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 December 31, 1998
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 February 12, 1999 is 10,301,667 shares, $.001 par value.
<PAGE>
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<CAPTION>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements.
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
12/31/98 9/30/98
----------- -----------
CURRENT ASSETS:
<S> <C> <C>
Cash and equivalents $ 568,900 $ 553,100
Restricted cash 50,000 50,000
Trade receivables, less allowance for
doubtful accounts of $109,000 and $108,400 892,200 879,400
Inventories 1,128,800 879,600
Prepaid expenses 49,500 24,800
----------- -----------
Total Current Assets 2,689,400 2,386,900
----------- -----------
SOFTWARE DEVELOPMENT AND SUPPORT:
Software development costs, net of
accumulated amortization of $524,000
and $417,800 2,618,700 2,619,800
Technical support contracts, net of
accumulated amortization of $383,300
and $305,000 1,194,800 1,303,100
----------- -----------
Total Software Development and Support 3,813,500 3,922,900
----------- -----------
PROPERTY AND EQUIPMENT:
Demonstration equipment 451,500 420,900
Machinery and equipment 563,700 553,800
Furniture and fixtures 358,400 355,200
Leasehold improvements 127,000 127,000
----------- -----------
1,500,600 1,456,900
Less accumulated depreciation and
amortization (846,300) (799,400)
----------- -----------
Property and Equipment, Net 654,300 657,500
----------- -----------
OTHER ASSETS:
Goodwill, net of accumulated 1,861,300 1,892,300
amortization of $151,800 and $120,800
Non-compete agreement's net of accumulated
amortization of $100,000 and $80,000 99,200 119,200
Debt issuance costs, net of accumulated --
amortization of $122,400 and $85,400 146,800 125,400
Patents and trademarks, net of accumulated
amortization of $771,200 and $766,200 24,300 29,200
Deposits and other 14,500 37,000
----------- -----------
Total Other Assets 2,146,100 2,203,100
----------- -----------
TOTAL ASSETS $ 9,303,200 $ 9,170,400
=========== ===========
See Notes to Consolidated Financial Statements.
2
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<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, Continued
LIABILITIES AND STOCKHOLDERS' EQUITY
12/31/98 9/30/98
------------ ------------
CURRENT LIABILITIES:
Current maturities of notes payable $ 599,400 $ 546,100
Current maturities of obligations under
capital lease 39,100 40,000
Accounts payable 775,900 565,800
Accrued expenses 783,200 416,000
Unearned revenue 429,700 370,100
------------ ------------
Total Current Liabilities 2,627,300 1,938,000
------------ ------------
NOTES PAYABLE, net 288,900 321,900
OBLIGATIONS UNDER CAPITAL LEASE, net 31,400 39,400
CONVERTIBLE DEBENTURES, net 1,366,900 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
10,301,667 and 10,034,500 shares 10,300 10,000
Additional paid-in capital 25,770,800 25,246,900
Accumulated deficit (20,792,400) (19,793,000)
------------ ------------
Total Stockholders' Equity 4,988,700 5,463,900
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 9,303,200 $ 9,170,400
============ ============
See Notes to Consolidated Financial Statements.
3
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Quarter Ended
Ended December 31
--------------------------------
1998 1997
--------------------------------
NET SALES:
Software & training $ 1,158,200 $ 565,600
Equipment & Installation 1,372,000 587,900
Support services 551,500 355,900
------------ ------------
3,081,700 1,509,400
------------ ------------
COST OF SALES:
Software & training 270,100 127,700
Equipment & Installation 888,100 506,800
Support services 260,400 91,800
------------ ------------
1,418,600 726,300
------------ ------------
GROSS PROFIT 1,663,100 783,100
------------ ------------
OPERATING EXPENSES:
Selling & marketing 945,100 142,200
General & administrative 1,599,900 940,100
Stock based compensation 22,500 --
Research & development 600 4,100
------------ ------------
Total operating expenses 2,568,100 1,086,400
------------ ------------
OPERATING LOSS (905,000) (303,300)
OTHER INCOME (EXPENSE):
Other income 4,100 600
Interest income 3,100 13,900
Interest expense (101,900) (31,100)
------------ ------------
NET LOSS $ (999,700) $ (319,900)
============ ============
Earnings per share $ (0.10) $ (0.04)
============ ============
Weighted average number
of shares outstanding 10,220,900 8,866,000
============ ============
See Notes to Consolidated Financial Statements.
