SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10-KSB
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
----- OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: September 30, 1997
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 (IRS Employer
incorporation or organization) Identification Number)
99 Inverness Drive East
Englewood, Colorado 80112
- --------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 790-2990
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 Par Value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
(1) Yes X No
----- -----
(2) Yes X No
----- -----
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B, and no disclosure will be contained, to the best of
Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendments to
this Form 10-KSB.[XX ]
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The issuer's revenues for its most recent fiscal year were $982,800.
The aggregate market value of the voting stock held by non- affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of December 8, 1997 was approximately
$27,952,323.
Class Outstanding at December 8 , 1997
- ----- --------------------------------
Common Stock 9,255,736 shares
Documents incorporated by reference: None
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MEDICAL DYNAMICS, INC.
FORM 10-KSB
PART I
Item 1. Business.
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(a) Business Development
------------------------
Medical Dynamics, Inc., a Colorado corporation incorporated in March 1971
("MEDY" or the "Company"), is engaged in the design, development, manufacture
and marketing of medical and dental video cameras and related disposable
products for a variety of professional specialties. MEDY's principal products
are small, color, medical and dental video camera systems for use in patient
diagnosis and various surgical procedures. MEDY has been manufacturing such
cameras since August of 1981. In October 1997 MEDY acquired 100% of the
outstanding capital stock of Computer Age Dentist, Inc. (CADI), a California
corporation based in Los Angeles, California. CADI is engaged in the development
and sale of Practice Management Software and related electronic services to the
dental profession. MEDY also has one inactive subsidiary, MedPacific
Corporation, a Washington state corporation. MEDY's principal executive offices
and manufacturing facilities are at 99 Inverness Drive East, Englewood,
Colorado, 80112. Its telephone number at that address is (303) 790-2990.
During the fiscal year ended September 30, 1997, MEDY was not involved in
any bankruptcy, receivership or similar proceeding nor did it engage in any
material reclassification, or consolidation. During that period, MEDY did not
dispose of any material amounts of its assets other than in the ordinary course
of its business.
During the 1995 fiscal year MEDY entered into a distribution agreement with
Micro- Medical Devices, Inc. (MMD), of Castle Rock, Colorado. MMD is a
corporation formed by and wholly-owned by MEDY's Chairman. MMD manufactures and
sells minimal quantities of various medical products to MEDY. See Item 12 -
"Certain Relationships and Related Transactions, Distribution Agreement."
As discussed in Note 2 to the financial statements, the Company has
suffered recurring losses and negative cash flows from operations. Subsequent to
fiscal year end, MEDY sold a convertible debenture in the amount $1,100,000 to
The Tailwind Fund, Ltd., an unaffiliated entity, pursuant to an exemption from
registration under Regulation D. Despite the recurring operating losses,
management believes the Company has adequate capital resources to carry out
planned activities in fiscal 1998. See also "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
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(b) Business of the Issuer
--------------------------
As a result of the acquisition of CADI in October 1997, MEDY has two
principal business segments:
(i) The design, development, manufacture and marketing of medical and
dental video cameras and related disposable products for a variety of
professional specialties ("The Medical and Dental Camera Segments". These
products are used in surgical, diagnostic, research and teaching applications by
physicians, dentists, and other health care professionals.
(ii) The development and sale of dental practice management software and
related electronic services ("The Dental Practice Management Segment").
The Medical and Dental Camera Segment
A variety of less invasive diagnostic and surgical techniques have been
developed which enable operations to be performed or observation to occur with
minimal surgical incisions. Arthroscopy and Laparoscopy are the two most common
surgical procedures performed utilizing the types of surgical cameras
manufactured by MEDY. MEDY's current product offerings in this area are the 5980
Digital Surgical Video Camera, and Model 5990 Optical Catheter System, as well
as two disposable drape products, Cam-Wrap and Lap- Wrap.
MEDY has recently applied it's surgical camera expertise to the development
of intraoral dental cameras for use as a diagnostic tool for the dental
profession. MEDY believes that the True Vision(TM) family of cameras it has
created represents the state-of-the- art for this camera technology, with high
resolution surgical camera picture quality coupled with competitive pricing.
Existing Products and New Products. MEDY's principal products and their
markets, and new products which are under development, are as follows. MEDY's
medical video camera systems and disposable medical products are sold
principally to physicians and hospitals, either directly or through one of
MEDY's independent sales representatives. MEDY's intraoral dental camera is
typically sold through a select dealer distribution network or on an OEM
distributor basis. MEDY has engaged in marketing and advertising of all its
products at dental conventions and through a sales representative or distributor
network. During the years ended September 30, 1997 and 1996, MEDY spent $140,800
and $193,700, respectively, on sales promotions, conventions and advertising
expenses.
True Vision(TM) and True Vision 2 Intraoral Dental Camera. MEDY currently
manufactures and markets dental video cameras which are designed for most common
dental applications. These camera models contain a high performance video sensor
coupled with a 1/4" lens and camera system which management believes provides
superior high resolution picture quality compared to other cameras used in the
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dental profession. The cameras' state-of-the-art technology consists of easy
angle, high resolution viewing, a single lens format, and the smallest and
lightest hand piece available in the market today. Production and sales of these
cameras began in September of 1996. The principal market for the True Vision
cameras are dentists.
Model 5980 and 5990 Cameras. Sales of the 5980 and 5990 model cameras were
minimal in fiscal 1997. Management anticipates an increase in 5990 sales in the
upcoming year through a distributor that is negotiating for a non-exclusive
license on the 5990 Optical Catheter System, although no assurances can be given
as to the successful completion of that license or the level of sales that may
be generated by it.
Miniaturized Electronic Endoscopes. MEDY is developing Electronic
Endoscopes in the four millimeter diameter range that will utilize either CCD
(Charged Coupled Device) or CMOS (Complementary Metal Oxide Sensor) imaging
chips and incorporating MEDY's "Rotatable Chip" technology acquired via a
license agreement from High Tech Medical Instrumentation, Inc. on U.S. Patent
No. 4,858,001 entitled Modular Endoscopic Apparatus With Image Rotation.
Depending on the availability of imaging chips, these devices should be ready
for market during calendar 1999. Management of MEDY believes this to be an
important project because it will provide the market with Electronic Video
Arthroscopes, Cystoscopes, Ureteroscopes and other devices which have all the
advantages of image clarity and light weight design similar to the Registrant's
existing ten millimeter Electronic Video Laparoscope, but in four millimeter
diameters. That diameter is the industry standard for these types of endoscopes
and have been previously unavailable to the market in the electronic or "chip on
a stick" format. This project will again give the Registrant a product entrant
into the $1 billion annual endoscopic capital equipment market.
Intraoral Dental Cameras Incorporating CMOS Imaging Chips. Due to the CMOS
imaging chip's lower volume costs, MEDY is pursuing this project as a way in
which to substantially lower the cost of the Intra Oral Camera to the market.
The time frame for potential introduction to the market is calendar 1999.
During each of 1997 and 1996 fiscal years, sales of various models of
medical video camera systems (including ancillary camera equipment) contributed
approximately 2% and 22% of MEDY's total revenue, respectively. Dental cameras
and related accessories contributed 70% of revenues for the year ended September
30, 1997.
Inventory and Raw Materials. MEDY is required to carry significant
quantities of inventory to meet rapid delivery requirements of customers or to
assure itself of a continuous allotment of goods from suppliers. MEDY also
carries a significant quantity of repair parts. At September 30, 1997,
inventories of repair parts valued at $32,000 were classified as a long-term
asset in MEDY's balance sheet. This estimate was determined by considering both
historical and projected levels of sales for goods included in inventories. A
substantial portion of raw materials is expected to be utilized for repairs of
equipment sold over the past several years (see note 3 to the consolidated
financial statements). MEDY has continued to maintain an inventory of components
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for its Models 5500, 5940, 5960, 5970, and 5980 cameras, the 5990 Optical
Catheter(TM) System, and various peripherals. Sufficient quantities of MEDY's
disposable product line such as Lap-Wrap and Cam-Wrap must also be maintained in
anticipation of customer's future needs.
MEDY is able to obtain the raw materials for its camera products from a
large number of suppliers. MEDY does not believe that it is dependent on any
single supplier for its raw materials. For a number of years, MEDY had purchased
cameras from Panasonic Industrial Company - Audio Video Systems Group
("Panasonic") exclusively. Although Panasonic is still the primary supplier of
cameras, MEDY now procures cameras from additional sources without sacrificing
product or picture quality.
Warranty. MEDY's medical and dental video cameras are warranted for a
one-year period with respect to parts and labor required as a result of defects
in material and workmanship. Cables and optical couplers are warranted to be
free of defects for a period of 180 days. Defects or malfunctions are corrected
by MEDY at MEDY's cost, if the applicable conditions to the warranty are
satisfied. Failures normally occur during the early life of the cameras, and
repair expenses usually occur in the same year in which the camera is initially
placed in service. MEDY estimates future warranty costs and enters the estimated
cost into its results of operations based upon historical experience and
revenues currently reported. The estimated warranty reserve at fiscal year end
September 30, 1997 and 1996 was $11,000 and $15,000, respectively.
Distribution Methods. During fiscal 1997 MEDY engaged four field sales
representative organizations to market its medical camera systems in the United
States. The sales representatives enter into a one year agreement with MEDY
under which they receive commissions of approximately 15% to 20% on video camera
sales revenues, 10% to 15% on camera accessories and 10% on disposable product
sales generated by them in exclusive marketing areas. All selling expenses are
borne by the sales representative. The sales representative agreements prohibit
each representative from purchasing or dealing in products of competitors of
MEDY. In addition to sales made in this manner, MEDY also modifies some of its
products to display the labeling of its customers. Those customers then sell the
products directly to end-users.
As of the fiscal year ended September 30, 1997, MEDY engaged approximately
three agents to sell medical video cameras and related disposables in areas
outside the United States. The primary foreign territories where MEDY has
distributors are the United Kingdom, Western Europe, and Latin America.
MEDY typically sells products on a net 30 day basis to all domestic
customers and on a cash or net 60 to 270 day basis to foreign customers and
distributors. With some exceptions, most foreign distributors post letters of
credit to insure payment on orders. Inventory levels, net of allowance for
obsolescence, for the fiscal years ended September 30, 1997 and 1996 were
$715,400 and $714,400 respectively.
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Competition. With regard to MEDY's medical and dental video cameras, the
principal competitive factors to which it is subject are price, technological
configuration, product performance, and product line diversification. Principal
medical competitors in the United States include Circon/ACMI Corporation,
Stryker Corporation, Olympus, Wolf, and Karl Storz, each of which manufactures
and sells some form of medical video system, and there are certain competitors
overseas. Principal competitors in the dental camera field are Patterson Dental,
New Image Industries and Dental/Medical Diagnostic Systems. Principal
competitors in the dental software business are Dentrix, EagleSoft and Practice
Works. The principal reasons why medical sales volumes have remained volatile
over the last several years are fluctuating OEM revenue, the limited product
line previously offered by MEDY, a limited amount of capital available to
promote the products through successful marketing efforts and distribution
channels, and the consolidation of hospitals coupled with less influence over
buying decisions by physicians. Such limitations have proven detrimental to the
ongoing operations of MEDY to date.
Government Regulation. The United States Food and Drug Administration (the
"FDA"), pursuant to the Medical Device Amendments of 1976 to the Food, Drug and
Cosmetic Act (the "Act") and regulations promulgated thereunder, regulates the
testing, manufacturing, packaging, distribution and marketing of medical devices
in the United States, including certain of the products manufactured by MEDY.
The Act requires manufacturers of medical devices to register annually and,
semi-annually, to list new devices being produced by the manufacturer for
commercial distribution.
The Act also classifies medical devices and requires compliance with
specific manufacturing and quality assurance standards. The FDA has published
regulations defining good manufacturing practices to provide that each step of
the manufacturing process for any device is controlled to maximize the
probability that the finished product meets all quality and design
specifications. The regulations also require that each manufacturer establish a
quality assurance program by which the manufacturer monitors the manufacturing
process and maintains records which show compliance with the FDA regulations and
the manufacturer's written specifications and procedures relating to the
devices.
