Item 1. Financial
Statements
MTS MEDICATION
TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
ASSETS
|
December 31, 2007
|
|
March 31, 2007
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
$
|
2,499
|
|
|
$
|
292
|
|
Restricted Cash
|
|
|
|
751
|
|
|
|
|
|
Accounts Receivable, Net
|
|
|
|
7,806
|
|
|
|
9,194
|
|
Inventories, Net
|
|
|
|
11,827
|
|
|
|
5,767
|
|
Prepaids and Other, Net
|
|
|
|
2,005
|
|
|
|
926
|
|
Deferred Tax Asset
|
|
|
|
350
|
|
|
|
271
|
|
|
|
|
|
Total Current Assets
|
|
|
|
25,238
|
|
|
|
16,450
|
|
|
|
|
|
Property and Equipment
|
|
|
|
7,910
|
|
|
|
5,344
|
|
Goodwill
|
|
|
|
770
|
|
|
|
740
|
|
Other Intangible Assets
|
|
|
|
850
|
|
|
|
808
|
|
Other Assets
|
|
|
|
2,279
|
|
|
|
2,507
|
|
|
|
|
|
Total Assets
|
|
|
$
|
37,047
|
|
|
$
|
25,849
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
Current Liabilities:
|
|
|
Accounts Payable and Accrued Liabilities
|
|
|
$
|
7,605
|
|
|
$
|
7,024
|
|
Customer Deposits
|
|
|
|
3,461
|
|
|
|
|
|
Current Maturities of Long-Term Debt
|
|
|
|
84
|
|
|
|
2,447
|
|
Current Maturities of Related Party Note Payable
|
|
|
|
190
|
|
|
|
328
|
|
|
|
|
|
Total Current Liabilities
|
|
|
|
11,340
|
|
|
|
9,799
|
|
|
|
|
|
Long-Term Debt, Less Current Maturities
|
|
|
|
11,961
|
|
|
|
5,395
|
|
Related Party Note Payable, Less Current Maturities
|
|
|
|
|
|
|
|
106
|
|
Other Liabilities
|
|
|
|
1,011
|
|
|
|
283
|
|
Deferred Tax Liability
|
|
|
|
576
|
|
|
|
553
|
|
|
|
|
|
Total Liabilities
|
|
|
|
24,888
|
|
|
|
16,136
|
|
|
|
|
|
Stockholders' Equity:
|
|
|
Common Stock
|
|
|
|
64
|
|
|
|
62
|
|
Capital In Excess of Par Value
|
|
|
|
9,886
|
|
|
|
8,736
|
|
Accumulated Other Comprehensive Income
|
|
|
|
329
|
|
|
|
254
|
|
Retained Earnings
|
|
|
|
2,208
|
|
|
|
989
|
|
Treasury Stock
|
|
|
|
(328
|
)
|
|
|
(328
|
)
|
|
|
|
|
Total Stockholders' Equity
|
|
|
|
12,159
|
|
|
|
9,713
|
|
|
|
|
|
Total Liabilities and Stockholders' Equity
|
|
|
$
|
37,047
|
|
|
$
|
25,849
|
|
|
|
|
|
The accompanying notes
are an integral part of these financial statements.
1
Table of Contents
MTS MEDICATION
TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS
(In Thousands; Except Earnings Per Share Amounts)
(Unaudited)
|
Three Months Ended December 31,
|
|
Nine Months Ended December 31,
|
|
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
$
|
14,720
|
|
$
|
12,435
|
|
|
$
|
43,658
|
|
$
|
36,807
|
|
|
|
|
|
Costs and Expenses:
|
|
|
Cost of Sales
|
|
|
|
9,075
|
|
|
7,695
|
|
|
|
26,691
|
|
|
22,857
|
|
Selling, General and Administrative
|
|
|
|
3,738
|
|
|
2,920
|
|
|
|
11,361
|
|
|
9,123
|
|
Depreciation and Amortization
|
|
|
|
719
|
|
|
594
|
|
|
|
1,919
|
|
|
1,755
|
|
|
|
|
|
|
|
|
|
Total Costs and Expenses
|
|
|
|
13,532
|
|
|
11,209
|
|
|
|
39,971
|
|
|
33,735
|
|
|
|
|
|
|
|
|
|
Operating Profit
|
|
|
|
1,188
|
|
|
1,226
|
|
|
|
3,687
|
|
|
3,072
|
|
|
|
|
|
Interest Expense
|
|
|
|
184
|
|
|
67
|
|
|
|
501
|
|
|
183
|
|
|
|
|
|
|
|
|
|
Income Before Taxes
|
|
|
|
1,004
|
|
|
1,159
|
|
|
|
3,186
|
|
|
2,889
|
|
|
|
|
|
Income Tax Expense
|
|
|
|
393
|
|
|
448
|
|
|
|
1,267
|
|
|
1,121
|
|
|
|
|
|
|
|
|
|
Net Income Before Preferred Stock Dividends
|
|
|
|
611
|
|
|
711
|
|
|
|
1,919
|
|
|
1,768
|
|
|
|
|
|
Convertible Preferred Stock Dividends
|
|
|
|
|
|
|
39
|
|
|
|
|
|
|
151
|
|
|
|
|
|
Constructive Dividend on Convertible Preferred Stock
|
|
|
|
|
|
|
4,504
|
|
|
|
|
|
|
4,504
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) Available to Common Stockholders
|
|
|
$
|
611
|
|
$
|
(3,832
|
)
|
|
$
|
1,919
|
|
$
|
(2,887
|
)
|
|
|
|
|
|
|
|
|
Net Income (Loss) Per Basic Common Share
|
|
|
$
|
0.10
|
|
$
|
(0.63
|
)
|
|
$
|
0.30
|
|
$
|
(0.48
|
)
|
|
|
|
|
|
|
|
|
Net Income (Loss) Per Diluted Common Share
|
|
|
$
|
0.09
|
|
$
|
(0.63
|
)
|
|
$
|
0.28
|
|
$
|
(0.48
|
)
|
|
|
|
|
|
|
|
|
Weighted Average Shares Outstanding - Basic
|
|
|
|
6,393
|
|
|
6,082
|
|
|
|
6,324
|
|
|
6,042
|
|
|
|
|
|
|
|
|
|
Weighted Average Shares Outstanding - Diluted
|
|
|
|
6,809
|
|
|
6,082
|
|
|
|
6,763
|
|
|
6,042
|
|
|
|
|
|
|
|
|
|
The accompanying notes
are an integral part of these financial statements.
2
Table of Contents
MTS MEDICATION
TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
NINE MONTHS ENDED DECEMBER 31, 2007
(In Thousands; Except Shares)
(Unaudited)
|
|
Common Stock
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
$.01 Par Value
|
|
Capital
|
|
Other
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
In Excess of
|
|
Comprehensive
|
|
Retained
|
|
Treasury
|
|
Treasury
|
|
Stockholders'
|
|
|
Shares
|
|
Amount
|
|
Par Value
|
|
Income
|
|
Earnings
|
|
Shares
|
|
Stock
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance March 31, 2007
|
|
6,243,665
|
|
$
|
62
|
|
$
|
8,736
|
|
$
|
254
|
|
$
|
989
|
|
|
(60
|
)
|
|
$
|
(328
|
)
|
|
$
|
9,713
|
|
Cumulative Effect of Initial Application of FIN 48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(700
|
)
|
|
|
|
|
|
|
|
|
|
(700
|
)
|
Tax Benefit of Stock Option Exercises
|
|
|
|
|
|
|
|
147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
147
|
|
Exercise of Stock Options
|
|
176,200
|
|
|
2
|
|
|
858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
860
|
|
Share-Based Compensation
|
|
10,000
|
|
|
|
|
|
145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
145
|
|
Comprehensive Income:
|
|
|
Net Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,919
|
|
|
|
|
|
|
|
|
|
|
1,919
|
|
Foreign Currency
Translation Adjustment
|
|
|
|
|
|
|
|
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2007
|
|
6,429,865
|
|
$
|
64
|
|
$
|
9,886
|
|
$
|
329
|
|
$
|
2,208
|
|
|
(60
|
)
|
|
$
|
(328
|
)
|
|
$
|
12,159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying
notes are an integral part of this financial statement.
