UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to ___________.
COMMISSION FILE NUMBER: 0-8632
MEDICAL DYNAMICS, INC.
-----------------------
Exact name of Registrant as specified in its charter
Colorado 84-0631765
- -------- ----------
State or other jurisdiction of I.R.S. Employer
incorporation or organization Identification No.
99 INVERNESS DRIVE EAST, ENGLEWOOD, CO 80112
- -------------------------------------- -----
Address of principal executive offices Zip Code
Registrant's telephone number, including area code: 303-790-2990
Former name, former address and former fiscal year, if changed since last
report: NA
Indicate by check mark whether the Registrant (1) has filed all annual,
quarterly and other reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the Registrant was required to file such reports) and (2)
has been subject to such filing requirements for the past 90 days.
YES X NO
----- -----
The number of shares outstanding of each of the issuer's classes of common
stock, as of August 12, 1999 is 11,773,543 shares, $.001 par value.
<PAGE>
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<CAPTION>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements.
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
ASSETS
6/30/99 9/30/98
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and equivalents $ 308,600 $ 553,100
Restricted cash 0 50,000
Trade receivables, less allowance for
doubtful accounts of $101,300 and $108,400 492,700 879,400
Inventories 855,400 879,600
Prepaid expenses 33,100 24,800
----------- -----------
Total Current Assets 1,689,800 2,386,900
----------- -----------
SOFTWARE DEVELOPMENT AND SUPPORT:
Software development costs, net of
accumulated amortization of $751,400 and $417,800 2,467,200 2,619,800
Technical support contracts, net of
accumulated amortization of $539,900 and $305,000 1,058,300 1,303,100
----------- -----------
Total Software Development and Support 3,525,500 3,922,900
----------- -----------
PROPERTY AND EQUIPMENT:
Demonstration equipment 451,800 420,900
Machinery and equipment 583,200 553,800
Furniture and fixtures 361,200 355,200
Leasehold improvements 127,000 127,000
----------- -----------
1,523,200 1,456,900
Less accumulated depreciation and
amortization (916,600) (799,400)
----------- -----------
Property and Equipment, Net 606,600 657,500
----------- -----------
OTHER ASSETS:
Goodwill, net of accumulated
amortization of $188,000 and $120,800 1,825,100 1,892,300
Non-compete agreement's net of accumulated
amortization of $140,000 and $80,000 59,200 119,200
Debt issuance costs, net of accumulated --
amortization of $299,200 and $85,400 239,100 125,400
Patents and trademarks, net of accumulated
amortization of $781,000 and $766,200 14,400 29,200
Deposits and other 73,800 37,000
----------- -----------
Total Other Assets 2,211,600 2,203,100
----------- -----------
TOTAL ASSETS $ 8,033,500 $ 9,170,400
=========== ===========
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS, Continued
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<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
6/30/99 9/30/98
------------ ------------
CURRENT LIABILITIES:
Current maturities of notes payable $ 303,000 $ 546,100
Current maturities of obligations under capital lease 50,600 40,000
Accounts payable 894,600 565,800
Accrued expenses 631,100 416,000
Unearned revenue 340,300 370,100
------------ ------------
Total Current Liabilities 2,219,600 1,938,000
------------ ------------
NOTES PAYABLE, net 358,000 321,900
OBLIGATIONS UNDER CAPITAL LEASE, net -- 39,400
CONVERTIBLE DEBENTURES, net 734,800 1,407,200
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value;
authorized 5,000,000 shares; none
issued and outstanding -- --
Common stock, $.001 par value; authorized
30,000,000 shares; issued & outstanding
11,635,400 and 10,034,500 shares 11,600 10,000
Additional paid-in capital 27,595,000 25,246,900
Accumulated deficit (22,885,500) (19,793,000)
------------ ------------
Total Stockholders' Equity 4,721,100 5,463,900
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 8,033,500 $ 9,170,400
============ ============
See Notes to Consolidated Financial Statements.
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<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
Quarter Ended Nine Months
June 30 Ended June 30
--------------------------------- ---------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
NET SALES:
Software & training $ 1,013,300 $ 949,600 $ 3,348,200 $ 2,114,600
Equipment & Installation 1,175,900 1,108,600 3,949,100 2,151,200
Support services 676,000 557,100 1,832,400 1,196,500
------------ ------------ ------------ ------------
2,865,200 2,615,300 9,129,700 5,462,300
------------ ------------ ------------ ------------
COST OF SALES:
Software & training 470,100 119,000 1,040,800 351,800
Equipment & Installation 960,300 731,200 2,891,100 1,533,300
Support services 95,700 79,900 628,200 228,400
------------ ------------ ------------ ------------
1,526,100 930,100 4,560,100 2,113,500
------------ ------------ ------------ ------------
GROSS PROFIT 1,339,100 1,685,200 4,569,600 3,348,800
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Selling & marketing 616,300 395,100 2,401,100 841,200
General & administrative 1,450,500 1,631,700 4,856,100 3,373,200
Stock based compensation 15,000 -- 42,500 --
Research & development -- 14,900 2,700 34,100
------------ ------------ ------------ ------------
Total operating expenses 2,081,800 2,041,700 7,302,400 4,248,500
------------ ------------ ------------ ------------
OPERATING LOSS (742,700) (356,500) (2,732,800) (899,700)
OTHER INCOME (EXPENSE):
Other income 15,800 17,600 41,000 27,000
Interest income 4,700 4,400 11,100 30,500
Interest expense (68,800) (51,800) (412,200) (149,400)
------------ ------------ ------------ ------------
NET LOSS $ (791,000) $ (386,300) $ (3,092,900) $ (991,600)
============ ============ ============ ============
Earnings per share $ (0.07) $ (0.04) $ (0.29) $ (0.10)
============ ============ ============ ============
Weighted average number 11,257,200 9,791,000 10,628,600 9,579,900
of shares outstanding
============ ============ ============ ============
See Notes to Consolidated Financial Statements.
