UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB / A1
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 August 12, 1998 is 9,991,739 shares, $.001 par value.
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PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements.
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS 6/30/98 9/30/97
(Unaudited)
----------- -----------
CURRENT ASSETS
Cash and equivalents $ 333,400 $ 836,400
Restricted cash 50,000 50,000
Trade receivables, less allowance for
doubtful accounts of $115,000 and $5,000 836,300 127,500
Inventories 990,300 683,400
Prepaid expenses 8,100 15,700
----------- -----------
Total Current Assets 2,218,100 1,713,000
----------- -----------
PROPERTY AND EQUIPMENT
Demonstration equipment 430,900 296,700
Machinery and equipment 515,200 334,300
Furniture and fixtures 389,200 221,300
Leasehold improvements 127,000 54,500
----------- -----------
1,462,300 906,800
Less accumulated depreciation and
Amortization (795,500) (830,600)
----------- -----------
Property and Equipment, Net 666,800 76,200
----------- -----------
OTHER ASSETS
Inventories 32,000 32,000
Software development costs - net of
accumulated amortization of $300,900 2,596,800 --
Non-compete agreement net of
accumulated amortization of $49,800 152,100 --
Debt issuance costs net of accumulated
amortization of $62,100 171,700 --
Technical support contracts net of
accumulated amortization of $228,400 1,369,800 --
Goodwill net of accumulated
amortization of $87,000 2,117,900 --
Patents, patents pending and trade-
marks net of accumulated amortization
of $752,900 and $734,300 42,600 49,700
Other 41,100 46,000
----------- -----------
Total Other Assets 6,524,000 127,700
----------- -----------
TOTAL ASSETS $ 9,408,900 $ 1,916,900
=========== ===========
See Notes to Consolidated Financial Statements
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MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, Continued
LIABILITIES AND STOCKHOLDERS' EQUITY 6/30/98 9/30/97
(Unaudited)
------------ ------------
CURRENT LIABILITIES
Current portion of long term debt -
related parties $ 556,100 --
Accounts payable 403,700 $ 297,600
Accrued expenses 426,800 72,100
Deferred revenue 346,700 --
------------ ------------
Total Current Liabilities 1,733,300 369,700
------------ ------------
LONG TERM DEBT - RELATED PARTIES 280,100 --
CONVERTIBLE DEBENTURE 880,000 --
CAPITALIZED LEASE OBLIGATIONS 87,600 --
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
9,838,697 and 7,627,300 shares 9,800 7,600
Additional paid-in capital 24,681,200 18,811,100
Accumulated deficit (18,263,100) (17,271,500)
Total Stockholders' Equity 6,427,900 1,547,200
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 9,408,900 $ 1,916,900
============ ============
See Notes to Consolidated Financial Statements.
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<TABLE>
<CAPTION>
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Quarter Ended Nine months
June 30 Ended June 30
--------------------------------------------------------
1998 1997 1998 1997
--------------------------------------------------------
<S> <C> <C> <C> <C>
Medical & dental sales $ 1,108,600 $ 225,600 $ 2,151,200 $ 713,900
Cost of sales 731,200 210,500 1,533,300 582,600
----------- ----------- ----------- -----------
Gross profit 377,400 15,100 617,900 131,300
Software sales 949,600 -- 2,114,600 --
Cost of sales 119,000 -- 351,800 --
----------- ----------- ----------- -----------
Gross profit 830,600 -- 1,762,800 --
Software support sales 557,100 -- 1,196,500 --
Cost of sales 79,900 -- 228,400 --
----------- ----------- ----------- -----------
Gross profit 477,200 -- 968,100 --
Total Sales 2,615,300 225,600 5,462,300 713,900
Other operating revenue 17,600 5,300 27,000 17,600
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Total Gross Margin 1,702,800 20,400 3,375,800 148,900
----------- ----------- ----------- -----------
Operating expenses:
Sales and marketing 395,100 46,300 841,200 81,400
General and
administrative 1,631,700 242,800 3,373,200 842,600
Royalties -- 30,000 -- 90,600
Research and
development 14,900 51,700 34,100 132,700
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Total Operating Exp 2,041,700 370,800 4,248,500 1,147,300
----------- ----------- ----------- -----------
Operating Loss (338,900) (350,400) (872,700) (998,400)
----------- ----------- ----------- -----------
Other income/(expense)
Other Income -- 37,000 -- 41,500
Interest income 4,400 15,500 30,500 42,400
Interest expense (51,800) -- (149,400) (600)
----------- ----------- ----------- -----------
(47,400) 52,500 (118,900) 83,300
----------- ----------- ----------- -----------
Net Loss $ (386,300) $ (297,900) $ (991,600) $ (915,100)
=========== =========== =========== ===========
Earnings per share $ (0.04) $ (0.04) $ (0.10) $ (0.12)
=========== =========== =========== ===========
Weighted average number
of shares outstanding 9,791,000 7,637,500 9,579,900 7,534,100
=========== =========== =========== ===========
See Notes to Consolidated Financial Statements.