3
Table of Contents
MTS MEDICATION
TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS
(In Thousands)
(Unaudited)
|
Nine Months Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
Operating Activities
|
|
|
|
|
|
|
|
|
|
Net Income Before Preferred Stock Dividends
|
|
|
$
|
1,919
|
|
|
$
|
1,768
|
|
Adjustments to Reconcile Net Income to Net Cash
|
|
|
|
|
|
|
|
|
|
Provided by Operating Activities:
|
|
|
|
|
|
|
|
|
|
Gain on Translation of Foreign Currency
|
|
|
|
(20
|
)
|
|
|
(103
|
)
|
Depreciation and Amortization
|
|
|
|
1,983
|
|
|
|
1,730
|
|
Tax Benefit of Options Exercised
|
|
|
|
(147
|
)
|
|
|
(143
|
)
|
Deferred Income Taxes
|
|
|
|
(74
|
)
|
|
|
594
|
|
Share-Based Compensation
|
|
|
|
145
|
|
|
|
132
|
|
(Increase) Decrease in:
|
|
|
|
|
|
|
|
|
|
Restricted Cash
|
|
|
|
(751
|
)
|
|
|
|
|
Accounts Receivable
|
|
|
|
1,427
|
|
|
|
(115
|
)
|
Inventories
|
|
|
|
(5,926
|
)
|
|
|
(343
|
)
|
Prepaids and Other
|
|
|
|
(1,078
|
)
|
|
|
(633
|
)
|
Increase (Decrease) in:
|
|
|
|
|
|
|
|
|
|
Accounts Payable and Accrued Liabilities
|
|
|
|
757
|
|
|
|
(282
|
)
|
Customer Deposits
|
|
|
|
3,461
|
|
|
|
|
|
|
|
|
|
Total Adjustments
|
|
|
|
(223
|
)
|
|
|
837
|
|
|
|
|
|
Net Cash Provided by Operating Activities
|
|
|
|
1,696
|
|
|
|
2,605
|
|
|
|
|
|
Investing Activities
|
|
|
|
|
|
|
|
|
|
Expended for Property and Equipment
|
|
|
|
(3,856
|
)
|
|
|
(1,021
|
)
|
Expended for Product Development
|
|
|
|
(536
|
)
|
|
|
(464
|
)
|
Expended for Patents and Other Assets
|
|
|
|
|
|
|
|
(47
|
)
|
Proceeds on Sale of Property and Equipment
|
|
|
|
--
|
|
|
|
4
|
|
|
|
|
|
Net Cash Used by Investing Activities
|
|
|
|
(4,392
|
)
|
|
|
(1,528
|
)
|
|
|
|
|
Financing Activities
|
|
|
|
|
|
|
|
|
|
Payments on Notes Payable and Long-Term Debt
|
|
|
|
(1,894
|
)
|
|
|
(503
|
)
|
Payments on Related Party Note Payable
|
|
|
|
(244
|
)
|
|
|
(229
|
)
|
Paydowns on Revolving Line of Credit
|
|
|
|
(40,434
|
)
|
|
|
(34,268
|
)
|
Advances on Revolving Line of Credit
|
|
|
|
43,382
|
|
|
|
33,780
|
|
Advances on New Credit Facility
|
|
|
|
11,918
|
|
|
|
|
|
Repayment of Previous Credit Facility
|
|
|
|
(8,773
|
)
|
|
|
|
|
Borrowing on Term Loans
|
|
|
|
|
|
|
|
6,400
|
|
Tax Benefit of Options Exercised
|
|
|
|
147
|
|
|
|
143
|
|
Exercise of Stock Options
|
|
|
|
860
|
|
|
|
513
|
|
Expended on Financing Costs
|
|
|
|
(7
|
)
|
|
|
|
|
Dividends on Convertible Preferred Stock
|
|
|
|
|
|
|
|
(151
|
)
|
Redemption of Preferred Stock
|
|
|
|
|
|
|
|
(6,483
|
)
|
|
|
|
|
Net Cash Provided (Used) by Financing Activities
|
|
|
|
4,955
|
|
|
|
(798
|
)
|
|
|
|
|
Effect of Exchange Rate Changes on Cash
|
|
|
|
(52
|
)
|
|
|
25
|
|
|
|
|
|
Net Increase in Cash
|
|
|
|
2,207
|
|
|
|
304
|
|
Cash at Beginning of Period
|
|
|
|
292
|
|
|
|
447
|
|
|
|
|
|
Cash at End of Period
|
|
|
$
|
2,499
|
|
|
$
|
751
|
|
|
|
|
|
S
upplemental Disclosure of Cash Flow Information
|
|
|
|
|
|
|
|
|
|
Cash Paid for Interest
|
|
|
$
|
549
|
|
|
$
|
172
|
|
Cash Paid for Taxes
|
|
|
|
1,072
|
|
|
|
282
|
|
Non-Cash Activities:
|
|
|
Reclassified machine rentals from Inventory to Equipment
|
|
|
|
9
|
|
|
|
48
|
|
Provision for Uncertain Tax Positions
|
|
|
|
700
|
|
|
|
|
|
Reclassified costs from product development to inventory
|
|
|
|
127
|
|
|
|
|
|
The accompanying notes
are an integral part of these financial statements.
4
Table of Contents
MTS MEDICATION
TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED DECEMBER 31, 2007
NOTE A BASIS OF
PRESENTATION
MTS
Medication Technologies, Inc., a Delaware corporation (the "Company" or "MTS"),
was incorporated in March 1984. The Company is a holding company that operates
through its subsidiaries, MTS Packaging Systems, Inc. ("MTSP"), and MTS
Medication Technologies International, Ltd. ("MTS Limited"). BAF Printers, Ltd.
("BAF") and Consilio, GmbH ("Consilio") are wholly owned subsidiaries of MTS Limited.
MTSP
primarily manufactures and sells consumable medication punch cards, packaging
equipment and ancillary products throughout the United States. Its customers are
predominantly pharmacies that supply nursing homes, assisted living and correctional
facilities with prescription medications for their patients. MTSP manufactures its
proprietary consumable punch cards and packaging equipment in its own facilities and
also uses third parties to manufacture packaging equipment. This manufacturing
process uses integrated equipment for manufacturing the consumable medication punch
cards. The consumable medication punch cards and packaging equipment are designed to
provide a cost effective method for pharmacies to dispense medications. The
Company's medication dispensing systems and products provide innovative methods for
dispensing medications in consumable packages. MTS Limited and its subsidiaries
distribute products for MTSP in the United Kingdom and Germany. In addition, BAF
manufactures and sells prescription bags and labels in the UK.
The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the United
States of America ("US GAAP") for interim financial information and with the
instructions to Form 10-Q and Rule 10 of Regulation S-X. Accordingly, they do not
include all of the information and notes required by US GAAP for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three- and nine-month periods ended December 31,
2007 are not necessarily indicative of the results that may be expected for the fourth
quarter in the year ended March 31, 2008. The unaudited condensed consolidated
financial statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's annual report on Form 10-K for the
year ended March 31, 2007.
NOTE B RESTRICTED CASH
In
May 2007, the Company entered into an agreement to provide sixteen OnDemand® Express
II and eight AccuFlex machines to its largest customer over an eighteen-month
period. The agreement provides that certain deposits will be made by the customer that
will ultimately be applied towards the purchase price of the machines. The agreement
further provides that the deposits will be held in a separate bank account and used
exclusively for costs associated with the manufacture of the machines. As of December
31, 2007, the customer has provided the Company with deposits of approximately $3.5
million. The cash deposits have been used to pay for deposits to an outsourced
manufacturer, and other costs and expenses related to the manufacture and
installation of the machines. The remaining cash is held in a separate bank account to
be used to fund future costs associated with the manufacture of the machines and has
been recorded as restricted cash.
The
deposits received from the customer have been recorded as customer deposits because
they are fully refundable if the acceptance criteria for the delivered machines are
not met. The deposits the Company has provided to the outsourced manufacturer of the
machines will ultimately be applied towards the purchase of the machines from the
manufacturer and are only refundable to the extent that costs have not been incurred
to manufacture machines. These deposits are recorded as Prepaids and Other.
5
Table of Contents
The
agreement further provides that in the event the Company does not deliver the machines,
the customer will be entitled to a full refund of the deposit. In addition, the
Company may be responsible for financial penalties in the event the machines are not
delivered according to the delivery schedule contained in the agreement. As of
December 31, 2007, the Company delivered six machines to the customer pursuant to the
agreement and incurred approximately $56,000 in penalties because three of the six
machines were not delivered according to the delivery schedule.
