . . . . . . 613 473 381 -------- ------- -------- CASH AT END OF PERIOD. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 965 $ 613 $ 473 -------- ------- -------- -------- ------- -------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,570 $ 1,409 $ 557 -------- ------- -------- -------- ------- --------
The accompanying notes are an integral part of these financial statements. 26 MEDICAL TECHNOLOGY SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1996, 1995 AND 1994 NOTE 1 - BACKGROUND INFORMATION Medical Technology Systems, Inc., a Delaware corporation, incorporated in March of 1984, provides products and services to pharmacies that dispense prescription pharmaceuticals to nursing homes, hospitals and other health assisted care facilities. The Company's principal businesses consist of the following product lines: (I) the core business of manufacturing and selling proprietary medication dispensing systems which include punch cards for use by pharmacies in dispensing prescription medicines; (ii) computerized pharmacy information and dispensing systems business which consists of the Performance hospital pharmacy management software and the MedServ-TM- mobile computerized medication dispensing systems for hospitals and nursing homes and (iii) the clinical laboratory service business of supplying diagnostic testing services to the medical profession. During the second quarter of 1996, the Company received notice from Creighton Pharmaceuticals Corporation, a wholly owned subsidiary of Sandoz Pharmaceuticals Corporation, that it intended to terminate its relationship with the Company in the Glasgow Pharmaceutical Corporation (GPC) joint venture which packaged and distributed pharmaceutical products. As a result of this termination, the Company recorded a $4.6 million dollar write-off of its investment in GPC. In addition to the terminated joint venture expense, the Company recorded a related valuation allowance in the amount of approximately $505,000 on inventory carried in its drug packaging subsidiary, which had been acquired for the joint venture. The GPC joint venture was created to provide the Company with a competitive price advantage in the acquisition cost of its pharmaceuticals as well as provide additional product lines. As a direct result of the joint venture termination, the Company re-evaluated its position in the medication packaging market. It was determined that the automated packaging equipment associated with the core packaging business should be more fully utilized in order to remain competitive. The early retirement of portions of the existing packaging equipment resulted in a $3.0 million charge. During the same quarter, the Company recorded other losses and write-downs which impacted its earnings. These adjustments included a $1.2 million charge relating to the obsolescence of an early version of its computerized medication dispensing product and an additional charge of approximately $500,000 relating to the valuation of certain inventory and project development costs. As a result of these significant losses in the second quarter of fiscal 1996, the Company was in violation of certain financial covenants in the borrowing agreements with its principal lenders. The Company was unable to reach an agreement with its lenders to amend or restructure the debt. The extended negotiations with the Company's lenders created substantial uncertainty which led to management's decision to file for protection under Chapter 11 for certain of its subsidiaries. During the fourth quarter of 1996, the Company filed voluntary petitions for relief under Chapter 11 ("Chapter 11") of Title 11 of the United States Bankruptcy Code in the Middle District of Florida, Tampa Division (the "Bankruptcy Court") for four of its subsidiaries (MTS debtors). The MTS debtors are presently operating their businesses as debtors-in-possession under the jurisdiction of the Bankruptcy Court and intend to reorganize pursuant to Chapter 11. As debtors-in-possession, these subsidiaries may engage in transactions within the ordinary course of business without approval of the Bankruptcy Court. Because of the events described above, the Company's working capital and borrowing capacity were extremely limited. The Company ultimately decided to suspend most project development activities, incurring substantial write-offs of the suspended project costs. Liabilities subject to compromise in the accompanying consolidated balance sheets represent the Company's estimate of liabilities as of the filing date subject to adjustment in the reorganization process. Under Chapter 11, actions to enforce certain claims against the MTS debtor subsidiaries are stayed if the claims arose, or are based on events that occurred, on or before the petition date. The ultimate terms of settlement of these liabilities and claims will be determined in accordance with a plan of reorganization which requires the approval of prepetition creditors and confirmation by the Bankruptcy Court. Other liabilities may arise or be subject to compromise as a result of rejection of executory contracts, including leases, or the Bankruptcy Court's resolution of claims for contingencies and other disputed amounts. The ultimate resolution of such liabilities will be part of a plan of reorganization. Claims secured by the debtor's assets ("secured claims") also are stayed, although the creditors of such claims have the right to move the court for relief from the stay. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company incurred losses during the current year of approximately $34.6 million and 27 its total liabilities exceed its total assets by approximately $18.5 million as of March 31, 1996. The Company also had negative cash flows from operations during the current year of approximately $.9 million and loans in the amount of approximately $29 million are past due. In addition, the major operating subsidiaries of the Company have filed for protection under Chapter 11 of the U.S. Bankruptcy Code. These conditions raise substantial doubt as to the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties. A plan of reorganization could materially change the amounts reported in the accompanying consolidated financial statements, which do not give effect to adjustments to the carrying values of assets and liabilities which might be a consequence of a plan of reorganization. The ability of the Company to continue as a going concern is dependent on, among other things, confirmation of an acceptable plan of reorganization, future profitable operations, the ability to generate sufficient cash from operations, and the ability to obtain financing sources to meet future obligations. NOTE 2 - RESTRUCTURING AND OTHER CHARGES In December 1995, the Company initiated a cost reduction strategy that focused upon reducing operating expenses and returning the Company to profitability. This plan included the filing on January 3, 1996 of voluntary petitions under Chapter 11 of the United States Bankruptcy Code in the Middle District of Florida for three of the Company's subsidiaries: MTS Packaging Systems, Inc., Medical Technology Laboratories, Inc. and MTS Sales and Marketing, Inc. On February 22, 1996, the Company also filed a voluntary petition under Chapter 11 for its generic drug repackaging subsidiary, Vangard Labs, Inc. These Chapter 11 filings, together with the limitation on the Company's financing alternatives, necessitated a comprehensive examination of the Company's business operations. Because of the numerous development projects that the Company had underway, and the limited opportunity