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MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended June 30
----------------------------
1998 1997
----------- -----------
Cash Flows From Operating Activities:
Net Loss $ (991,600) $ (915,100)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation 35,100 77,000
Amortization 761,400 39,300
Fair value Common Stock Options (23,600) 40,800
Common stock issued for expense 35,800 --
Gain on disposal of loaner equipment -- 41,600
Changes in operating assets and
liabilities, net of effects from
purchase of businesses:
Decrease (increase) in:
Trade receivable (251,900) 52,100
Inventories (182,000) (304,100)
Prepaid expenses 59,300 (15,000)
Other Assets 4,900 3,300
Increase (decrease) in:
Accounts payable (149,700) (62,600)
Accrued expenses 157,700 --
Deferred revenue (18,000) --
Accrued royalties -- 90,000
----------- -----------
Net cash used in operating activities (562,600) (952,700)
----------- -----------
Cash Flows From Investing Activities:
Payment for acquisition of businesses (598,900) --
Additions to patents (10,900) (9,000)
Purchase of property and equipment (172,800) (22,200)
Software Development Costs (166,300) --
Deposits and other -- (40,000)
----------- -----------
Net cash used in investing activities (948,900) (71,200)
----------- -----------
Cash Flows From Financing Activities:
Principal payments on long term debt (19,700) --
Proceeds from exercise of options to
purchase common stock 41,900 1,059,600
Net proceeds from issuance of
convertible debenture 986,300 --
----------- -----------
1,008,500 1,059,600
----------- -----------
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MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Continued)
Nine Months Ended June 30
----------------------------
1998 1997
----------- -----------
Net Increase (Decrease) in Cash and
Equivalents (503,000) 35,700
Cash and Equivalents beginning of period 836,400 993,200
----------- -----------
Cash and Equivalents end of period $ 333,400 $ 1,028,900
=========== ===========
Supplemental disclosures of Cash Flow
Information:
Cash paid for interest $ 0 $ 600
=========== ===========
Supplemental Schedule of Noncash
Investing and Financing Activities:
Common stock issued for acquisition of
businesses $ 5,508,200 --
Notes payable for acquisition of
Businesses, net of discounts 800,100 --
Debt issuance costs incurred for
convertible debenture 113,700 --
Debt assumed in business combinations 67,900 --
Fair value of warrants issued for debt
issuance costs 120,000 --
Conversion of debentures to common
stock 220,000 --
Demonstration equipment transfers from
inventories $ 0 $ 102,000
See Notes to Consolidated Financial Statements
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MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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, 1997. The results of operations for
the periods ended June 30, 1998 and June 30, 1997 are not necessarily indicative
of operating results for the full years.
In October 1997, the Company completed the acquisition of Computer Age
Dentist, Inc. (CADI). In addition, the Company also completed the acquisitions
of Information Presentation Systems, Inc. (IPS) in February, 1998 and Command
Dental Systems, Inc. (Command) in April 1998. Accordingly, the accompanying
statements of operations include the accounts of CADI beginning October 1, 1997,
the accounts of IPS beginning February 1, 1998, and the accounts of Command
beginning April 1, 1998.
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 June 30, 1998, MEDY had 1,335,852 of vested common stock
options outstanding. Total common stock options outstanding (including both
vested and unvested) were 3,885,852 at June 30, 1998.
NOTE 3. INCOME TAXES
Under the provisions of the Internal Revenue Code, MEDY has available net
operating loss and research and development tax credit carryforwards of
approximately $18,000,000 and $170,000, respectively, which expire in varying
amounts from 1998 through 2011.