In
December 2007, the Company and the customer agreed to suspend deliveries of additional
machines under the agreement and concentrate their efforts on installation, training
and the development of acceptance criteria to evaluate the six delivered machines.
The Company currently believes that the remaining machines will ultimately be
delivered to the customer and the delivered machines will be accepted by the customer.
The Company will record the revenue and gross profit associated with each machine as
they are accepted by the customer.
NOTE C INVENTORIES
The
components of inventory consist of the following:
|
December 31, 2007
|
|
March 31, 2007
|
|
|
|
|
|
(In Thousands)
|
|
|
|
|
Raw Materials
|
|
$
|
3,500
|
|
|
$
|
2,678
|
|
Work in Process
|
|
|
3,146
|
|
|
|
389
|
|
Finished Goods
|
|
|
5,785
|
|
|
|
3,040
|
|
Less: Inventory Valuation Allowance
|
|
|
(604
|
)
|
|
|
(340
|
)
|
|
|
|
|
|
|
$
|
11,827
|
|
|
$
|
5,767
|
|
|
|
|
|
As
of December 31, 2007, there was approximately $2.7 million in finished goods inventory
related to OnDemand machines awaiting acceptance from our largest customer. During the
three and nine months ended December 31, 2007, the Company recorded approximately $166,000
and $176,000, respectively, in inventory write-offs due to obsolescence of certain machine
parts and consumable products.
NOTE D EARNINGS
PER SHARE
Basic
earnings per share is calculated by dividing net income (loss) available to common
stockholders by the weighted average number of shares of common stock outstanding for the
period. Diluted earnings per share is calculated by dividing net income before preferred
stock dividends by the basic weighted average number of shares of common stock outstanding
for the period, adjusted for the dilutive effect of common stock equivalents, using the
treasury stock method and the if converted method as it relates to
the convertible preferred stock outstanding.
6
Table of Contents
The
following table sets forth the computation of net income (loss) per basic and diluted
common share:
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
|
|
December 31, 2007
|
|
December 31, 2006
|
|
December 31, 2007
|
|
December 31, 2006
|
|
|
|
|
|
|
|
|
|
(In Thousands; Except Per Share Amounts)
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income Before Preferred Stock Dividends
|
|
|
$
|
611
|
|
$
|
711
|
|
|
$
|
1,919
|
|
$
|
1,768
|
|
|
|
|
|
|
|
|
|
Minus: Convertible Preferred Stock Dividends
|
|
|
|
|
|
|
39
|
|
|
|
|
|
|
151
|
|
|
|
|
|
|
|
|
Minus: Constructive Dividend on Convertible Preferred Stock
|
|
|
|
|
|
|
4,504
|
|
|
|
|
|
|
4,504
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) Available to Common Stockholders
|
|
|
$
|
611
|
|
$
|
(3,832
|
)
|
|
$
|
1,919
|
|
$
|
(2,887
|
)
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Shares Outstanding - Basic
|
|
|
|
6,393
|
|
|
6,082
|
|
|
|
6,324
|
|
|
6,042
|
|
|
|
|
|
|
|
|
Weighted Average Shares Outstanding - Diluted
|
|
|
|
6,809
|
|
|
6,082
|
|
|
|
6,763
|
|
|
6,042
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) Per Common Share - Basic
|
|
|
$
|
0.10
|
|
$
|
(0.63
|
)
|
|
$
|
0.30
|
|
$
|
(0.48
|
)
|
|
|
|
|
|
|
|
|
Net Income (Loss) Per Common Share - Diluted
|
|
|
$
|
0.09
|
|
$
|
(0.63
|
)
|
|
$
|
0.28
|
|
$
|
(0.48
|
)
|
|
|
|
|
|
|
|
|
The
effect of 60,000 and 66,000 and 1,091,000 and 1,180,000 options were not included in the
calculation of net income per diluted common share for the three and nine months ended
December 31, 2007 and 2006, respectively, as the effect would have been anti-dilutive.
NOTE E
SHARE-BASED COMPENSATION
The
Company awards share-based compensation as an incentive for employees to contribute to the
Companys long-term success. Historically, the Company has issued options and
restricted stock under its Stock Incentive Plan (the Plan). As of December 31,
2007, options to purchase 631,450 shares were outstanding. On September 19, 2007, the
shareholders approved a new plan that includes 600,000 options and/or restricted shares.
On
April 1, 2006, the Company adopted Statement of Financial Accounting Standards SFAS No.
123 (revised 2004) Share-Based Payment (SFAS No. 123R). The following
disclosures provide information regarding the Companys share-based compensation
awards, all of which are classified as equity awards in accordance with SFAS
No. 123R:
|
Restricted
Stock Awards
The Company grants restricted stock to certain executive employees
in exchange for services performed, which is based on the terms of their respective
employment agreements. In addition, the Company may make restricted stock grants to
members of its Board of Directors. The restricted shares issued are valued based on the
value of the Companys common stock on the date of grant. During the nine months
ended December 31, 2007 and 2006 the Company issued 5,000 shares of restricted common
stock to its Chief Operating Officer as additional compensation under his employment
agreement. In addition, during the nine months ended December 31, 2007, the Company issued
5,000 shares of restricted stock to the members of the Board of Directors as additional
compensation for their services. The Company recorded share-based compensation expense in
the amount of approximately $69,000 ($42,000 net of tax) and $125,000 ($76,000 net of tax)
and approximately $0 and $31,000 ($19,000 net of tax) during the three and nine months
ended December 31, 2007 and 2006, respectively, based on the fair value of the shares at
the date of grant.
|
7
Table of Contents
|
Stock Options and Warrants
The Company grants stock options to employees that allow
them to purchase shares of the Companys common stock. Options are also granted to
outside members of the Board of Directors of the Company. The Company determines the fair
value of stock options at the date of grant using the Black-Scholes valuation model.
Options generally vest over a three-year period. Awards generally expire ten years after
the date of grant. The Company issues new shares upon the exercise of stock options and
warrants. The Company issued 60,000 options to employees during the three and nine months
ended December 31, 2007. The options had a fair value of approximately $247,000. The
Company issued 0 and 21,750 options to members of the Board of Directors during the three
and nine months ended December 31, 2006. The options had a fair value of approximately
$90,000.
|
|
The Company has 5,900 warrants outstanding at an exercise price of $1.88 per share as of
December 31, 2007, which expire in 2009. These warrants were issued in 1998 and no new
warrants have been issued since that time. There has been no activity relating to the
warrants during the nine months ended December 31, 2007.
|
During
the nine months ended December 31, 2007, the Company received approximately $860,000 in
cash from stock option exercises. A tax benefit of approximately $147,000 was recorded in
the statement of changes in stockholders equity and comprehensive income. As of
December 31, 2007, the Company has unrecognized compensation cost of approximately
$247,000 expected to be recognized over the next three years for share-based awards.
A
summary of the changes in stock options outstanding during the nine months ended December
31, 2007 is as follows:
|
|
|
|
|
Weighted Average
|
|
Number of
|
|
Range of
|
|
Exercise Price
|
|
Shares
|
|
Exercise Price
|
|
Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2007
|
|
763,250
|
|
|
$
|
1.45
|
-
|
$
|
12.45
|
|
$
|
4.27
|
Options Granted
|
|
60,000
|
|
|
|
|
-
|
$
|
13.70
|
|
$
|
13.70
|
Options Exercised
|
|
(176,200
|
)
|
|
$
|
1.50
|
-
|
$
|
6.55
|
|
$
|
4.88
|
Options Expired
|
|
(15,600
|
)
|
|
$
|
1.50
|
-
|
$
|
5.00
|
|
$
|
3.34
|
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
631,450
|
|
|
$
|
1.45
|
-
|
$
|
13.70
|
|
$
|
5.01
|
|
|
|
|
|
|
Outstanding Options
|
|
|
|
Weighted Average
|
|
|
Range of
|
|
Number
|
|
Remaining Contractual
|
|
Weighted Average
|
Exercise Prices
|
|
Outstanding
|
|
Life (Years)
|
|
Exercise Price
|
|
|
|
|
|
|
|
|
$1.45 - $2.30
|
|
235,000
|
|
3.2
|
|
$1.55
|
$2.50 - $4.29
|
|
69,500
|
|
5.2
|
|
$3.79
|
$5.60 - $13.70
|
|
326,950
|
|
8.0
|
|
$7.77
|
8
Table of Contents
Exercisable Options
|
|
|
|
Weighted Average
|
|
|
Range of
|
|
Number
|
|
Remaining Contractual
|
|
Weighted Average
|
Exercise Prices
|
|
Outstanding
|
|
Life (Years)
|
|
Exercise Price
|
|
|
|
|
|
|
|
|
$1.45 - $2.30
|
|
235,000
|
|
3.2
|
|
$1.55
|
$2.50 - $4.29
|
|
29,500
|
|
4.4
|
|
$2.87
|
$5.60 - $13.70
|
|
236,617
|
|
7.6
|
|
$6.42
|
The
options outstanding at December 31, 2007 expire on various dates through November 2017.
