UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period 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: 0-8632
------
MEDICAL DYNAMICS, INC.
----------------------------------------------------
Exact name of Registrant as specified in its charter
Colorado 84-0631765
- -------- ------------------
State or other jurisdiction of I.R.S. Employer
incorporation or organization Identification No.
99 INVERNESS DRIVE EAST, ENGLEWOOD, CO 80112
- -------------------------------------- --------
Address of principal executive offices Zip Code
Registrant's telephone number, including area code: 303-790-2990
------------
Former name, former address and former fiscal year, if changed
since last report: NA
Indicate by check mark whether the Registrant (1) has filed an annual, quarterly
and other reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter periods
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
The number of shares outstanding of each of the issuer's classes of common
stock, as of March 31, 1996 is 6,879,511 shares, $.001 par value.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements.
MEDICAL DYNAMICS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS March September
31, 1996 30, 1995
-------- ---------
CURRENT ASSETS
Cash and cash equivalents $ 759,300 $1,071,700
Short term investments 10,000 10,000
Trade receivables, less
allowance for doubtful
accounts of $45,000 and $45,000 256,200 391,600
Note receivable -- 110,000
Inventories, net of allowance
for obsolescence of $200,000
and $200,000 (Note 3) 902,400 948,500
Prepaid expenses 10,400 25,100
---------- ----------
Total Current Assets $1,938,300 $2,556,900
---------- ----------
EQUIPMENT
Loaner equipment $ 692,300 $ 678,100
Machinery and equipment 350,000 343,100
Furniture and fixtures 270,600 270,200
Leasehold improvements 54,500 54,500
---------- ----------
$1,367,400 $1,345,900
Less accumulated deprecia-
tion and amortization (1,258,700) (1,202,000)
--------- ----------
$ 108,700 $ 143,900
---------- ----------
OTHER ASSETS
Patents, patents pending and
trademarks, net of accumulated
amortization of $637,300
and $609,400 $ 131,200 $ 155,500
Other 16,900 29,400
---------- ---------
$ 148,100 $ 184,900
---------- ----------
$2,195,100 $2,885,700
========== ==========
See Notes to Consolidated Financial Statements.
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<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
March, September
31, 1996 30, 1995
----------- -----------
CURRENT LIABILITIES
Accounts payable $ 154,900 $ 188,400
Accrued expenses 73,400 50,900
Product warranty costs 25,000 25,000
Accrued royalties -- 90,000
----------- -----------
Total Current Liabilities $ 253,300 $ 354,300
----------- -----------
STOCKHOLDERS' EQUITY
Preferred stock, $.001
par value; authorized
5,000,000 shares; none
issued and outstanding $ -- $ --
Common stock, $.001 par
value; authorized
15,000,000 shares;
issued 6,895,411
and 6,885,411 shares 6,900 6,900
Additional paid-in capital 16,585,500 16,585,500
Accumulated deficit (14,571,300) (13,981,700)
----------- -----------
$ 2,021,100 $ 2,610,700
----------- -----------
Treasury stock at cost
15,900 shares (79,300) (79,300)
----------- -----------
$ 1,941,800 $ 2,531,400
----------- -----------
$ 2,195,100 $ 2,885,700
=========== ===========
See Notes to Consolidated Financial Statements.