The net operating loss and business tax credit carryforwards described
above give rise to a deferred tax asset of approximately $7,300,000. This asset
is recorded net of a valuation allowance of the same amount. Therefore no
amounts are reflected in the accompanying balance sheets.
NOTE 4. INVENTORIES
Inventories consist of the following at June 30, 1998 and September 30,
1997:
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MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
June 30 September 30
1998 1997
-------------------------
Raw materials and replacement parts $ 816,700 $ 723,900
Finished goods 817,100 422,300
Work in progress -- 126,000
Allowance for obsolescence (611,500) (556,800)
Less inventory classified as long term (32,000) (32,000)
-------------------------
$ 990,300 $ 683,400
=========================
At June 30, 1998 medical products inventories have decreased $26,500 while other
inventories have increased $333,400 due to the purchases of CADI, IPS, and
Command for a net inventory increase of $306,900 or 44.9%. Management continues
its efforts to reduce inventory and inventory carrying costs, while maintaining
inventory levels needed to meet sales requirements.
NOTE 5. DEFERRED REVENUE
Deferred revenue represents payments received on deferred maintenance
contracts that have not been earned. The amounts are amortized into revenue on a
monthly basis using the straight-line method over the life of the contract.
Costs for maintenance and customer support are charged to expense when the
related revenue is recognized or when those costs are incurred, whichever occurs
first.
Note 6. Prior Period Adjustment
The 1998 financial statements reflect the revaluation of common stock issued as
consideration for three acquisitions that were completed in fiscal 1998. The
impact of this revaluation was to increase stockholders equity, software
development costs, and goodwill. The revaluation also increased the net loss due
to higher amortization expense. The valuation of the common stock reflected in
the Company's 1998 interim financial statements was based upon the report of an
independent valuation expert. However, based on comments recently received from
the Securities and Exchange Commission, the value of the shares issued in each
of the acquisitions was increased.
The Company has also recognized discounts on the debt incurred in the
acquisitions due to below market interest rates.
The impact of the revaluation on the Company's 1998 quarterly financial
statements is summarized as follows:
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MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Originally As
Reported Restated Change
-------- -------- ------
Current Assets $ 2,218,100 $ 2,218,100 $ --
Long Term Assets 5,383,600 7,190,800 1,807,200
Current Liabilities 1,775,800 1,733,300 (42,500)
Long Term Liabilities 1,317,600 1,247,700 (69,900)
Stockholders' Equity 4,508,300 6,427,900 1,919,600
Net Loss
3 months ended June 30, 1998 $ (327,900) $ (386,300) $ (58,400)
9 months ended June 30, 1998 (845,500) (991,600) (146,100)
Net Loss Per Share
3 months ended June 30, 1998 $ (0.03) $ (0.04) $ (0.01)
9 months ended June 30, 1998 (0.09) (0.10) (0.01)
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MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
During the current fiscal year, MEDY has significantly changed its
corporate emphasis. While MEDY is still manufacturing and selling cameras and
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
cameras 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 Aged 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 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
management 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 has 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 in revenues to MEDY and a reduction in operating losses and
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<PAGE>
net losses per share. Because of the costs of the acquisitions and the costs of
integrating the operations and administration of these new companies, the
acquisitions have temporarily increased negative 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.
As discussed in Note 2 to the audited financial statements as of September
30, 1997, (see MEDY's form 10-KSB dated September 30, 1997 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 three quarters, MEDY anticipates negative cash flow from
operations and net losses to continue through fiscal 1998, ending September 30,
1998.
Except for historical information contained herein, the statements in this
report may be forward-looking statements that are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements involve known and unknown risks and uncertainties
that may cause the actual results in future periods to differ materially from
forecasted results. These risks and uncertainties include, among other things,
product demand, market competition, risks inherent in MEDY's international
operations and the possibility that contemplated acquisitions will not occur.
These and other risks are described elsewhere herein and in the Company's other
filings with the Securities and Exchange Commission.