MEDY's facilities and records are subject to periodic unannounced
inspections by the FDA for compliance with the applicable FDA regulations. The
FDA may issue reports or citations where the manufacturer has failed to comply
with all appropriate regulations and procedures. If the FDA finds a manufacturer
not to be in such compliance, the FDA may prohibit a manufacturer from selling
the products for which the manufacturer is not in compliance, until such time as
the manufacturer complies with the applicable FDA regulations with respect to
those products. Compliance with the provisions of the Act and the FDA's
regulations is time consuming and expensive due to the extensive record keeping
required.
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MEDY's last inspection by the FDA was in October 1996 when no adverse
actions were taken. MEDY has not been inspected since that date, although an
inspection is scheduled for December, 1997.
Research and Development. During the fiscal years ended September 30, 1996
and 1997, MEDY spent approximately $206,900 and $200,300, respectively, on
company-sponsored research and development activities. During those periods,
there were minimal customer-sponsored research activities relating to new
products, services, techniques or to the improvement of existing products,
services or techniques.
The Dental Practice Management Operations
With its October 1997 purchase of Computer Age Dentist, Inc. (CADI), MEDY
now offers software for the dental office that provides patient scheduling,
patient education, graphical charting, word processing, camera and digital x-ray
integration and insurance benefits database. The software:
o allows the scheduling of patients and dental professionals, and ties
scheduled patients directly to their dental records;
o integrates with all intraoral dental cameras, allowing the dentist to
include intra- oral pictures directly on the patient's computerized
chart:
o provides for computer based charting and digitized x-rays to be
automatically attached to the patient's chart for easy viewing and
printing;
o integrates the patient's chart directly with word processor,
spreadsheet, and database functions, allowing the dentist and his or
her staff to create correspondence, charts, and reports based on the
patient's information; and
o provides the ability to submit claims to insurance companies
electronically, track laboratory requests and results, and many other
services useful to the modern dental office.
CADI's current product is a Windows-based application and is a flexible
open architecture design that can be used either through a computer keyboard,
mouse, or light pen. Charts, reports, statements, x-rays, and pictures can be
printed on plain paper laser printers.
No Principal Customers and No Significant Inventory Requirements. CADI has
over 2,200 customer installations throughout the United States serving in excess
of 3,500 dental professionals and, therefore, it is not dependent on sales to
any principal customer.
There are no significant inventory requirements for this business.
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Distribution Methods. Distribution for CADI's software product is conducted
both with direct sales people employed by the Company and through a network of
value-added resellers (VARs). The Windows 95-based multi-user product sells for
approximately $7,000 each, including one-year of free upgrades and telephone
technical support. In CADI's last fiscal year ending September 30, 1997, it had
approximately $2.9 million of revenue. Management of MEDY believes that those
revenues can be increased over time with the addition of working capital for
future R&D, additional acquisitions of companies in similar businesses and an
expanded distribution system. It is Management's intention to pursue all of
those strategies in attempting to profitably grow that business, but no
assurances can be made as to the success of that effort.
Competition. There are no significant individual competitors in the Dental
Practice Management Segment; instead, there are a large number of small
companies which offer dental practice management software and related electronic
services of their own design. MEDY believes that CADI's software is among the
more highly integrated and easier to use software products available for the
dental office. CADI's software is more expensive than that of many of its
competitors, but MEDY believes that its superior features justify its price.
Research and Development. CADI is continually seeking to improve its dental
practice management software and related electronic services. The software
industry is characterized by continual changes and improvements and, in some
case, startling new designs (such as the changes from DOS-based applications to
Windows, and from Windows 3.1 to Windows 95). CADI must keep its software
current for new versions of computer operating system software being published
by third parties, as well as to maintain existing software which may be running
on older computers. MEDY anticipates that CADI will spend approximately $200,000
on research and development in the fiscal year ending September 30, 1998, as
compared to minimal amounts that were charged to operations during its last two
fiscal years as an independent company.
Governmental Regulation. There is no governmental regulation which impacts
the development and sale of CADI's dental practice management software. Because
the dental industry is so dependent on government and private insurance company
oversight, however, it is important for the CADI software to be able to allow
dentists and their offices to show compliance with governing rules and
regulations. Consequently, CADI has developed its dental practice management
software to allow dentists and dental offices to maintain accountability in
accordance with the requirements.
Other Information
Principal Customers. MEDY had one customer who contributed 10% or more of
total gross revenues during the 1997 fiscal year and one who contributed more
than 10% in the 1996 fiscal year. Gross billings to Information Presentation
Systems, Inc.(IPS) of Marietta, GA. during fiscal year 1997 was $599,500 or 61%
of the Registrant's revenues. IPS markets and installs dental intraoral cameras,
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multi operatory image systems, digital x- ray systems and other related dental
products. Gross billings to Rosot Enterprises of Locust Valley, New York during
fiscal year 1996 were $108,800 or 16% of the Registrant's revenues. Rosot
Enterprises is an international distributing company which concentrates on
Mexico, Central and South America.
Patents, Trademarks, etc. Patents. MEDY holds an exclusive license on three
patents related to its Optical Catheter System(TM). United States Patents No.
4,782,819, No. 4,736,733, and No. 4,754,328 expiring November 8, April 12, and
June 28, 2005, respectively, relating to the Optical Catheter(TM) are owned by
Dr. and Mrs. Adair and are licensed on an exclusive basis to MEDY. The terms of
the license agreement are described under "Licenses" below.
In addition to the above referenced patents, the following patents are also
licensed to MEDY from the Chairman:
TITLE ISSUE DATE PATENT NUMBER
- ----- ---------- -------------
"Laser Endoscope" 5/20/86 4,589,404
"Laser Endoscope" (Divisional) 6/28/88 4,754,328
"Endoscope with Removable 4/12/88 4,736,733
Eyepiece"
"Gas Insufflation Needle with 9/26/89 4,869,717
Instrument Port" (Adair Veress
Needle)
"Rigid Video Endoscope with 11/07/89 4,878,485
Heat Sterilizable Sheath"
(EVL and Lap-Wrap)
Reissue 3/24/92 RE 33854
"Deformable and Removable
Sheath for Optical Catheter" 3/30/93 5,197,457
"Deflectable Sheath for 6/30/92 5,125,395
Optical Catheter"
"Heat Sterilizable Electronic 2/23/93 5,188,094
Video Endoscope"
(Autoclavable EVL)
"Steerable Sheath for Use 7/5/94 5,325,845
With Selected Removable
Optical Catheter"
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"Imaging Tissue or Stone 5/17/94 5,311,858
Removal Basket"
"Stereoscopic Endoscope" 1/17/95 5,381,784
(3-D EVL)
"Stereoscopic Endoscope With 2/27/96 5,494,483
Miniaturized Electronic
Imaging Chip"
"Miniaturized Electronic 2/27/96 5,495,114
Imaging Chip"
(For Reduced Diameter
Electronic Endoscopes)
Trademarks. MEDY is also the holder of United States Trademarks,
registration numbers 1,299,413, 1,299,414, 1,719,664, and 2,111,413 which relate
to the name "Medical Dynamics", the corporate logo of MEDY, the Adair/Veress
Needle, and True Vision, respectively. The trademarks are granted for a term of
20 years and expire on those terms beginning October 8, 2004, and if still in
use at that time may be renewed for successive 20- year periods by application.
In addition, MEDY claims rights in numerous unregistered trademarks which it
uses in interstate commerce, and which are subject only to common law
protection. Additionally, MEDY holds trademark registration number 1,282,319
which relates to the name "MedPacific Corporation" and its corporate logo. This
Trademark was renewed for a 20 year term in June 1990. Computer Age Dentist,
Inc. holds trademark numbers 2,034,684 and 1,930,685 on the name "Computer Age
Dentist", and the product name "O.M.S. Plus" issued February 4, 1997 and October
31, 1995, respectively.
Licenses. MEDY entered into an exclusive revocable license agreement with
Dr. Edwin Adair effective June 3, 1987, as amended, relating to use of certain
technology invented and developed by Dr. Adair. Before an amendment negotiated
in September 1997, MEDY was obligated to pay Dr. Adair a minimum annual royalty
of $120,000. Additionally, Dr. Adair was obligated to give MEDY a right of first
refusal for his inventions. Actual royalties never exceeded the minimum annual
royalty. As a result of negotiations between the disinterested directors and Dr.
Adair, the parties agreed to amend the license agreement to waive the minimum
annual royalty due September 30, 1997 for the year then ended, and any future
minimum annual royalty, and to waive Dr. Adair's obligation to provide MEDY with
a right of first refusal on future technology.
Compliance With Environmental Laws. MEDY is not materially affected by
federal, state and local provisions which have been enacted or adopted
regulating the discharge of materials into the environment or otherwise relating
to the protection of the environment.
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Employees. At October 31, 1997, MEDY (not including CADI) employed 15
persons, including 3 persons engaged in general administration, and 12 persons
engaged in production, distribution, and customer service of MEDY's products. At
that date, CADI employed approximately 40 people in sales, customer service, and
administrative functions. In addition CADI had nine value-added resellers.
Item 2. Description of Property.
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MEDY leases 18,358 square feet of space at 99 Inverness Drive East,
Englewood, Colorado, where its principal executive offices are located and its
business activities, including research, assembly, storage and customer service,
are conducted. MEDY has used the bulk of these facilities since 1981. This lease
has been renewed through December 31, 1998 at a rental (during 1998) of $13,845
per month. MEDY also pays certain maintenance, insurance, common area and other
expenses with respect to the property to the extent that the lessor's costs for
such items exceed a specified amount. MEDY pays any increases in property taxes
due to improvements on the property and pays for utilities.
Computer Age Dentist, Inc leases 5,002 square feet of office space in Los
Angeles, California at 11300 W. Olympic Boulevard, Suite 600. The lease runs for
five years from November, 1997 to October, 2002 at a rate of $9,004 per month
which includes operating costs and property taxes.
Item 3. Legal Proceedings.
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There are no material pending legal or regulatory proceedings and MEDY is
not aware of any that are known to be contemplated.
Item 4. Submission of Matters to a Vote of Security Holders.
- ------------------------------------------------------------
MEDY has not submitted any matter to a vote of security holders during the
fourth quarter of the fiscal year ended September 30, 1997.
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PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
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(a) Market Information
----------------------
MEDY's common stock is traded in the over-the-counter market and price
quotations for the two fiscal years shown below were reported on the National
Association of Securities Dealers Automated Quotation SmallCap Market System
under the symbol "MEDY". The quotations shown below were compiled by MEDY from
Monthly Statistical Reports supplied by the NASD. All quotes represent
inter-dealer quotations, without retail markup, markdown or commission and may
not necessarily represent actual transactions in the common stock:
High bid Low bid
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Fiscal Year ended
September 30, 1996
------------------
First quarter $1.38 $0.50
Second quarter 2.31 1.03
Third quarter 4.06 1.44
Fourth quarter 5.19 2.13
Fiscal Year ended
September 30, 1997
------------------
First quarter $4.63 $2.89
Second quarter 4.94 2.19
Third quarter 3.19 1.81
Fourth quarter 3.31 2.28
(b) Holders
-----------
The number of record holders of the Common Stock as of September 30, 1997,
was approximately 12,844 not including an unknown number of beneficial holders
in street name.
(c) Dividends
-------------
(c)(1) Payment of Dividends.
Because of its need to retain its cash for operations and the lack of a
positive cash flow, MEDY has never paid a dividend with respect to its common
stock and does not intend to pay such a dividend in the foreseeable future.
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(c)(2) Restrictions on the payment of dividends.
There are no contractual restrictions on the Company's present or future
ability to pay dividends.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
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of Operations.
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Liquidity and Capital Resources. (September 30, 1997 as compared to
September 30, 1996)
During the fiscal year ended September 30, 1997, the Registrant's current ratio
declined to 4.6 as compared to 4.7 at September 30, 1996. Net working capital
increased approximately $195,100.