At
December 31, 2007, exercisable options had aggregate intrinsic values of
approximately $4.8 million. At December 31, 2007, exercisable warrants had aggregate
intrinsic values of approximately $67,000. Options exercised during the three and
nine months ended December 31, 2007, had intrinsic values of approximately $588,000 and
$1,413,000, respectively.
NOTE F LONG-TERM DEBT
|
December 31,
|
|
March 31,
|
|
2007
|
|
2007
|
|
|
|
|
|
(In Thousands)
|
|
|
|
|
|
|
|
Reducing revolving line of credit due in
November 2010 with interest payable monthly at LIBOR plus 1.75% (6.35% at December 31, 2007).
|
|
|
$
|
11,918
|
|
|
$
|
|
|
|
|
|
|
Term Loan Payable
|
|
|
|
|
|
|
|
5,867
|
|
|
|
|
|
Revolving Line of Credit
|
|
|
|
|
|
|
|
1,765
|
|
|
|
|
|
Note payable to related party
payable in monthly installments of $28,785 including interest at 6.25% through July 2008.
|
|
|
|
190
|
|
|
|
434
|
|
|
|
|
|
Capital leases expiring at various times
through fiscal year 2010 at interest rates ranging from 6.29% to 9.5%.
|
|
|
|
127
|
|
|
|
210
|
|
|
|
|
|
Total Long-Term Debt
|
|
|
|
12,235
|
|
|
|
8,276
|
|
|
|
|
|
Less Current Portion (including $190,000
and $328,000, respectively due to a related party).
|
|
|
|
(274
|
)
|
|
|
(2,775
|
)
|
|
|
|
|
Long-Term Debt Due After One Year
|
|
|
$
|
11,961
|
|
|
$
|
5,501
|
|
|
|
|
|
On
December 19, 2007, the Company entered into a new loan agreement for a reducing revolving
credit facility (the Credit Facility) with a maximum borrowing limit of up to
$14,000,000. Availability under the Credit Facility will be permanently reduced by
$335,000 each January 31, April 30, July 31, and October 31, through maturity, commencing
January 31, 2008. An initial advance under the Credit Facility of approximately $9,750,000
was used to repay all amounts outstanding under the previous credit facility with another
secured lender.
9
Table of Contents
The
Credit Facility will be available on a revolving basis during the period commencing on
December 19, 2007 and ending on November 30, 2010 and contains provisions that require the
Company to maintain certain financial ratios such as, Debt Service Coverage, a
Funded Debt to EBITDA and Total Liabilities to Tangible Net Worth.
The
Credit Facility is collateralized by a first security interest in all of the assets of the
Company and a pledge of the shares of the wholly owned subsidiaries. There was
approximately $12 million borrowed and an additional $2 million available on the
Companys reducing revolving line of credit at December 31, 2007. At the most recent
date there was approximately $10 million borrowed and $3.6 million available.
NOTE G
COMMITMENTS AND CONTINGENCIES
The
Company is involved in certain claims and legal actions arising in the ordinary course of
business. There can be no assurances that these matters will be resolved on terms
acceptable to the Company. In the opinion of management, based upon advice of counsel and
consideration of all facts available at this time, the ultimate disposition of these
matters are not expected to have a material adverse effect on the financial position,
results of operations or liquidity of the Company.
The
Company has entered into certain agreements, which require the Company to potentially make
certain payments to members of senior management in the event of a change in control of
the Company or upon termination of employment. Also, the Company has entered into
indemnification agreements with its directors and officers for certain events or
occurrences that affect the officer or director as a result of the officer or director
serving in that capacity. The maximum potential amount of future payments the Company
could be required to make under these indemnification agreements is unlimited; however,
the Company has a director and officer liability insurance policy that is considered
adequate to cover its exposure.
NOTE H
STOCKHOLDERS EQUITY
In
December 2006, the Company entered into an agreement with an investor to redeem 2,000
shares of its convertible preferred stock. The convertible preferred stock had been
outstanding since 2002, paid a dividend of 11 percent, or $220,000 annually, and was
convertible into 847,457 shares of common stock. The Company paid the investor
approximately $6.5 million, or $7.65 per common share equivalent, as well as a $20,000
transaction fee, to fully redeem all of the outstanding shares of convertible preferred
stock held by the investor and completely satisfy all of its obligations under the
convertible preferred stock agreement. The Company recorded a constructive dividend of
approximately $4.5 million, or $0.73 per diluted common share in December 2006, associated
with the redemption which represents the amount by which the payment to the investor
exceeded the carrying value of the convertible preferred stock on the date of redemption.
The payment was funded with the proceeds of a term loan provided by the Companys
former secured lender.
10
Table of Contents
NOTE I OTHER
ASSETS
Other
assets consist of the following:
|
Amortization Period
|
|
December 30,
|
|
March 31,
|
|
(Years)
|
|
2007
|
|
2007
|
|
|
|
|
|
|
|
(In Thousands)
|
|
|
|
|
|
|
Product Development
|
|
3 5
|
|
$
|
4,138
|
|
|
$
|
3,760
|
|
Less: Accumulated
Amortization
|
|
|
|
|
(2,593
|
)
|
|
|
(2,205
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
1,545
|
|
|
$
|
1,555
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents
|
|
5 17
|
|
$
|
2,639
|
|
|
$
|
2,639
|
|
Less:
Accumulated Amortization
|
|
|
|
|
(2,028
|
)
|
|
|
(1,831
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
611
|
|
|
$
|
808
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Costs
|
|
3 5
|
|
$
|
7
|
|
|
$
|
162
|
|
Less:
Accumulated Amortization
|
|
|
|
|
|
|
|
|
(120
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
7
|
|
|
$
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
$
|
116
|
|
|
$
|
102
|
|
|
|
|
|
|
|
Total Other Assets, Net
|
|
|
|
$
|
2,279
|
|
|
$
|
2,507
|
|
|
|
|
|
|
|
All
of the Companys other assets are pledged as collateral on the Credit Facility.
NOTE J RECENT
ACCOUNTING PRONOUNCEMENTS
In
December 2007, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141 (revised 2007),
Business Combinations
, which replaces SFAS No 141. The statement retains the
purchase method of accounting for acquisitions, but requires a number of changes,
including changes in the way assets and liabilities are recognized in the purchase
accounting. It also changes the recognition of assets acquired and liabilities assumed
arising from contingencies, requires the capitalization of in-process research and
development at fair value, and requires the expensing of acquisition-related costs as
incurred. SFAS No. 141R is effective for the Company beginning April 1, 2009 and will
apply prospectively to business combinations completed on or after that date.
In
December 2007, the FASB issued SFAS No. 160;
Noncontrolling Interest is Consolidated
Financial Statements
, an amendment of ARB 51, which changes the accounting and
reporting for minority interest. Minority interest will be recharacterized as
noncontrolling interest and will be reported as component of equity separate from the
parents equity, and purchases or sales of equity interests that do not result in
change in control will be accounted for as equity transactions. In addition, net income
attributable to the noncontrolling interest will be included in consolidated net income on
the face of the income statement and, upon a loss of control, the interest sold, as well
as any interest retained, will be recorded at fair value with any gain or loss recognized
in earnings. SFAS No. 160 is effective for the Company beginning April 1, 2009 and will
apply prospectively, except for the presentation and disclosure requirements, which will
apply retrospectively.
11
Table of Contents
In
July 2006, the FASB issued FASB Interpretation 48,
Accounting for Uncertainty in Income
Taxes: an Interpretation of FAS No. 109 (FIN 48).