-3-
<PAGE>
<TABLE>
<CAPTION>
MEDICAL DYNAMICS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Quarter ended Six months
March 31, ended March 31,
----------------------- -----------------
1996 1995 1996 1995
------- ---------- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 227,300 $ 280,800 $ 390,700 $ 589,000
Cost of goods sold 202,300 252,300 375,300 514,100
---------- ----------- ---------- -----------
Gross profit $ 25,000 $ 28,500 $ 15,400 $ 74,900
---------- ----------- ---------- -----------
Other operating
revenue $ 20,900 $ 37,000 $ 51,600 $ 69,400
---------- ----------- ---------- -----------
Operating expenses:
Selling, general
and adminis-
trative $ 294,300 $ 394,900 $ 588,800 $ 827,200
Research and
development 42,600 39,500 93,800 70,600
---------- ----------- ----------- -----------
$ 336,900 $ 434,400 $ 682,600 $ 897,800
---------- ----------- ----------- -----------
Operating (loss) $ (291,000) $ (368,900) $ (615,600) $ (753,500)
---------- ----------- ----------- -----------
Financial income
(expense):
Interest income 10,600 22,600 26,000 46,800
Interest expense -- -- -- --
---------- ----------- ----------- -----------
$ 10,600 $ 22,600 $ 26,000 $ 46,800
---------- ----------- ----------- -----------
(Loss) before
income taxes $ (280,400) $ (346,300) $ (589,600) $ (706,700)
Income tax expense
(Note 2) -- -- -- --
---------- ----------- ----------- -----------
Net (loss) $ (280,400) $ (346,300) $ (589,600) $ (706,700)
========== =========== =========== ===========
Fully diluted loss
per share (Note 1)
Net (loss) per share $ (.04) $ (.05) $ (.08) $ (.10)
=========== ============ =========== ============
See Notes to Consolidated Financial Statements.
-4-
</TABLE>
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months ended March 31,
--------------------------
1996 1995
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) $(589,600) $(706,700)
Adjustments to reconcile net
(loss) to net cash (used in)
operating activities:
Depreciation and
amortization 89,800 133,700
Gain on sale of loaner
equipment (4,500) (29,500)
Change in assets and liabilities:
Decrease in accounts receivable 135,500 87,700
Decrease in notes
receivable 110,000 --
(Increase) Decrease in
inventories 55,200 (140,800)
Increase in reserve for
inventory obsolescence -- --
Decrease in other assets 27,200 7,600
(Decrease) in accounts
payable, accrued expenses
and product warranty costs (101,000) (19,000)
------------ ----------
Net cash (used in)
operating activities $ (277,400) $ (667,000)
------------ ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of
loaner equipment $ 4,500 $ 21,600
Note advances to
Micro-Medical Devices -- --
Changes in other assets (8,900) (16,200)
Purchase of investments -- ( 296,900)
Purchase of equipment (30,600) (6,700)
----------- -----------
Net cash (used in)
investing activities $ (35,000) $ (298,200)
----------- -----------
See Notes to Consolidated Financial Statements.
-5-
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
Six months ended March 31,
----------------------------
1996 1995
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of common
stock arising from exercise
of options $ -- $ --
Proceeds from stock offerings -- --
Net cash provided by
financing activities $ -- $ --
----------- -----------
(Decrease) Increase in cash
and cash equivalents $ (312,400) $ (965,200)
Cash and cash equivalents:
Beginning 1,071,700 1,151,600
----------- -----------
Ending $ 759,300 $ 186,400
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period
for interest $ -- $ --
=========== ===========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Loaner equipment transferred
from inventory $ 23,300 $ --
=========== ===========
See Notes to Consolidated Financial Statements.
-6-
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. MANAGEMENT ADJUSTMENTS
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these financial statements
be read in conjunction with the Registrant's September 30, 1995 Form 10-KSB. The
results of operations for the periods ended March 31, 1996 and March 31, 1995
are not necessarily indicative of operating results for the full years.
The Consolidated Financial Statements and other information furnished
herein reflect all adjustments which are, in the opinion of management of the
Registrant, necessary for a fair presentation of the results of the interim
periods covered by this report. Adjustments to the financial statements were of
a normal recurring nature.
For the six months ended March 31, 1996 and 1995, both primary and
fully-diluted earnings per share are calculated based upon 6,879,511 and
6,869,511, respectively, average common shares outstanding. Shares issuable
under common stock options were excluded from the computation of earnings per
share because the effect was deemed to be anti-dilutive. At March 31, 1996 and
1995, the Registrant had 1,176,900 and 951,700, respectively, common stock
options outstanding.
NOTE 2. INCOME TAXES
Under the provisions of the Internal Revenue Code, the Registrant has
available net operating loss and business tax credit carryforwards of
approximately $14,500,000 and $188,000, respectively, which expire in varying
amounts from 1996 through 2010.
The net operating loss and business tax credit carryforwards described
above give rise to a deferred tax asset of approximately $5,500,000. This asset
is recorded net of a valuation allowance of the same amount, therefore no
amounts are reflected in the accompanying balance sheet.