Principal changes in the components of net working capital for the fiscal
year ended September 30, 1997 consist of:
W/C
1997 1996 Effect
---------- ---------- ----------
Cash and Cash Equivalents $ 886,400 $ 993,200 ($ 106,800)
Trade Receivable 127,500 181,600 (54,100)
Inventories 683,400 264,400 419,000
Pre-paid Expenses 15,700 19,400 (3,700)
---------- ---------- ----------
Current Assets: 1,713,000 1,458,600 254,400
Accounts Payable 297,600 217,900 79,700
Accrued Expenses 61,100 77,500 (16,400)
Warranty Reserves 11,000 15,000 (4,000)
---------- ---------- ----------
Current Liabilities: 369,700 310,410 59,300
Working Capital: $1,343,300 $1,148,200 $ 195,100
========== ========== ==========
During the fiscal year ended September 30, 1997 the registrant experienced
negative cash flow from operations of $1,110,700 as compared to negative cash
flow from operations of $779,200 during the comparable period of the prior
fiscal year. The aggregate increase in cash used in operating activities during
fiscal 1997 was a result of the following factors:
Inventory levels, net of provisions for obsolescence, increased by $108,700.
Accounts payable and accrued expenses increased during fiscal 1997 by $63,300
over fiscal 1996 balances. Aggregate trade accounts receivable cash collection
reduced outstanding balances due by $18,400 during fiscal 1997 versus a
reduction of $170,000 during fiscal 1996.
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Certain consulting services received by the Registrant in prior periods were
paid for through the issuance of common stock options in lieu of cash. Although
the services required no cash outlay, the options granted, issued at an exercise
price higher than market, still required the recognition of expense under the
applicable accounting rules. FAS 123 "Accounting for Stock-Based Compensation"
requires that the fair value of stock options issued to non-employees of the
Company be computed under an option pricing model and be recorded in the
Registrant's accounts. A total of $76,100 of non-cash consulting expense has
been recognized to comply with this accounting rule. The Registrant has elected
to continue to use APB 25 for the computation of employee stock option expense.
Total non-cash compensation expense recognized for employee stock options was
$33,300 during fiscal 1997. See note 5 to the Consolidated Financial Statements
for additional information.
To curtail operating losses and negative cash flow from operations, management
is continually reviewing all expense categories to determine if any additional
reductions in expenditures are possible.
During fiscal 1997 the Registrant maintained workforce levels approximately the
same as the levels of fiscal year 1996. In addition, the Registrant was able to
renegotiate the license agreement to eliminate any minimum royalty obligation
due to the Chairman of the Board beginning in fiscal 1997.
Without significant sales increases, The Registrant anticipates negative cash
flow from operations for fiscal 1998 and beyond. The Registrant's future
viability depends on it's ability to generate cash through profitable
operations. During fiscal 1997, cash flow deficits were funded by employee,
officer, and consultant stock option exercises (raising $1,059,500 during the
fiscal year). However, the Registrant's ability to fund it's operations will be
dependent upon achieving profitability and in generating positive cash flow from
operations. Unless the Registrant is able to increase sales revenue and maintain
profitability, the Registrant may be facing significant working capital
shortages beginning in fiscal 1999. The Registrant believes that it's existing
capital resources are sufficient for the 1998 fiscal year, due to the issuance
of a $1.1 million convertible debenture which raised a net of approximately
$986,000 in cash on October 31, 1997. The Registrant is not seeking additional
debt or equity capital at this time, but may do so during the course of fiscal
1998. The issuance of this debenture will enable the Registrant to allocate more
capital resources to sales and marketing efforts, research and development, as
well as additional acquisitions in the dental products and software market.
Results of Operations. (Fiscal 1997 as compared to Fiscal 1996) As an aid
to understanding Registrants 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 years ended
September 30, 1997, and 1996 and the percentage changes in those items for the
same years.
-15-
<PAGE>
<TABLE>
<CAPTION>
As a percent of total
revenue for the years Percentage
ended September 30, change from
1997 1996 Revenue/Expense Items FYE 1996 to FYE 1997
---- ---- --------------------- ---------------------
<S> <C> <C> <C>
100.0% 100.0% Net sales 47.2%
66.2% 55.6% Cost of goods sold 75.4%
33.8% 44.5% Gross profit 11.9%
8.3% 15.4% Other operating revenue 21.1%
113.5% 173.6% Selling general and (3.8%)
administrative
11.1% 78.6% Fair value of common (79.2%)
stock options
20.4% 31.0% Research and Dev. (3.2%)
17.6% 31.0% Depreciation (16.5%)
35.3% 13.1% Obsolete Inventory 297.3%
7.2% 0.0% Loss on Loaner 100.0%
(163.1%) (267.6%) Operating loss (10.3%)
5.6% 6.7% Other income/(expense) 21.8%
(157.5%) (260.8%) Net income (loss) (11.1%)
</TABLE>
Additionally, as an aid to understanding trends of the Registrant, the
following ratios describe historical summaries of liquidity, activity and
profitability for the years ended September 30, 1997 and 1996.
1997 1996
---- ----
Liquidity
---------
Current ratio 4.6 4.7
Current ratio less inventory 2.8 3.9
Activity
--------
Trade receivables turnover 7.7 3.7
Inventory turnover 1.4 .09
Profitability
-------------
Return on assets (80.8%) (77.9%)
Return on equity (100.0%) (86.8%)
Return on sales (157.5%) (260.8%)
-16-
<PAGE>
Revenue. Revenues increased $315,000 or 47.2% over fiscal 1996. The sales
results by product category can be summarized as follows:
1997 1996 Var.
---- ---- ----
Catheters & Accessories $1,300 $8,300 ($7,000)
Cam Wrap & Lap Wrap 191,400 223,400 (32,000)
General Accessories 83,600 253,700 (170,000)
Medical Cameras 20,200 159,900 (139,700)
Electronics 1,500 24,800 (23,300)
AV Needle 600 33,000 (32,400)
Dental Camera & Accessories 684,900 11,500 673,400
Returns & Allowances (700) (46,800) 46,100
----- -------- ------
Total Sales: $982,800 $667,800 $315,000
======== ======== ========
The sales decrease in all categories, except cameras, was due primarily to
a lack of market acceptance for the Registrant's medical products, a decrease in
capital budget expenditures in hospitals coupled with less influence over
purchasing decisions by physicians, reduced marketing efforts by the Registrant,
and increased competition from other manufacturers of surgical cameras. The
decrease in product sales in the above categories was offset by the market
introduction of the dental camera and dental camera accessories in late fiscal
1996.
Foreign market sales for fiscal 1996 were $235,400 or 35% of net sales. Export
sales for the year ended September 30, 1997 were $80,700 or 8.2%. The Registrant
has experienced a slowdown in the foreign marketplace due to the same factors
listed above for domestic sales. The Registrant remains optimistic regarding
expansion of the foreign distribution network in fiscal 1998, although the
emphasis in expanding that network will be to increase revenue from dental
cameras and accessory sales.
Cost of Goods Sold. Cost of goods sold for the fiscal years ended 1997 and
1996 were $650,700 and $371,000 respectively, for an increase of $279,700 or
75.4%. Cost of goods sold as a percent of revenue increased to 66.2% for fiscal
1997 from 55.6% in fiscal 1996. The overall increase in cost of goods sold is
due primarily to the increase of sales volume by $315,000 or 47.2%, while the
increase in cost of sales as a percentage of revenue is due to the increase in
sales of lower margin dental cameras and dental camera accessories as a
percentage of product sales.
Selling, General & Administrative Expenses (S,G&A). S,G&A expenses for the
fiscal years 1997 and 1996 were $1,115,600 and $1,159,600, respectively, for a
decrease of $44,000 or 3.8%. The decrease is primarily due to the continued
effectiveness during fiscal 1997 of cost cutting measures instituted by
management, highlighted by increased sales and production volumes. The
Registrant continues to adhere to a cost containment strategy designed to reduce
or eliminate expenses in all areas when practical.
-17-
<PAGE>
Stock Based Compensation. Stock-based compensation for the fiscal years
1997 and was 1996, $109,400 and $525,000, respectively, for a decrease of
$415,600 or 79.2%. The decrease is due to a large decrease in stock options
granted in fiscal 1997 with most of the 1997 expense related to the vesting of
options granted in the previous fiscal year.
Research & Development Research and development costs for the fiscal years
1997 and 1996 were $200,300 and $206,900, respectively, for a decrease of $6,600
or 3.2%. The Registrant's R & D efforts continue to focus on the intraoral
dental camera and it's improvements. The Registrant will, however, continue to
fund R & D as it deems appropriate to maintain or gain a competitive market
advantage.
Depreciation & Amortization Depreciation and amortization costs for the
fiscal years 1997 and 1996 were $173,300 and $207,600, respectively, for a
decrease of $34,300 or 16.5%. Depreciation and amortization is a function of the
estimated useful lives ascribed to the underlying assets and can be affected by
additions and retirements. Please refer to the "Notes to Consolidated Financial
Statements" for a more detailed description of the underlying assets and
management's estimates of their useful lives.
Provision for Obsolete and Slow-moving Inventories The provision for
obsolete inventory was increased in fiscal 1997 by $346,800. Management's
decision to increase this reserve is predicated on the declining level of sales
of the Company's medical video cameras and related products. Management
continues to expect these inventories to liquidate. For a more detailed analysis
of inventories please refer to Note 3 in the "Notes to Consolidated Financial
Statements".
Loss on Impairment of Demonstration Equipment For the fiscal year ended
September 30, 1997, Registrant's management team estimated the carrying amount
on the books for field and demonstration equipment was overstated compared to
fair market value by $70,600. This amount was recognized as a loss to adjust the
carrying value to estimated market value. This provision was computed in
accordance with a new accounting standard that was required to be adopted in
fiscal 1997.
Gain on Sale of Demonstration Equipment For the fiscal year ended September
30, 1997 there was no gain or loss realized on the sale of demonstration
equipment as compared to a gain of $7,400 in fiscal year 1996.
Interest Income & Expense For the fiscal years ended September 30, 1997 and
1996, interest income net of interest expense categories were $54,800 and
$37,600, respectively, for a net increase of $17,200 or 45.7%. This increase is
a function of cash flow and conservative investment strategies. The Registrant
invests non-current cash requirements in either a U.S. government bond or
money-market fund.
-18-
<PAGE>
Effect of Changing Prices and Inflation
Generally, inflation has not been a significant factor on MEDY's
operations.
Item 7. Financial Statements.
---------------------
The following consolidated financial statements are filed as a part of this
Form 10-KSB and are included immediately following the signature page.
Report of Independent Certified Public Accountants
Consolidated Balance Sheet - September 30, 1997
Consolidated Statements of Operations - Years ended September 30, 1997
and 1996
Consolidated Statements of Stockholders' Equity - Years ended
September 30, 1997 and 1996
Consolidated Statements of Cash Flows - Years ended September 30, 1997
and 1996
Notes to Consolidated Financial Statements
Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
----------------------------------------------------------------
On September 5, 1996 the board of directors of Medical Dynamics, Inc. (the
"Registrant") approved the engagement of Hein + Associates, LLP, of Denver,
Colorado, to audit and report on MEDY's financial statements for the year ended
September 30, 1996.
On such date, the board of directors also approved the dismissal of
McGladrey & Pullen, LLP, of Denver, Colorado as the Company's previous auditors.
The reports of McGladrey & Pullen, LLP on the Company's financial
statements as of September 30, 1995, and for the year then ended contained an
explanatory paragraph as to the ability of MEDY to continue as a going concern.
Such reports for the last two years contained no other adverse opinion or
disclaimer of an opinion. None of such reports were qualified or modified as to
uncertainty, audit scope, or accounting principles.
During MEDY's two most recent fiscal years and subsequent interim periods
through the date of dismissal of McGladrey & Pullen, LLP, there were no
disagreements with McGladrey & Pullen, LLP on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
-19-
<PAGE>
procedure, which disagreement, if not resolved to the satisfaction of McGladrey
and Pullen, LLP, would have caused it to make reference to the subject matter of
the disagreement in connection with its report.
MEDY has provided the former accountant, McGladrey & Pullen, LLP, with a
copy of the foregoing disclosures. A letter, addressed to the Commission, by the
former accountants stating that it agrees with the above statements made by MEDY
is attached hereto as an exhibit.