4
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended December 31
------------------------------
1998 1997
--------- ---------
Cash Flows From Operating Activities:
Net Loss $(999,700) $(319,900)
Adjustments to reconcile net loss to
net cash used in operating activities:
Common stock options granted for compensation
and other services 22,500 --
Depreciation expense 47,000 87,200
Amortization of intangible assets 240,500 145,500
Amortization of debt discount and issuance costs 56,300 --
Conversion of accrued interest on debentures
to common stock 33,000 --
Changes in operating assets and
liabilities, net of effects
of acquisitions:
Decrease (increase) in:
Trade receivable (12,800) (262,200)
Inventories (249,200) 103,100
Prepaid expenses 6,600 (5,200)
Increase (decrease) in:
Accounts payable 227,400 (17,200)
Accrued expenses 391,200 8,000
Deferred revenue 59,600 18,100
--------- ---------
Net cash used in operating activities (177,600) (242,600)
--------- ---------
Cash Flows From Investing Activities:
Payment for acquisition of businesses -- (379,200)
Software development costs (75,100) (8,400)
Purchase of property and equipment (61,000) (24,500)
Other -- (18,300)
--------- ---------
Net cash used in investing activities (136,100) (430,400)
--------- ---------
5
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MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
Three Months Ended December 31
------------------------------
1998 1997
----------- ----------
Cash Flows From Financing Activities:
Principal payments on:
Notes payable (318,700) --
Capital lease obligations (8,800) --
Proceeds from exercise of options to
purchase common stock 22,300 29,600
Net proceeds from issuance of
convertible debenture 339,800 986,300
Proceeds from notes payable 294,900 --
----------- -----------
329,500 1,015,900
----------- -----------
Net Increase in Cash and Equivalents 15,800 342,900
Cash and Equivalents, beginning of period 553,100 836,400
----------- -----------
Cash and Equivalents, end of period $ 568,900 $ 1,179,300
=========== ===========
Supplemental Disclosures of Cash Flow
Information:
Cash paid for interest $ 10,000 $ --
=========== ===========
Supplemental Schedule of Noncash
Investing and Financing Activities:
Common stock issued for acquisition of
businesses $ -- $ 4,480,000
Notes payable for acquisition of
Businesses, net of discounts $ -- $ 372,000
Conversion of debentures to common stock,
net of discount $ 406,700 --
Fair value of warrants issued for debt
discount $ 40,000 $ 120,000
Debt issuance costs incurred for
convertible debenture $ 60,200 $ 113,700
See Notes to Consolidated Financial Statements.
6
<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 Decemebr 31, 1998 and December 31, 1997 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 December 31, 1998, MEDY had 3,176,200 of vested common stock
options and warrants outstanding. Total common stock options and warrants
outstanding (including both vested and unvested) were 4,676,200 at December 31,
1998.
NOTE 3. INVENTORIES
Inventories consist of the following at December 31, 1998 and September 30,
1998:
December 31 September 30
1998 1998
----------- -----------
Raw materials and replacement parts $ 287,000 $ 313,900
Finished goods 893,800 601,000
Work in progress -- --
Show Stock 185,800 186,000
Allowance for obsolescence (237,800) (221,300)
----------- -----------
$ 1,128,800 $ 879,600
=========== ===========
At December 31, 1998 medical products inventories have decreased $26,900 while
other inventories have increased $276,100 due to the on going business of
Computer Age Dentist, Inc. (CADI), MEDY's wholly owned subsidiary, for a net
inventory increase of $249,200. 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. DEFERRED REVENUE
Deferred 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>
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
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.