that existed for completion of these projects, it was decided by management that without additional capital virtually none of the existing development projects could be successfully completed. In addition, in March 1995, the Financial Accounting Standards Board (FASB) issued Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be disposed of, which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present. This statement was effective for fiscal years beginning after December 15, 1995, but the company decided to apply this standard as of March 31, 1996 as permitted by the statement. Consequently, in order to comply with this standard, the Company has charged to expensed approximately $17.9 million excluding discontinued operations as detailed below: March 31, 1996 --------- (In Thousands) Terminated Joint Venture $ 550 Early Retirement of Fixed Assets 8,329 Product Development and Software Cost 4,605 Inventory Revaluation 1,510 Goodwill 2,937 --------- $17,391 --------- --------- NOTE 3 - DISCONTINUED OPERATIONS As part of a corporate restructuring strategy, the Company plans to concentrate its resources on its medication card business and the medication dispensing technology products which have been developed and are presently marketable. Although the clinical diagnostic laboratory business has been identified as a non-core business, its operations are a source of cash to support future debt obligations of the Company. The Company's generic drug repackaging subsidiary, Vangard Labs, Inc. whose production operations were suspended on January 3, 1996 and subsequently filed a voluntary petition under Chapter 11 of the United States Bankruptcy Code in the Middle District of Florida on February 22, 1996, will be divested. In addition, the Glasgow Pharmaceutical Corporation (GPC) joint venture with Creighton Pharmaceutical Corporation, a wholly owned subsidiary of Sandoz Pharmaceuticals, Inc. is considered a discontinued operation primarily because of its dependence upon Vangard production capabilities. A pre-tax charge of approximately $5.2 million for a loss on disposal of these discontinued operations was recorded in fiscal year 1996 and is shown in the Statement of Operations as estimated loss on disposal of discontinued operations. In addition, the net assets and operating results of the discontinued operations were segregated in the consolidated financial statements for all periods presented. 28 A summary of unusual charges which are included in loss from discontinued operations during the current year is as follows: March 31, 1996 ------ (In Thousands) Product Development and Software $ 2,320 Inventory Revaluation 570 Other 237 ------- $ 3,127 ------- ------- At fiscal year end, the investment in net assets of the discontinued operations consisted of: March 31, March 31, March 31, 1996 1995 1994 ---- ---- ---- (In Thousands) Current Assets $ 3,136 $ 4,388 $ 2,529 Current Liabilities 4,387 1,783 $ 1,849 Non-Current Assets 2,032 9,769 $ 7,757 Non-Current Liabilities 781 629 $ 12 -------- -------- ------- $ -0- $ 11,745 $ 8,425 -------- -------- ------- -------- -------- ------- Net revenues of discontinued operations were $5,968, $6,045, and $5,942 in fiscal years 1996, 1995 and 1994, respectively. NOTE 4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONSOLIDATION The consolidated financial statements include the accounts of Medical Technology Systems, Inc. and its subsidiaries, MTS Packaging, Inc., Medical Technology Laboratories, Inc., Clearwater Medical Services, Inc., Clinical Diagnostic Center, Inc., Performance Pharmacy Systems, Inc., Medication Management Systems, Inc., Medication Management Technologies, Inc., MTS Sales & Marketing, Inc., and Systems Professionals, Inc. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain minor reclassifications have been made in the Company's prior years consolidated financial statements for comparability to the current year's statements. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Vangard Labs, Inc., a wholly owned subsidiary of the Company, and Glasgow Pharmaceutical Corporation, a 50% joint venture with Creighton Pharmaceuticals, Inc. are treated as discontinued operations for all periods presented as set forth in Note 3. INVENTORIES Inventories are stated at the lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method. REVENUE RECOGNITION The Company recognizes revenue as follows: when products are shipped by MTS Packaging Systems, Inc.; when medication dispensing systems are placed into service by Medication Management Systems, Inc.; when pharmacy management systems are placed into service by Performance Pharmacy Systems, Inc.; when services are performed by Medical Technology Laboratories, Inc. The company recognizes revenues from the clinical laboratory services net of estimated contractual adjustments resulting from the unpaid portion of the assigned insurance billings and other third party payers, as services are performed. 29 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 ----- Transportation Equipment 3 Computer Equipment 3 Furniture and Fixtures 5 Leasehold Improvements 5 Machinery Equipment 7 Buildings 20 Effective April 1, 1995, the Company reduced the estimated useful lives of its property and equipment to reflect technological changes. The effect of this change was to increase the net loss for 1996 by $589,000 ($.15 per share) SOFTWARE DEVELOPMENT COST The Company capitalizes software development costs in accordance with the guidelines set forth in FASB Statement No. 86. All costs associated with the software development from the point of technological feasibility to its general distribution to customers are capitalized and, subsequently, amortized. Annually, the Company re-examines its amortization policy relating to its software development cost. The Company has determined that a five-year period is appropriate. This represents a change in estimates which does not have a material effect on the Company's results of operations. In accordance with FASB Statement No. 121, the Company evaluated the unamortized software development cost and adjusted the balance downward, if necessary, to reflect the remaining net realized value. GOODWILL Goodwill represents amounts paid in excess of fair market value of assets acquired by the Company in the purchase of other companies. These amounts are amortized over a ten-year period. In accordance with FASB Statement No. 121, the Company evaluates the unamortized Goodwill and adjusts the balance downward, if necessary, to reflect the remaining net realizable value. OTHER ASSETS Other assets are carried at cost less accumulated amortization, which is being provided on a straight-line basis over a five to seventeen year period. In accordance with FASB Statement No. 121, the Company evaluates the unamortized Other Assets and adjusts the balance downward, if necessary, to reflect the remaining net realizable value. EARNINGS (LOSS) PER SHARE Primary earnings (loss) per common and common equivalent share and earnings (loss) per common and common equivalent share assuming full dilution were computed using the weighted average number of shares outstanding adjusted for the incremental shares attributed to outstanding warrants and options to purchase common stock, if dilutive. INCOME TAXES Effective April 1, 1993, the Company adopted FASB No. 109, "Accounting for Income Taxes". Under FASB No. 109, income taxes are provided for under the liability method, whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is 30 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. 