During the two most recent fiscal years and the subsequent interim period
preceding McGladrey & Pullen, LLP's dismissal, MEDY was not advised by McGladrey
& Pullen, LLP that internal controls necessary for MEDY to develop reliable
financial statements do not exist nor that information has come to its attention
that led it to no longer be able to rely on management's representations or that
has made it unwilling to be associated with the financial statements prepared by
management. MEDY has not been advised by McGladrey & Pullen, LLP of the need to
expand significantly the scope of MEDY's audit, nor has MEDY been advised that
during the two most recent fiscal years and the subsequent interim periods
preceding its dismissal, information has come to the attention of McGladrey &
Pullen, LLP that if investigated may (i) materially impact the fairness or
reliability of either a previously issued audit report or the underlying
financial statements, or the financial statements issued or to be issued
covering the fiscal periods subsequent to the date of the most recent financial
statements covered by an audit report (September 30, 1995), or (ii) cause
McGladrey & Pullen, LLP to be unwilling to rely on management's representations
or be associated with MEDY's financial statements.
MEDY has not been advised by McGladrey & Pullen, LLP that information has
come to its attention that it has concluded materially impacts the fairness or
reliability of either (i) a previously issued audit report or the underlying
financial statements or (ii) the financial statements issued or to be issued
covering the fiscal periods subsequent to September 30, 1995.
No consultations occurred between MEDY and Hein + Associates, LLP during
the two most recent fiscal years and any subsequent periods prior to Hein +
Associates, LLP's appointment, regarding the application of accounting
principles, the type of audit opinion, or other information considered by MEDY
in reaching a decision as to any accounting, auditing, or financial reporting
issue.
-20-
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons of the
Company; Compliance With Section 16(a) of the Exchange Act.
--------------------------------------------------------------------
(a) Identification of Directors and Executive Officers.
-------------------------------------------------------
The following table sets forth certain information regarding the directors
and executive officers of MEDY:
Name Age Position
- ---- --- --------
Edwin L. Adair, M.D. (1) 67 Chairman of the Board and Treasurer
of MEDY
Van A. Horsley (2) 45 Director, President, Chief Financial
Officer and Chief Executive Officer
of MEDY; Director and Vice President
of CADI
Daniel L. Richmond 36 Director of MEDY; Director and Chief
Executive Officer of CADI
Chae U. Kim 36 Director of MEDY; Director and
President of CADI
Pat Horsley Adair (1) 69 Director and Secretary of MEDY
I. Dean Bayne, M.D. (2) 70 Director and Assistant Secretary of
MEDY
Leroy Bilanich (2) 47 Director of MEDY
Jo Brehm 61 Vice President of MEDY
(1) Members of the Compensation Committee.
(2) Members of the Audit Committee
No arrangement exists between any of the above officers and directors
pursuant to which any one of those persons was elected to such office or
position except that Messrs. Kim and Richmond were appointed to the MEDY Board
as a result of the acquisition of CADI.
-21-
<PAGE>
Directors hold office until the next meeting of shareholders and until a
successor is elected and qualified, or until their resignation. Executive
officers are elected at annual meetings of the Board of Directors. Each such
officer holds office for one year or until a successor has been duly elected and
qualified or until death, resignation or removal. No director of the Company is
a director of another company having securities registered under Section 12 of
the Securities Exchange Act of 1934 or a company registered under the Investment
Company Act of 1940.
Edwin L. Adair, M.D. has been a director of MEDY since June 30, 1971,
Chairman of the Board since September 8, 1981 and Treasurer since March 27,
1973. From February 6, 1986 until July 13, 1990, Dr. Adair also served as Chief
Executive Officer of MEDY. Dr. Adair received B.S. and M.D. degrees from the
University of Colorado in 1951 and 1955, respectively. He practiced medicine
from 1956 until 1983 and is a board-certified urologist who discontinued the
practice of medicine due to a physical disability resulting from an accident.
Dr. Adair has published articles in medical journals and has taught at the
University of Colorado School of Medicine. Dr. Adair is a member of the American
Medical Association, American Board of Urology, the American Urological Society
and the American College of Surgeons. MEDY currently carries a $100,000 key man
life insurance policy on Dr. Adair, reduced from $1,100,000 as a cost savings
measure during fiscal 1996.
Van A. Horsley has been a director, President and Chief Executive Officer
of MEDY since July 13, 1990. From March 1, 1990 until July 13, 1990, Mr. Horsley
served as Chief Financial Officer. Mr. Horsley holds a B.S.B.A. degree in
finance from the University of Denver and a graduate degree from the School of
Banking at the University of Colorado. From 1974 to February, 1990, Mr. Horsley
was employed in various capacities by Affiliated Denver National Bank in Denver,
Colorado and from 1985 through February, 1990 served as executive vice president
- - head of lending.
Pat Horsley Adair has been a director and Secretary of MEDY since September
8, 1981. Mrs. Adair attended McMurray College in Abilene, Texas, taking courses
in English and business which did not lead to a degree. From June 1974 to July
1983, Mrs. Adair was employed by MEDY as office manager. Since that time, Mrs.
Adair has served as Corporate Secretary to MEDY. From 1964 to 1975, Mrs. Adair
served as executive director of the Arapahoe County Medical Society and from
1976 to 1980 she served as executive director of the Metro Denver Foundation for
Medical Care, an organization which serves Arapahoe, Denver, Boulder, Jefferson
and Adams counties, Colorado.
I. Dean Bayne, M.D. has been a director of MEDY since July 1987 and
Assistant Secretary since October 1988. Dr. Bayne received B.S. and M.D. degrees
from Louisiana State University in 1949 and 1953, respectively, and has been
engaged in private medical practice since 1958. Dr. Bayne was a resident in
obstetrics at Herman Kiefer Hospital, Detroit, Michigan, and a resident in
gynecology at Detroit Receiving Hospital, Detroit, Michigan. He is a member of
the Board of Obstetrics and Gynecology and the American College of Obstetrics
and Gynecology.
-22-
<PAGE>
Leroy Bilanich, Ed.D. has been a director of MEDY since September 13, 1990.
Dr. Bilanich has a B.S. in journalism and broadcasting from Pennsylvania State
University, an M.A. in communication from the University of Colorado and has an
Ed.D. in organizational behavior from Harvard University. Dr. Bilanich currently
works as a consultant to large corporations in the area of organizational
development and in the past has held various positions in the Human Resource
Departments at Pfizer, Inc. from 1983 to March of 1988 and the Olin Corporation.
Daniel L. Richmond has been a director of MEDY since October 1997. In June
1984, Mr. Richmond graduated from UCLA with a B.S. degree in Math/Computer
Science. From 1983 through 1985, Mr. Richmond founded and then served as
President of Compulink, a software company that sells to retail jewelry stores.
From 1986 until 1987, Mr. Richmond, along with Mr. Chae Kim headed up the
technical team for Emory & Associates, a software development company
specializing in custom accounting packages for large manufacturers and
distributors. In June 1987 Mr. Richmond co-founded CADI. He has served as Chief
Executive Officer of CADI from June 1987 until present.
Chae U. Kim has been a director of MEDY since October 1997. In June 1985,
Mr. Kim Graduated from UCLA with a B.A. degree in Biology. From 1986 until 1987,
Mr. Kim, along with Dan Richmond headed up the technical team for Emory &
Associates, a software development company specializing in custom accounting
packages for large manufacturers and distributors. In June 1987 Mr. Kim
co-founded CADI. He has served as President of CADI from June 1987 until
present.
Jo Brehm is Vice President - Sales and Administration of MEDY. She has been
an employee of MEDY since 1973. From December 1984 to September 1988, Mrs. Brehm
served as Vice President of MEDY. From September 1988 until July 1990, Mrs.
Brehm served as President of MEDY.
(b) Identification of Certain Significant Employees.
----------------------------------------------------
There are no significant employees who are not also directors or executive
officers, described above.
(c) Family relationships.
-------------------------
Dr. Edwin L. Adair and Pat Horsley Adair are married. Van A. Horsley is the
son of Pat Horsley Adair. There are no other family relationships among the
officers or directors.
-23-
<PAGE>
(d) Involvement in Certain Legal Proceedings.
---------------------------------------------
During the past five years, no director or officer of the Company has:
(1) Filed or has had filed against him a petition under the
federal bankruptcy laws or any state insolvency law, nor has a receiver, fiscal
agent or similar officer been appointed by a court for the business or property
of such person, or any partnership in which he was a general partner, or any
corporation or business association of which he was an executive officer at or
within two years before such filings;
(2) Been convicted in a criminal proceeding or is a named subject of a
pending criminal proceeding (excluding traffic violations and other minor
offenses);
(3) Been the subject of any order, judgment, or decree, not
subsequently reversed, suspended or vacated, of any court of competent
jurisdiction, permanently or temporarily enjoining such person from, or
otherwise limiting his involvement in any type of business, securities or
banking activities.
(4) Been found by a court of competent jurisdiction in a civil action,
the Securities and Exchange Commission or the Commodity Futures Trading
Commission to have violated any federal or state securities or commodities law,
which judgment has not been reversed, suspended, or vacated.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires the Company's directors and officers and persons who own more than ten
percent of the Company's equity securities, to file reports of ownership and
changes in ownership with the Securities and Exchange Commission (the "SEC").
Directors, officers and greater than ten- percent shareholders are required by
SEC regulation to furnish the Company with copies of all Section 16(a) reports
filed.
Based solely on its review of the copies of the reports it received from
persons required to file, the Company believes that during the period from
October 1, 1996 through December 1, 1997 all filing requirements applicable to
its officers, directors and greater than ten-percent shareholders were complied
with.
-24-
<PAGE>
Item 10. Executive Compensation.
------------------------
(a) Summary Compensation Table
The following table sets forth information regarding compensation paid to
the chief executive officer of MEDY for the three years ended September 30,
1997. No other person who is currently an executive officer of MEDY earned
salary and bonus compensation exceeding $100,000 during any of those years.
<TABLE>
<CAPTION>
Annual Compensation ($$) Long Term Compensation
------------------------ ----------------------
Awards Payouts
------ -------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Restricted
Name and Stock Options LTIP Other
Position Year Salary Bonus Other Awards & SARs Payouts Compensation
-------- ---- ------ ----- ----- ------ ------ ------- ------------
($$) ($$) ($$) ($$) (##) ($$) ($$)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Van A. Horsley 1997 110,000 -0- -0- -0- -0- -0- 272
President and 1996 105,000 -0- 925 -0- 87,174 -0- 260
Chief Executive 1995 105,000 -0- 925 -0- 40,900 -0- 559
Officer
</TABLE>
401(k) Plan. On January 1, 1990, MEDY adopted an employee benefit plan
under Internal Revenue Code Section 401(k). The 401(k) plan is a profit sharing
plan under which both employees and MEDY are entitled (at their own discretion)
to contribute a portion of compensation and earnings, respectively, to
investment funds to supplement employee retirement benefits. At September 30,
1997, MEDY's matching contributions to the plan for the accounts of Van Horsley
and Jo Brehm totaled approximately $400 and the matching contribution under the
plan for the accounts of all executive officers as a group totaled $400. These
amounts are included in column (i) of the Summary Compensation Table.
Employment Agreements. On October 1, 1997 the Registrant, in conjunction
with its purchase of Computer Age Dentist, Inc. (CADI), entered into employment
agreements with Dan Richmond (CEO) and Chae Kim (President). The term of the
agreements are five years and call for annual compensation of $105,000 each, car
allowances of $500 per month and other benefits customarily extended to other
CADI employees. In both cases, the employment agreements define their duties to
include a continuation of their present positions with CADI, and for a default
under the employment agreements if the employee is not re-elected to the Board
of Directors of MEDY or if the Board of Directors of MEDY is expanded otherwise
than as the result of an increase approved by a vote of a majority of the Board.
-25-
<PAGE>
(b) Stock Option Plans.
Options and Option Plans. Until April 10, 1988 MEDY had two plans pursuant
to which stock options could be granted to its directors and officers. These
plans were the 1981 NonQualified Consultants' Plan and the 1981 Incentive Stock
Option Plan (the "Old Plans"). On April 10, 1988, the Board of Directors
canceled the Old Plans to the extent that shares reserved for issuance
thereunder were not then under option, and adopted and authorized the 1988 Stock
Option Plan (the "1988 Plan") and directed that management prepare the documents
formally defining the plan. At that time the Board also authorized the issuance
of certain options under the 1988 Plan. The Board formally approved the 1988
Plan on July 14, 1988 and the shareholders approved the 1988 Plan on September
28, 1988.