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<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended June 30
-----------------------------------
1999 1998
----------- -----------
Cash Flows From Operating Activities:
Net Loss $(3,092,500) $ (991,600)
Adjustments to reconcile net loss to
net cash used in operating activities:
Common stock options granted for compensation
and other services 42,500 --
Depreciation expense 117,200 35,100
Amortization of intangible assets 528,800 761,400
Amortization of debt discount and issuance costs
202,000 --
Conversion of accrued interest on debentures to common stock
83,700 --
Provision for obsolete and slow-moving inventories
230,000 --
Changes in operating assets and
liabilities, net of effects
of acquisitions:
Decrease (increase) in:
Trade receivable 386,700 (251,900)
Restricted Cash 50,000 --
Inventories (205,800) (182,000)
Prepaid expenses and other assets (8,300) 59,300
Deposits and other (36,800) 17,100
Increase (decrease) in:
Accounts payable 345,700 (149,700)
Accrued expenses 391,200 157,700
Unearned revenue (29,800) (18,000)
----------- -----------
Net cash used in operating activities (995,400) (562,600)
----------- -----------
Cash Flows From Investing Activities:
Payment for acquisition of businesses -- (598,900)
Software development costs (156,000) (166,300)
Purchase of property and equipment (83,600) (172,800)
Patents -- (10,900)
----------- -----------
Net cash used in investing activities (239,600) (948,900)
----------- -----------
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<PAGE>
Nine Months Ended June 30,
------------------------------------
1999 1998
---------- -----------
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
Cash Flows From Financing Activities:
Proceeds from borrowings 671,800 986,300
Principal payments related to:
Notes Payable (486,000) (19,700)
Capital lease obligations (28,800) --
Debt Issuance costs (58,000) --
Proceeds from exercise of common stock
options 124,400 41,900
Proceeds from issuance of common stock 767,100 --
----------- -----------
Net cash provided by (used in) financing activities 990,500 1,008,500
----------- -----------
Net Increase/(decrease) in Cash and Equivalents
(244,500) (503,000)
Cash and Equivalents, beginning of period 553,100 836,400
----------- -----------
Cash and Equivalents, end of period $ 308,600 $ 333,400
=========== ===========
Supplemental Disclosures of Cash Flow
Information:
Cash paid for interest $ 47,800 $ --
=========== ===========
Supplemental Schedule of Non-cash
Investing and Financing Activities:
Fair value of inducement related to
amendment to convertible debentures $ 259,400 $ --
=========== ===========
Increase (decrease) in payables for capital
expenditures $ (17,300) $ --
=========== ===========
Debt discount and issuance costs incurred
for convertible debentures $ 40,000 $ 113,700
=========== ===========
Conversion of debentures to common stock $ 1,140,000 $ 220,000
=========== ===========
Fair value of warrants issued for debt
issuance costs
$ -- $ 120,000
=========== ===========
Issuance of common stock for acquisition of
business $ --
$ 5,508,200
=========== ===========
Notes payable incurred for acquisition of
business, net of discounts $ -- $ 800,100
=========== ===========
Debt assumed in business acquisitions $ -- $ 67,900
=========== ===========
See Notes to Consolidated Financial Statements.
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<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these financial statements
be read in conjunction with Medical Dynamics, Inc.'s (`MEDY' or the `Company')
Form 10-KSB for the year ended September 30, 1998. The results of operations for
the periods ended June 30, 1999 and June 30, 1998 are not necessarily indicative
of operating results for the full years.
The Consolidated Financial Statements and other information furnished
herein reflect all adjustments which are, in the opinion of management of MEDY,
necessary for a fair presentation of the results of the interim periods covered
by this report. Adjustments to the financial statements were of a normal
recurring nature.
NOTE 2. EARNINGS PER SHARE
Shares issuable under common stock options and warrants were excluded from
the computation of fully diluted earnings per share because the effect was
anti-dilutive. At August 4, 1999, MEDY had 2,910,237 of vested common stock
options and warrants outstanding. Total common stock options and warrants
outstanding (including both vested and unvested) were 3,760,037 at August 4,
1999.
NOTE 3. INVENTORIES
Inventories consist of the following at June 30, 1999 and September 30,
1998:
June 30 September 30
1999 1998
---------------------------
Raw materials and replacement parts $ 192,700 $ 313,900
Finished goods 1,005,700 601,000
Work in progress - -
Show Stock 158,300 186,000
Allowance for obsolescence (501,300) (221,300)
========= ========
$ 855,400 $ 879,600
========= =========
At June 30, 1999 raw materials inventories have decreased $121,200, while
finished goods inventory has increased $404,700 due to the on going business of
Computer Age Dentist, Inc. (CADI), MEDY's wholly owned subsidiary. Allowance for
obsolescence has been estimated and increased by $280,000, along with a decrease
in show stock of $27,700 for a net inventory decrease of $24,200. Management
continues its efforts to reduce inventory and inventory carrying costs, while
maintaining inventory levels needed to meet sales requirements.
-7-
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 4. UNEARNED REVENUE
Unearned revenue represents payments received on deferred software support
contracts, installation charges and training that have not been earned. The
amounts for deferred software support contracts are amortized into revenue on a
monthly basis using the straight-line method over the life of the contract.
Deferred amounts for installation and training are recognized when the services
are performed.
Costs for software support contracts, installation and training, are
charged to expense when those costs are incurred.