Financial Condition. (June 30, 1998 as compared to September 30, 1997)
During the nine month period ended June 30, 1998, MEDY's net working capital
decreased approximately $858,500. Principal changes in the components of net
working capital for the nine months ended June 30, 1998 consist of:
June 30 September 30 W/C
1998 1997 Effect
----------- ----------- -----------
Cash & Equivalents $ 383,400 $ 886,400 $ (503,000)
Trade Receivables 836,300 127,500 708,800
Inventories 990,300 683,400 306,900
Pre-paid Expenses 8,100 15,700 (7,600)
----------- ----------- -----------
Current Assets: 2,218,100 1,713,000 505,100
Accounts Payable 403,700 297,600 (106,100)
Accrued Expenses 426,800 72,100 (354,700)
Notes Payable - Related
Parties - Current Portion 556,100 -- (556,100)
Deferred Revenue 346,700 -- (346,700)
----------- ----------- -----------
Current Liabilities 1,733,300 369,700 (1,363,600)
Working Capital $ 484,800 $ 1,343,300 $ (858,500)
=========== =========== ===========
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MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations. (Continued)
The components of the decrease in working capital include negative cash
flow from operations of $562,600, payment of the cash portions of the
consideration for the acquisitions of Computer Age Dentist, Inc. (CADI) and
Information Presentation Systems, Inc. (IPS) of $300,000 and $200,000
respectively, payment of acquisition costs associated with the acquisitions of
CADI, IPS, and Command of $98,900, and other capital expenses incurred by MEDY
during the nine month period ended June 30, 1998.
Offsetting the expenditures of cash used for operating and investing
activities, were net proceeds of $986,300 that MEDY raised from the sale of
$1,100,000 of convertible debentures during the first quarter of the current
fiscal year. (Please refer to the debenture activity schedule below).
During June and July 1998 MEDY experienced decreased working capital as it
built up inventory and trade receivables and cash flow trailed some months
behind. To augment working capital, in July 1998 MEDY raised net proceeds of
approximately $1,000,000 from the sale of $1,100,000 of convertible debentures
to the same unaffiliated company which had purchased the debentures in October
1997. (Please refer to the debenture schedule below). In addition, MEDY is
negotiating a $1,000,000 line of credit (with a different financial institution)
based upon eligible accounts receivable (although there can be no assurance that
MEDY will be able to obtain the line of credit). Also, there are 1,335,852
vested common stock options outstanding as of August 15, 1998, that if exercised
(of which there can be no assurance), these options would provide additional
working capital to MEDY.
Debenture Activity Schedule:
Debentures - October 1997 $ 1,100,000
Debenture Conversions (220,000)
-----------
Debenture Liability - June 30, 1998 880,000
-----------
Subsequent to June 30, 1998:
Debenture Conversions (330,000)
Debentures - July 1998 1,100,000
-----------
Debenture Liability - August 15, 1988 $ 1,650,000
===========
The acquisitions of CADI, IPS, and Command, together with the placement of
the convertible debentures in 1998 are unique transactions that have no parallel
in prior periods. Due to the fundamental requirement for MEDY to achieve
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MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations. (Continued)
positive cash flow from operations and positive net income, MEDY will continue
to direct it's efforts toward eliminating or minimizing expenses, reviewing and
improving product profit margins, and increasing revenues from the sale of
products with higher profit margins such as those now offered by CADI.
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. Purchasing procedures are also in
place to ensure minimized product costs and to avoid excess inventory levels.
The Company also entered into a revised license agreement with Dr. Edwin Adair
during fiscal 1997 resulting in reduced patent maintenance and other associated
costs as well as eliminating minimum royalty payments.
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, MEDY still anticipates negative cash flow from
operations during fiscal 1998. During fiscal 1997 and fiscal 1996, cash flow
deficits were funded by employee, officer, and consultant stock option exercises
and by equity placements and loans from the Company's chairman. 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. If needed, it is
not known whether any debt or equity financing will be available on reasonable
terms.