Allocations of options under MEDY's stock option plans are made by the
Compensation Committee based on the duties, contributions and value of the
services of the respective optionee. The Committee has the authority to
determine to whom options were granted, the number of shares covered by each
option, when each option was to be granted, date of initial ability to exercise,
exercise price and certain other terms and to prescribe, interpret, amend and
rescind rules and regulations relating to each plan. Any options canceled or not
exercised within the option period became available for grants of new options
under the plans. The Board also has the power to select committees consisting of
not less than two members to administer each plan. The 1988 Plan contains the
same provisions for administration as were contained in the Old Plans.
Under the 1988 Plan, MEDY reserved an aggregate of 1,000,000 shares of its
common stock for issuance to employees (including officers), consultants and
directors of MEDY or any subsidiary. The plan contains restrictions on the
number of options granted to officers and directors, exercise price, maximum
term and transferability. On May 14, 1991, MEDY filed a registration statement
under the Securities Act of 1933 on Form S-8 which registered the shares of
common stock underlying options granted under the 1988 Plan. As such, shares
issued upon exercise of outstanding options can be traded on the open market
with limited restriction.
All of the options granted under the Old Plans and the 1988 Plan may be
exercised through payment of the exercise price with shares of MEDY's Common
Stock or cash, or both. The ability to exercise options through surrendering
shares of Common Stock enables holders of options to exercise the entire amount
of an option by first exercising a small number of options, followed by
successively larger option exercises which the optionee is able to effect by
surrendering the increasing number of shares obtained thereby. For little or no
initial cash payment, repeated exercises of options by surrendering stock having
a market price in excess of the option exercise price, enable an optionee to
provide sufficient consideration to MEDY to exercise his entire stock option.
The exercise of options might otherwise require substantial cash consideration.
This procedure is often referred to as pyramiding.
-26-
<PAGE>
The following table sets forth certain information regarding stock options
granted by MEDY to the Chief Executive Officer and no other executive officers
received total annual salary and bonus in excess of $100,000 during 1997. No
stock appreciation rights were granted.
Option Grants in Fiscal 1997
- ----------------------------
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
% of Total
Options Granted Exercise or
Options to Empl. / Cons. in Base Price Expiration
Name Granted (#) Fiscal Year ($/sh) Date
- ---- ----------- ----------- ------ ----
<S> <C>
Van A. Horsley None
</TABLE>
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End
Option Values.
- --------------------------------------------------------------------
The following table sets forth information regarding stock options
exercised by the chief executive officer and certain other officers or directors
during the 1997 fiscal year as well as the year-end value of options being held
by such persons on September 30, 1997: No Stock Appreciation Rights have been
granted, or are held by, any such person:
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
Number of Value of
Unexercised In-the-Money
Shares Options at Options at
Acquired FY End FY End
on Value (Exercisable/ (Exercisable/
Name Exercise Realized Unexercisable) Unexercisable)
- ---- -------- -------- -------------- --------------
<S> <C> <C> <C> <C>
Van A. Horsley 3,958 $3,216 220,680 / 0 $279,602 / 0
Edwin L. Adair 65,000 $16,855 295,000 / 0 $241,872 / 0
I. Dean Bayne -0- $0 20,000 / 0 $ 0 / 0
Leroy Bilanich -0- $0 20,000 / 0 $ 30,132 / 0
Jo Brehm 50,000 $132,438 0 / 0 $ 0 / 0
</TABLE>
(c) Long Term Incentive Compensation Plans
------------------------------------------
MEDY has no long term incentive compensation plans.
(d) Other Compensation
----------------------
There are no plans to pay bonuses or deferred compensation to employees of
the Company.
The Company has adopted a medical and life insurance plan for its employees
at the Company's cost and provides a discretionary disability, dental and other
insurance plans for the benefit of its employees at their expense.
-27-
<PAGE>
(e) Compensation of Directors
-----------------------------
General. MEDY's directors are authorized to receive $200 for each
directors' meeting attended by them. To date, the directors have waived their
right to receive directors fees. In September 1990, certain directors were
granted options under the 1988 Stock Option Plan. Dr. Bayne owns an incentive
stock option to acquire 20,000 shares of common stock at $4.00 per share,
expiring June 11, 2003. Leroy Bilanich owns an incentive stock option to acquire
20,000 shares of common stock at $1.50 per share, expiring June 11, 2003.
No options were granted during fiscal 1997 to board members.
Royalty Agreements. Dr. Adair and Dr. Bayne, directors of MEDY, are each
entitled to receive royalties equal to two percent of the net sales of products
each assigned to the Company. No royalties have been accrued or paid to Dr.
Bayne, however, $600,000 has been paid to Dr. Adair through the end of fiscal
1995. No cash amounts have been paid to Dr. Adair subsequently. In an effort to
help reduce negative cash flow during fiscal 1996, Dr. Adair accepted 120,000
common stock options priced at $1.00 per share in substitution for his cash
royalty payment for the 1996 fiscal year. During 1997 Dr. Adair and MEDY made
certain changes to the license agreement which included an elimination of the
minimum annual royalty, effective for the 1997 fiscal year. See Item 13 -
"Certain Relationships and Related Transactions" for further information
regarding the royalty agreement.
Indemnification Agreements. MEDY has entered into indemnification
agreements with each of its directors and officers providing for indemnification
of each such director by MEDY to the full extent permitted by the Colorado
Corporation Code. The agreements provide that in all circumstances in which a
director or officer may receive indemnification by statute, such indemnity shall
be provided.
Officer's Life Insurance. MEDY currently maintains a $100,000 whole life
key-man insurance policy on its Chairman which was acquired in 1985.
MEDY has no other arrangements pursuant to which it compensates its
directors for acting in their capacities as such.
(g) MEDY has no employment contracts with any executive officer except as
described above with Messrs. Kim and Richmond. MEDY has no compensatory
arrangement which may result from a change-of-control of MEDY or a change in any
executive officers responsibilities.
(h) No options were repriced during the fiscal year.
-28-
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management.
---------------------------------------------------------------
(a) and (b) Security ownership of certain beneficial owners and management.
---------------------------------------------------------------------------
At September 30, 1997, MEDY had only one class of outstanding voting
securities, its common stock. The following table sets forth information as of
October 31, 1997 with respect to the ownership of the Company's Common Stock for
all directors, individually, all officers and directors as a group, and all
beneficial owners of more than five percent of the Common Stock. The following
shareholders have sole voting and investment power with respect to the shares,
unless it has been indicated otherwise.
Shares owned * Percent
Name of beneficial owner beneficially (1) of class
- ------------------------ ---------------- --------
Edwin L. Adair, M.D. 1,174,298 (2) 12.7%
and Pat Horsley Adair
317 Paragon Way
Castle Pines Village
Colorado 80104
Daniel L. Richmond 647,760 (5) 7.0%
6500 Baird Av
Reseda, CA. 91335
Chae U. Kim 647,760 (5) 7.0%
3231 Chevio Vista Place
Los Angeles, CA. 90034
I. Dean Bayne, M.D. 20,000 0.2%
Van A. Horsley 305,586 (3) 3.3%
Leroy Bilanich, Ed.D. 20,000 0.2%
All officers and 2,825,404 (4) 30.5%
directors as a
group (8 persons)
* Percent of class based upon post acquisition shares of 9,255,736.
(1) As used in this section, the term beneficial ownership with respect to a
security is defined by Rule 13d-3 under the Securities Exchange Act of 1934
as consisting of sole or shared voting power (including the power to vote
or direct the vote) and/or sole or shared investment power (including the
-29-
<PAGE>
power to dispose or direct the disposition) with respect to the security
through any contract, arrangement, understanding, relationship or
otherwise. Unless otherwise indicated, beneficial ownership is of record
and consists of sole voting and investment power.
(2) Includes 175,000 stock options issued to the Chairman of which all are
presently exercisable. Also includes 120,000 options issued to Dr. Adair in
December, 1995 in consideration for cancellation of fiscal 1996 royalty
payments due him totaling $120,000, also presently exercisable.
(3) Includes 220,680 shares under presently exercisable stock options. Does not
include options to acquire 150,000 shares exercisable at prices ranging
from $2.75 to $3.75 per share which vest based upon defined performance
goals.
(4) Includes shares referenced in notes (2) through (5) and 10,000 additional
shares and options held by one officer (Jo Brehm) who is not a director,
all of which are presently exercisable. Does not include options to acquire
60,000 shares exercisable at prices ranging from $2.75 to $3.75 per share
which vest based upon defined performance goals.
(5) Does not include options to acquire 600,000 shares exercisable at $3.25
which vest upon defined performance goals.
(c) Changes in Control.
-----------------------
The Company knows of no arrangement, the operation of which may, at a
subsequent date, result in change in control of the Company.
Item 12. Certain Relationships and Related Transactions.
-----------------------------------------------
(a) and (b) Transactions With Management and Others.
----------------------------------------------------
MEDY has engaged in certain transactions with members of its Board of
Directors. In each case, the Board believed that the transaction was in MEDY's
best interests and the terms of the transaction were at least as fair to
Registrant as could have been obtained from an independent person, and the
transaction was approved by the disinterested directors. Registrant will
continue to follow this procedure in approving any transactions with affiliated
persons. No such transactions are contemplated at this time.
License Agreement with Dr. Adair. MEDY entered into an exclusive revocable
license agreement with Dr. Edwin Adair effective June 3, 1987, as amended,
relating to use of certain technology invented and developed by Dr. Adair.
Before an amendment negotiated in September 1997, MEDY was obligated to pay Dr.
Adair a minimum annual royalty of $120,000. Additionally, Dr. Adair was
obligated to give MEDY a right of first refusal for his inventions. Actual
-30-
<PAGE>
royalties never exceeded the minimum annual royalty. As a result of negotiations
between the disinterested directors and Dr. Adair, the parties agreed to amend
the license agreement to waive the minimum annual royalty due September 30, 1997
for the year then ended and any future minimum annual royalty, and to waive Dr.
Adair's obligation to provide MEDY with a right of first refusal on future
technology.
Distribution Agreement. MEDY entered into a distribution agreement with
Micro- Medical Devices, Inc. ("MMD"), a corporation wholly-owned by Dr. Adair
during June of fiscal year 1995. The distribution agreement includes all
products developed by Dr. Adair related to his Universal Sterile Endoscopy
System(TM) ("USES").
MMD has appointed MEDY as its exclusive worldwide distributor for the USES
products through June 30, 2000. MMD also granted MEDY a right of first refusal
to distribute any further products MMD may develop. There are no minimum
performance requirements under the distribution agreement, and MEDY need only
purchase products it has already sold to third parties.
MMD also agreed to sublease space from MEDY for administration purposes at
cost. The rental payment and reimbursement to MEDY for employees MMD may utilize
are intended to compensate MEDY for all associated expenses, including rent on a
per- square-foot basis. During the fiscal year ended September 30, 1997, MEDY
purchased $12,760 in products from MMD, and MMD has not needed any significant
leased space.
Other Related Party Transactions.
- ---------------------------------
MEDY employs two sons of Dr. Adair and one son of Pat Horsley Adair at
annual salary rates of approximately $45,600, $45,600, and $115,000. During the
most recently completed fiscal year those persons received no other compensation
from MEDY in addition to their salaries.
Except as otherwise stated above, since October 1, 1995, MEDY has not been
a party to any transaction involving in excess of $60,000, in which any director
or executive officer, nominee for election as a director, security holder of
record or beneficially of more than five percent of any class of MEDY's
securities, or any member of the immediate family of the foregoing had or will
have a direct or indirect material interest.
MEDY is not aware of any other relationship between nominees for election
as directors or its directors and MEDY that are similar in nature and scope to
those relationships listed in this Item 12.
(c) Parents of the Company
--------------------------
Not applicable, inasmuch as there are no "Parents" of MEDY.
-31-
<PAGE>
(d) Transactions with Promoters
-------------------------------
Not applicable, inasmuch as the Company was organized more than five years
ago.
Item 13. Exhibits and Reports on Form 8-K.