During late fiscal 1996, MEDY had adapted its cameras for use in dental
offices and in fiscal 1997 had commenced sales of its cameras for dental
applications. To take further advantage of the entry into dental offices, MEDY
acquired Computer Age Dentist, Inc. ("CADI") of Los Angeles, CA in October 1997.
CADI has developed a Windows' based dental office practice management software
which allows a dental office to integrate patient and financial management
information. The acquisition of CADI provided MEDY's entry into both the
software sales and software support segments in which MEDY did not previously
participate.
MEDY's largest purchaser of dental cameras during fiscal 1997 was
Information Presentation Systems, Inc. ("IPS") of Marietta, GA. In its
eight-year history, IPS had become one of the nation's largest suppliers of
customized multimedia systems for use in a variety of dental operatory
environments. IPS had been involved in the development and marketing of several
dental technology products, including intra-oral video cameras, video and
computer image storage systems, patient education systems, and digital
radiography and micro-abrasion instruments. To take advantage of IPS's
significant industry presence and to further integrate the CADI operations with
the MEDY dental camera sales, MEDY acquired IPS in February 1998.
Neither CADI nor IPS had a significant presence in the Upper Midwest/Great
Lakes region of the U.S. In April 1998, MEDY acquired Command Dental Systems
("Command") of Farmington Hills, MI which did have a significant sales base in
this region for its dental office management software, which are UNIX and ZENIX
based systems. Command had an in-house staff of programmers, sales people,
installers, trainers, and support technicians with more than 550 clients ranging
from small offices to large clinics like the University of Michigan Dental
School.
CADI is now operating the businesses previously operated by IPS and
Command, both of which were merged into CADI. As a result of the CADI, IPS, and
Command acquisitions, MEDY has integrated the hardware and software necessary to
manage a dental practice. Since MEDY's products are all Year 2000 compliant,
MEDY is positioned to market CADI's products to a large number of dental
practices with MS-DOS and UNIX based software which may not be Y2K compliant.
The acquisitions of CADI, IPS, and Command have already resulted in a
significant increase Item 2. MD & A, Continued in revenues to MEDY. Due to the
9
<PAGE>
rapid growth of the post acquisition company and because of the costs of the
acquisitions and the costs of integrating the operations and administration of
these new companies, the acquisitions have resulted in negative operating cash
flow and have caused certain working capital shortages. MEDY believes this
situation to be temporary because these operations are expected to increase
MEDY's revenues further and, as MEDY begins to benefit from the economies of
scale, MEDY expects that it will realize improved cash flows from operations,
operating profits, and liquidity, although there can no assurances that it will
actually be able to do so. MEDY's goal is to become the `Single Source
Technology Solution' for dental practices moving into the complex
digital/computer age. With the purchases of IPS and Command, CADI now offers a
comprehensive range of products to the dental industry, including practice
management software, electronic claims processing, image capture software,
intra-oral cameras, multi-operatory video/digital networks, patient education
and digital x-ray systems.
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 recurring losses
and negative cash flows from operations. Even though the Company has seen
significant sales increases over the last fiscal year end and last quarter, MEDY
has, and for at least the near term, expects to experience periodic negative
cash flow from operations and net losses as it continues to build the Company's
infrastructure to handle further expected growth.
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, 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.