MEDY believes that, following the receipt of the net proceeds from the
convertible debentures sold in July 1988, its existing capital resources are
sufficient for the remainder of the current fiscal year and into the 1999 fiscal
year. MEDY's goal is to become the 'Single Source Technology Solution' for
dental practices moving into the complex digital/computer age. MEDY completed
the acquisition of Command on April 9, 1998, with an effective date of April 1,
1998. Command develops and markets turn-key computer systems for the efficient
management of dental practices and has more than 550 clients. For the period
ended September 30, 1997, Command Dental Systems, Inc. is estimated to have
achieved gross revenues of approximately $1.4 million. MEDY has consolidated
Command with it's Computer Age Dentist, Inc. (CADI) subsidiary. Command's
existing client base offers a significant opportunity for the cross-selling of
CADI's new Windows-based software and other dental technology products. With the
purchases of IPS and Command, CADI now offers a comprehensive range of products
to the dental industry - practice management software, electronic claims
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MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations. (Continued)
processing, image capture software, intra-oral cameras, multi-operatory
video/digital networks, and digital x-ray systems. Management believes that,
even after the acquisitions of CADI, IPS and Command, MEDY has sufficient
capital resources for the current fiscal year and beyond. If MEDY seeks to
complete another acquisition (of which there can be no assurance), MEDY may need
additional capital. There can be no assurance that MEDY will attempt another
acquisition or that if MEDY needs additional financing, it will be available on
reasonable terms, if at all. There are 1,335,852 vested common stock options
outstanding as of June 30, 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 August 11, 1998 the price of MEDY's common
stock was approximately $2.375. 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. Medical/Dental sales for the nine months ended June 30, 1998 and
1997 were $2,151,200 and $713,900 respectively, for an increase of $1,437,300 or
201.3%. Medical/Dental sales for the three months ended June 30, 1998 and 1997
were $1,108,600 and $225,600 respectively, for an increase of $883,000 or
391.4%. The increase in sales was due to MEDY's sale of dental related computer
hardware, multi-operatory video/digital networks, and digital x-ray systems
('hardware'), which are new product lines resulting from the acquisition of IPS.
There were no sales of dental related hardware during the comparable periods of
fiscal 1997.
Software sales were $2,114,600 for the nine months ended June 30, 1998 and
$949,600 for the three months ended June 30, 1998. Software Support sales were
$1,196,500 for the nine months ended June 30, 1998 and $557,100 for the three
months ended June 30, 1998. All of these sales were attributable to CADI (as an
integrated subsidiary - CADI, IPS & Command), therefore, there were no software
or software support sales during the comparable periods of fiscal 1997.
Total sales attributable to CADI (as an integrated subsidiary), both
hardware and software related, for the nine months ended June 30, 1998 were
$4,395,700 or 80.5% of MEDY's total sales. Total sales attributable to CADI,
both hardware and software related, for the three months ended June 30, 1998
were $2,198,700 or 84.1% of MEDY's total sales.
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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)
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.
Nine Months Ended Nine Months Ended
-------------------------------------------
June 30, Percent June 30, Percent
1998 of Sales 1997 of Sales
-------------------------------------------
Medical/Dental Sales $2,151,200 100.0% $ 713,900 100.0%
COGS - Medical/Dental 1,533,300 71.3% 582,600 81.6%
Gross Profit - Med/Dental 617,900 28.7% 131,300 18.4%
Software Sales 2,114,600 100.0% 0 N/A
COGS - Software 351,800 16.6% 0 N/A
Gross Profit - Software 1,762,800 83.4% 0 N/A
Software Support Sales 1,196,500 100.0% 0 N/A
COGS - Software Support 228,400 19.1% 0 N/A
Gross Profit - Software Support 968,100 80.9% 0 N/A
Total Sales $5,462,300 100.0% $ 713,900 100.0%
Total COGS 2,113,500 38.7% 582,600 81.6%
Total Gross Profit 3,348,800 61.3% 131,300 18.4%
Quarter Ended Quarter Ended
-------------------------------------------
June 30, Percent June 30, Percent
1998 of Sales 1997 of Sales
-------------------------------------------
Medical/Dental Sales $1,108,600 100.0% $ 225,600 100.0%
COGS - Medical/Dental 731,200 66.0% 210,500 93.3%
Gross Profit - Med/Dental 377,400 34.0% 15,100 6.7%
Software Sales 949,600 100.0% 0 N/A
COGS - Software 119,000 12.5% 0 N/A
Gross Profit - Software 830,600 87.5% 0 N/A
Software Support Sales 557,100 100.0% 0 N/A
COGS - Software Support 79,900 14.3% 0 N/A
Gross Profit - Software Support 477,200 85.7% 0 N/A
Total Sales $2,615,300 100.0% $ 225,600 100.0%
Total COGS 930,100 35.6% 210,500 93.3%
Total Gross Profit 1,685,200 64.4% 15,100 6.7%
-15-
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations. (Continued)
Cost of Sales. Cost of sales for Medical/Dental products for the nine
months ended June 30, 1998 and 1997 as a percent of gross Medical/Dental sales
were 71.3% and 81.6%, resulting in gross margin percentages of 28.7% and 18.4%,
respectively. Cost of sales for Medical/Dental products for the three months
ended June 30, 1998 and 1997 as a percent of gross Medical/Dental sales were
66.0% and 93.3%, resulting in gross margin percentages of 34.0% and 6.7%,
respectively. The cost of sales percentages of Medical/Dental products for the
nine months ended June 30, 1998 and 1997 show a 10.3% positive variance due to
lower margin medical product sales in 1997 having been replaced by higher margin
dental related hardware sales in 1998. The cost of sales percentage drop of
27.3% for the quarter is due to the product mix of higher margin dental related
hardware sales versus lower margin dental camera sales.