---------------------------------
(a) Exhibits
------------
The following is a complete list of exhibits filed as part of this Annual
Report on Form 10-KSB, which Exhibits are incorporated herein.
Exhibit
Number Description
------ -----------
3.1(k) Restated Articles of Incorporation
(December 30, 1988)
3.2(n) Bylaws, as amended
10.1(m) Amendment Number Five to Lease
Agreement - Englewood Office Space
10.2(a) Stock Option Plan - Consultant's
10.3(j) 1988 Stock Option Plan
10.4(d) Sales Representative Agreement
- Form
10.5(e) International Distributor Agreement
10.6(f) Indemnification Agreement - Edwin L.
Adair, M.D.
10.7(f) Indemnification Agreement - Pat
Horsley Adair
10.8(h) Indemnification Agreement - I. Dean
Bayne
10.9(b) Indemnification Agreement - Van A.
Horsley
-32-
<PAGE>
10.10(b) Indemnification Agreement - Leroy A.
Bilanich
10.11(a) Employee Confidentiality Agreement -
Form
10.12(b) Section 125 Cafeteria Plan
10.13(h) Patent Assignment - Bayne Pap Brush
10.14(o) Amended and restated License Agreement with
Edwin L. Adair
10.15(n) 401(k) Plan
10.16(p) Agreement and Plan of Merger by and between Medical
Dynamics, Inc., CADI Acquisition Corp., and Computer
Age Dentist, Inc., dated as of October 1, 1997
10.17(p) Form of Registration Rights Agreement between Medical
Dynamics, Inc., Daniel L. Richmond, Chae U. Kim and
James DeVico, Jr.
10.18(p) Purchase Agreement between Medical Dynamics, Inc. and
The Tail Wind Fund, Ltd.
10.19(p) Form of Convertible Debenture
10.20(p) Registration Rights Agreement between Medical
Dynamics, Inc. and The Tail Wind Fund, Ltd.
10.21(p) Common Stock Purchase Warrant issued to The Tail Wind
Fund Ltd.
21.1 Subsidiaries of MEDY:
MedPacific Corporation, a Washington corporation
Computer Age Dentist, Inc., a California corporation
23.1* Consent of Hein + Associates, LLP
* Filed herewith.
(a) Incorporated by reference from Registration Statement
on Form S-1, SEC File No. 2-82856.
-33-
<PAGE>
(b) Incorporated by reference from MEDY's Form 10-K for
the period ended September 30, 1991.
(d) Incorporated by reference from MEDY's Form 10-K for
the year ended September 30, 1984.
(e) Incorporated by reference from MEDY's Form 8-K
reporting an event of February 8, 1985.
(f) Incorporated by reference from MEDY's Form 10-K for
the year ended September 30, 1986.
(h) Incorporated by reference from MEDY's Form 10-K for
the fiscal year ended September 30, 1987.
(j) Incorporated by reference from MEDY's Form 8-K
reporting an event of October 12, 1988.
(k) Incorporated by reference from MEDY's Form 10-Q for
the quarter ended December 31, 1988.
(m) Incorporated by reference from Amendment No. 1 to
Registration Statement on Form S-1, Commission File
No. 33-29497, filed with the Commission on July 26,
1989.
(n) Incorporated by reference from MEDY's Form 10-K for
the fiscal year ended September 30, 1990.
(o) Incorporated by reference from MEDY's Form 10-QSB for
the quarter ended June 30, 1995.
(p) Incorporated by reference from MEDY's Form 8-K
reporting an event of October 23, 1997
-34-
<PAGE>
(b) Reports on Form 8-K
- -----------------------
During the fourth quarter of fiscal 1997 up to December 1, 1997, the
Company filed the following reports on Form 8-K:
October 23, 1997, reporting an event under Item 2 - Acquisition or
Disposition of Assets and Item 5 -- Other Events, and an amendment thereto
including the financial information and pro forma financial information required
by Item 7.
SIGNATURES
----------
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MEDICAL DYNAMICS, INC.
By:/s/ Van A. Horsley
-------------------------------
Van A. Horsley,
President
December 12, 1997
-35-
<PAGE>
In accordance with the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates indicated.
December 12, 1997 /s/ Van A. Horsley
------------------
Van A. Horsley, Principal Executive
Officer, Principal Financial Officer, and
Director
December 12, 1997 /s/ Edwin L. Adair
------------------
Edwin L. Adair, M.D., Chairman
of the Board and Director
December 12, 1997 /s/ Daniel L. Richmond
----------------------
Daniel L. Richmond, Director
December 12, 1997 /s/ Chae U. Kim
---------------
Chae U. Kim, Director
December 12, 1997 /s/ I. Dean Bayne
-----------------
I. Dean Bayne, M.D., Director
December 12, 1997 /s/ Pat Horsley Adair
---------------------
Pat Horsley Adair, Director
December 12, 1997 /s/ Leroy Bilanich
Leroy Bilanich, Director
-36-
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Independent Auditor's Report..............................................F-2
Consolidated Balance Sheet - September 30, 1997...........................F-3
Consolidated Statements of Operations - For the Years Ended
September 30, 1997 and 1996......................................F-4
Consolidated Statements of Stockholders' Equity - For the Years Ended
September 30, 1997 and 1996......................................F-5
Consolidated Statements of Cash Flows - For the Years Ended
September 30, 1997 and 1996......................................F-6
Notes to Consolidated Financial Statements................................F-7
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Medical Dynamics, Inc.
Englewood, Colorado
We have audited the accompanying consolidated balance sheet of Medical Dynamics,
Inc. and subsidiary (the "Company") as of September 30, 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years ended September 30, 1997 and 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Medical Dynamics,
Inc. and subsidiary as of September 30, 1997, and the results of their
operations and their cash flows for the years ended September 30, 1997 and 1996,
in conformity with generally accepted accounting principles.
As discussed in Note 1, the Company changed its method of accounting for
long-lived assets during 1997.
HEIN + ASSOCIATES LLP
Denver, Colorado
November 20, 1997
F-2
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997
ASSETS
------
CURRENT ASSETS:
Cash and equivalents $ 836,400
Restricted cash 50,000
Trade receivables, less allowance for
doubtful accounts of $5,000 127,500
Inventories 683,400
Prepaid expenses and other 15,700
------------
Total current assets 1,713,000
------------
PROPERTY AND EQUIPMENT:
Demonstration equipment 296,700
Machinery and equipment 334,300
Furniture and fixtures 221,300
Leasehold improvements 54,500
------------
906,800
Less accumulated depreciation and amortization (830,600)
------------
Property and equipment, net 76,200
------------
OTHER ASSETS:
Inventories 32,000
Patents, patents pending, and trademarks, net
of accumulated
amortization of $740,900 49,700
Deposits and other 46,000
------------
Total other assets 127,700
------------
TOTAL ASSETS $ 1,916,900
============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 297,600
Accrued expenses 61,100
Warranty reserve 11,000
------------
Total current liabilities 369,700
------------
COMMITMENTS AND CONTINGENCIES (Notes 4, 7, and 11)
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value; authorized
5,000,000 shares; none issued
Common stock, $.001 par value; authorized
15,000,000 shares, issued and
outstanding 7,627,300 shares 7,600
Additional paid-in capital 18,811,100
Accumulated deficit (17,271,500)
------------
Total stockholders' equity 1,547,200
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,916,900
============
See accompanying notes to these consolidated financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
MEDICAL DYNAMICS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED
SEPTEMBER 30,
------------------------------------
1997 1996
----------- -----------
<S> <C> <C>
NET SALES $ 982,800 $ 667,800
COST OF GOODS SOLD 650,700 371,000
----------- -----------
GROSS PROFIT 332,100 296,800
----------- -----------
OTHER OPERATING REVENUE 81,100 102,800
----------- -----------
OPERATING EXPENSES:
Selling, general and administrative 1,115,600 1,159,600
Stock-based compensation 109,400 525,000
Research and development 200,300 206,900
Depreciation and amortization 173,300 207,600
Provision for obsolete and slow-moving inventories 346,800 87,300
Loss on impairment of demonstration equipment 70,600 --
----------- -----------
Total operating expenses 2,016,000 2,186,400
----------- -----------
OPERATING LOSS (1,602,800) (1,786,800)
----------- -----------
OTHER INCOME (EXPENSE):
Gain on sale of demonstration equipment -- 7,400
Interest income 55,000 39,000
Interest expense (200) (1,400)
----------- -----------
NET LOSS $(1,548,000) $(1,741,800)
=========== ===========
NET LOSS PER COMMON SHARE $ (.21) $ (.25)
=========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 7,523,200 6,898,300
=========== ===========
See accompanying notes to these consolidated financial statements.
F-4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MEDICAL DYNAMICS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND 1996
COMMON STOCK Additional Treasury Stock
--------------------- Paid-in Accumulated --------------------
Shares Amount Capital Deficit Shares Amount Total
--------- --------- ------------ ------------ -------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, October 1, 1995 6,895,400 $ 6,900 $ 16,585,500 $(13,981,700) 15,900 $ (79,300) $ 2,531,400
Exercise of options
common stock to purchase 284,800 300 611,400 -- -- -- 611,700
Issuance of common stock
options for:
Royalty obligation -- -- 120,000 -- -- -- 120,000
Employee compensation -- -- 271,400 -- -- -- 271,400
Marketing arrangements -- -- 78,500 -- -- -- 78,500
Other services -- -- 55,100 -- -- -- 55,100
Net loss -- -- -- (1,741,800) -- -- (1,741,800)
---------- --------- ------------ ------------ -------- --------- ------------
BALANCE, September 30, 1996 7,180,200 7,200 17,721,900 (15,723,500) 15,900 (79,300) 1,926,300
Exercise of options to purchase
common stock 463,000 400 1,059,100 -- -- -- 1,059,500
Retirement of treasury stock (15,900) -- (79,300) -- (15,900) 79,300 --
Issuance of common stock
options for services -- -- 109,400 -- -- -- 109,400
Net loss -- -- -- (1,548,000) -- -- (1,548,000)
---------- --------- ------------ ------------ -------- --------- ------------
BALANCE, September 30, 1997 7,627,300 $ 7,600 $ 18,811,100 $(17,271,500) -- $ -- $ 1,547,200
========== ========= ============ ============ ======== ========= ============
See accompanying notes to these consolidated financial statements.
F-5
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MEDICAL DYNAMICS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
SEPTEMBER 30,
--------------------------
1997 1996
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $(1,548,000) $(1,741,800)
Adjustments to reconcile net loss to net cash used in
operating activities:
Common stock options granted for:
Royalty obligation -- 120,000
Compensation and other services 109,400 405,000
Depreciation 113,800 130,400
Amortization 59,500 77,200
Bad debt expense 35,700 --
Loss on impairment of demonstration equipment 70,600 --
Provision for obsolete and slow-moving inventories 346,800 87,300
Decrease in warranty reserve (4,000) (10,000)
Gain on sale of demonstration equipment -- (7,400)
Changes in operating assets and liabilities:
Decrease (increase) in:
Trade receivables 18,400 170,000
Inventories (369,900) (1,700)
Prepaid expenses (6,300) 25,700
Increase (decrease) in:
Accounts payable 79,700 29,500
Accrued expenses (16,400) 26,600
Accrued royalties -- (90,000)
----------- -----------
Net cash used in operating activities (1,110,700) (779,200)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in restricted cash (40,000) (10,000)
Proceeds from sale of demonstration equipment -- 7,400
Collections on note receivable - related party -- 110,000
Additions to patents (12,500) (18,400)
Purchase of property and equipment (22,000) (14,500)
Deposits and other (31,100) 14,500
----------- -----------
Net cash provided by (used in) investing activities (105,600) 89,000
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES -
Proceeds from exercise of options to purchase common stock 1,059,500 611,700
----------- -----------
NET DECREASE IN CASH AND EQUIVALENTS (156,800) (78,500)
CASH AND EQUIVALENTS, beginning of year 993,200 1,071,700
----------- -----------
CASH AND EQUIVALENTS, end of year $ 836,400 $ 993,200
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION -
Cash paid for interest $ 200 $ 1,400
=========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Demonstration equipment transfers from inventories $ -- $ 148,500
=========== ===========
Retirement of treasury stock $ 79,300 $ --
=========== ===========
Retirement of fully depreciated demonstration equipment $ 557,000 $ --
=========== ===========
See accompanying notes to these consolidated financial statements.