-8-
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
General Discussion
During the fiscal year ended September 30, 1998, MEDY significantly changed
its corporate emphasis. While MEDY is still manufacturing and selling disposable
drapes for use in medical operations, MEDY has greatly expanded its operations
and has entered into additional industry segments as a result of acquisitions
completed in fiscal 1998. Consequently, as described below, medical products
have become much less significant to MEDY's operations and financial condition,
accounting for only approximately 1.2% of MEDY's total revenues during the most
recent nine month period.
As discussed in Note 2 to the audited financial statements as of September
30, 1998, (see MEDY's form 10-KSB for the year ended September 30, 1998 and the
accompanying audited financial statements), MEDY has suffered and is continuing
to suffer recurring losses and negative cash flows from operations. As a result
of these losses and negative cash flow, MEDY has a working capital deficit at
June 30,1999. Even though the Company has seen significant sales increases over
the last fiscal year end and the last three quarters, MEDY has, and for at least
the near term, expects to experience periodic negative cash flow from operations
and net losses as it strives to bring operational expenses more in line with
current revenues. Also as described below, MEDY is taking a number of steps to
reduce its administrative expenses which increased at a significantly greater
rate than the increase in revenues.
Management has taken a number of steps to restructure the Company's product
and expense structure to better match its revenues. Effective April 15, 1999 the
manufacturing of intra oral cameras was ceased and eight employees were
terminated. Additional employees were also terminated during the June 1999
quarter. In addition, MEDY took a $200,000 write off of raw material inventory
in the March quarter to reflect any possible losses the Company might incur from
the liquidation of unused raw material inventory. The Company is in the process
of liquidating its current finished goods inventory of intra oral cameras in the
ordinary course of business and then will begin to represent other camera
manufacturer's products in the market place on a non-exclusive distributor
basis. Gross margins on cameras distributed are not expected to differ
materially from the margins obtained on cameras manufactured by the Company, but
the overall profitability of the camera product line is expected to improve
since, as a distributor, MEDY will not be required to incur the overhead
expenses associated with manufacturing; MEDY cannot offer any assurance,
however, that profitability will, in fact, increase. This is in line with the
Company's overall strategy, which is to be a systems integrator of hardware
components in connection with the sales of our proprietary software products.
Concurrent with the decision to cease the manufacturing operation and throughout
the third quarter and beyond, management has continued to make other substantive
expense cuts in the areas of management compensation, personnel, consulting and
advertising. The Company is also in the process of consolidating its dental
operations into its Los Angeles office and systematically reducing the staff and
eliminating the expense associated with its operations in both Detroit and
Atlanta. These cuts have taken effect in the Company's fiscal third quarter
ending June 30, 1999 and will continue throughout the Company's fourth quarter.
These cuts and consolidations are projected to have a positive effect on net
operating cash flow, but no assurance of that fact can be given.
-9-
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. (Continued)
This report on form 10-QSB, including the information incorporated by
reference herein, contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Certain statements contained
in this report using the term "may", "expects to", and other terms denoting
future possibilities, are forward looking statements. These statements include,
but are not limited to, those statements relating to development of new
products, the financial condition of MEDY, the ability to increase distribution
of MEDY's products, integration of new businesses MEDY has acquired during the
1998 fiscal year, reduction of general and administrative expenses and costs of
sales as described herein, approval of MEDY's products as and when required by
the Food and Drug Administration ("FDA") in the United States and similar
regulatory bodies in other countries. The accuracy of these statements cannot be
guaranteed as they are subject to a variety of risks which are beyond the
Company's ability to predict or control and which may cause actual results to
differ materially from the projections or estimates contained herein. The
business and economic risks faced by MEDY and MEDY's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors as described herein and in the Company's other reports
filed with the Securities and Exchange Commission.
Financial Condition. (June 30, 1999 as compared to September 30, 1998)
During the nine month period ended June 30, 1999, MEDY's net working capital
decreased approximately $978,700 and, consequently, at June 30, 1999 MEDY had a
working capital deficit where its current assets were less than its current
liabilities. Principal changes in the components of net working capital (W/C)
for the nine months ended June 30, 1999 consist of:
<TABLE>
<CAPTION>
June 30 September 30 W/C
1999 1998 Effect
--------------------------------------------------------
<S> <C> <C> <C>
Cash & Equivalents $ 308,600 $ 553,100 $ (244,500)
Restricted Cash -- 50,000 (50,000)
Trade Receivables 492,700 879,400 (386,700)
Inventories 855,400 879,600 (24,200)
Pre-paid Expenses 33,100 24,800 8,300
----------- ----------- -----------
Total Current Assets 1,689,800 2,386,900 (697,100)
Current maturities of notes payable 303,000 546,100 243,100
Current maturities of under capital lease 50,600 40,000 (10,600)
Accounts payable 894,600 565,800 (328,800)
Accrued expenses 631,100 416,000 (215,100)
Deferred Revenue 340,300 370,100 29,800
----------- ----------- -----------
Current liabilities: 2,219,600 1,938,000 (281,600)
----------- ----------- -----------
Working capital $ (529,800) $ 448,900 $ (978,700)
=========== =========== ===========
</TABLE>
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<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. (Continued)
Cash Used In Operating Activities. Cash used in operating activities for
the nine months ended June 30, 1999 amounted to $995,400 compared to $562,600
for the nine months ended June 30, 1998. This 177% increase in cash used in
operations was due in large part to the significant operating losses suffered by
MEDY and its subsidiary, and MEDY's using it's cash to finance those losses.
The Company's net loss amounted to $3,092,500 for nine months ended June
30, 1999 which includes $1,204,200 of non-cash charges for depreciation,
amortization and stock compensation expense. Inventory increases required cash
of $205,800. This amount was offset by an increase in accounts payable, accrued
expenses and other of $892,800 which had a positive impact on operating cash
flows.