31 NOTE 5 - ACCOUNTS RECEIVABLE The Company maintains an allowance for potential losses on individual and commercial accounts receivable. Management considers the allowances provided to be reasonable. Accounts Receivable consist of the following: March 31, March 31, March 31, 1996 1995 1994 --------- --------- --------- (In Thousands) Accounts Receivable at Gross $3,788 $3,742 $2,686 Less: Allowance for Doubtful Accounts (528) (167) (10) --------- --------- --------- $3,260 $3,575 $2,676 --------- --------- --------- --------- --------- --------- Substantially all of the Company's accounts receivable are pledged as collateral on bank notes. NOTE 6 - INVENTORIES Inventories consist of the following: March 31, March 31, March 31, 1996 1995 1994 --------- --------- --------- (In Thousands) Raw Material $ 661 $ 993 $ 716 Finished Goods and Work in Process 1,784 3,259 1,994 --------- --------- --------- $2,445 $4,252 $2,710 --------- --------- --------- --------- --------- --------- Substantially all of the Company's inventories are pledged as collateral on bank notes. NOTE 7 - PROPERTY AND EQUIPMENT Property and equipment consists of the following: March 31, March 31, March 31, 1996 1995 1994 --------- --------- --------- (In Thousands) Property and Equipment $ 7,273 $16,041 $13,144 Leasehold Improvements 806 817 687 --------- --------- --------- $ 8,079 $16,858 $13,831 Less: Accumulated Depreciation and Amortization (3,162) (2,982) (2,186) --------- --------- --------- $ 4,917 $13,876 $11,645 --------- --------- --------- --------- --------- --------- Substantially all of the Company's property and equipment are pledged as collateral on bank notes. 32 MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1996, 1995 AND 1994 NOTE 8 - PRODUCT AND SOFTWARE DEVELOPMENT COSTS, GOODWILL AND OTHER ASSETS Software development costs, goodwill and other assets consists of the following: March 31, March 31, March 31, 1996 1995 1994 --------- --------- --------- (In Thousands) Software Development Costs . . . . . . . $ -0- $1,555 $1,353 Less: Accumulated Amortization. . . . . -0- (249) (100) --------- --------- --------- $ -0- $1,306 $1,253 --------- --------- --------- --------- --------- --------- Goodwill . . . . . . . . . . . . . . . . $1,204 $2,943 $2,738 Less: Accumulated Amortization . . . . (233) (330) (98) --------- --------- --------- $ 971 $2,613 $2,640 --------- --------- --------- --------- --------- --------- Product Development. . . . . . . . . . . $ -0- $ -0- $1,790 Less: Accumulated Amortization. . . . . -0- -0- (273) --------- --------- --------- $ -0- $ -0- $1,517 --------- --------- --------- --------- --------- --------- MedServ-TM- Development and Related Software. . . . . . . . . . . . . . . . $ 212 $3,027 $1,043 Less: Accumulated Amortization . . . . (42) (15) -0- --------- --------- --------- $ 170 $3,012 $1,043 --------- --------- --------- --------- --------- --------- Patents. . . . . . . . . . . . . . . . . $ 873 $ 853 $ 416 Less: Accumulated Amortization. . . . (308) (93) (64) --------- --------- --------- $ 565 $ 760 $ 352 --------- --------- --------- --------- --------- --------- Other Assets: Acquisition of Business . . . . . . . . $ 192 $ 219 $ -0- Finance Costs . . . . . . . . . . . . . -0- 337 176 Other . . . . . . . . . . . . . . . . . 63 583 56 Less: Accumulated Amortization. . . . (23) (83) (50) --------- --------- --------- $ 232 $1,056 $ 182 --------- --------- --------- --------- --------- --------- Substantially all of the Company's intangible assets are pledged as collateral on bank notes. 33 MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1996, 1995 AND 1994 NOTE 9 - LONG-TERM DEBT Long-term debt consists of the following:
March 31, March 31, March 31, 1996 1995 1994 --------- --------- ---------- (In Thousands) Note payable; interest at bank prime plus 1/2%; or LIBOR rate plus 2 1/4%; payable $93,000 per month plus interest, maturing September, 1998, past due . . . . . . . . . . . . . . . . . . . . . . $ 10,398 $ 9,595 $ 9,342 Bank line of credit, interest at bank prime plus 1/2%, or LIBOR rate plus 2%; interest payable monthly; principal maturing September, 1996, past due . . . . . . . . . . . . . . . . . . . . . . 16,862 14,699 2,216 Seller Financing Under Tampa Pathology Acquisition Agreement, face value of $971,000 discounted at 10%, with variable monthly payments until satisfied, past due . . . . . . . . . . . . . . . . . . . . . . 871 -0- -0- Other Notes and Agreements; interest and principal payable monthly and annual at various amounts through June 1998 . . . . . . . . . . . . . 545 95 9 -------- ------- ------- Total Long-Term Debt . . . . . . . . . . . . . . . . . . . . . . . . . 28,676 24,389 11,567 Less Current Portion . . . . . . . . . . . . . . . . . . . . . . . . . (168) (1,165) (979) Subject to Compromise . . . . . . . . . . . . . . . . . . . . . . . . . (28,158) -0- -0- -------- ------- ------- LONG-TERM DEBT DUE AFTER 1 YEAR . . . . . . . . . . . . . . . . . . . . $ 350 $23,224 $10,588 -------- ------- ------- -------- ------- -------
The following is a schedule by year of the principal payments required on these notes payable and long-term debts exclusive of debt subject to compromise as of March 31, 1996: (In Thousands) 1997. . . . . . . . . . . . . $ 168 1998. . . . . . . . . . . . . $ 350 The above bank loans and line of credit are collateralized by the Company's accounts receivables, inventory, equipment and intangibles. The prime rate at March 31, 1996 was 8.25%. The Company has reported approximately $1.7 million in interest expense for the year ended March 31, 1996. This excludes $.6 million that was not accrued subsequent to filing Chapter 11, as required by generally accepted accounting principles. 34 MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1996, 1995 AND 1994 NOTE 10 - LEASE COMMITMENTS The following is a schedule by year of future minimum rental payments required under operating leases that have an initial or remaining non-cancelable lease term in excess of one year as of March 31, 1996. (In Thousands) 1997. . . . . . . . . . . . . .$ 340 1998. . . . . . . . . . . . . .$ 279 1999. . . . . . . . . . . . . .$ 279 2000. . . . . . . . . . . . . .$ -0- 2001. . . . . . . . . . . . . .$ -0- Rent expense amounted to $504,000, $422,000, and $236,000 for the years ended March 31, 1996, 1995 and 1994, respectively. NOTE 11 - 401(K) PROFIT SHARING PLAN During the year ended March 31, 1994 the Company established a 401(K) profit sharing plan. The Plan covers substantially all of its employees. Contributions are at the employees discretion and may be matched by the Company up to certain limits. For the year ended March 31, 1995 and 1996 the Company made no contributions to the Plan. The Company contributed $7,000 to the Plan for the year ended March 31, 1994. NOTE 12 - SELF INSURANCE PLAN During the year ended March 31, 1993, the Company established a medical health benefit self-insurance plan for substantially all of its employees. The Company is reinsured for claims which exceed $30,000 per participant and has an annual maximum aggregate limit of approximately $390,000. NOTE 13 - RELATED PARTY TRANSACTIONS Todd E. Siegel ("Siegel") is the Trustee of the Siegel Family QTIP Trust ("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. Siegel, through his beneficial interest in the Trust, owns approximately 10 percent of the outstanding common stock of the Company. In addition, Siegel beneficially owns 6,500,000 shares of voting preferred stock which has two votes per share for all matters submitted to the holders of the common stock of the Company. Siegel had outstanding indebtedness to