-7-
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 3. INVENTORIES
Inventories consist of the following at March 31, 1996 and September 30,
1995:
March 31, September 30,
1996 1995
---------- -------------
Raw materials, purchased and
replacement parts $ 457,700 $ 466,200
Finished goods 641,700 656,300
Work in process 3,000 26,000
Allowance for obsolescence (200,000) (200,000)
--------- ---------
$ 902,400 $ 948,500
========= =========
-8-
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARY
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Financial Condition. (March 31, 1996 as compared to September 30, 1995)
During the six month period ended March 31, 1996, the Registrant's net working
capital decreased approximately $517,600, due primarily to the use of cash in
operations and the resulting operating loss. Cash has been used primarily to
fund the general operations of the Registrant including research and
development, and to promote the sales and marketing of products.
Principal changes in the components of net working capital for the six
months ended March 31, 1996 consist of a decrease in the accounts receivable
balance by $135,500, a decrease in notes receivable of $110,000, a decrease in
total inventory levels by $55,200, a reduction in prepaid expenses of $27,200,
and a reduction in current liabilities by $101,000.
During the six month and three month (quarter) periods ended March 31,
1996, the Registrant experienced negative cash flows from operations of
approximately $277,400 and $103,900, respectively, as compared to negative cash
flows from operations of approximately $667,000 and $405,100, respectively,
during the comparable periods of the prior fiscal year 1995. This aggregate
decrease in cash used for operations of $389,600 was a result of the following
significant factors: Inventory levels were reduced by $55,200 during FY 1996 as
compared to cash used of $140,800 in FY 1995 for inventory increases, resulting
in a net reduction in cash expenditures of $196,000 for inventory activity.
Accounts payable and accrued expenses were reduced during FY 1996 and FY 1995
requiring cash outlays of $101,000 and $19,000 respectively for a net increase
in cash payments of $82,000 during FY 1996. Trade accounts receivable cash
collections totalled $135,500 during FY 1996 versus cash collections of $87,700
during FY 1995 for a net cash increase of $47,800. A $110,000 note receivable
was collected during FY 1996.
To continue the Registrant's objective of curtailing operating losses,
negative cash flow from operations and liquidity erosion further, management is
continually reviewing product profit margins and general expense accounts, and
will reduce or eliminate all non-essential expenditures. Purchasing procedures
have also been implemented to ensure minimized product costs and to avoid excess
inventory levels. A distribution agreement signed last fiscal year with Micro
Medical Devices, Inc. will allow the Registrant more flexibility in matching
inventory requirements and purchases with currently anticipated sales of USES
products, thereby reducing inventory carrying costs. To date, sales pursuantto
this agreement have been minimal. Management of the Registrant is also
continuing to seek OEM customers for all product lines.
-9-
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARY
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operation. (Continued)
The Company also entered into a revised license agreement with Dr. Edwin
Adair during fiscal 1995 in an effort to reduce patent maintenance costs and
other associated costs. In a related agreement, the Registrant's Chairman has
agreed to forego his cash royalty payment for fiscal 1996 and instead has
accepted stock options as a replacement in an effort to help conserve the
Company's capital. See the Registrant's September 30, 1995 form 10-KSB for
additional information. Without significant sales increases, the Registrant
still anticipates negative cash flow from operations for fiscal 1996 and beyond.
The Registrant's future viability depends on its ability to generate cash to
fund it's operations. In the short term, this was accomplished through equity
placements during fiscal 1994, and in previous fiscal years through loans from
the company's chairman. However, the Registrant's ability to fund its operations
will be dependant upon achieving profitability and in generating a positive cash
flow from operations. Unless the Registrant is able to increase sales revenues
and maintain profitability during fiscal 1996, the Registrant may be facing
significant working capital shortages beginning in and during fiscal year 1996.
There can be no assurance that the Company will be able to achieve this goal.
The Registrant believes that its existing capital resources are sufficient
for the current fiscal year, and the Registrant has planned no significant
capital expenditures. The Registrant is not seeking additional debt or equity
capital at this time, however there are 1,176,900 common stock options
outstanding as of March 31, 1996 (see note 1, "Management Adjustments"), and if
exercised (of which there can be no assurance), these options would provide
varying amounts of additional working capital to the Registrant (see
Registrant's form S-3 filed May 8, 1996). If the Registrant does obtain
additional capital (of which there can be no assurance), the Registrant will be
able to allocate more resources to sales and marketing efforts (including
negotiations with prospective OEM relationships), and research and development.