Cash Used In Investing Activities. For the nine months ended June 30, 1999,
the Company used cash in investing activities of $239,600. This amount was
comprised of the acquisition of computers and other equipment of $83,600 and
enhancements to the Company's dental practice management software of $156,000.
For the comparable period of the preceding year the Company utilized $948,900 of
cash in investing activities, primarily due to cash payments of $598,900 in
connection with the CADI and IPS acquisitions. MEDY has restructured its accrued
indebtedness incurred to acquire Command as a result of a settlement of
litigation described below.
Cash Generated in Financing Activities. Offsetting the expenditures of cash
used for operating and investing activities, were net proceeds of $767,100 from
the sale of 523,834 shares of common stock in a private placement, $360,000 from
the issuance of convertible debentures, $311,800 from bank borrowings and
$124,400 from the exercise of employee stock options. Uses of cash for financing
activities were $514,800 for principal payments on debt obligations and $58,000
for debt issuance costs.
During fiscal 1999 MEDY experienced decreased and negative working capital
as MEDY was required to finance increased sales and marketing activities. To
augment working capital, in November 1998 MEDY raised net proceeds of $360,000
from the sale of $400,000 of convertible debentures to the same unaffiliated
company which had purchased debentures in October 1997 and July 1998. (Please
refer to the debenture schedule below). On March 18, 1999, Resonance Limited, an
unaffiliated company located in the Isle of Man, British Isles, purchased
523,834 shares of MEDY common stock for $800,000. MEDY now has an effective
registration statement related to these shares. In addition, MEDY agreed to
issue "additional shares" to Resonance at various "determination dates." The
determination dates are two, four, and six months after the registration
statement for the shares issued to Resonance becomes effective. The number of
additional shares to be issued to Resonance are intended to compensate Resonance
for one-third of the decrease (if any) in market price of MEDY common stock
during the period following the original purchase. MEDY issued an additional
80,108 shares of its restricted common stock as a result of the reduced market
price of its common stock as of the first determination date. MEDY is obligated
to issue no more than 2,060,033 shares and warrants pursuant to this obligation
(the "Future Priced Securities Cap").
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<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. (Continued)
After the end of fiscal 1998, MEDY obtained a $1,000,000 line of credit
with a three year term from Norwest Business Credit, Inc. with borrowings based
upon 80% of eligible accounts receivable. The Company has pledged substantially
all of its assets as collateral for the loan, but to date has only been able to
borrow approximately $400,000 at any given time. This loan was repaid in July
1999 with funds made available by affiliates of the Company as described below.
The bank assigned its security interest in substantially all of the collateral
to the affiliate.
The following schedule outlines convertible debenture activity:
<TABLE>
<CAPTION>
Balance Balance
Debenture: 9/30/98 Additions Conversions Amortized 6/30/99
- ---------- ------- --------- ----------- --------- -------
<S> <C> <C> <C> <C> <C>
October 97 $ 440,000 $ -- $ (440,000) $ -- $ --
July 98 1,100,000 -- (700,000) -- 400,000
November 98 -- 400,000 -- -- 400,000
----------- ----------- ----------- ----------- -----------
Total 1,540,000 400,000 (1,140,000) -- 800,000
----------- ----------- ----------- ----------- -----------
Discount:
October 97 (33,300) -- 33,300 -- --
July 98 (99,600) -- 56,000 13,000 (30,600)
November 98 -- (40,000) -- 5,300 (34,700)
----------- ----------- ----------- ----------- -----------
Total (132,900) (40,000) 89,300 18,300 (65,300)
----------- ----------- ----------- ----------- -----------
Net: $ 1,407,100 $ 360,000 $(1,050,700) $ 18,300 $ 734,700
=========== =========== =========== =========== ===========
</TABLE>
To continue MEDY's objective of curtailing operating losses, negative cash
flow from operations and further liquidity erosion, management is continually
reviewing product profit margins and general expense accounts, and will reduce
or eliminate all non-essential expenditures.
Although the acquisitions of CADI, IPS, and Command have resulted in
significant increases in revenues to MEDY during the current fiscal year and
beyond, MEDY expects to continue to experience negative cash flow from
operations during fiscal 1999. During fiscal 1998 and fiscal 1997, cash flow
deficits were funded by employee, officer, and consultant stock option exercises
and by convertible debt placements. However, MEDY's ability to fund its
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<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation. (Continued)
operations will be dependent upon achieving profitability and generating a
positive cash flow from operations in the future. Unless MEDY is able to
increase sales revenues further or decrease operating expenses further, and
achieve and maintain positive operating cash flow during fiscal 1999, MEDY may
continue to face significant working capital shortages in the latter part of
fiscal year 1999. There can be no assurance that MEDY will be able to avoid
future working capital shortages or that it will be able to finance working
capital shortages as necessary.
Management of the Company does not believe that its existing capital
resources are sufficient for the balance of the 1999 fiscal year if it continues
to grow revenues and expenses in proportion to what it experienced during fiscal
1998 and the first three quarters of fiscal 1999. As discussed below, in August
1999 an affiliate of the Company has advanced an additional $400,000 to the
Company for working capital purposes. The affiliate took a security interest in
substantially all of the Company's assets to secure repayment of the amounts
advanced.
The Company is currently seeking additional debt or equity capital to
augment its working capital position, although no assurances can be made as to
the availability of such debt or equity capital or if it can be obtained at
prices and terms that are in the best interest of the Company and its
shareholders. If the Company is able to raise additional debt or equity capital,
it would allow the Company to fund its operating losses and bring trade payables
current until such time as its expanded efforts in marketing, R & D and cost
cutting continues to increase revenues and decrease costs to a level of break
even operating cash flow or profitability, although no assurance of that fact
can be given. In addition, the Company is considering other alternatives,
including business combinations with other entities to provide MEDY with
flexibility and liquidity. MEDY is negotiating an arrangement with an affiliated
party to assume a significant portion of MEDY's Englewood, Colorado, lease
obligations and expects to complete this transaction in the near future. No
other financing or business combination alternatives have yet been identified,
however, and there can be no assurance that the Company will be able to complete
any financing or business combination alternative if one or more is identified.