FIN 48, which
clarifies FAS No. 109,
Accounting for Income Taxes
, establishes the criterion
that an individual tax position has to meet for some or all of the benefits of that
position to be recognized in the Companys financial statements.
The
Company adopted the provisions of FIN 48 and FASB Staff Position No. FIN 48-1 on April 1,
2007. Only tax positions that met the more-likely-than-not recognition threshold at the
adoption date were recognized or continued to be recognized. As a result of the
implementation of FIN 48, an additional $700,000 liability for uncertain tax positions was
recorded as a decrease to the beginning balance of retained earnings. As of December 31,
2007, the Company has approximately $753,000 of unrecognized tax benefits that is recorded
as a component of other liabilities. Approximately $116,000 of the total liability has
been recorded as a current liability because the Company believes that this amount could
be paid during the next twelve months.
Interest
and penalties related to uncertain tax positions are recorded as income tax expense.
During the nine months ended December 31, 2007, approximately $59,000 of interest and
penalties associated with uncertain tax positions was recorded, which is included in the
liability above.
Tax
returns for various years from 1996 through 2006 are subject to examination in the
jurisdictions in which the Company has operations.
In
June 2006, the Emerging Issues Task Force reached a consensus on Issue No. 06-3
(EITF 06-3),
Disclosure Requirements for Taxes Assessed by a
Governmental Authority on Revenue-Producing Transactions.
The consensus allows
companies to choose between two acceptable alternatives based on their accounting policies
for transactions in which the Company collects taxes on behalf of a governmental
authority, such as sales taxes. The guidance should be applied to financial reports
through retrospective application for all periods presented, if amounts are significant,
for interim and annual reporting beginning after February 1, 2007 and was adopted by
the Company on April 1, 2007.
In
September 2006, the FASB issued FAS No. 157,
Fair Value Measurements
. SFAS
No. 157 defines fair value, establishes a framework for measuring fair value and
enhances disclosures about fair value measurements required under other accounting
pronouncements, but does not change existing guidance as to whether or not an instrument
is carried at fair value. SFAS No. 157 is effective for fiscal years beginning after
November 15, 2007, the year beginning April 1, 2008 for the Company.
In
February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial
Assets and Financial Liabilities
which permits entities to choose to measure many
financial instruments and certain other items at fair value that are not currently
required to be measured at fair value. FAS No. 159 will be effective for the Company
on April 1, 2008. The Entities electing the fair value option would be required to
recognize changes in fair value of earnings. Entities electing the fair value option are
required to distinguish, on the face of the balance sheet, the fair value of assets and
liabilities measured using another measurement attribute. FAS No. 159 will become
effective for the Company as of April 1, 2008. The adjustment to reflect the difference
between the fair value and the carrying amount would be accounted for as a
cumulative-effect adjustment to retained earnings as of the date of initial adoption.
The
Company reviews the potential impact of recent accounting pronouncements on a regular
basis to determine the effect they may have when they are adopted.
A
variety of proposed or otherwise potential accounting standards are currently under study
by standard-setting organizations and various regulatory agencies. Because of the
tentative and preliminary nature of these proposed standards, management has not
determined whether implementation of such proposed standards would be material to the
Companys consolidated financial statements.
12
Table of Contents
NOTE K SEGMENT
INFORMATION
The
individual subsidiaries comprising the Company operate predominantly in a single industry
as manufacturers of consumable medication punch cards, packaging equipment and ancillary
products. The Company has operations in the United States and subsidiaries in the United
Kingdom and Germany. In computing operating profit for foreign subsidiaries, allocations
of general corporate expenses have been made and intercompany sales were recorded at
values that management believes approximate fair value exchanges between unrelated
parties. Management evaluates the Companys business performance on a geographic
basis.
Total
assets of the foreign subsidiaries are those assets related to the operations of those
companies. United States total assets consist of all other operating assets of the
Company. Segment information is as follows:
|
United States
|
|
United Kingdom
|
|
Germany
|
|
Elimination
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands)
|
Three Months Ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales to Unaffiliated Customers
|
|
|
$
|
12,152
|
|
$
|
2,229
|
|
|
$
|
339
|
|
$
|
|
|
|
$
|
14,720
|
Intercompany Sales
|
|
|
$
|
629
|
|
$
|
|
|
|
$
|
|
|
$
|
(629
|
)
|
|
$
|
|
Operating Profit
|
|
|
$
|
745
|
|
$
|
362
|
|
|
$
|
49
|
|
$
|
32
|
|
|
$
|
1,188
|
Total Assets
|
|
|
$
|
31,641
|
|
$
|
4,988
|
|
|
$
|
986
|
|
$
|
(568
|
)
|
|
$
|
37,047
|
Depreciation and Amortization
|
|
|
$
|
686
|
|
$
|
32
|
|
|
$
|
1
|
|
$
|
|
|
|
$
|
719
|
Capital Expenditures
|
|
|
$
|
2,679
|
|
$
|
10
|
|
|
$
|
|
|
$
|
|
|
|
$
|
2,689
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31, 2006
|
|
|
Sales to Unaffiliated Customers
|
|
|
$
|
10,740
|
|
$
|
1,695
|
|
|
$
|
|
|
$
|
|
|
|
$
|
12,435
|
Intercompany Sales
|
|
|
$
|
534
|
|
$
|
|
|
|
$
|
|
|
$
|
(534
|
)
|
|
$
|
|
Operating Profit
|
|
|
$
|
1,230
|
|
$
|
(2
|
)
|
|
$
|
|
|
$
|
(2
|
)
|
|
$
|
1,226
|
Total Assets
|
|
|
$
|
19,391
|
|
$
|
4,824
|
|
|
$
|
|
|
$
|
(265
|
)
|
|
$
|
23,950
|
Depreciation and Amortization
|
|
|
$
|
548
|
|
$
|
46
|
|
|
$
|
|
|
$
|
|
|
|
$
|
594
|
Capital Expenditures
|
|
|
$
|
306
|
|
$
|
1
|
|
|
$
|
|
|
$
|
|
|
|
$
|
307
|
13
Table of Contents
|
United States
|
|
United Kingdom
|
|
Germany
|
|
Elimination
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands)
|
Nine Months Ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales to Unaffiliated Customers
|
|
|
$
|
36,547
|
|
$
|
6,249
|
|
|
$
|
862
|
|
$
|
|
|
|
$
|
43,658
|
Intercompany Sales
|
|
|
$
|
1,879
|
|
$
|
|
|
|
$
|
|
|
$
|
(1,879
|
)
|
|
$
|
|
Operating Profit
|
|
|
$
|
2,787
|
|
$
|
726
|
|
|
$
|
122
|
|
$
|
52
|
|
|
$
|
3,687
|
Total Assets
|
|
|
$
|
31,641
|
|
$
|
4,988
|
|
|
$
|
986
|
|
$
|
(568
|
)
|
|
$
|
37,047
|
Depreciation and Amortization
|
|
|
$
|
1,824
|
|
$
|
90
|
|
|
$
|
5
|
|
$
|
|
|
|
$
|
1,919
|
Capital Expenditures
|
|
|
$
|
3,819
|
|
$
|
33
|
|
|
$
|
4
|
|
$
|
|
|
|
$
|
3,856
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended December 31, 2006
|
|
|
Sales to Unaffiliated Customers
|
|
|
$
|
31,965
|
|
$
|
4,842
|
|
|
$
|
|
|
$
|
|
|
|
$
|
36,807
|
Intercompany Sales
|
|
|
$
|
1,613
|
|
$
|
|
|
|
$
|
|
|
$
|
(1,613
|
)
|
|
$
|
|
Operating Profit
|
|
|
$
|
3,346
|
|
$
|
(214
|
)
|
|
$
|
|
|
$
|
(60
|
)
|
|
$
|
3,072
|
Total Assets
|
|
|
$
|
19,391
|
|
$
|
4,824
|
|
|
$
|
|
|
$
|
(265
|
)
|
|
$
|
23,950
|
Depreciation and Amortization
|
|
|
$
|
1,618
|
|
$
|
137
|
|
|
$
|
|
|
$
|
|
|
|
$
|
1,755
|
Capital Expenditures
|
|
|
$
|
971
|
|
$
|
50
|
|
|
$
|
|
|
$
|
|
|
|
$
|
1,021
|
Sales
to Canada have been included in the United States because they are not material.