Subsequent to the Registrant's quarter ended March 31, 1996, on May 9,
1996, the Registrant announced it's intent to form a Dental Division for the
purpose of manufacturing and marketing, on an OEM basis, an intra oral dental
camera. In conjunction with the formation of that division, the Registrant also
announced that it had retained Michael Williams and Dave Wilson, two dental
industry veterans, to lead the new division. Prototypes of the Registrant's
intra oral camera have been released to potential customers in anticipation of
generating orders, but no assurances can be given as to the successful receipt
of any order.
-10-
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARY
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operation. (Continued)
Results of Operations. As an aid to understanding the Registrant's
operating results, the following table indicates the percentage relationships of
principal revenue and expense items to total net sales included in the
Consolidated Statements of Operations for the six months ended March 31, 1996
and 1995 and the percentage changes in those items for the same years.
<TABLE>
<CAPTION>
As a percent of
total revenue
for the six Percentage
month period change from
ended March 31, the prior years
1996 1995 Revenue/Expense Items comparable period
---- ---- --------------------- -----------------
<S> <C> <C> <C>
100.0% 100.0% Net sales (33.7%)
96.1% 87.3% Cost of goods (27.0%)
3.9% 12.7% Gross profit (79.4%)
13.2% 11.8% Other operating revenue (25.6%)
150.7% 140.4% Selling, general and admin (28.8%)
24.0% 12.0% Research and development +32.9%
(157.6%) (127.9%) Operating (loss) (18.3%)
6.7% 7.9% Other income/(expense) (44.4%)
(150.9%) (120.0%) Net (loss) (16.6%)
</TABLE>
Revenue. Total Sales for the six months ended March 31, 1996 and 1995 were
$390,700 and $589,000, respectively, for a decrease of approximately $198,300 or
33.7%. The following product groups incurred significant sales decreases over
the comparable period of fiscal 1995 in the following amounts: general
accessories $92,300, electronic video laparoscope (EVL's) $53,100, optical
catheters & accessories $26,200, and model 5970's $16,200. Domestic, non-OEM
sales accounted for 52% and 51% of total sales, foreign sales accounted for 40%
and 36% of total sales, and OEM sales accounted for 8% and 13% of the total
sales for the comparable periods ended March 31, 1996 and 1995, respectively.
Total domestic, non-OEM sales for the six months ended March 31, 1996 and
1995 were $203,300 and $300,200, respectively, decreasing by $96,900 from the
fiscal 1995 comparable period. The Registrant is currently taking steps to
introduce products such as the Universal Sterile Endoscopy System(TM) (USES) and
Coupler/Drape(TM) which will address the combined issues of cost and sterility
that plague the capital tight hospital market, but no assurances of the success
of that strategy can be given.
-11-
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARY
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operation. (Continued)
Foreign sales for the six months ended March 31, 1996 and 1995 were
$155,700 and $209,600, respectively, for a decrease of $53,900 or 26%. This
decrease is due primarily to a decline in total sales levels to $62,100 for FY
1996 from $127,400 for FY 1995 by the Registrant's South American distributor.
In the long run the Registrant expects to continue expansion of the foreign
distribution network. It is expected that an eventual increase in revenues will
be provided from foreign distributors as they become established, although no
assurances can be given as to the success of those efforts.
Total OEM sales for the six months ended March 31, 1996 and 1995 were
$31,800 and $79,100, respectively, for a decrease of $47,300 or 60%. This
reduction is primarily attributable to the Registrants significantly reduced
shipments of model 5990's to Endosurgical Development Corporation (EDC) and also
as a result of reduced accessory sales to Weck Endoscopy and Wolf Medical
Instrument Corporation over the comparable period of the prior fiscal year. The
Registrant is attempting to replace the OEM base lost during fiscal 1992 by
expanding existing business with current OEM customers and cultivating new
relationships that are in the beginning stages of sales such as Origin
Medsystems, Inc., a subsidiary of the Eli Lilly Company. The Registrant expects
to expand revenues from all OEM customers as well as attempt to add others in
the areas of general laparoscopy, arthroscopy, cardiovascular surgery, dental
endoscopy, as well as add a national distributor for the Registrants Lap-Wrap
product although no assurances can be given as to the success of those efforts.