There are 2,910,200 vested common stock options and warrants outstanding as
of August 12, 1999, and if exercised (of which there can be no assurance), these
options would provide varying amounts of additional working capital to MEDY.
These options have various exercise prices which range between $.875 and $5.00
per share and at August 3, 1999 the price of MEDY's common stock was
approximately $.94 If MEDY does obtain additional capital (of which there can be
no assurance), MEDY will be able to allocate more resources to sales and
marketing efforts, further acquisitions, as well as research and development.
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<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation. (Continued)
Results of Operations. As previously discussed, MEDY has made significant
changes to its operations in fiscal 1998 and 1999. With the purchases of CADI,
IPS, and Command, MEDY added several new product lines, such as dental practice
management software, software support, multi-operatory video/digital networks,
and digital x-ray systems. These new product lines have greatly increased MEDY's
gross profits as these new product lines have greater gross margins than the
products MEDY sold prior to the acquisitions.
Revenue. Software and training sales for the nine month period ended June
30, 1999 and 1998 were $3,348,200 and $2,114,600, respectively, for an increase
of $1,233,600 or 58.3%. Software and training sales for the three month period
ended June 30, 1999 and 1998 were $1,013,300 and $949,600, respectively, for an
increase of $63,700 or 6.7%. Increased sales are attributable to the Company's
additional expenditures on and expansion in the number of sales/marketing
personnel and increased advertising expenditures. Additionally, the 1998 periods
only include sales to customers from the April 1998 Command acquisition (April
1998 through June 1998). Based on MEDY's subsequent analysis, however, it does
not appear that the Command acquisition improved the Company's bottom line gross
profit or net income; as a result, the Company has settled litigation brought
against the former principals of Command which has resulted in them reassuming
the service obligation with respect to certain of their former customers who did
not switch from the XENIX/UNIX practice management software.
Equipment and installation sales for the nine months ended June 30, 1999
and 1998 were $3,949,100 and $2,151,200, respectively, for an increase of
$1,797,900 or 83.6%. Equipment and installation sales for the three months ended
June 30, 1999 and June 30, 1998 were $1,175,900 and $1,108,600, respectively,
for an increase of $67,300 or 6.1%. Increased sales are attributable to
increased software sales which requires many dentists to buy new computer
hardware or to upgrade their existing hardware. Also, sales are higher in 1999
compared to 1998 due to the acquisition of IPS in February 1998 and the
additional hardware product lines which that acquisition allowed the company to
enter.
Software support services sales for the nine months ended June 30, 1999 and
1998 were $1,832,400 and $1,196,500, respectively, for an increase of $635,900
or 53.1%. Software support services sales for the three months ended June 30,
1999 and 1998 were $676,000 and $557,100, respectively, for an increase of
$118,900 or 21.3%. Increased support services sales can be attributed to
increased software sales. Also, sales are higher through June 1999 compared to
June 1998 due to the acquisition of Command in April 1998.
MEDY believes that profit from these activities will improve as MEDY's
general and administrative expenses are consolidated and decreased and it's
operations become more efficient. There can be no assurance these positive
changes will ever result in an increase in cash flow or net income from MEDY's
operations (as compared to MEDY's historical net losses). Because of MEDY's
significant working capital deficit and negative cash flow, MEDY is attempting
to make these adjustments quickly, although there can be no assurance that MEDY
will be able to do so.
-14-
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation. (Continued)
Please refer to the schedules below for a summary of revenues, cost of
sales, and gross margins.
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
----------------------------------- -----------------------------------
June 30, Percent of June 30, Percent of
1999 Sales 1998 Sales
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Software & training:
Sales $3,348,200 100.0% $2,114,600 100.0%
Cost of sales 1,040,800 31.1% 351,800 16.6%
---------- -------- ---------- --------
Gross margin $2,307,400 68.9% $1,762,800 83.4%
========== ======= ========== ========
Equipment & Installation:
Sales $3,949,100 100.0% $2,151,200 100.0%
Cost of sales 2,891,100 73.2% 1,533,300 71.3%
---------- -------- ---------- --------
Gross margin $1,058,000 26.8% $ 617,900 28.7%
========== ======== ========== ========
Support Services:
Sales $1,832,400 100.0% $1,196,500 100.0%
Cost of sales 628,200 34.3% 228,400 19.1%
---------- -------- ---------- --------
Gross margin $1,204,200 65.7% $ 968,100 80.9%
========== ======== ========== ========
Total Sales $9,129,700 100.0% $5,462,300 100.0%
Total COS 4,560,100 49.9% 2,113,500 38.7%
---------- -------- ---------- --------
Total Gross Margin $4,569,600 50.1% $3,348,800 61.3%
========== ======== ========== ========
Three Months Ended Three Months Ended
-----------------------------------------------------------------------
June 30, Percent of June 30, Percent of
1999 Sales 1998 Sales
-----------------------------------------------------------------------
Software & training:
Sales $1,013,300 100.0% $ 949,600 100.0%
Cost of sales 470,100 46.4% 119,000 12.5%
---------- ------- ---------- -------
Gross margin $ 543,200 53.6% $ 830,600 87.5%
========== ======= ========== =======
Equipment & Installation:
Sales $1,175,900 100.0% $1,108,600 100.0%
Cost of sales 960,300 81.7% 731,200 66.0%
---------- ------- ---------- -------
Gross margin $ 215,600 18.3% $ 377,400 34.0%
========== ======= ========== =======
Support Services:
Sales $ 676,000 100.0% $ 557,100 100.0%
Cost of sales 95,700 14.2% 79,900 14.3%
---------- ------- ---------- -------
Gross margin $ 580,300 85.8% $ 477,200 85.7%
========== ======= ========== =======
Total Sales $2,865,200 100.0% $2,615,300 100.0%
Total COS 1,526,100 53.3% 930,100 35.6%
---------- ------- ---------- -------
Total Gross Margin $1,339,100 46.7% $1,685,200 64.4%
========== ======= ========== =======
</TABLE>
-15-
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation. (Continued)
Cost of Sales. Cost of sales of software and training for the nine months
ending June 30, 1999 and 1998 as a percent of software and training revenue were
31.1% and 16.6%, resulting in gross margin percentages of 68.9% and 83.4%,
respectively. Cost of sales of software and training for the three months ending
June 30, 1999 and 1998 as a percent of software and training revenue were 46.4%
and 12.5%, resulting in gross margin percentages of 53.6% and 87.5%,
respectively. The decline in gross margin percentage, for both the nine and
three month periods ended June 1999, can be attributed to increased training
personnel and wages, as well as difficulties that arose in connection with
MEDY's acquisition of Command which were the subject of litigation instituted in
April 1999. Additional training personnel were necessary as the Company grew
from regional training coverage to national coverage.