the Company at March 31, 1996 and March 31, 1995 of approximately $12,000 and $8,000 respectively. The Company expects to collect the full balance of this indebtedness, however, no final payment schedule has been established. During 1995, the Company paid a related company $16,750 for services rendered in connection with the refinancing of the Company's debt. 35 MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1996, 1995 AND 1994 NOTE 14 - TAXES Loss from continuing operations of consolidated companies before income tax benefit was approximately $24.6 million and $2.1 million during the years ended March 31, 1996 and March 31, 1995 respectively. Income from continuing operations of consolidated companies before income taxes was approximately $2.9 million during the year ended March 31, 1994. The components of related income taxes provided on continuing operations were as follows: Years Ended March 31, --------------------- 1996 1995 1994 ---- ---- ---- (In Thousands) Current Tax (Benefit) Due: Federal . . . . . . . . $ (635) $(1,277) $ 813 State . . . . . . . . . -0 - (208) 111 ------- ------- ------ (635) (1,485) 924 ------- ------- ------ Deferred Tax: Federal . . . . . . . . (1,132) 547 100 State . . . . . . . . . (133) 94 54 ------- ------- ------ (1,265) 641 154 ------- ------- ------ $(1,900) $ (844) $1,078 ------- ------- ------ ------- ------- ------ Total income tax (benefit) expense for 1996, 1995, and 1994 from continuing operations resulted in effective tax rates of 7.7%, 39.9% and 36.7%, respectively. The reasons for the differences between these effective tax rates and the U.S. statutory rate of 35.0% on continuing operations are as follows: Years Ended March 31, --------------------- 1996 1995 1994 ---- ---- ---- (In Thousands) Tax (Benefit) Expense at U.S. statutory rate......... $(8,616) $ 741 $1,027 Valuation allowance for deferred tax asset........... 6,877 State and local income tax, net...................... (543) (75) 109 Difference between marginal and U.S. statutory rate.. 246 21 (29) Other (net).......................................... 136 (49) (29) ------- ----- ------ Income Tax (Benefit) Expense......................... $(1,900) $(844) $1,078 ------- ----- ------ ------- ----- ------ Income taxes receivable as of March 31, 1996 and March 31, 1995 in the amount of $880,000 and $808,000 represent refunds of federal and state taxes previously paid. During the year ended March 31, 1995, the Company had a tax net operating loss of approximately $3.2 million. The Company elected to forgo carryback of the loss so that the full amount of the net operating loss would be available to offset future taxable income. This net operating loss carry forward will expire in 2010 which included income from discontinued operations. In the current year, the Company has a net operating loss of $21 million. A portion of this loss has been carried back, and a receivable of $820,000 has been recorded to reflect the anticipated refund. The unused loss of $17.8 million, which will expire in 2011, plus the carryforward loss from the prior year of $3.2 million will be available to offset future taxable income. Effective April 1, 1993, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." The cumulative effect of this accounting change on years prior to April 1, 1993, was a benefit of approximately $543,000, which is included in the year ended March 31, 1994 results of operations. 36 MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1996, 1995 AND 1994 NOTE 14 - TAXES (Cont'd) Deferred taxes and deferred tax asset resulted from differences in timing of deductions recognized for tax and financial reporting purposes. Deferred taxes for continuing operations consist of the following:
March 31, March 31, March 31, 1996 1995 1994 ---- ---- ---- (In Thousands) Depreciation/Amortization Gross Deferred Tax Liability ............................... $ 379 $ 2,909 $1,366 ------ ------- ------ Depreciation/Amortization temporary difference.. (1,386) -0- -0- Allowance for Doubtful Accounts................. (73) (73) (55) Inventory Valuation Allowance................... (163) -0- -0- Tax Loss Carry forward.......................... (5,525) (1,459) -0- Reserves and Provisions......................... (109) -0- -0- ------ ------- ------ Gross Deferred Tax Asset........................ (7,256) (1,532) (55) ------ ------- ------ Net deferred tax (asset) liability.............. (6,877) 1,377 1,311 Less Valuation Allowance........................ (6,877) -0- -0- ------ ------- ------ Deferred Income Taxes........................... $ -0- $ 1,377 $1,311 ------ ------- ------ ------ ------- ------
The Internal Revenue Service has completed its examination of the Company's consolidated federal income tax returns for the years ended March 31, 1993 and 1992. No deficiencies were proposed. No other income tax returns have been examined by taxing authorities. The Florida State Department of Revenue is examining the Company's sales and use tax and intangible tax returns for the period January, 1988 through December, 1993. The State has proposed a suggested assessment of $1,375,000 including taxes, penalties and interest. Although a proposed assessment has been made, the Company has filed a request for reconsideration which was granted. The Company believes the amount of additional tax owed, if any, is substantially less than the State has proposed, and intends to vigorously defend its position should a final assessment be made. 37 MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1996, 1995 AND 1994 NOTE 15 - STOCKHOLDERS' EQUITY (DEFICIT) Stockholders' Equity (Deficit) consists of the following:
March 31, March 31, March 31, 1996 1995 1994 ---- ---- ---- Voting Preferred Stock: Par value $.0001 per share Authorized Shares............... 7,500,000 7,500,000 7,500,000 Issued Shares................... 6,500,000 6,500,000 6,500,000 Outstanding Shares.............. 6,500,000 6,500,000 6,500,000 Common Stock: Par value $.01 per share Authorized Shares............... 25,000,000 25,000,000 25,000,000 Outstanding Shares.............. 5,445,335 3,986,832 3,968,332 Issued Shares................... 5,485,335 4,026,832 4,008,332
STOCK OPTIONS Activity related to options is as follows:
NUMBER OF SHARES PRICE PER SHARE ---------------- --------------- Outstanding at March 31, 1993......... 130,500 $1.00 - $6.00 Granted in Fiscal 1994: Officers & Directors............... 60,000 $1.63 Employees.......................... 30,200 $4.00 - $10.00 -------- -------------- Outstanding at March 31, 1994......... 220,700 Granted in Fiscal 1995: Officers & Directors............... 99,000 $1.63 Employees.......................... 13,226 $6.00 - $7.75 -------- -------------- Outstanding at March 31, 1995......... 332,926 Granted in Fiscal 1996: Officers & Directors............... 59,000 $1.63 Employees.......................... 8,808 $6.00 - $8.00 -------- -------------- Outstanding at March 31, 1996......... 400,734 $1.00 - $10.00 -------- -------------- -------- --------------
38 MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1996, 1995 AND 1994 15 - STOCKHOLDERS' EQUITY (DEFICIT) (Cont'd) WARRANTS Activity related to warrants is a follows:
NUMBER OF SHARES PRICE PER SHARE ---------------- --------------- Outstanding at March 31, 1993.................. 1,320,000 $7.00 Granted in Fiscal 1994 through Fiscal 1996..... -0- --------- ------ Outstanding at March 31, 1996.................. 1,320,000 $7.00 --------- ------ --------- ------