Cost of Goods Sold. Cost of goods sold for the six months ended March 31,
1996 and 1995 totalled $375,300 and $514,100, respectively, for a decrease of
approximately $138,800 or 27%. Total cost of goods sold as a percent of sales
was 96.1% and 87.3%, respectively, for the same periods, respectively. This cost
of goods sold amount for fiscal 1996 includes a significant underapplied
overhead amount charged by management for underutilized manufacturing capacity.
The increase of 8.8% as a percent of sales is primarily due to lower production
volumes and charging excess overhead (excess manufacturing capacity) to cost of
goods sold. Varying sales mixes and sales discounts allowed OEM and foreign
distributors are other factors contributing to the cost of sales percentage
increase. Underutilized overhead variances will continue to adversely affect
cost of goods sold as a percentage of net sales until such time that the
Registrant increases its sales and production volume or takes additional steps
to reduce its fixed costs currently included in overhead.
-12-
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARY
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operation. (Continued)
Selling, General and Administrative Expenses (SG&A). SG&A expenses for the
six months ended March 31, 1996 and 1995 were $588,800 and $827,200,
respectively, for a decrease of approximately $238,400 or 28.8%. This decrease
is primarily due to the lack of royalty, insurance and other expenses ordinarily
incurred on behalf of the Registrant's Chairman foregone in fiscal 1996 in
exchange for 120,000 of the Registrant's common stock options, per the amended
and restated license agreement with the Chairman (see fiscal 1995 form 10-KSB
for a detailed discussion). Other significant expense reductions during fiscal
1996 versus the comparable period of fiscal 1995 include significantly fewer
inventory and patent writeoffs, reduced depreciation and amortization charges as
a substantial amount of loaner equipment became fully depreciated during fiscal
1995, and cost cutting measures instituted by Management precipitated by lower
sales and production values. The registrant continues to reduce or eliminate
expenses in all areas when practical.
Research and Development Costs. For the six months ended March 31, 1996 and
1995 R&D expenses were $93,800 and $70,600, respectively, for an increase of
approximately $23,200 or 32.9%. A significant portion of this increase is due to
projects related to electrical compatibility testing required to achieve TUV and
CE approval markings which are required to successfully market products in the
European common market countries. Additional research and development expense
was incurred on projects related to the Registrant's new intra-oral dental
camera, the Optical Catheter System(TM) as it applies to a new cardio vascular
system, and a new and improved version of the Lap-Wrap(TM) family of products.
The Registrant will continue to fund research and development as it deems
appropriate to maintain or gain a competitive advantage.
-13-
<PAGE>
PART II - OTHER INFORMATION
Item 5. Other Information.
None
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits: None
(b) Reports on Form 8-K: None
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
/s/ VAN A. HORSLEY
Date: May 15, 1996 -----------------------------------
Van A. Horsley, President,
Principal Executive Officer,
and Principal Financial Officer
-14-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> MAR-31-1996
<CASH> 759,300
<SECURITIES> 10,000
<RECEIVABLES> 301,200
<ALLOWANCES> (45,000)
<INVENTORY> 902,400
<CURRENT-ASSETS> 1,938,300
<PP&E> 1,367,400
<DEPRECIATION> (1,258,700)
<TOTAL-ASSETS> 2,195,100
<CURRENT-LIABILITIES> 253,300
<BONDS> 0
0
0
<COMMON> 6,900
<OTHER-SE> 1,934,900
<TOTAL-LIABILITY-AND-EQUITY> 2,195,100
<SALES> 390,700
<TOTAL-REVENUES> 468,300
<CGS> 375,300
<TOTAL-COSTS> 1,057,900
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (589,600)
<INCOME-TAX> 0
<INCOME-CONTINUING> (589,600)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (589,600)
<EPS-PRIMARY> (.08)
<EPS-DILUTED> (.08)
</TABLE>