Cost of sales for equipment and installation for the nine months ended June
30, 1999 and 1998 as a percent of equipment and installation revenue were 73.2%
and 71.3%, resulting in gross margin percentages of 26.8% and 28.7%,
respectively. Cost of sales for equipment and installation for the three months
ended June 30, 1999 and 1998 as a percent of equipment and installation revenue
were 81.7% and 66.0%, resulting in gross margin percentages of 18.3% and 34.0%,
respectively. The decrease in gross margin percentage, for the nine and three
month period ended June 30, 1999, is due to decreasing the markup of dental
equipment to facilitate the liquidation of dental equipment inventory.
Cost of sales for software support for the nine months ended June 30, 1999
and 1998 as a percent of support services revenue were 34.3% and 19.1%,
resulting in gross margin percentages of 65.7% and 80.9%, respectively. Cost of
sales for software support for the three months ended June 30, 1999 and 1998 as
a percent of support services revenue were 14.2% and 14.3%, resulting in gross
margin percentages of 85.8% and 85.7%, respectively. For the nine months ended
June 30, 1999 and 1998 cost of sales for software support has increased due to
the Company's acquisition of Command whose support staff to client ratio was
much higher than that of CADI. For the three months ended June 30, 1999 and 1998
CADI has endeavored to bring support staff costs down while enhancing client
support services.
Selling & Marketing Expenses. Selling and marketing expenses for the nine
month periods ended June 30, 1999 and 1998 were $2,401,100 and $841,200,
respectively, for an increase of $1,559,900 or 185.4%. Selling and marketing
expenses for the three month period ended June 30, 1999 and 1998 were $616,300
and $395,100, respectively, for an increase of $221,200 or 56.0%. Due to the
Company's efforts to aggressively grow revenues, the Company greatly increased
-16-
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation. (Continued)
advertising expenditures and hired additional sales staff, resulting in
increased advertising, salary, convention, and travel costs. Although MEDY
believes that the increased marketing efforts have already resulted in increased
sales volume, sales and marketing expenses will have to continue and increase in
order to maintain and to continue to grow the increased volumes. There can be no
assurance that MEDY will be able to maintain or grow its revenues, and the
negative cash flow necessary to pay for the marketing expenses usually precedes
any increased positive cash flow from revenues by more than 90 days.
General and Administrative Expenses (G & A). G & A expenses for the nine
month period ended June 30, 1999 and 1998 were $4,856,100 and $3,373,200,
respectively, for an increase of $1,482,900 or 44.0%. G & A expenses for the
three month period ended June 30, 1999 and 1998 were $1,450,500 and $1,631,700
respectively, for a decrease of $181,200 or 11.1%. The acquisitions of IPS and
Command together with the Company's efforts to aggressively grow revenues
resulted in higher wages and benefits, travel, rent, and office related expenses
for the nine months ended June 30, 1999. Decreased costs for the three months
ended June 30, 1999 are the result of the implementation of management's cost
cutting measures.
Research and Development Costs (R & D). For the nine months ended June 30,
1999 and 1998, R & D expenses were $2,700 and $34,100, respectively, for a
decrease of $31,400 or 92.1%. For the three months ended June 30, 1999 and 1998,
R & D expenses were $0 and $14,900, respectively, for a decrease of $14,900 or
100.0%. The Company's policy is to fund R & D as it deems appropriate to
maintain or gain a competitive advantage. Note that software development costs
are not included in R & D costs. After technological feasibility of products is
established, software development costs are capitalized then amortized to cost
of sales. For the nine months ended June 30, 1999 and 1998, software development
costs capitalized were $171,100 and $165,800, respectively. For the three months
ended June 30, 1999 and 1998, software development costs capitalized were
$36,000 and $86,400, respectively.
Interest Income and Expense. Interest income is a function of current cash
invested for the period. Interest income for the nine months ended June 30, 1999
and 1998 was $11,100 and 30,500, respectively. Interest income for the three
months ended June 30, 1999 and 1998 was $4,700 and $4,400, respectively.
Interest expense for the nine months ended June 30, 1999 totaled $412,200.
Interest expense for the three months ended June 30, 1999 totaled $68,800.
-17-
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation. (Continued)
The following table illustrates interest expense for these periods.
