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 June 30, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
ECURITIES 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 June 30, 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)
<TABLE>
<CAPTION>
ASSETS June September
30, 1996 30, 1995
-------- --------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 492,800 $1,071,700
Short term investments 10,000 10,000
Trade receivables, less
allowance for doubtful
accounts of $45,000 and $45,000 217,600 391,600
Note receivable -0- 110,000
Inventories, net of allowance
for obsolescence of $200,000
and $200,000 (Note 3) 887,800 948,500
Prepaid expenses 11,000 25,100
---------- ----------
Total Current Assets $1,619,200 $2,556,900
---------- ----------
EQUIPMENT
Loaner equipment $ 696,900 $ 678,100
Machinery and equipment 355,300 343,100
Furniture and fixtures 270,800 270,200
Leasehold improvements 54,500 54,500
---------- ----------
$1,377,500 $1,345,900
Less accumulated deprecia-
tion and amortization (1,287,000) (1,202,000)
---------- ----------
$ 90,500 $ 143,900
--------- ----------
OTHER ASSETS
Patents, patents pending and
trademarks, net of accumulated
amortization of $653,900
and $609,400 $ 120,000 $ 155,500
Other 20,400 29,400
---------- ---------
$ 140,400 $ 184,900
---------- ----------
$1,850,100 $2,885,700
========== ==========
See Notes to Consolidated Financial Statements.
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</TABLE>
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
June, September
30, 1996 30, 1995
----------- -----------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 142,300 $ 188,400
Accrued expenses 65,500 50,900
Product warranty costs 25,000 25,000
Accrued royalties -0- 90,000
----------- -----------
Total Current Liabilities $ 232,800 $ 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 (14,895,800) (13,981,700)
----------- -----------
$ 1,696,600 $ 2,610,700
----------- -----------
Treasury stock at cost
15,900 shares (79,300) (79,300)
----------- -----------
$ 1,617,300 $ 2,531,400
----------- -----------
$ 1,850,100 $ 2,885,700
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
-3-
<PAGE>
<TABLE>
<CAPTION>
MEDICAL DYNAMICS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Quarter ended Nine months
June 30, ended June 30,
--------------------------------- ----------------------------------
1996 1995 1996 1995
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Net sales $ 132,700 $ 331,500 $ 523,500 $ 920,600
Cost of goods sold 155,200 309,900 530,600 824,000
---------- ----------- ---------- -----------
Gross profit $ (22,500) $ 21,600 $ (7,100) $ 96,600
----------- ----------- ----------- -----------
Other operating
revenue $ 15,900 $ 18,700 $ 60,500 $ 67,800
---------- ----------- ---------- -----------
Operating expenses:
Selling, general
and adminis-
trative $ 262,600 $ 413,200 $ 844,400 $ 1,240,400
Research and
development 62,200 39,000 156,000 109,800
---------- ----------- ----------- -----------
$ 324,800 $ 452,200 $ 1,000,400 $ 1,350,200
---------- ----------- ----------- -----------
Operating (loss) $ (331,400) $ (411,900) $ (947,000) $(1,185,800)
---------- ----------- ----------- -----------
Financial income
(expense):
Interest income 6,900 13,800 32,900 81,000
Interest expense -- -- -- --
---------- ----------- ----------- -----------
$ 6,900 $ 13,800 $ 32,900 $ 81,000
---------- ----------- ----------- -----------
(Loss) before
income taxes $ (324,500) $ (398,100) $ (914,100) $(1,104,800)
Income tax expense
(Note 2) -- -- -- --
---------- ----------- ----------- -----------
Net (loss) $ (324,500) $ (398,100) $ (914,100) $(1,104,800)
========== =========== =========== ===========
Fully diluted loss per share (Note 1)
Net (loss) per share $ (.05) $ (.06) $ (.13) $ (.16)
=========== ============ =========== ============
See Notes to Consolidated Financial Statements.