Net
foreign currency gains reflected in results of operations were not material for the three
and nine months ended December 31, 2007 and 2006. Operating profit is total sales and
other operating income less operating expenses. Segment operating profit does not include
interest expense and net miscellaneous income/expense.
14
Table of Contents
MTS MEDICATION
TECHNOLOGIES, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31,
2007
Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operations
References
in this Form 10-Q to the Company, MTS, we,
our or us means MTS Medication Technologies, Inc., together with
its subsidiaries, except where the context otherwise indicates. This Form 10-Q contains
forward-looking statements within the meaning of that term in Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Additional
written or oral forward-looking statements may be made by us from time to time, in filings
with the Securities and Exchange Commission or otherwise. Statements contained herein that
are not historical facts are forward-looking statements made pursuant to the safe harbor
provisions described above. Forward-looking statements may include, but are not limited
to, projections of revenues, income or losses, capital expenditures, plans for future
operations, the elimination of losses under certain programs, financing needs or plans,
compliance with financial covenants in loan agreements, plans for sale of assets or
businesses, plans relating to our products or services, assessments of materiality,
predictions of future events and the effects of pending and possible litigation, as well
as assumptions relating to the foregoing. In addition, when used in this discussion, the
words anticipates, estimates, expects,
intends, believes, plans and variations thereof and
similar expressions are intended to identify forward-looking statements.
Forward-looking
statements are inherently subject to risks and uncertainties, some of which cannot be
predicted or quantified based on current expectations. Consequently, future events and
actual results could differ materially from those set forth in, contemplated by, or
underlying the forward-looking statements contained herein. Statements in Quarterly
Reports, particularly in Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations and Notes to Condensed Consolidated
Financial Statements, describe factors, among others, that could contribute to or cause
such differences. Other factors that could contribute to or cause such differences
include, but are not limited to, unanticipated increases in operating costs, labor
disputes, capital requirements, increases in borrowing costs, product demand, pricing,
market acceptance, intellectual property rights and litigation, risks in product and
technology development and other risk factors detailed in our Securities and Exchange
Commission filings. In particular any comments regarding possible default waivers related
to our loan agreement are forward-looking statements.
Readers
are cautioned not to place undue reliance on any forward-looking statements contained
herein, which speak only as of the date hereof. We undertake no obligation to publicly
release the result of any revisions of these forward-looking statements that may be made
to reflect events or circumstances after the date hereof or to reflect the occurrence of
unexpected events.
Overview
The
Company continues to experience growth for several reasons. First, the global aging
population results in more medication being prescribed and increases the number of people
that reside in skilled nursing and assisted living facilities. Our pharmacy
customers deliver medication to those residents and we provide pharmacies with packaging
supplies for medications as well as automation for fulfillment. As our customers
grow we grow with them. Secondly, we have made strategic acquisitions in Europe
which have added to the organic growth of our core products. We believe Europe
represents a market that is very receptive to our packaging and automation systems and we
expect the European market to continue to represent an expanding portion of our total
consolidated revenue. Third, we have invested heavily in technology that has
enhanced the automation we sell. As a result, we have experienced growth in sales of
both prepackaging equipment, as well as our highly advanced robotic OnDemand systems.
15
Table of Contents
Since
2001, our operations have consistently been profitable; however, our operating margins
have been impacted by our expansion into new markets and introduction of new
products. The principal reason for this is we have continued to invest in our
infrastructure in terms of personnel and other resources. This investment has been
necessary to help set the stage for future growth and take advantage of our
opportunities. We believe these investments will enhance our chance of success in
markets such as retail pharmacy, nutraceutical and our traditional long term care market
in the U.S. and Europe. We anticipate that ultimately our operating margins will
benefit from the significant impact on our revenue that could result from the successful
launch of our products into the retail pharmacy market, the introduction of our automation
into the retail pharmacy medication delivery model and the continued acceptance of our OnDemand
system automation by our long term care market customers in the U.S. and Europe.
We
believe that our base of business in the long term care market provides us with a very
reliable recurring stream of profitable revenue and we remain committed to leverage that
base to achieve our long term objectives to grow the Company and create more value for our
shareholders.
The
following table sets forth, for the three- and nine-month periods indicated, certain key
operating results and other financial information.
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
|
|
December 31, 2007
|
|
December 31, 2006
|
|
December 31, 2007
|
|
December 31, 2006
|
|
|
|
|
|
|
|
|
|
(In Thousands; Except Per Share Amounts)
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
$
|
14,720
|
|
$
|
12,435
|
|
|
$
|
43,658
|
|
$
|
36,807
|
|
Gross Profit Percentage
|
|
|
|
38.3%
|
|
|
38.1%
|
|
|
|
38.9%
|
|
|
37.9%
|
|
Operating Profit Percentage
|
|
|
|
8.1%
|
|
|
9.9%
|
|
|
|
8.4%
|
|
|
8.3%
|
|
Net Income (Loss) Available to Common Stockholders
|
|
|
$
|
611
|
|
$
|
(3,832
|
)
|
|
$
|
1,919
|
|
$
|
(2,887
|
)
|
Net Income (Loss) Per Common Share Diluted
|
|
|
$
|
0.09
|
|
$
|
(0.63
|
)
|
|
$
|
0.28
|
|
$
|
(0.48
|
)
|
RESULTS OF OPERATIONS
Three Months Ended
December 31, 2007 and 2006
Net
sales for the three months ended December 31, 2007 were $14.7 million compared with $12.4
million during the same period of the prior fiscal year. Net sales increased for
consumable punch cards and machines sold to new and existing customers by 11.9% overall
primarily due to: (1) increased penetration of independent pharmacies; (2) growth in
market demands due to the aging demographics of the U.S. population; (3) a continued shift
toward punch-card use; (4) growth in international markets; and (5) increased sales to our
largest customer. Revenue associated with the sale of OnDemand and MedLocker machines
increased 37.8% to $.7 million during the three months ended December 31, 2007 compared
with $0.5 million in the same period of the prior year. Revenue in Europe increased 51.5%
due primarily to revenue associated with Consilio, our German subsidiary, which was
acquired in February 2007. Average selling prices for consumable products were slightly
higher during the third quarter of fiscal 2008 compared to the same period of the prior
fiscal year.
Cost
of sales for the three months ended December 31, 2007 was $9.1 million compared with $7.7
million during the same period of the prior year. Cost of sales as a percentage of sales
decreased to 61.7% from 61.9% during the same period of the prior fiscal year. Cost of
sales as a percentage of sales decreased primarily as a result of additional product
margin realized on increased net sales which were partially offset by increased overhead
costs primarily associated with automation products and services.
16
Table of Contents
Selling,
general and administration expenses for the three months ended December 31, 2007 increased
28.0% to $3.7 million compared to $2.9 million in the prior year. SG&A expense
increased primarily due to increased personnel and personnel related costs in both the
U.S. and UK and administrative and selling costs associated with Consilio in Germany, as
well as increased costs of consulting services utilized to evaluate our intellectual
property and analyze new market opportunities for our products. .
Depreciation
and amortization expense increased to approximately $719,000 from $594,000 in the same
period the prior year due to acquisitions of capital equipment made during this fiscal
year, including a new press to manufacture punch cards.
Interest
expense for the three months ended December 31, 2007 increased 175% to approximately
$184,000 from $67,000 during the same period of the prior fiscal year. The increase
resulted primarily from higher debt levels compared with the same period of the prior year
offset, in part, by lower interest rates. In December 2006, the Company entered into a
term loan agreement for $6.5 million and used the proceeds to redeem 2,000 shares of its
convertible preferred stock. In addition, the Company borrowed approximately $2 million
for the purchase of a new punch card press.
Income
tax expense decreased to approximately $393,000 during the three months ended December 31,
2007 from $448,000 during the same period of the prior fiscal year. This decrease results
from lower net income before taxes during the three-month period ended December 31, 2007
compared to the same period of the prior year. The effective tax rate for the three-month
period ended December 31, 2007 was 39.1% compared with 38.7% the prior year. The increase
in the effective tax rate results primarily from state and local taxes, which were payable
to more states than in the prior year.