Nine Months Three Months
Ended June Ended June
Description: 30, 1999 30,1999
-------------------------------
Related Party Notes $38,200 $11,400
Convertible Debentures 84,400 22,300
Line of Credit 27,400 11,600
Capitalized Lease 16,000 4,500
Debt Issuance / Discount Amortization 246,200 19,000
==============================
Total Interest Expense: $412,200 $68,800
==============================
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
MEDY and its wholly-owned subsidiary Computer Age Dentist, Inc.
("CADI")have filed litigation against Sally Marcotte, Oliver Marcotte Eric
Heverly, and ADG, Inc. This litigation was pending in the U.S. District Court
for the District of Colorado. The litigation sought, among other things,
rescission of the April 1998 merger agreement by which Computer Age Dentist,
Inc. acquired the assets of Command Dental Systems, Inc. from the Command
shareholders, rescission of the employment agreement between Computer Age
Dentist and Sally Marcotte, damages, and other affirmative relief in favor of
Medical Dynamics and CADI.
Dr. and Mrs. Marcotte filed actions against MEDY and CADI in courts in
Michigan for breach of an office lease and breach of Mrs. Marcotte's employment
agreement, and for other claims.
MEDY and CADI initiated settlement discussions and reached a settlement
agreement with all of the participants in the litigation. As a result of this
settlement which was completed in August 1999, MEDY reduced its indebtedness
from the Command acquisition from approximately $500,000 (which was current
indebtedness) to $250,000 of long-term indebtedness; MEDY retained the
approximately 150 former Command clients who had converted to the CADI software;
and MEDY terminated all lease obligations on the Michigan office space and the
Employment Agreement with Mrs. Marcotte. In addition, the parties entered into
mutual, general releases and stipulations to dismiss the litigation.
Item 2. Changes in Securities and Use of Proceeds.
On March 18, 1999, Resonance Ltd., an unaffiliated company located in the
Isle of Man, British Isles, purchased 523,834 shares of MEDY common stock for
$800,000. MEDY subsequently obtained effectiveness of a registration statement
related to those shares and additional shares of common stock underlying
warrants issued to Resonance. In addition, MEDY agreed to issue "additional
-18-
<PAGE>
shares" to Resonance at various "determination dates." The determination dates
are two, four, and six months after the registration statement for the shares
issued to Resonance becomes effective. The number of additional shares to be
issued to Resonance are intended to compensate Resonance for one-third of the
decrease (if any) in market price of MEDY common stock during the period
following the original purchase. MEDY is obligated to issue no more than
2,060,033 shares and warrants pursuant to this obligation (the "Future Priced
Securities Cap"). As of the first "determination date", July 5, 1999, MEDY has
issued Resonance, Ltd. 80,108 additional shares.
The following information is provided for securities sold since the end of
the fiscal year which were not registered under the Securities Act of 1933:
(a) The date, title and amount of securities sold. $400,000 of convertible
debentures (the "Tail Wind Transaction"), November 18, 1999, and 523,834 shares
of restricted common stock (the "Resonance Transaction"), March 17, 1999.
(b) (1) Give the names of the principal underwriters, if any: None. MEDY
did pay fees to:
Rochon Capital, Inc. of San Rafael, California, as a finder in
connection with the sale of convertible debentures to Tail Wind in
the Tail Wind Transaction; and
Ayeh Trading Inc., of New York, New York, in connection with its
due diligence activities on behalf of Resonance in the Resonance
Transaction.
(2) The securities were offered to accredited investors only with respect
to the convertible debentures sold to Tail Wind and the shares sold to
Resonance, both in transactions described above in the Management's Discussion
and Analysis.
(c) As described in the management's discussion and analysis, above,
Convertible Debentures were sold to a single accredited investor
(Tail Wind) in November 1999 aggregating $400,000, bringing the
total of debentures outstanding to $1,500,000. Since that time, that
accredited investor has converted $700,000 of the debentures into
701,060 shares of common stock.
523,834 shares of restricted common stock was sold to a single
accredited investor (Resonance) in March 1999 for a total investment
of $800,000. Subsequently, 80,109 shares were issued under the reset
provisions of that agreement.
(d) The section of the Securities Act or the rule of the Commission under
which the small business issuer claimed exemption from registration and the
facts relied upon to make the exemption available.
The convertible debentures were offered and sold to Tail Wind,
and the common stock was offered and sold to Resonance pursuant to
the exemptions found in Sections 4(2) and 4(6) of the Securities Act
of 1933, as amended, and Rule 506 thereunder.
The common stock was issued on conversion of the convertible
debentures pursuant to the exemption from registration found in
Section 3(a)(9) of the Securities Act of 1933, as amended.
-19-
<PAGE>
(e) The terms of conversion of the convertible securities issued to Tail
Wind, and the terms of additional securities and warrants that may be issued to
Resonance are as follows:
Convertible Securities Issued To Tail Wind
- ------------------------------------------
Tail Wind will acquire shares upon conversion of convertible securities at
85% of Market Price (as defined) on the date of conversion. "Market Price" is
defined to mean the average of the two lowest closing bid prices of the Common
Stock as reported by The Nasdaq Stock Market over the 60 trading day period
immediately preceding the determination date. For the purposes of the 1998
Debentures, "Ceiling Price" is defined to mean 105% of the average closing bid
price of the Common Stock for the twenty trading days prior to the effective
date of this registration statement. The Ceiling Price is to be adjusted on July
31, 2000, to 105% of the Market Price on that date if the adjustment would
result in a lower price.