10
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MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation. (Continued)
Financial Condition. (December 31, 1998 as compared to September 30, 1998)
During the three month period ended December 31, 1998, MEDY's net working
capital decreased approximately $386,800. Principal changes in the components of
net working capital for the three months ended December 31, 1998 consist of:
December 31 September 30 W/C
1998 1998 Effect
---------- ---------- ----------
Cash & Equivalents $ 568,900 $ 553,100 $ 15,800
Restricted Cash 50,000 50,000 0
Trade Receivables 892,200 879,400 12,800
Inventories 1,128,800 879,600 249,200
Pre-paid Expenses 49,500 24,800 24,700
---------- ---------- ----------
Total Current Assets 2,689,400 2,386,900 302,500
Current maturities of
notes payable 599,400 546,100 (53,300)
Current maturities of
under capital lease 39,100 40,000 900
Accounts payable 775,900 565,800 (210,100)
Accrued expenses 783,200 416,000 (367,200)
Deferred Revenue 429,700 370,100 (59,600)
---------- ---------- ----------
Current liabilities: 2,627,300 1,938,000 (689,300)
---------- ---------- ----------
Working capital $ 62,100 $ 448,900 $ (386,800)
========== ========== ==========
Cash used in operating activities for the quarter ended December 31, 1998
amounted to $177,600 compared to $242,600 for the quarter ended December 31,
1997. The Company's net loss amounted to $999,700 for the 1998 quarter which
includes $399,300 of non-cash charges for depreciation, amortization and stock
compensation expense. Increases in inventories required resources cash of
$249,200. This amount was offset by increases in accounts payable and accrued
expenses of $618,600 which had a positive impact on operating cash flows.
For the quarter ended December 31, 1998, the Company used cash in investing
activities of $136,100. This amount was comprised of the acquisition of
computers and other equipment of $61,000 and enhancements to the Company's
dental practice management software of $75,100. For the comparable quarter of
the preceding year the Company utilized $430,400 of cash in investing
activities, primarily due to cash payments of $379,200 in connection with the
CADI acquisition.
Offsetting the expenditures of cash used for operating and investing
activities, were net proceeds of $339,800 that MEDY raised from the sale of
$400,000 of convertible debentures during the first quarter of the current
fiscal year.
11
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MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation. (Continued)
During October and November 1998 MEDY experienced decreased working capital
as its sales increased, and it built up inventory and trade receivables, as cash
flow trailed some months behind. To augment working capital, in November 1998
MEDY raised net proceeds of $339,800 from the sale of $400,000 of convertible
debentures to the same unaffiliated company which had purchased the debentures
in October 1997 and July 1998. (Please refer to the debenture schedule below).
The company is currently negotiating a private placement of $750,000 of common
stock which should serve to augment working capital for the balance of 1999, but
there is no assurance that equity or debt can be successfully placed. 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 its
assets to the loan, but to date has only been able to borrow approximately
$350,000 at any given time. The debt currently accrues interest at Prime plus 3%
and required a 1.5% commitment fee payable $10,000 upon closing and $5,000 on
the facility's first anniversary. There is a minimum interest charge monthly of
$2,750, which when applied against the minimal borrowings able to be utilized by
the Company creates a significantly higher interest cost to the Company than the
designated Prime plus 3%. Among other covenants, the loan agreement has
affirmative covenants requiring the Company to maintain certain levels of net
worth and limit negative EBITDA (Earnings Before Interest Taxes Depreciation and
Amortization) to certain levels. As of December 15, 1998 the lender has informed
the Company that the Company is in technical default of the net worth covenant
of the credit agreement. Without waiving the existence of the technical default,
the lender has agreed to allow the Company to utilize the credit facility up to
a limit of $400,000, accruing interest at the default rate of Prime plus 6%,
with line availability decreasing at $10,000 per week until March 1, 1999 at
which time the lender could chose to request payment in full or extend the
credit facility on similar or different terms.
Also, there are 3,176,200 vested common stock options outstanding as of
February 12, 1999, that if exercised (of which there can be no assurance), these
options would provide additional working capital to MEDY.