Nine Months Ended
December 31, 2007 and 2006
Net
sales for the nine months ended December 31, 2007 were $43.7 million compared with $36.8
million during the same period of the prior year. Net sales increased for consumable punch
cards and machines sold to new and existing customers by 11.8% overall primarily due to:
(1) increased penetration of independent pharmacies; (2) growth in market demands due to
the aging demographics of the U.S. population; (3) a continued shift toward punch-card
use; (4) growth in international markets; and (5) increased sales to our largest
customers. In addition, revenue associated with the sale of OnDemand and MedLocker
machines was $3.2 million during the nine months ended December 31, 2007 compared with
$2.2 million in the same period of the prior year. Revenue in Europe increased 46.9%
primarily due to revenue associated with Consilio, our German subsidiary, which was
acquired in February 2007. Average selling prices for consumable products were slightly
higher during the nine months ended December 31, 2007 compared to the same period of the
prior fiscal year.
Cost
of sales for the nine months ended December 31, 2007 was $26.7 million compared with $22.9
million during the same period of the prior year. Cost of sales as a percentage of sales
decreased to 61.1% from 62.1% during the same period of the prior fiscal year. Cost of
sales as a percentage of sales decreased primarily as a result of additional product
margin realized on increased net sales which were partially offset by increased overhead
costs primarily associated with automation products and services.
Selling,
general and administration expenses for the nine months ended December 31, 2007 increased
24.5% to $11.4 million from $9.1 million in the prior year. SG&A expense increased
primarily due to increased personnel and personnel related costs in both the U.S. and UK
and administrative and selling costs associated with Consilio in Germany, as well as costs
related to our automation products and services.
Depreciation
and amortization expenses for the nine months ended December 31, 2007 and 2006 were $1.9
and $1.8 million, respectively. The increase resulted primarily from additional
depreciation expense related to capital equipment acquired during this fiscal year.
17
Table of Contents
Interest
expense for the nine months ended December 31, 2007 increased 174% to approximately
$501,000 from $183,000 during the same period of the prior fiscal year. The increase
resulted primarily from higher debt levels and was partially offset by lower interest
rates. In December 2006, the Company entered into a term loan agreement for $6.5 million
and used the proceeds to redeem 2,000 shares of its convertible preferred stock. In
addition, the Company borrowed approximately $2 million for the purchase of a new punch
card press.
Income
tax expense was approximately $1,267,000 during the nine months ended December 31, 2007
compared with $1,121,000 during the same period of the prior fiscal year. The increase
results from higher net income before taxes. The effective tax rate during the nine months
ended December 31, 2007 was 39.8% compared with 38.8% the prior year. The increase in the
effective tax rate results primarily from state and local taxes, which were payable to
more states than in the prior year.
LIQUIDITY AND CAPITAL
RESOURCES
During
the nine months ended December 31, 2007, we had net income of approximately $1.9 million
compared with a net loss of $2.9 million during the same period of the prior fiscal year.
Cash provided by operations was approximately $1.7 million during the nine months ended
December 31, 2007 compared to $2.6 million in the same period in the prior year. The
decrease results primarily from increased inventory levels as well as deposits provided to
an outsourced manufacturer of our OnDemand machines in connection with a significant
contract with our largest customer.
Investing
activities used approximately $4.4 million during the nine months ended December 31, 2007
compared with $1.5 million during the same period of the prior fiscal year. The increase
resulted primarily from higher capital expenditures during this fiscal year including
approximately $2.0 million for a new punch card press.
Financing
activities provided approximately $5.0 million during the nine months ended December 31,
2007 compared with $798,000 used during the same period of the prior fiscal year. The
increase results primarily to increased borrowing under the Credit Facility to fund
working capital needs and purchase capital equipment.
In
December 2006, the Company entered into an agreement with an investor to redeem 2,000
shares of its convertible preferred stock. The convertible preferred stock had been
outstanding since 2002, paid a dividend of 11 percent, or $220,000 annually, and was
convertible into 847,457 shares of common stock. The Company paid the investor
approximately $6.5 million, or $7.65 per common share equivalent, as well as a $20,000
transaction fee, to fully redeem all of the outstanding shares of convertible preferred
stock held by the investor and completely satisfy all of its obligations under the
convertible preferred stock agreement. The Company recorded a constructive dividend of
approximately $4.5 million, or $0.73 per diluted common share, associated with the
redemption which represents the amount by which the payment to the investor exceeded the
carrying value of the convertible preferred stock on the date of redemption. The payment
was funded with the proceeds of an overadvance term loan provided by the Companys
former secured lender.
In
May 2007, we entered into an agreement to provide sixteen OnDemand Express II and eight
AccuFlex machines to our largest customer over an eighteen-month period. The agreement
provides that certain deposits will be made by the customer that will ultimately be
applied towards the purchase price of the machines. The agreement further provides
that the deposits will be held in a separate bank account and used exclusively for costs
associated with the manufacture of the machines. As of December 31, 2007, the
customer has provided the Company with deposits of $3.5 million. The cash deposits have
been used to pay for deposits to an outsourced manufacturer, and other costs and expenses
related to the manufacture and installation of the machines. The remaining cash is
held in a separate bank account to be used to fund future costs associated with
the manufacture of the machines and has been recorded as restricted cash.
The
deposits received from the customer have been recorded as customer deposits since they
are fully refundable if the acceptance criteria for the delivered machines are not met.
The deposits the Company has provided to the outsourced manufacturer of the machines will
ultimately be applied towards the purchase of the machines from the manufacturer and is
only refundable to the extent that costs have not been incurred to manufacture machines.
18
Table of Contents
The
agreement further provides that in the event the Company does not deliver the machines,
the customer will be entitled to a full refund of the deposit and the Company may be
responsible for financial penalties in the event the machines are not delivered according
to the delivery schedule contained in the agreement. As of December 31, 2007, the Company
delivered six machines to the customer pursuant to the agreement and incurred
approximately $56,000 in penalties because three of the six machines were not delivered
according to the delivery schedule.
In
December 2007, the Company and the customer agreed to suspend deliveries of additional
machines under the agreement and concentrate their efforts on installation, training and
the development of acceptance criteria to evaluate the six delivered machines. The Company
currently believes that the remaining machines will ultimately be delivered to the
customer and the delivered machines will be accepted by the customer.
Our
short-term and long-term liquidity is primarily dependent on our ability to generate cash
flow from operations. Inventory levels may change significantly if we are successful in
selling our OnDemand machines. Increases in net sales may result in corresponding
increases in accounts receivable. Cash flow from operations and borrowing availability
under the Credit Facility is anticipated to support an increase in accounts receivable and
inventory.
We
have new product development projects underway that are expected to be funded by cash flow
from operations. These projects are monitored on a regular basis to attempt to ensure that
the anticipated costs associated with them do not exceed our ability to fund them from
cash flow from operations and other sources of capital.
There
was $12 million borrowed and an additional $2 million available on our reducing revolving
line of credit at December 31, 2007. At the most recent date there was approximately $10
million borrowed and $3.6 million available.
The
reducing revolving line of credit contains financial covenants that, among other things,
require us to maintain a Debt Service Coverage Ratio, a Funded Debt to
EBITDA Ratio and a ratio of Total Liabilities to Tangible Net Worth. We
were in compliance with all provisions of the loan agreements at December 31, 2007.
We
believe that the cash generated from operations during this fiscal year, and amounts
available on our reducing revolving line of credit, will be sufficient to meet our capital
expenditures, product development and working capital needs.
ESTIMATES AND CRITICAL
ACCOUNTING POLICIES
The
preparation of our consolidated financial statements in conformity with generally accepted
accounting principles in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities as of
the date of the financial statements and revenue and expenses for the respective
period-ended for such statements. The determination of estimates requires the use of
judgment since future events and their effect on our operations cannot be determined with
absolute certainty. Actual results typically differ from these estimates in some fashion,
and at times, these variances may be material to our financial statements. Our management
continually evaluates its estimates and assumptions, which are based on historical
experience and other factors that are believed to be reasonable under these circumstances.
These estimates and our actual results are subject to the risk factors listed under
Item 1. Business in our Form 10-K for the fiscal year ended March 31, 2007.
Nevertheless, our management believes the following items involve a higher degree of
complexity and, judgment and therefore, has commented on these items below.
Consolidation
The
consolidated financial statements include the accounts of the Company and its
subsidiaries, MTSP and MTS Limited. All significant inter-company accounts and
transactions have been eliminated in consolidation.