Tail Wind has agreed by contract that it will at no time own more than
4.99% of the Common Stock. This contractual limitation prohibits Tail Wind from
converting the 1998 Debentures or exercising the 1998 Warrants to the extent
that conversion or exercise would result in Tail Wind owning more than 4.99% of
the issued and outstanding shares of Common Stock. This limitation is referred
to in this Prospectus as the "5% Limitation." As a result of the 5% Limitation
and pursuant to SEC Rule 13d-4, Tail Wind disclaims beneficial ownership of all
shares to the extent such ownership would result in it exceeding the 5%
Limitation. Since the 5% Limitation is the result of a contractual agreement
between MEDY and Tail Wind, the parties could, by agreement, waive the
restriction.
Tail Wind also holds warrants to acquire 150,000 shares at an exercise
price equal to $2.58 per share.
MEDY and Tail Wind have agreed that, notwithstanding any decrease in Market
Price, Tail Wind may not convert 1998 Debentures which would result in the
issuance of more than 1,880,000 shares (including shares issued as interest on
the 1998 Debentures, or issued or issuable upon exercise of the 1998 Warrants).
If Tail Wind is precluded from converting any 1998 Debentures because of this
provision, Tail Wind may demand, upon six months' notice, that the Company
redeem the remaining 1998 Debentures for 115% of the remaining principal amount.
This is referred to herein as the "Future Priced Securities" limitation. If MEDY
is required to redeem any portion of the 1998 Debentures as a result of the
Future Priced Securities limitation, MEDY will have six months notification to
obtain the financing to do so. In such an event, MEDY will have to seek debt or
equity financing (unless it has sufficient funds from other sources, such as
revenues from operations, available). Although MEDY believes it can do so based
on its past experiences, there can be no assurance that MEDY will be able to
obtain financing necessary to redeem the 1998 Debentures if required.
-20-
<PAGE>
Additional Securities and Warrants Potentially Issuable to Resonance
- --------------------------------------------------------------------
In connection with the Resonance Transaction, MEDY agreed to issue
"additional shares" to Resonance at July 5, 1999, September 5, 1999, and
November 5, 1999. The number of additional shares to be issued to Resonance are
intended to compensate Resonance for one-third of the decrease in market price
of MEDY common stock (if any) during the period following the original purchase.
MEDY is obligated to issue no more than 2,060,033 shares and warrants pursuant
to this obligation (the "Future Priced Securities Cap").
After November 5, 1999 and subject to the Future Priced Securities cap,
MEDY will issue Resonance a warrant to purchase 523,834 shares for a six month
period at $1.5272. The issuance of the additional common shares and warrants to
Resonance will result in a dilution adjustment to warrants held by Tail Wind.
Item 5. Other Information.
In July 1999, and in an effort to ease MEDY's cash flow difficulties and
working capital deficity, MEDY extended certain amounts which were currently
payable to affiliates, and borrowed certain other amounts from other affiliates,
as follows:
MEDY owes two of its officers and directors, Daniel L. Richmond and
Chae U. Kim, amounts which derive from MEDY's original acquisition of
CADI. Approximately $127,000 was outstanding under these notes, and all
of this was payable on August 1, 1999. Messrs. Richmond and Kim agreed
to extend the due date on their respective notes for one additional
year or, if earlier, upon the sale by MEDY or CADI of all or
substantially all of its or their assets. These promissory notes bear
interest at 12% per annum, with interest being payable when the
principal is due.
On July 30, 1999, MEDY issued a promissory note in the amount of
$400,000 to Dr. and Mrs. Adair, two officers and directors of MEDY. Dr.
and Mrs. Adair advanced the entire amount to MEDY on July 30, 1999. To
collateralize repayment of the amounts due under that note, Dr. and
Mrs. Adair received an assignment of collateral from Norwest Business
Credit which was repaid in full. The note bears interest at 12% per
annum, with interest payable monthly in arrears. All unpaid interest
and principal is due on July 30, 2000 or, if earlier, upon the sale by
MEDY or CADI of all or substantially all of its or their assets.
In both cases, the note extensions (in the case of Messrs. Richmond
and Kim) and the borrowing from Dr. and Mrs. Adair were approved by a unanimous
vote of all directors, including all of the disinterested directors.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27. Financial data schedule.
-21-
<PAGE>
(b) Reports on Form 8-K:
The Company's Current Report on Form 8-K reporting events
of:
March 4, 1999 describing amendments to Tailwind Fund's
$1,500,000 convertible debentures.
March 18, 1999 describing further amendments to Tailwind
Fund's $1,500,000 convertible debentures and the purchase of
523,834 shares of the registrant's common stock by Resonance,
Ltd. for $800,000.
April 13, 1999 describing the registrant's pending
litigation against the previous owners of Command Dental
Systems, Inc., settlement efforts and the lack of a material
adverse impact on the registrant's financial condition.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 13, 1999 /s/ Van A. Horsley
-----------------------------------------
Van A. Horsley, President, Principal
Executive Officer, and Principal
Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> JUN-30-1999
<CASH> 308,600
<SECURITIES> 0
<RECEIVABLES> 594,000
<ALLOWANCES> (101,300)
<INVENTORY> 855,400
<CURRENT-ASSETS> 1,689,800
<PP&E> 1,523,200
<DEPRECIATION> (916,600)
<TOTAL-ASSETS> 8,033,500
<CURRENT-LIABILITIES> 2,219,600
<BONDS> 734,800
0
0
<COMMON> 11,600
<OTHER-SE> 4,709,500
<TOTAL-LIABILITY-AND-EQUITY> 8,033,500
<SALES> 2,865,200
<TOTAL-REVENUES> 2,885,700
<CGS> 1,526,100
<TOTAL-COSTS> 3,607,900
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 68,800
<INCOME-PRETAX> (791,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (791,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (791,000)
<EPS-BASIC> (.07)
<EPS-DILUTED> (.07)
</TABLE>