Cost of sales of Software for the nine and three month periods ended June
30, 1998, as a percent of gross software sales, were 16.6% and 12.5%, resulting
in gross margin percentages of 83.4% and 87.5%, respectively.
Cost of sales for Software Support, the only component of which is the
amortization expense of technical support contracts, remains flat as a dollar
amount but will fluctuate as a percentage of gross software support sales as
support revenue increases or decreases. Cost of sales of software support sales
for the nine and three month periods ended June 30, 1998 as a percent of gross
software support sales were 19.1% and 14.3%, resulting in gross margin
percentages of 80.9% and 85.7%, respectively.
Selling, General and Administrative Expenses (S,G&A). S,G&A expenses for
the nine month period ended June 30, 1998 and 1997 were approximately $4,214,400
and $924,000, respectively for an increase of $3,290,400 or 356.1%. The
acquisitions of CADI, IPS, and Command and their related expense streams, as
well as their depreciation and amortization, account for $3,308,500 of the total
S,G&A expenses. S,G&A expenses for the quarter ended June 30, 1998 and 1997 were
approximately $2,026,800 and $289,100, respectively, for an increase of
$1,737,700 or 601.1%. The acquisitions of CADI, IPS, and Command and their
related expense streams, as well as their depreciation and amortization, also
accounted for the majority of this increase.
-16-
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations. (Continued)
Research and Development Costs (R&D). For the nine months ended June 30,
1998 and 1997 R & D expenses were $34,100 and $132,700 respectively, for a
decrease of $98,600 or 74.3%. For the quarter ended June 30, 1998 and 1997, R &
D expenses were $14,900 and $51,700 respectively, for a decrease of $36,800 or
71.2%. The Company's policy is to fund research and development as it deems
appropriate to maintain or gain a competitive advantage. Note that software
development costs are not included in R&D costs. Software development costs are
capitalized then amortized to costs of sales. Software development costs for the
nine months ended June 30, 1998 were $166,300. For the quarter ended June 30,
1998, software development costs were $86,900.
Interest Income and Expense. Interest income is a function of current cash
invested for the period. Interest income for the three months ended June 30,
1998 and 1997 was $4,400 and $15,500, respectively. Interest income for the nine
months ended June 30, 1998 and 1997 was $30,500 and $42,400 respectively.
Interest expense for the nine months ended June 30, 1998 totaled $149,400.
The components of interest expense for the nine months ended June 30, 1998 are:
interest of $28,900 on notes payable to related parties, interest on the
convertible debentures of $55,600, $36,800 of interest on debt issuance costs,
and $28,100 for amortization of discounts on notes payable.
-17-
<PAGE>
PART II - OTHER INFORMATION
Item 5. Other Information.
None
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
3. Articles of Amendment to Articles of Incorporation, effective
July 22, 1998
27. Financial data schedule.
(b) Reports:
Form 8-K dated July 31, 1998, reporting an event under Item 5
(the July 1998 convertible debenture financing)
Form 8-K dated April 9, 1998, reporting an event under Item 2
(the acquisition of Command)
Form 8-K dated February 6, 1998, reporting an event under Item 2
(the acquisition of IPS)
Form 8-K dated January 5, 1998, reporting an event under Item 5
(a letter of intent to acquire IPS)
Form 8-K dated October 23, 1997, and amendment thereto reporting
an event under Item 2 (the acquisition of CADI) and Item 5 (the
October 1997 convertible debenture financing)
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: January 12, 1999 /s/ Van A. Horsley
----------------------------------
Van A. Horsley, President,
Principal Executive Officer, and
Principal Financial Officer
-18-
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