All of the warrants outstanding at March 31, 1996 expire in July 1997. The options outstanding at March 31, 1996 expire on various dates commencing in April 1998 and ending in March 2006. During fiscal 1995, the Company entered into a stock appreciation rights agreement with its Chief Executive Officer. The agreement, which is for a term of 10 years, call for additional compensation payable annually equal to 6.5% of the total of the incremental increase in the value of the Company's outstanding stock. No dividends have ever been paid on either the Company's Common or Preferred Stock. 39 MEDICAL TECHNOLOGY SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1996, 1995 AND 1994 NOTE 16 - ACQUISITIONS In March 1996, the Company acquired the rights and interests in certain clinical laboratory services of Tampa Pathology Laboratory. The purchase agreement provided that the total purchase price to be paid by the Company for the rights and interests was determined based upon the actual revenues associated with the services performed for designated customer accounts of Tampa Pathology Laboratory for a period of time in 1996. The purchase price is payable monthly based upon 25% of the actual revenues of former Tampa Pathology Laboratory customer accounts. The Company has estimated the total present value of the purchase price to be approximately $971,000, based upon an estimated amortization period of 96 months discounted at 10%. During 1996, the Company made payments, under the terms of the purchase agreement, of approximately $131,000. NOTE 17 - CONCENTRATION OF CREDIT RISK The business of Medical Technology Laboratories, Inc. is primarily with individuals located in the State of Florida, many of whom routinely assign to the company payment by their medical insurance providers. As of March 31, 1996 Medical Technology Laboratories, Inc.'s patient accounts receivable from individuals and commercial medical insurance providers was approximately $310,000. As of March 31, 1996 Medical Technology Laboratories, Inc.'s accounts receivable from Medicare and Medicaid was approximately $467,000. NOTE 18 - SUBSEQUENT EVENTS On May 16, 1996 the Company filed plans of reorganization with the bankruptcy court for MTS Packaging Systems, Inc. and Medical Technology Laboratories, Inc. On July 5, 1996, a reorganization plan was also filed by the Company for Vangard Labs, Inc. A confirmation hearing to approve each of these plan is scheduled for September 4, 1996. No assurance can be given that these plans will be confirmed by the bankruptcy court. 40 SIGNATURES Pursuant to the requirements Section 13 or 15(d) of the Securities Exchange Act of 1934 the registrant has duly caused this Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized. MEDICAL TECHNOLOGY SYSTEMS, INC. July 11, 1996 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 Executive Officer, President (Principal - - ------------------------ (Executive Officer) Treasurer (Principal July 11, 1996 Todd E. Siegel Financial Officer and Director /s/ R. Rhodes Principal Accounting Officer, Controller July 11, 1996 - - ------------------------ R. Rhodes /s/ Gerald R. Couture Director July 11, 1996 - - ------------------------ Gerald R. Couture
41 EX-11 2 EXHIBIT 11 EXHIBIT 11. MEDICAL TECHNOLOGY SYSTEMS, INC. STATEMENT RE COMPUTATION OF PER SHARE EARNINGS (LOSS)
Year Ended March 31, -------------------------------- 1996 1995 1994 ---------- --------- --------- (In thousands, except per share amounts) PRIMARY EARNINGS (LOSS) PER SHARE: Shares used in computing earnings per share: Weighted average number of shares outstanding 4,059 3,974 3,879 ---------- --------- --------- ---------- --------- --------- Income (Loss) from Continuing Operations Before Discontinued Operations and Cumulative Effect of Accounting Change........................................ $ (22,717) $ (1,272) $ 1,856 Income (Loss) from Discontinued Operations, Net of Income Tax Benefit........ (6,634) 16 762 Estimated (Loss) on Disposal of Discontinued Operations........................ (5,229) -0- -0- ---------- --------- --------- Income (Loss) Before Cumulative Effect of Accounting Change.................... (34,580) (1,256) 2,618 Cumulative Effect of Accounting Change for Adoption of FASB No. 109 on Income Taxes......................................................................... -0- -0- 543 ---------- --------- --------- Net Income (Loss).............................................................. $ (34,580) $ (1,256) $ 3,161 ---------- --------- --------- ---------- --------- --------- Primary Net Earnings (Loss) per Common Share: Income (Loss) from Continuing Operations..................................... $ (5.60) $ (.32) $ .48 Income (Loss) from Discontinued Operations................................... (2.92) .00 .20 Cumulative Effect of FASB No. 109 Accounting Change.......................... .00 .00 .14 ---------- --------- --------- Net Income (Loss) Per Common Share........................................... $ (8.52) $ (.32) $ .82 ---------- --------- --------- ---------- --------- --------- EARNINGS PER SHARE - ASSUMING FULL DILUTION: Year Ended March 31, -------------------------------- 1996* 1995* 1994 ---------- --------- --------- (In thousands, except per share amounts) Shares used in computing earnings per share: Weighted average number of shares outstanding 3,879 Incremental shares attributed to outstanding options 1,518 Weighted average number of shares repurchased (802) --------- 4,595 --------- --------- Earnings: Net Income From Continuing Operations $ 1,856 Income from Discontinued Operations 762 Cumulative Effect of Accounting Change 543 --------- Net Income $ 3,161 --------- --------- Earnings Per Common and Common Equivalent Share: Income From Continuing Operations $ .43 Income from Discontinued Operations .17 Cumulative Effect of Accounting Change .12 --------- $ .72 --------- ---------
*Not Applicable - Non-Dilutive 42 EX-22 3 EXHIBIT 22 EXHIBIT 22. STATE OF SUBSIDIARY INCORPORATION TAX ID # ---------- ------------- ---------- Clearwater Medical Services, Inc. Florida 59-3120188 Clinical Diagnostic Center, Inc. Florida 59-3119952 Medical Technology Systems, Inc. Delaware 59-2740462 Performance Pharmacy Systems, Inc. Florida 59-3146550 MTS Packaging Systems, Inc. Florida 59-3150941 Vangard Labs, Inc. Kentucky 61-0658846 Vangard Pharmaceutical Packaging, Inc. Florida 59-3126068 Medication Management Systems, Inc. Florida 59-3228602 Glasgow Pharmaceutical Corporation Florida 61-1248298 Medication Management Technologies, Inc. Florida 59-3308518 Medical Technologies Laboratories, Inc. Florida 59-3120190 MTS Sales & Marketing, Inc. Florida 59-3298577 Systems Professionals, Inc. Florida 59-2557872 EX-23 4 EXHIBIT 23 AGREEMENT THIS AGREEMENT entered into this 15th of March, 1996, by and between MEDICAL TECHNOLOGY SYSTEMS, INC. ("Company") and GERALD COUTURE ("Executive/Consultant"), at Clearwater, Florida. WITNESSETH: 1. Executive/Consultant has been employed as Company's Vice President for approximately seven (7) years. 2. The parties entered into an Employment Agreement September 1, 1994 (the "Contract") which has not yet expired. 3. Executive/Consultant and the Company mutually agree that Executive/Consultant retire as an employee, effective June 15, 1996; 4. Executive/Consultant has advised the Company that he will establish an independent management consulting business upon retirement. 5. Company has agreed to employ Executive/Consultant to provide management and financial consulting services to it for a period of one (1) year from June 16, 1996 through June 15, 1997, as provided herein. THEREFORE, for ten dollars and other good and valuable consideration, including the covenants contained herein, the parties agree as follows: 1. RECITALS. The recitals are incorporated into this Agreement. 