================================================================================
Balance Balance
Debenture: 9/30/98 Additions Conversions Amortized 12/31/98
- --------------- ------------ ------------- ------------- ------------ ----------
October 97 $440,000 - $(440,000) - -
- --------------- ------------ ------------- ------------- ------------ ----------
July 98 1,100,000 - - - 1,100,000
- --------------- ------------ ------------- ------------- ------------ ----------
November 98 - 400,000 - - 400,000
- ---------------
Total 1,540,000 400,000 $(440,000) - 1,500,000
- --------------- ------------ ------------- ------------- ------------ ----------
Discount:
- --------------- ------------ ------------- ------------- ------------ ----------
October 97 (33,300) - 33,300 - -
- --------------- ------------ ------------- ------------- ------------ ----------
July 98 (99,600) - - 5,200 (94,400)
- --------------- ------------ ------------- ------------- ------------ ----------
November 98 - (40,000) - 1,300 (38,700)
- ---------------
Total (132,900) (40,000) 33,300 (133,100)
- ---------------
Net
Debentures: $1,407,100 $360,000 $33,300 6,500 $1,366,900
================================================================================
12
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MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation. (Continued)
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. Expenditure levels will tend to
remain in the range of those for the quarter ended December 31, 1998 due to the
company's strategy of positioning itself for further revenue increases,
purchasing procedures are also in place to ensure minimized product costs and to
avoid excess inventory levels.
Although the acquisitions of CADI, IPS, and Command have resulted in (and
are expected to continue to generate) significant increases in revenues to MEDY
during the current fiscal year and beyond, MEDY could still experience periodic
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 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, and achieve and maintain
profitability during fiscal 1999, MEDY may be facing 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.
Management of the Company does not believe that its existing capital
resources are sufficient for the 1999 fiscal year if it continues to grow
revenues and expenses in proportion to what it experienced during fiscal 1998.
To not interrupt that continuing growth, 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 until such time as its expanded efforts in marketing, R & D and
acquisitions continues to increase revenues to a level of break even cash flow
or profitability, although no assurance of that fact can be given.
13
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MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation. (Continued)
There are 3,176,200 vested common stock options and warrants outstanding as
of December 31, 1998, 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 $1.00 and
$4.50 per share and at February 12, 1999 the price of MEDY's common stock was
approximately $2.00. 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.
Results of Operations. As previously discussed, MEDY has made significant
changes to its operations in fiscal 1998. With the purchases of CADI, IPS, and
Command, MEDY has added several new product lines, such as dental practice
management software, software support, multi-operatory video/digital networks,
and digital x-ray systems. MEDY has also used these purchases to enhance the
sales of its dental cameras. 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 sales for the three months ended December 31, 1998 and 1997
were $1,158,200 and $565,600, respectively, for an increase of $592,600 or
104.8%. Increased sales can be attributed to the Company's acquisitions of
Information Presentation Systems (IPS) in February 1998 and Command Dental
Systems (Command) in April 1998. Increased sales can also be attributed to the
Company's additional expenditures on sales/marketing personnel and increased
advertising expenditures.
Equipment and installation sales for the three months ended December 31, 1998
and 1997 were $1,372,000 and $587,900, respectively, for an increase of $784,100
or 133.4%. 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 1998 compared to 1997 due to the acquisition
of IPS in February 1998.
Software support services sales for the three months ended December 31, 1998 and
1997 were $551,500 and $355,900, respectively, for an increase of $195,600 or
55.0%. Increased support services sales can be attributed to increased software
sales. Also, sales are higher in 1998 compared to 1997 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 it's operations become
more efficient. There can be no assurance these positive changes will ever
result in an increase in cash flow from MEDY's operations or net income (as
compared to MEDY's historical net losses).
Please refer to the schedules below for a summary of revenues, cost of sales,
and gross margins.