F-6
</TABLE>
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES:
--------------------------------
Nature of Business Operations - Medical Dynamics, Inc. (the "Company") is
engaged in the design, development, manufacture and marketing of medical
and dental video cameras and surgical disposable products for a variety of
medical specialties. These products are sold directly to health care
professionals, hospitals, wholesalers, and original equipment manufacturers
throughout the United States and foreign markets. The Company markets its
products primarily through a group of sales representatives and
distributors.
Principles of Consolidation - The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiary, MedPacific
Corporation. All significant intercompany accounts and transactions have
been eliminated. MedPacific Corporation is an inactive corporation, and
there was no activity during the years ended September 30, 1997 and 1996.
Use of Estimates - The preparation of the Company's consolidated financial
statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes. The
actual results could differ from those estimates.
The Company's consolidated financial statements are based on a number of
estimates, including the allowance for doubtful accounts, the provision for
obsolete and slow-moving inventories, the selection of estimated useful
lives of property and equipment, realization of long-lived assets, and
assumptions affecting the valuation of stock options granted to
non-employees. It is reasonably possible that estimates affecting the
provision for obsolete and slow-moving inventories and realization of
long-lived assets will change in the forthcoming year and such revisions
could be material.
Cash Equivalents - The Company considers all highly liquid debt instruments
purchased with an original maturity of three months or less to be cash
equivalents. At September 30, 1997, cash equivalents include a mutual fund
that invests in money market instruments.
Inventories - Inventories are stated at the lower of cost (first-in,
first-out method) or market.
Property and Equipment - Property and equipment is stated at cost.
Depreciation is computed principally by the straight-line method over the
following estimated useful lives:
Years
-----
Demonstration equipment 3
Machinery and equipment 3 - 10
Furniture and fixtures 3 - 10
Leasehold improvements are amortized over the lesser of the life of the
lease or the estimated useful life of the improvement.
F-7
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Patents and Trademarks - Patents and trademarks are stated at cost and are
amortized over their estimated economic lives of three to ten years. In the
event patents pending are not granted, the related costs are charged to
operations.
Impairment of Long-Lived Assets - Management of the Company assesses
impairment whenever events or changes in circumstances indicate that the
carrying amount of a long-lived asset may not be recoverable. If the net
carrying value exceeds the net cash flows, then impairment will be
recognized to reduce the carrying value to the estimated fair value. During
the year ended September 30, 1997, management determined that certain
demonstration equipment was impaired, and recorded a loss on impairment of
$70,600.
Warranty Reserve - The Company provides a warranty against defects in
materials and workmanship, generally for a period between one month and one
year following the date of sale of the equipment. Estimated future costs of
product warranties are included in current liabilities in the accompanying
balance sheet.
Research and Development - Research and development costs are charged to
operations in the period incurred.
Net Loss Per Share - Net loss per common share is calculated by dividing
the net loss by the weighted average number of shares of common stock
outstanding during each fiscal year. Common stock equivalents were
anti-dilutive for fiscal 1997 and 1996 and were excluded from the
computation.
Income Taxes - The Company accounts for income taxes under the liability
method, which requires recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been included
in the financial statements or tax returns. Under this method, deferred tax
assets and liabilities are determined based on the difference between the
financial statement and tax bases of assets and liabilities using enacted
tax rates.
Revenue Recognition - The Company recognizes sales when finished goods are
shipped to a customer.
Stock-Based Compensation - The Company accounts for stock-based
compensation for employees using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. Accordingly, compensation cost for
stock options granted to employees is measured as the excess, if any, of
the quoted market price of the Company's common stock at the measurement
date (generally, the date of grant) over the amount an employee must pay to
acquire the stock.
In October 1995, the Financial Accounting Standards Board issued a new
statement titled "Accounting for Stock-Based Compensation" (FAS 123). The
new statement is effective for fiscal years beginning after December 15,
1995. FAS 123 encourages, but does not require, companies to recognize
compensation expense for grants of stock, stock options, and other equity
instruments to employees based on fair value. Companies that do not adopt
the fair value accounting rules must disclose the impact of adopting the
new method in the notes to the financial statements. Transactions in equity
F-8
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
instruments with non-employees for goods or services must be accounted for
by the fair value method. The Company has elected not to adopt the fair
value accounting prescribed by FAS 123 for employees, but is subject to the
related disclosure requirements.
Impact of Recently Issued Accounting Standards - Statement of Financial
Accounting Standards 128 (FAS 128) "Earnings per Share" provides a
different method of calculating earnings per share than is currently used
in accordance with Accounting Principles Board Opinion 15 "Earnings per
Share." FAS 128 provides for the calculation of "basic" and "diluted"
earnings per share. Basic earnings per share includes no dilution and is
computed by dividing income available to common shareholders by the
weighted average number of common shares outstanding for the period.
Diluted earnings per share reflects the potential dilution of securities
that could share in the earnings of an entity, similar to fully diluted
earnings per share. Statement of Financial Accounting Standards 129 (FAS
129) "Disclosure of Information About an Entity's Capital Structure"
establishes standards for disclosing information about an entity's capital
structure. FAS 128 and 129 are effective for financial statements issued
for periods ending after December 15, 1997. Their implementation is not
expected to have a material effect on the consolidated financial
statements.
Statement of Financial Accounting Standards 130 (FAS 130) "Reporting
Comprehensive Income" establishes standards for reporting and display of
comprehensive income, its components and accumulated balances.
Comprehensive income is defined to include all changes in equity except
those resulting from investments by owners and distributions to owners.
Among other disclosures, FAS 130 requires that all items that are required
to be recognized under current accounting standards as components of
comprehensive income be reported in a financial statement that displays
with the same prominence as other financial statements. Statement of
Financial Accounting Standards 131 (FAS 131) "Disclosures About Segments of
an Enterprise and Related Information" establishes standards on the way
that public companies report financial information about operating segments
in annual financial statements and requires reporting of selected
information about operating segments in interim financial statements issued
to the public. It also establishes standards for disclosures regarding
products and services, geographic areas, and major customers. FAS 131
defines operating segments as components of a company about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in
assessing performance. FAS 130 and 131 are effective for financial
statements for periods beginning after December 15, 1997 and require
comparative information for earlier years to be restated. Because of the
recent issuance of these standards, management has been unable to fully
evaluate the impact, if any, the standards may have on the future financial
statement disclosures. Results of operations and financial position,
however, will be unaffected by implementation of these standards.
Reclassifications - Certain amounts in the 1996 financial statements have
been reclassified to conform with the 1997 presentation. These
reclassifications had no effect on the 1996 net loss.
F-9
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. LIQUIDITY:
----------
The Company has incurred continued substantial operating losses and
negative cash flows from operations. The Company's future viability depends
on its ability to increase sales and become profitable.
During 1996, the Company developed intraoral dental cameras for use as a
diagnostic tool for the dental profession. During fiscal 1997, the Company
realized $684,000 in sales of dental products and management is optimistic
about the prospects for additional growth. Additionally, as discussed in
Note 11, in October 1997, the Company obtained additional debt financing of
$1.1 million and completed the acquisition of a dental practice management
software company. Management believes the Company has adequate capital
resources to carry out planned activities during the forthcoming fiscal
year.
3. INVENTORIES:
------------
Inventories consist of the following at September 30, 1997:
Raw materials and replacement parts $ 723,900
Finished goods 422,300
Work in process 126,000
---------
Total inventory 1,272,200
Less provision for obsolete and slow-moving inventory (556,800)
---------
Net inventories, including $32,000 classified as $ 715,400
long-term assets =========
During the year ended September 30, 1997, management of the Company
increased the provision for obsolete and slow-moving inventories by
$346,800. Substantially, all of this provision related to medical cameras
and related products. Due to the declining level of production for the
Company's medical video cameras, the Company incurred under applied
overhead costs of approximately $290,800 and $281,300 for the years ended
September 30, 1997 and 1996, respectively. These amounts are included in
selling, general and administrative expense in the accompanying statements
of operations.
4. RELATED PARTY TRANSACTIONS AND COMMITMENTS:
-------------------------------------------
License Agreement - The Company has various agreements to pay royalties to
both a former officer and current directors of the Company. These royalties
are based on the sales of specified products, some of which are no longer
manufactured by the Company. In June 1987, the Company entered into a
license agreement with its then CEO and Chairman relating to the use of
certain technology invented and developed by the Chairman. In connection
with the agreement, the Company agreed to pay royalties based on the
F-10
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
greater of 2% of sales of products which relate to this technology or
minimum annual royalties of $120,000. On December 1, 1995, the Chairman
agreed to waive all payments due him under the above license agreement for
the year ended September 30, 1996, in exchange for stock options to
purchase 120,000 shares of common stock at $1.00 per share. The Company
recorded $120,000 of royalty expense in 1996 as a result of this
transaction.
During 1997, the license agreement was amended to eliminate the minimum
annual royalty and to provide for future royalties generally equal to 2% of
sales of the products that relate to the technology. For the year ended
September 30, 1997, the Company did not incur any royalty expense related
to this agreement. The license agreement may be terminated by the Chairman
in certain circumstances and the rights to the patents may revert to him if
commercial development of the related products does not occur within
prescribed deadlines.
Distribution Agreement - In a related transaction, during the year ended
September 30, 1995, the Company transferred to an entity owned by the
Chairman the rights to patents with a net book value of approximately
$21,000. The patents had originally been obtained from the Chairman under
the license agreement described above, and were transferred because the
Company was unable to obtain FDA approval for products using the patents.
The related entity has since obtained FDA approval and has entered into an
exclusive agreement to have the Company distribute all products it
manufactures. The agreement expires in June 2000. The Company purchased
approximately $32,000 of products under the agreement through September 30,
1997.
5. STOCK OPTIONS:
--------------
Stock Option Plan - The Company has a stock option plan under which
incentive and non-qualified stock options may be granted to officers,
directors, employees, and consultants. Incentive stock options are required
to have an exercise price which is not less than the fair market value of
the stock at the date of grant. The Company's Board of Directors approved
the plan on July 14, 1988 and a majority of the Company's stockholders
approved the plan in October 1988. The maximum term is ten years for
options granted under the plan. An aggregate of 1,000,000 shares were
F-11
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
reserved for issuance pursuant to the terms of the plan. Activity in the
stock option plan for the years ended September 30, 1997 and 1996 is as
follows:
Weighted
Average
Number of Exercise Price
Shares Per Share
--------- ---------
Outstanding, October 1, 1995 133,100 $2.69
Granted 94,300 1.49
Exercised (30,000) 1.73
Expired (94,300) 2.52
---------
Outstanding, September 30, 1996 103,100 2.02
Granted 29,500 2.43
Exercised (70,900) 2.36
---------
Outstanding, September 30, 1997 61,700 1.83
=========
For options granted during the years ended September 30, 1997 and 1996, the
weighted average market price per share of the Company's common stock on
the grant date was approximately $2.43 and $2.38, respectively. Options
available for future grant at September 30, 1997 totaled 100,000 shares.
All options outstanding under the plan are vested at September 30, 1997. If
not previously exercised, options outstanding at September 30, 1997, will
expire as follows:
Number of Exercise
Year Ending September 30: Shares Price
------------------------- ------ -----
2001 37,200 $1.38
2002 24,500 2.52
------
61,700
======
F-12
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Non-Qualified Stock Options - The Company has also granted non-qualified
stock options to officers, directors, employees, and consultants. The
following is a summary of activity during the years ended September 30,
1997 and 1996.