2. CONTRACT. This Agreement is an amendment and novation of the Contract. The provisions hereof replace, and revoke, the Contract in its entirety, except as provided herein, unless, as a result of proceedings in bankruptcy or insolvency of the Company this Agreement is voided or rescinded, in which case the Contract shall be reinstated ab initio and shall remain in full force and effect. 3. TERMS OF EMPLOYMENT. Executive/Consultant is employed by Company through June 15, 1996; and, by mutual agreement, shall retire as an employee as of that date, anything contained in the Contract to the contrary notwithstanding. 4. EMPLOYMENT. Through June 15, 1996 (the "employment period"), Company employs Executive/Consultant, and Executive/Consultant agrees to such employment, in accordance with this Agreement. a. During the employment period, Executive/Consultant shall hold the office of Executive Vice President, and Executive/Consultant shall perform assigned executive management, accounting and administrative duties and responsibilities for Company, at its principal office in Pinellas County, Florida, as directed by the Chief Executive Officer of Company. b. Services shall be rendered on substantially a full-time basis. c. From time to time during the employment period, Executive/Consultant may provide consulting services to one or more other companies, provided, however, rendition of such services shall not interfere in any material way with the performance of his duties or responsibilities under this Agreement, or as an officer of the Company, nor shall such consulting breach any confidentiality of the Company. 5. CONSULTING. From June 16, 1996 through June 15, 1997 (the "consulting period"), the Company shall employ Executive/Consultant as a consultant, in accordance with the provisions of this Agreement. a. During the consulting period, the Executive/Consultant shall render services to the Company not less than eighty-five (85) hours each consecutive quarter-annual period, commencing June 16, 1996 and ending June 15, 1997. b. Services rendered during the consulting period will consist of executive-type financial and management advisory and administrative services requested by the Company, utilizing the background and experience of the Executive/Consultant, particularly as it relates to his employment with the Company. c. To the extent required by the Company, Executive/Consultant's services shall be rendered at, or from, the principal office of the Company, and such times for such services shall be coordinated and designated by the Chief Executive Officer of the Company, in his discretion. d. The Company will use reasonable efforts to schedule services during the consulting period at times mutually convenient, reserving to its discretion the right to schedule priority consulting services dealing with the needs and priorities of the Company, particularly its present, urgent needs relating to public company financial and securities reporting requirements, timely audit of its books and records, requirements of its subsidiaries in bankruptcy, and development and preparation of its recapitalization plans. e. During the consulting period, Executive/Consultant agrees that the requirements of the Company shall be his first business priority. 2 6. PAST-DUE COMPENSATION. a. The parties acknowledge Company has been unable to pay Executive/Consultant full 1996 compensation due under the Contract. b. The parties agree that the balance of past-due compensation under the Contract is $32,769 through the date of this Agreement. c. Upon the execution hereof, office furniture valued by mutual agreement at $__,000, consisting of furniture and computers (described in attachment 1) shall be transferred by Company "AS IS" by delivery and receipt as partial payment of past-due compensation described above. d. No compensation, or payments in the nature of compensation, under paragraphs 3 and 4 of the Contract, or otherwise (except under this Agreement), shall be due or payable to Executive/Consultant. e. Payment of past-due compensation shall be paid to Executive/Consultant on or before June 15, 1996. Such payments are full and complete satisfaction of all past due compensation sums due Executive/Consultant under the Contract, including interest thereon. 7. STOCK OPTIONS. Executive/Consultant is holder of various stock options granted by the Company during the period of his employment. Such options have been granted from time to time under "Stock Option Agreements" substantially in the form of exhibit A hereto (individually, the "Option" and collectively, the "Options"). The number of shares of common stock subject to the Options in favor of the Executive/Consultant are two hundred twenty-two thousand five hundred (222,500) shares. Each of the Options in favor of the Executive/Consultant are amended in the following particulars, anything contained in an Option to the contrary notwithstanding: a. Subject to adjustment for dilution and recapitalization as contained in the applicable Option, the purchase price for each share of Company common stock purchased under the Options shall be the lower of the following: i. the purchase price stated for the Option being exercised; or ii. one and five-eighths (1 5/8) dollars; or iii. the price reset by the Company as being applicable under any outstanding option of the Company, existing the date hereof, with any other executive of the Company. 3 b. Each Option shall terminate (i) ten (10) years from the date it was issued, or (ii) five (5) years from the date of this Agreement, whichever is longer, subject, however, to any provisions of the particular Option related to forfeiture, earlier termination in the event of death, or other event, none of which are changed by this Agreement. 8. FRINGE BENEFITS. Company shall provide Executive/Consultant with health insurance under its existing health care benefit plan through June 30, 1996. For purposes of COBRA benefits available upon termination of employment, Executive/Consultant's COBRA rights commence July 1, 1996. The Company will pay Executive/Consultant's health insurance premiums during the COBRA period, but only through June 30, 1997. If the Executive/Consultant elects to continue such coverage thereafter, it shall be at his expense. No life insurance, retirement or other such fringe benefits shall be provided Executive/Consultant during the employment or consulting periods. 9. TRANSPORTATION. During the employment period and consulting period, Company shall make the following vehicles available to Executive/Consultant, from the date hereof through the termination date of the applicable vehicle lease: a. Mercedes Benz (SN# WDBCB35DOM4601833). This vehicle is leased and Executive/Consultant shall have the right to purchase it upon termination of the lease, in accordance with the purchase provisions of the lease, b. Jeep Cherokee (SN# 1J4GZ585XPC691838). This vehicle is leased and Executive/Consultant shall have the right to purchase it upon termination of the lease, in accordance with the purchase provisions of the lease, While each of the above vehicles is leased by Company, Executive/Consultant shall reimburse Company for personal use, which reimbursement shall be equal to the periodic lease payments, insurance, fuel, repairs, replacements, and maintenance. Company shall reimburse Executive/Consultant for business use under paragraph 10 hereof. 