14
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MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation. (Continued)
Three Months Ended Three Months Ended
---------------------- --------------------
December Percent December Percent
31, 1998 of Sales 31, 1997 of Sales
---------- ---------- ---------- --------
Software & training:
Sales $1,158,200 100.0% $ 565,600 100.0%
Cost of sales 270,100 23.3% 127,700 22.6%
---------- ------- ---------- -----
Gross margin $ 888,100 76.7% $ 437,900 77.4%
========== ======= ========== =====
Equipment & Installation:
Sales $1,372,000 100.0% $ 587,900 100.0%
Cost of sales 888,100 64.7% 506,800 86.2%
---------- ------- ---------- -----
Gross margin $ 483,900 35.3% $ 81,100 13.8%
========== ======= ========== =====
Support Services:
Sales $ 551,500 100.0% $ 355,900 100.0%
Cost of sales 260,400 47.2% 91,800 25.8%
---------- ------- ---------- -----
Gross margin $ 291,100 52.8% $ 264,100 74.2%
========== ======= ========== =====
Total Sales $3,081,700 100.0% $1,509,400 100.0%
Total COS 1,418,600 46.0% 726,300 48.1%
---------- ------- ---------- -----
Total Gross Profit $1,663,100 54.0% $ 783,100 51.9%
========== ======= ========== =====
Cost of Sales. Cost of sales of Software and training for the three months
ending December 31, 1998 and December 31, 1997 as a percent of software and
training revenue were 23.3% and 22.6%, resulting in gross margin percentages of
76.7% and 77.4% respectively.
Cost of sales for Equipment and installation for the three months ended
December 31, 1998 and December 31, 1997 as a percent of equipment and
installation revenue were 64.7% and 86.2%, resulting in gross margin percentages
of 35.3% and 13.8% respectively. The increase in gross margin percentages is due
to lower margin camera sales being augmented by the sale of higher margin dental
product sales. These higher margin dental product sales were a result of the
acquisition of IPS in February of 1998.
Cost of sales for Software Support for the three months ended December 31,
1998 and December 31, 1997 as a percent of support services revenue were 47.2%
and 25.8%, resulting in gross margin percentages of 52.8% and 74.2%
respectively. 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. CADI has also implemented a plan to raise its support
staff to client ratio in an effort to enhance its level of customer
service/support.
15
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation. (Continued)
Selling & Marketing Expenses. Selling and marketing expenses for the three month
period ended December 31, 1998 and 1997 were $945,100 and $142,200,
respectively, for an increase of $802,900 or 564.6%. Due to the Company's
efforts to aggressively grow revenues, the company greatly increased advertising
expenditures and hired additional sales staff, resulting in increased
advertising, salary, convention, and travel costs. Increased sales resulted in
an increase in commissions paid.
General and Administrative Expenses (G&A). G&A expenses for the three month
period ended December 31, 1998 and 1997 were $1,599,900 and $940,100,
respectively, for an increase of $659,800 or 70.2%. 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. Increased software sales resulted in increases in software
support/training wages.
Research and Development Costs (R&D). For the three months ended December 31,
1998 and 1997, R & D expenses were $600 and $4,100, respectively, for a decrease
of $3,500 or 85.4%. 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 three months ended December 31, 1998 and 1997, software
development costs amortized to cost of sales were $110,200 and $101,100,
respectively.
Interest Income and Expense. Interest income is a function of current cash
invested for the period. Interest income for the three months ended December 31,
1998 and 1997 was $3,100 and 13,900, respectively.
Interest expense for the three months ended December 31, 1998 totaled $101,900.
The components of interest expense for the three months ended December 31, 1998
are: interest on related party notes payable of $15,500, interest on convertible
debentures of $21,900, interest on lines of credit of $2,100, interest on
capital lease of $6,100, and amortization of debt issuance costs/debt discounts
of $56,300.
16
<PAGE>
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.
During the first quarter of fiscal 1999, the Company received $400,000 from
The Tail Wind Fund, Ltd., for the purchase of a convertible debenture in a
transaction made without any form of public solicitation to a single accredited
investor. There was a sales agent involved in this transaction, Rochon Capital,
Inc. This transaction is further described in the Company's annual report on
Form 10-KSB for the fiscal year ended September 30, 1998.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27. Financial data schedule.
(b) Reports on Form 8-K:
The Company's Current Report on Form 8-K reporting an event of
October 9, 1998, describing a line of credit the Company obtained from
Norwest Business Credit, Inc.
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: February 16, 1999 /s/ Van A. Horsley
-------------------------------
Van A. Horsley, President,
Principal Executive Officer,
and Principal Financial Officer
17
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<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
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