Weighted
Average
Number of Exercise Price
Shares Per Share
------ ---------
Outstanding, October 1, 1995 998,100 $2.68
Granted to:
Employees and officer 84,300 1.45
Director for royalty obligation
(Note 4) 120,000 1.00
Consultants 98,800 2.56
Performance options granted to:
Employees 200,000 2.88
Officers and directors 260,000 2.88
Marketing consultants 735,000 3.03
Options expired due to:
Repricing (77,100) 4.20
End of term (94,300) 2.52
Options exercised by:
Directors (167,600) 2.39
Employees and consultants (37,200) 1.57
Marketing consultants (50,000) 2.00
---------
Outstanding, September 30, 1996 2,070,000 2.73
Granted to employees 76,400 3.52
Expired (157,100) 3.50
Exercised (395,400) 2.29
----------
Outstanding, September 30, 1997 1,593,900 2.80
==========
F-13
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At September 30, 1997, a total of 754,000 non-qualified stock options are
vested. If not previously exercised, these options expire as follows:
Weighted
Average
Number of Exercise
Year Ending September 30: Shares Price
------------------------- ------ -----
1999 50,000 $1.13
2000 120,000 1.00
2000 55,800 1.50
2001 115,000 2.00
2001 530,000 2.88
2001 265,000 3.75
2002 44,200 3.68
2003 70,000 1.50
2003 148,900 2.75
2003 195,000 4.00
---------
1,593,900
=========
At September 30, 1997, unvested employee performance options were
outstanding for 385,000 shares, and unvested non-employee options were
outstanding for 425,000 shares. If not previously vested and exercised,
these options all expire during the year ending September 30, 2001. The
following is a summary of key vesting provisions and exercise prices for
performance options granted to employees:
Number of Exercise
Performance Condition Shares Price
-------------------------------- ------ -----
Cumulative revenue for the Company from the
sale of dental products exceeds:
$1,000,000 75,000 $2.75
$4,000,000 75,000 3.00
$9,000,000 75,000 3.75
Annual revenue for the Company exceeds:
$2,000,000 40,000 2.00
$3,000,000 40,000 2.75
$4,000,000 40,000 3.00
$9,000,000 40,000 3.75
-------
385,000
=======
F-14
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the year ended September 30, 1997, the Company recognized
compensation expense of $28,900 related to employee performance options.
The ultimate amount of compensation expense related to the employee
performance options will be determined based on the market value of the
Company's common stock on the date that the options vest.
The following is a summary of key vesting provisions for performance
options granted to non-employees:
Number of Exercise
Shares Price
------- -----
Cumulative sales of dental products exceeds:
$ 1,000,000 75,000 $2.75
$ 4,000,000 75,000 3.00
$ 9,000,000 75,000 3.75
Cumulative sales of dental products to
specific OEM customer exceeds:
$ 650,000 50,000 3.00
$ 4,000,000 75,000 3.25
$ 9,000,000 75,000 3.50
-------
425,000
=======
During the year ended September 30, 1997, the Company recognized stock
compensation expense of $61,000 related to non-employee performance
options. Assuming that all of the options eventually vest, the Company will
recognize an additional $272,000 of expense over the period in which
vesting occurs.
The common stock option granted to the director in satisfaction of the
royalty obligation in 1996 was valued based upon the $120,000 contractual
payment in the license agreement.
The fair value of all other options granted to non-employees in 1997 and
1996 was estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions:
Years Ended September 30,
-------------------------
1997 1996
---- ----
Expected volatility 87% 90%
Risk-free interest rate 6.2% 6.7%
Expected dividends 0% 0%
Expected terms (in years) 3.0 2.7
For the year ended September 30, 1997, options granted to non-employees
resulted in the recognition of approximately $20,000 of compensation
expense.
F-15
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For non-qualified stock options granted to consultants during the year
ended September 30, 1996, the weighted average fair value of the Company's
common stock on the grant date was $1.63 for 610,000 shares of performance
options, $3.38 for 125,000 shares of performance options, and $2.01 for
98,800 shares of vested options. For non-qualified stock options granted to
employees in 1997 and 1996, the weighted average fair value of the
Company's common stock on the grant date was approximately equal to the
exercise price.
In addition to the performance options granted to marketing consultants,
the Company has entered into an agreement with a consultant that provides
for payment of commissions for the sale of each dental camera which is
attributable to the consultant, provided that certain gross margin
requirements are met. The consulting agreement expires in October 1999.
Pro Forma Stock-Based Compensation Disclosures - The Company applies APB
Opinion 25 and related interpretations in accounting for stock options
which are granted to employees. Accordingly, no compensation cost is
recognized for grants of options to employees if the exercise prices were
not less than the market value of the Company's common stock on the
measurement dates. Had compensation cost been determined based on the fair
value at the measurement dates consistent with the method of FAS 123, the
Company's net loss and loss per share would have been changed to the pro
forma amounts indicated below.
Years Ended September 30,
---------------------------------
1997 1996
----------- -----------
Net loss
As reported $(1,548,000) $(1,741,800)
Pro forma (1,749,900) (1,774,500)
Net loss per common share:
As reported $ (.21) $ (.25)
Pro forma (.23) (.26)
The fair value of each employee option granted in 1997 and 1996 was
estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted average assumptions:
Years Ended September 30,
-------------------------
1997 1996
---- ----
Expected volatility 87% 90%
Risk-free interest rate 6.1% 6.4%
Expected dividends 0% 0%
Expected terms (in years) 3.2 3.7
F-16
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. INCOME TAXES:
------------
The amounts which give rise to the net deferred tax asset at September 30,
1997, are as follows:
CURRENT ASSETS:
Allowance for doubtful accounts $ 1,900
Accrued expenses 14,000
-----------
Total current assets 15,900
-----------
LONG-TERM ASSETS:
Property and equipment 29,700
Patents, patents pending, and trademarks 15,600
Provision for obsolete and slow-moving inventories 207,700
Compensation expense related to stock options 166,000
Net operating loss carryforwards 6,714,000
Research and development tax credit
carryforwards 28,000
-----------
Total long-term assets 7,161,000
-----------
TOTAL DEFERRED TAX ASSETS 7,176,900
VALUATION ALLOWANCE (7,176,900)
-----------
$ --
===========
Management has determined that a valuation allowance equal to the deferred
tax assets is required since it is more likely than not that the benefits
of these assets will not be realized. The valuation allowance increased by
$625,000 and $850,000 during the years ended September 30, 1997 and 1996,
respectively, due to the increase in the deferred tax asset balances which
were completely offset by a valuation allowance at each of those dates.
At September 30, 1997, the Company has approximately $18,000,000 of net
operating loss carryforwards, and approximately $28,000 of research and
development tax credit carryforwards, both of which expire in varying
amounts from 1998 through 2012.
7. COMMITMENTS AND CONTINGENCIES:
-----------------------------
Regulatory Matters - The Company is regulated by the Federal Food and Drug
Administration (FDA). The Company cannot ensure that an adverse financial
impact will not occur should the FDA find the Company's Good Manufacturing
Practices are in non-compliance with current Federal regulations. If the
FDA finds that a manufacturer is not in compliance, the manufacturer may be
prohibited from marketing the products for which they are not in
compliance, until such time as the manufacturer complies with the
applicable FDA regulation. The Company has recently had difficulty
F-17
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
obtaining FDA approval on new products due to past findings during FDA
inspections. However, the Company does not expect problems in the future
due to a change in FDA policy.
Operating Leases - The Company conducts its operations from leased
facilities and leases certain equipment. The terms of the facilities lease
require the Company to pay all maintenance, utilities, property taxes and
insurance. Rent expense has been recorded on a straight-line basis over the
life of the lease. Following is a schedule of future minimum commitments
under operating leases having an initial or remaining term of more than one
year.
Years Ending September 30,
--------------------------
1998 $171,100
1999 41,500
--------
$212,600
========
Total rent expense was $158,800 and $163,000 for the years ended September
30, 1997 and 1996, respectively.
Letter-of-Credit - At September 30, 1997, the Company had a standby
letter-of-credit (LOC) for $50,000 which was required by one of its
vendors. The LOC can be accessed by the vendor if the Company does not pay
amounts owed to the vendor on a timely basis. The LOC bears interest at the
prime rate plus 2% and expires in June 1999. The LOC is collateralized by a
certificate of deposit for $50,000, which is included in restricted cash in
the accompanying balance sheet. There was no balance outstanding under the
LOC at September 30, 1997.
8. FOREIGN SALES:
-------------
The Company had export sales $235,400, or 35% of net sales for the year
ended September 30, 1996. Export sales for the year ended September 30,
1997 were less than 10% of net sales. All sales were transacted in United
States dollars.
9. SIGNIFICANT CONCENTRATIONS:
--------------------------
During the years ended September 30, 1997 and 1996, the Company had sales
to a single customer which accounted for 61% and 16% of net sales,
respectively. At September 30, 1997 and 1996, the Company had accounts
receivable from a single customer for $61,200 and $75,800, respectively.
At September 30, 1997 and 1996, the Company had an investment in a single
mutual fund that invests in money market instruments. The amount invested
is not covered by Federal insurance and totaled $704,500 and $803,200 at
September 30, 1997 and 1996, respectively. At September 30, 1997, the
Company had cash balances totaling $81,000 that were in excess of Federally
insured limits.
F-18
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. FOURTH QUARTER ADJUSTMENTS:
--------------------------
During the fourth quarter of 1997, the company increased the provision for
obsolete and slow-moving inventories by approximately $260,000.
Additionally, the Company recognized an impairment loss of $70,600 related
to certain demonstration equipment.
11. SUBSEQUENT EVENTS:
-----------------
In October 1997, the Company created a new subsidiary which acquired all of
the outstanding capital stock of Computer Age Dentist, Inc. (CADI) and
satisfied an obligation to a former shareholder of CADI. CADI, which is
located in Santa Monica, California, is engaged in the design, sale, and
support of practice management software for the dental profession. The
Company paid total consideration of $4,700,000 to acquire CADI, consisting
of $300,000 in cash, $400,000 in notes payable, and 1,600,000 shares of the
Company's common stock. The transaction will be accounted for as a
purchase.
In connection with the acquisition of CADI, the Company entered into
employment agreements with two individuals who were officers and directors
of CADI. The agreements are effective for a period of five years and
provide for aggregate annual compensation of $210,000. Additionally, the
Company granted options to these individuals for an aggregate of 1,200,000
shares of the Company's common stock. All of these options are exercisable
at $3.25 per share and expire in September 2004. The Company's Board of
Directors has also reserved 250,000 shares for stock options to be granted
to other CADI employees.
Effective October 31, 1997, the Company issued convertible debentures
totaling $1,100,000. The debentures are uncollateralized and bear interest
at 8% per annum, payable semi-annually in cash or, at the Company's option,
in shares of the Company's common stock valued at the fair market value as
of the date the interest is due. The principal balance is due October 2000
and the holder of the debentures has the option to convert the debentures
into shares of the Company's common stock beginning in January 1998. Any
unpaid principal and interest as of October 31, 2000 will automatically be
converted into shares of the Company's common stock. The conversion price
is equal to the average of the two lowest closing bid prices of the
Company's common stock as reported by NASDAQ during the 60 trading days
preceding the conversion date, not to exceed $3.45 per share. The Company
received net proceeds of $986,000 from the debentures, after paying all
costs related to the issuance.
The Company also granted the Debenture holder a warrant to purchase 84,615
shares of the Company's common stock. The warrant is exercisable until
October 31, 2000 at an exercise price of $3.38.
F-19
INDEPENDENT AUDITOR'S CONSENT
We consent to the incorporation by reference in the registration statement of
Medical Dynamics, Inc. on our report dated November 20, 1997, on our audits of
the consolidated financial statements of Medical Dynamics, Inc. as of September
30, 1997, and for each of the two years in the period ended September 30, 1997,
which report is included in the Company's Annual Report on Form 10-KSB.
Hein + Associates LLP
Denver, Colorado
December 11, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<CASH> 836,400
<SECURITIES> 50,000
<RECEIVABLES> 132,500
<ALLOWANCES> (5,000)
<INVENTORY> 715,400
<CURRENT-ASSETS> 1,713,000
<PP&E> 906,800
<DEPRECIATION> (830,600)
<TOTAL-ASSETS> 1,916,900
<CURRENT-LIABILITIES> 369,700
<BONDS> 0
0
0
<COMMON> 7,600
<OTHER-SE> 1,539,600
<TOTAL-LIABILITY-AND-EQUITY> 1,916,900
<SALES> 982,800
<TOTAL-REVENUES> 1,063,900
<CGS> 650,700
<TOTAL-COSTS> 2,666,700
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 200
<INCOME-PRETAX> (1,548,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,548,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,548,000)
<EPS-PRIMARY> (.21)
<EPS-DILUTED> (.21)
</TABLE>