10. REIMBURSEMENT FOR BUSINESS EXPENSES. Company shall reimburse Executive/Consultant for approved reasonable and necessary business out-of- pocket expenses incurred in the ordinary course, subject to the terms and conditions of the applicable expense reimbursement policies and procedures adopted by Company from time to time. 11. COMPENSATION DURING THE EMPLOYMENT AND CONSULTING PERIODS. The following compensation provisions apply during the employment and consulting periods: 4 a. From the date hereof through June 15, 1996, Executive/Consultant shall be paid a monthly salary at the annualized rate of One Hundred Forty- Eight Thousand and Four Hundred Dollars ($148,400). b. From June 16, 1996 through June 15, 1997, Executive/Consultant shall be paid a monthly consulting fee of Four Thousand Dollars ($4,000) each full month he provides consulting services. Compensation for partial months shall be prorated. In addition, if after June 16, 1996, and during the consulting period, the Executive/Consultant renders services more than eighty-five (85) hours in any quarter- annual period, time of services rendered in excess of eighty-five (85) hours for that quarter-annual period shall be compensated at $150 an hour. c. Compensation shall be payable in accordance with the pay practices of Company. d. No compensation shall be due or payable after the employment and consulting periods terminate. 12. TERMINATION. This provision contains the exclusive termination provisions that apply during the employment and consulting periods. a. Company shall have the right at any time to terminate this Agreement for "cause" upon written notice to Executive/Consultant from the Chief Executive Officer of the Company. i. For these purposes, "cause" shall mean: (1) The Executive/Consultant was convicted of a felony and all appeals with respect thereto have been extinguished or abandoned by the Executive; (2) The Executive/Consultant was convicted of misappropriating assets or otherwise defrauding the Company or its subsidiaries or affiliates; or (3) The Executive/Consultant materially breaches any provision of this Agreement, including responsibilities and duties assigned to him under this Agreement by the chief executive officer of the Company, and such breach is not cured within seven (7) days after the Company has notified the Executive/Consultant in writing of the breach. ii. Upon any termination for cause under subparagraphs 12.a.i.(1) and (2), all obligations of Company under this Agreement for any compensation due thereafter shall terminate, including any unpaid severance compensation under paragraph 13. Termination for cause under subparagraph 12.a.i.(3) shall not terminate Executive/Consultant's right to unpaid severance compensation under paragraph 13, but shall terminate his right to any other compensation due after the date of termination. b. This Agreement shall terminate during the employment or consulting period upon the death of Executive/Consultant, and in that event Executive/Consultant shall be entitled to payment of compensation through the date of death, including past-due and severance compensation. c. If during the employment and consulting periods Executive/Consultant is unable to perform all or substantially all of his duties under this Agreement for a period of thirty (30) days or more because of accident or sickness, Company may elect to terminate this Agreement by written notice to Executive/Consultant. If this Agreement is so terminated, Executive/Consultant shall be paid compensation through the date of termination, including past-due and severance compensation. 13. SEVERANCE COMPENSATION. The parties are in dispute whether or not the provisions of paragraph 7 of the Contract, in particular, paragraph 7(d), apply entitling Executive/Consultant to compensation related to severance or termination. The purpose of this provision is to resolve that dispute and the parties agree that the provisions of this paragraph entirely replace any obligations of the Company under paragraph 7, or other paragraphs of the Contract, regarding compensation upon severance, termination or change of control. The following shall apply: a. Upon termination of his employment during the employment or consulting period, unless employment during the employment or consulting period is terminated for cause as defined herein, in addition to compensation payable through the date of termination, as provided under paragraph 12, Executive/Consultant shall be entitled to "severance compensation" in the amount of Four Hundred Fifty Thousand Dollars ($450,000). b. Payment of severance compensation shall be full and complete satisfaction and payment of any claims Executive/Consultant may now or hereafter have for compensation under paragraph 7, or other paragraphs, of the Contract, or otherwise, except as specified in this Agreement. 6 c. Unless terminated for cause, as provided herein, severance compensation shall be payable as provided in this paragraph. The first installment of One Hundred Thousand Dollars ($100,000) shall be paid thirty (30) days after a plan of reorganization for MTS Packaging Systems, Inc., a subsidiary of the Company presently in bankruptcy, has been approved by the bankruptcy court having jurisdiction thereof, or IF EARLIER, September 1, 1996. The second installment of Two Hundred Thousand Dollars ($200,000) shall be paid on June 16, 1997, and the final installment of One Hundred Fifty Thousand Dollars ($150,000) shall be paid on June 16, 1998. Provided, however, if while any sum is due Executive/Consultant under this paragraph, the Company issues two million (2,000,000) or more shares of its Common Stock within any one hundred twenty (120) day period following the date hereof to any person OTHER THAN to (i) the Executive/Consultant, or (ii) in any securities offering (private or public) wherein the underwriter, if public, or investor, if private, or lender of the Company or its subsidiaries in either case, requires as a condition that acceleration under this paragraph does not occur, then the entire unpaid amount of severance compensation shall accelerate and become due and payable thirty (30) days after such shares are issued by the Company. Such acceleration shall not waive the right of the Company to satisfy the obligation in shares, as hereinafter provided. d. At the sole and discretionary option of the Company, the Company may elect to pay severance compensation in whole or in part by delivering to Executive/Consultant shares of Common Stock of the Company (the "shares"). For this purpose: i. The number of shares delivered shall be equal in "value" to the amount of the compensation to be paid, and ii. For purposes of determining the numbers of shares to be delivered, the shares to be delivered in satisfaction of the first $100,000 of indebtedness shall be valued at the average of the bid and asked price for the Company's common stock shares traded "over-the-counter" during the LAST FULL ONE (1) CALENDAR WEEK PERIOD before the week the payment of such compensation is due. If such price cannot be determined from that period because Company is delisted and not traded, then from the MOST RECENT THREE (3) MONTH PERIOD for which the average bid and asked price of the common stock shares of Company can be determined. The price of shares used to satisfy the subsequent amounts of compensation due shall be valued at the average of the bid and asked price for the Company's common stock shares traded "over- the-counter" during the three (3) calendar month period ending one (1) week before the date 7 compensation is due, or, if such price cannot be determined from that period because Company is delisted and not traded, then from the most recent three (3) month period