-4-
</TABLE>
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months ended June 30,
------------------------------
1996 1995
--------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) $(914,100) $(1,104,800)
Adjustments to reconcile net
(loss) to net cash (used in)
operating activities:
Depreciation and
amortization 134,700 205,800
Gain on sale of loaner
equipment (4,500) (29,500)
Change in assets and liabilities:
Decrease in accounts receivable 174,000 62,700
Decrease in notes
receivable 110,000 16,000
(Increase) Decrease in
inventories 69,800 (162,400)
Increase in reserve for
inventory obsolescence -- 55,000
Decrease in other assets 23,100 25,900
(Decrease) in accounts
payable, accrued expenses
and product warranty costs (121,400) (91,800)
----------- -----------
Net cash (used in)
operating activities $ (528,400) $(1,023,100)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of
loaner equipment $ 4,500 $ 21,600
Note advances to
Micro-Medical Devices -- (90,000)
Changes in other assets (14,400) 33,500
Sale of investments -- 490,500
Purchase of equipment (40,600) (10,700)
----------- -----------
Net cash provided by
investing activities $ (50,500) $ 444,900
----------- -----------
See Notes to Consolidated Financial Statements.
-5-
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
Nine months ended June 30,
--------------------------------
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 $ (578,900) $ (578,200)
Cash and cash equivalents:
Beginning 1,071,700 1,151,600
----------- -----------
Ending $ 492,800 $ 573,400
=========== ===========
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 $ 27,900 $ --
=========== ===========
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 June 30, 1996 and June 30, 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 nine months ended June 30, 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 June 30, 1996 and
1995, the Registrant had 2,172,950 and 1,134,050, 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 June 30, 1996 and September 30,
1995:
June 30, September 30,
1996 1995
---------- -------------
Raw materials, purchased and
replacement parts $ 454,500 $ 466,200
Finished goods 620,700 656,300
Work in process 12,600 26,000
Allowance for obsolescence (200,000) (200,000)
--------- ---------
$ 887,800 $ 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. (June 30, 1996 as compared to September 30, 1995)
During the nine month period ended June 30, 1996, the Registrant's net working
capital decreased approximately $816,200, 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 nine
months ended June 30, 1996 consist of a decrease in the accounts receivable
balance by $174,000, a decrease in notes receivable of $110,000, a decrease in
total inventory levels by $69,800, a reduction in prepaid expenses of $23,100,
and a reduction in current liabilities by $121,400.
During the nine month and three month (quarter) periods ended June 30,
1996, the Registrant experienced negative cash flows from operations of
approximately $528,400 and $251,000, respectively, as compared to negative cash
flows from operations of approximately $1,023,100 and $356,100, respectively,
during the comparable periods of the prior fiscal year 1995. This aggregate
decrease in cash used for operations of $494,700 was a result of the following
significant factors: Inventory levels were reduced by $69,800 during FY 1996
compared to cash used of $162,400 in FY 1995 for a net reduction in cash
expenditures of $232,200. Accounts payable and accrued expenses were reduced
during FY 1996 and FY 1995 requiring cash outlays of $121,400 and $91,800
respectively for a net increase in cash payments of $29,600. Trade accounts
receivable cash collections totalled $174,000 during FY 1996 versus cash
collections of $62,700 during FY 1995 for a net cash increase of $111,300. 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 and the Sterile Coupler Drape, thereby reducing inventory carrying
costs. To date, sales pursuant to this agreement have been minimal.
-9-
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARY
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operation. (Continued)
Management of the Registrant is also continuing to seek OEM customers for all
product lines.
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 fiscal year 1996 and during
fiscal year 1997. 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 2,172,950 common stock options
outstanding as of June 30, 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-8 filed July 16, 1996). These options have various strike
prices which range between $1.12 and $4.00 per share and at June 30, 1996 the
average bid & ask price of the Company's common stock was $3.35. There were
331,197 options priced above this average price as of June 30, 1996. 680,000
other options are contingent upon achieving specific sales goals which had not
been achieved at the time of this filing, and a registration statement has not
been filed as yet with the Securities & Exchange Commission for others
(approximately 465,931). Total currently registered options with exercise
potential total approximately 588,000. 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.
-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 nine months ended June 30 , 1996
and 1995 and the percentage changes in those items for the same years.