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Revenue Recognition
The
Company recognizes revenue on the sale of machines, other than OnDemand machines, and all
consumables when title and risk of loss to the products shipped has transferred to the
customer. The Company recognizes revenue related to the sale of its OnDemand machines as
prescribed in SOP 97-2 Software Revenue Recognition because the software
component of the OnDemand machine is significant and not incidental to the value and
functionality of the machine. In addition, the sale of an OnDemand machine represents an
arrangement that encompasses multiple deliverables and therefore each deliverable
represents a separate unit of accounting. The separate deliverables are comprised of (a)
the OnDemand machine installed at the customers location; (b) user training; (c)
certain component parts that are sold separately, principally cassettes that hold
medications; and (d) maintenance. These separate deliverables are incidental to the
functionality of the machine. The vendor specific objective evidence (VSOE) of fair value
of the deliverables outlined in (b-d) has been determined based upon the value of these
deliverables as sold separately. The fair value of the deliverable outlined in (a) has
been determined using the residual method which equals the total selling price of the
OnDemand machine, including installation, training and cassettes, less the aggregate fair
value of (b-d). The terms of the sale arrangement for an OnDemand machine is typically FOB
shipping point, at which time title and risk of loss transfers to the customer, however,
because the installation of the machine is essential to the functionality of the machine
the recognition of any of the revenue associated with the machine is deferred until the
machine is installed. For those cassettes that are provided to the customer after the
OnDemand machine is installed, the revenue associated with those cassettes is recognized
upon their delivery. When the training is performed, the Company recognizes the revenue
associated with the training.
Revenue
includes certain amounts invoiced to customers for freight and handling charges. The
Company includes the actual cost of freight and handling incurred in cost of sales.
Revenue
is reported net of rebates and discounts provided to customers. Rebates are generally
determined based upon pricing agreements that offer certain customers incentives to
purchase products from the Company. Discounts are provided from time to time primarily to
compensate customers for inconveniences caused by late shipments, defective product or
pricing errors. Rebates and discounts were approximately $400,000 and $1,151,000 and
approximately $370,000 and $1,059,000 for the three and nine months ended December 31,
2007 and 2006, respectively. Rebates and discounts are recorded at the time they are
earned by the customer.
Accounts Receivable
Trade
accounts receivable are recorded based upon the invoiced amount, are generally not
interest bearing and are considered past due when full payment is not received by the
specified credit terms. The Company does not typically require collateral when granting
credit; however, customer credit worthiness is reviewed prior to granting credit. The
Company normally estimates the uncollectibility of its accounts receivable. The Company
considers many factors when making its estimates, including analyzing accounts receivable
and historical bad debts, customer concentrations, customer credit worthiness, current
economic trends and changes in its customer payment terms when evaluating the adequacy of
the reserve for uncollectible accounts. The Company reviews the status of its accounts
monthly, assessing the customers ability to pay. When a specific account is deemed
uncollectible, the account is written off against the reserve for uncollectible accounts.
As of December 31, 2007 and March 31, 2007, the Company has established an allowance for
doubtful accounts of approximately $154,000 and $149,000, respectively, to account for
estimated uncollectible accounts.
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Inventories
Inventories
are stated at the lower of cost or market. Cost is determined by the first-in, first-out
(FIFO) method. The elements of costs included in the valuation of inventory
are the direct costs associated with materials purchased, direct labor expended to
manufacture the inventory and an allocation of general overhead expenses incurred to
operate the manufacturing facilities. The allowance for inventory obsolescence and slow
moving inventory is reviewed on a regular basis. The Company reviews various information
related to the age and turnover of specific inventory items to assist its assessment. As
of December 31, 2007 and March 31, 2007, the Company established an inventory valuation
allowance of approximately $604,000 and $340,000, respectively, to account for the
estimated loss in value of inventory due to obsolescence.
Self-Insurance Plan
Reserve
The
Company has a medical health benefit self-insurance plan, which covers substantially all
of its employees. During the nine months ended December 31, 2007, the Company was
reinsured for claims that exceed $100,000 per participant and an annual maximum aggregate
limit of approximately $1,039,000. Future claims experience may affect the reinsurance
limits that may be available to the Company. The Company has established a reserve of
approximately $152,000 and $95,000 at December 31, 2007 and March 31, 2007, respectively,
for all unpaid claims incurred, but not reported during the quarter ended December 31,
2007 and the fiscal year ended March 31, 2007. Self-insured medical claims costs were
approximately $386,000 and $732,000 and approximately $311,000 and $655,000 for the three
and nine months ended December 31, 2007 and 2006, respectively.
Income Taxes
Income
taxes are provided for under the liability method in accordance with SFAS No. 109,
Accounting for Income Taxes
, whereby deferred tax assets are recognized for
deductible temporary differences and operating loss and tax credit carryforwards and
deferred tax liabilities are recognized for taxable temporary differences. Temporary
differences are the differences between the reported amounts of assets and liabilities and
their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or all of the deferred
tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of enactment.
Goodwill and Other
Intangible Assets
The
Company follows SFAS No. 142,
Goodwill and Other Intangible Assets
, and accordingly
will not amortize goodwill, but will annually review it for impairment. Other intangible
assets acquired in the BAF and Consilio acquisitions are amortized on a straight-line
basis over a period ranging from seven to fifteen years, the estimated useful lives of the
assets.
Valuation of Long-Lived
Assets and Certain Identifiable Intangibles
Long-lived
assets and certain identifiable intangibles that are held and used by the Company are
reviewed for impairment whenever events or changes in circumstance indicate that the
carrying amount of these assets may not be recoverable in accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets.
In performing the
review for recoverability, the Company estimates the future cash flows expected to result
from the use of the assets and their eventual disposition. If the sum of the expected
future cash flows is less than the carrying amount of the assets, an impairment loss is
recognized based on a discounted cash flow analysis. Our management believes no impairment
loss existed for any of the periods presented.
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Product Development
All
costs incurred subsequent to the completion of research and development activities
associated with software components achievement of technological feasibility are
capitalized until the product is available for general release to customers. Product
development costs are generally amortized over a three- to five-year period beginning on
the date the product is released for sale to customers. We review the viability and
recoverability of these costs on a regular basis.
Estimated Liabilities
We
make a number of estimates in the ordinary course of business. Historically, past changes
to these estimates have not had a material impact on our financial condition. However,
circumstances could change, which would alter future financial information based upon a
change in estimated-vs.-actual results.
We
are subject to various matters of litigation in the ordinary course of business. As the
outcome of any litigation is unknown, management estimates the potential amount of
liability, if any, in excess of any applicable insurance coverage, based on historical
experience and/or the best estimate of the matter at hand. Significant changes in
estimated amounts could occur. To date, we have not had to pay any legal settlements in
excess of existing insurance coverage.
Warranty
We
establish a reserve for warranty costs we may incur during the warranty period that is
provided for in the machine sales agreements with our customers. The balance was
approximately $24,000 and $81,000 at December 31, 2007 and March 31, 2007, respectively.
Warranty and service costs were approximately $194,000 and $463,000 and approximately
$97,000 and $307,000 for the three and nine months ended December 31, 2007 and 2006,
respectively.
Foreign Currency
Transactions and Translation
For
the Companys foreign subsidiaries that use a currency other than the U.S. dollar as
their functional currency, assets and liabilities are translated at exchange rates in
effect at the balance sheet date, and revenue and expenses are translated at the average
exchange rate for the period. The effects of these translation adjustments are reported in
other comprehensive income. Gains and losses arising from transactions denominated in a
currency other than the functional currency of the entity involved are included in
operating income.
Off-Balance Sheet
Arrangements
We
currently do not have any off-balance sheet arrangements.
Contractual Obligations
Summarized
below are our obligations and commitments to make future payments under certain
contractual obligations as of December 31, 2007:
Contractual Obligations
|
|
Total
|
|
Less Than 1 Year
|
|
1 - 3 Years
|
|
4 - 5 Years
|
|
More Than 5 Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Debt
|
|
|
$
|
12,108
|
|
$
|
190
|
|
$
|
11,918
|
|
$
|
|
|
$
|
|
Capital Leases
|
|
|
$
|
127
|
|
$
|
84
|
|
$
|
43
|
|
$
|
|
|
$
|
|
Operating Leases
|
|
|
$
|
7,360
|
|
$
|
1,033
|
|
$
|
2,495
|
|
$
|
1,649
|
|
$
|
2,183
|
Interest
|
|
|
$
|
2,120
|
|
$
|
765
|
|
$
|
1,355
|
|
$
|
|
|
$
|
|
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