for which the average bid and asked price of the common stock shares of Company can be determined. Provided, however, the price for shares delivered upon acceleration of the unpaid amounts due because the Company issues shares, as provided above in paragraph 13.c., shall be the average of the bid and asked price during the thirty (30) day period prior to the due date for the delivery of the accelerated shares. iii. Except as provided herein in the case unregistered shares are delivered, no special discount shall apply to the value of the shares for lack of marketability or minority interest, or otherwise. e. The shares delivered as payment of termination compensation shall, at the sole election of the Company, be registered or unregistered shares under applicable federal and state securities laws. i. If the Company elects to distribute unregistered shares, the shares and shall be delivered under exemptions from registration, and shall be endorsed in that regard. For this purpose the Executive/Consultant represents and warrants to the Company that he is an accredited investor under federal and state securities laws, and that he will execute and deliver to the Company upon payment of compensation in shares an investment representation in substance and form reasonably satisfactory to the Company and its counsel. ii. If the shares are unregistered, the shares shall bear an endorsement to that effect, and a forty percent (40%) "lack of marketability" discount shall be applied to the value of the shares otherwise determined from the average bid and asked price. The discounted price shall be the price used in calculating the numbers of shares to be paid as compensation. iii. If the Company elects to register the shares, it shall notify the Executive/Consultant, and the Company shall have a reasonable time, at its own expense, to register the shares before making delivery. In the event the shares delivered are so registered, the shares shall be valued at the average bid and asked price described above without discount. f. Company shall have no general obligation to register any shares; however, if after the shares are delivered to Executive/Consultant, the Company makes a public offering of its Common Stock, registered under applicable federal and state law, the Company shall notify the Executive/Consultant 8 and the Executive/Consultant shall have a right to elect in a writing delivered to the Company within thirty (30) days thereafter to "piggy back" any shares of Common Stock then owned by the Executive with the offering of shares then being offered to the public. Provided, however, the rights of the Executive/Consultant in any such offering shall be subject to the discretionary approval of the underwriter (and the absolute right of the underwriter to reject such participation) for the offering, and the Executive/Consultant shall, at the time, enter indemnity and representation agreements that are usual and customary in connection with the exercise of piggy-back rights. g. The parties understand that when shares are to be distributed as compensation, the distribution is subject to withholding and payroll taxes. Such taxes, and the manner of withholding and paying such taxes, shall be determined by the independent accountant for the Company. 14. STOCK PURCHASE. Executive/Consultant has elected to purchase up to $43,500 of common capital stock by payroll deduction, in accordance with terms and prices separately approved by the chief executive officer of Company in a writing signed by Executive/Consultant and the chief executive officer. 15. REPRESENTATIONS OF EXECUTIVE/CONSULTANT. Executive/ sophisticated investor, capable of taking the risks associated with any ownership of shares of stock in Company, that he is fully aware of the financial and business condition of Company and is able to bear any loss associated with any shares of stock he may own. Executive/Consultant represents to Company that any shares acquired shall be acquired for his own account for investment, and not for redistribution or sale, except to the extent the registration rights contained in this Agreement apply. 16. RESTRICTIVE COVENANTS. The provisions contained in paragraph 6 of the Contract, titled "Restrictive Covenants," are incorporated into this Agreement and shall apply through the employment period, and thereafter in accordance with their terms. For purposes of this Agreement, the "Term" referenced in paragraph 6 include the entire term of this Agreement, including both the employment and the consulting periods. 17. DEFINITION OF QUARTER-ANNUAL PERIOD. For purposes of this Agreement, references to a "quarter-annual" period shall mean a three (3) consecutive monthly period ending September 15, December 15, March 15, or June 15, respectively. 18. WAIVER. A party's failure to insist on compliance or enforcement of any provision of this Agreement, shall not affect the validity or enforceability or constitute a waiver of future enforcement of that provision or of any other provision of this Agreement by that party or the other party. 9 19. GOVERNING LAW. This Agreement shall in all respects be subject to, and governed by, the laws of the State of Florida. 20. SEVERABILITY. The invalidity or unenforceability of any provision in the Agreement shall not in any way affect the validity or enforceability of any other provision and this Agreement shall be construed in all respects as if such invalid or unenforceable provision had never been in the Agreement. 21. NOTICE. Any and all notices required or permitted herein shall be deemed delivered if delivered personally or if mailed by registered or certified mail to Company at its principal place of business and to Executive/Consultant at the address hereinafter set forth in the employment records of Company, or at such other address or addresses as either party may hereafter designate in writing to the other. 22. ASSIGNMENT. The rights and benefits of either of the parties under this Agreement may not be assigned, nor the burdens delegated, without the prior written consent of the other party. 23. AMENDMENTS. This Agreement may be amended at any time by mutual consent of the parties hereto, with any such amendment to be invalid unless in writing, signed by the parties. 24. ENTIRE AGREEMENT. This Agreement contains the entire agreement and understanding by and between the parties with respect to the employment of Executive/Consultant, and no representations, promises, agreements, or understandings, written or oral, relating to the employment of the Executive/Consultant by Company not contained herein shall be of any force or effect. The terms and provisions of any employee manual or handbook are not a part of this Agreement. 25. BURDEN AND BENEFIT. This Agreement shall be binding upon, and shall inure to the benefit of, each of the parties, and his or its respective heirs, personal and legal representatives, successors, and assigns. 26. REFERENCES TO GENDER AND NUMBER TERMS. In construing this Agreement, feminine or number pronouns shall be substituted for those masculine in form and vice versa, and plural terms shall be substituted for singular and singular for plural in any place in which the context so requires. 27. HEADINGS. The various headings in this Agreement are inserted for convenience only and are not part of the Agreement. 10 IN WITNESS WHEREOF, the parties have executed and delivered this Agreement. MEDICAL TECHNOLOGY SYSTEMS, INC. By: /s/ Todd E. Siegel --------------------------- /s/ Gerald Couture - - ------------------------------- Gerald Couture 11 -----END PRIVACY-ENHANCED MESSAGE-----