<TABLE>
<CAPTION>
As a percent of
total revenue
for the nine Percentage
month period change from
ended June 30, the prior years
1996 1995 Revenue/Expense Items comparable period
---- ---- --------------------- -----------------
<S> <C> <C> <C>
100.0% 100.0% Net sales (43.1%)
101.4% 89.5% Cost of goods (35.6%)
(1.4%) 10.5% Gross profit (107.3%)
11.6% 7.4% Other operating revenue (10.8%)
161.3% 134.7% Selling, general and admin (31.9%)
29.8% 11.9% Research and development +42.1%
(180.9%) (128.8%) Operating (loss) (20.1%)
6.3% 8.8% Other income/(expense) (59.4%)
(174.6%) (120.0%) Net (loss) (17.3%)
</TABLE>
Revenue. Total Sales for the nine months ended June 30, 1996 and 1995 were
$523,500 and $920,600, respectively, for a decrease of approximately $397,100 or
43.1%. The following product groups incurred significant sales decreases over
the comparable period of fiscal 1995 in the following amounts: general
accessories $173,400, electronic video laparoscope (EVL's) $163,900, optical
catheters & accessories $33,900, and model 5970's $29,700. Domestic, non-OEM
sales accounted for 60% and 53% of total sales, foreign sales accounted for 33%
and 36% of total sales, and OEM sales accounted for 7% and 11% of the total
sales for the comparable periods ended June 30, 1996 and 1995, respectively.
Total domestic, non-OEM sales for the nine months ended June 30, 1996 and
1995 were $312,000 and $489,200, respectively, decreasing by $177,200 from the
fiscal 1995 comparable period. The Registrant is currently taking steps such as
the creation of an in-house telemarketing department 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 nine months ended June 30, 1996 and 1995 were
$174,500 and $335,200, respectively, for a decrease of $160,700 or 48%. This
decrease is due primarily to a decline in total sales levels to $73,200 for FY
1996 from $217,700 for FY 1995 by the Registrant's South American distributor.
The Company's foreign sales are derived primarily from the following significant
markets: South America - 42%, England - 12%, Japan - 12% and Pakistan - 10%.
Other markets such as Korea, Spain, South Africa, Turkey and The Netherlands
have been established and comprise the balance of foreign sales.
Total OEM sales for the nine months ended June 30, 1996 and 1995 were
$37,000 and $96,200, respectively, for a decrease of $59,200 or 62%. 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 nine months ended June 30,
1996 and 1995 totalled $530,600 and $824,000, respectively, for a decrease of
approximately $293,400 or 35.6%. Total cost of goods sold as a percent of sales
was 101.4% and 89.5%, 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 under- utilized manufacturing
capacity. The increase of 11.9% 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
nine months ended June 30, 1996 and 1995 were $844,400 and $1,240,400,
respectively, for a decrease of approximately $396,000 or 31.9%. 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 nine months ended June 30, 1996 and
1995 R&D expenses were $156,000 and $109,800, respectively, for an increase of
approximately $46,200 or 42.1%. 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 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:
A form 8-K was filed with the Securities & Exchange Commission on April 17,
1996. The form 8-K described Item 5 requirements: Other Events.
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.
Date: August 14, 1996 /S/ VAN A. HORSLEY
--------------------------------------
Van A. Horsley, President,
Principal Executive Officer,
and Principal Financial Officer
-14-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> JUN-30-1996
<CASH> 492,800
<SECURITIES> 10,000
<RECEIVABLES> 262,600
<ALLOWANCES> (45,000)
<INVENTORY> 887,800
<CURRENT-ASSETS> 1,619,200
<PP&E> 1,377,500
<DEPRECIATION> (1,287,000)
<TOTAL-ASSETS> 1,850,100
<CURRENT-LIABILITIES> 232,800
<BONDS> 0
0
0
<COMMON> 6,900
<OTHER-SE> 1,610,400
<TOTAL-LIABILITY-AND-EQUITY> 1,850,100
<SALES> 523,500
<TOTAL-REVENUES> 616,900
<CGS> 530,600
<TOTAL-COSTS> 1,000,400
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (914,100)
<INCOME-TAX> 0
<INCOME-CONTINUING> (914,100)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (914,100)
<EPS-PRIMARY> (.13)
<EPS-DILUTED> 0
</TABLE>
