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 March 31, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANG
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 May 12, 1999 is 11,232,060 shares, $.001 par value.
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PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements.
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
ASSETS
3/31/99 9/30/98
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and equivalents $ 651,400 $ 553,100
Restricted cash 50,000 50,000
Trade receivables, less allowance for
doubtful accounts of $105,700 and $108,400 791,200 879,400
Inventories 1,005,000 879,600
Prepaid expenses 34,500 24,800
----------- -----------
Total Current Assets 2,532,100 2,386,900
----------- -----------
SOFTWARE DEVELOPMENT AND SUPPORT:
Software development costs, net of
accumulated amortization of $637,000 and $417,800 2,545,700 2,619,800
Technical support contracts, net of
accumulated amortization of $461,600 and $305,000 1,136,600 1,303,100
Total Software Development and Support 3,682,300 3,922,900
PROPERTY AND EQUIPMENT:
Demonstration equipment 449,000 420,900
Machinery and equipment 579,600 553,800
Furniture and fixtures 361,200 355,200
Leasehold improvements 127,000 127,000
----------- -----------
1,516,800 1,456,900
Less accumulated depreciation and
amortization (876,700) (799,400)
----------- -----------
Property and Equipment, Net 640,100 657,500
----------- -----------
OTHER ASSETS:
Goodwill, net of accumulated
amortization of $154,400 and $120,800 1,858,800 1,892,300
Non-compete agreement's net of accumulated
amortization of $120,000 and $80,000 79,200 119,200
Debt issuance costs, net of accumulated --
amortization of $259,900 and $85,400 263,500 125,400
Patents and trademarks, net of accumulated
amortization of $776,100 and $766,200 19,300 29,200
Deposits and other 76,000 37,000
Total Other Assets 2,296,800 2,203,100
----------- -----------
TOTAL ASSETS $ 9,151,300 $ 9,170,400
=========== ===========
See Notes to Consolidated Financial Statements.
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MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS, Continued
LIABILITIES AND STOCKHOLDERS' EQUITY
3/31/99 9/30/98
------------ ------------
CURRENT LIABILITIES:
Current maturities of notes payable $ 463,400 $ 546,100
Current maturities of obligations under
capital lease 46,800 40,000
Accounts payable 942,200 565,800
Accrued expenses 744,800 416,000
Unearned revenue 407,200 370,100
------------ ------------
Total Current Liabilities 2,604,400 1,938,000
------------ ------------
NOTES PAYABLE, net 358,000 321,900
OBLIGATIONS UNDER CAPITAL LEASE, net 14,200 39,400
CONVERTIBLE DEBENTURES, net 1,190,300 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
11,044,200 and 10,034,500 shares 11,000 10,000
Additional paid-in capital 27,068,300 25,246,900
Accumulated deficit (22,094,900) (19,793,000)
----------- -----------
Total Stockholders' Equity 4,984,400 5,463,900
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 9,151,300 $ 9,170,400
============ ============
See Notes to Consolidated Financial Statements.
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<CAPTION>
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
Quarter Ended Six Months
March 31 Ended March 31
---------------------------------------------------------------------------
1999 1998 1999 1998
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET SALES:
Software & training $ 1,176,700 $ 572,200 $ 2,334,900 $ 1,165,000
Equipment & Installation 1,401,200 454,800 2,773,200 1,042,600
Support services 604,900 310,700 1,156,400 639,400
------------ ------------ ------------ ------------
3,182,800 1,337,700 6,264,800 2,847,000
------------ ------------ ------------ ------------
COST OF SALES:
Software & training 300,600 101,700 570,700 235,300
Equipment & Installation 1,042,700 290,300 1,930,800 802,100
Support services 272,100 74,200 532,500 148,500
------------ ------------ ------------ ------------
1,615,400 466,200 3,034,000 1,185,900
------------ ------------ ------------ ------------
GROSS PROFIT 1,567,400 871,500 3,230,500 1,661,100
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Selling & marketing 839,700 371,700 1,784,800 759,300
General & administrative 1,805,700 690,400 3,405,600 1,427,100
Stock based compensation 5,000 -- 27,500 --
Research & development 2,100 15,100 2,700 19,200
------------ ------------ ------------ ------------
Total operating expenses 2,652,500 1,077,200 5,220,600 2,205,600
------------ ------------ ------------ ------------
OPERATING LOSS (1,085,100) (205,700) (1,990,100) (544,500)
OTHER INCOME (EXPENSE):
Other income 20,800 8,700 25,200 9,400
Interest income 3,300 12,200 6,400 26,100
Interest expense (241,500) (72,900) (343,400) (97,800)
------------ ------------ ------------ ------------
NET LOSS $ (1,302,500) $ (257,700) $ (2,301,900) $ (606,800)
============ ============ ============ ============
Earnings per share $ (0.13) $ (0.03) $ (0.22) $ (0.07)
============ ============ ============ ============
Weighted average number
of shares outstanding 10,400,600 9,474,400 10,314,300 9,163,300
============ ============ ============ ============
See Notes to Consolidated Financial Statements.
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MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended March 31
--------------------------
1999 1998
----------- -----------
Cash Flows From Operating Activities:
Net Loss $(2,301,900) $ (606,800)
Adjustments to reconcile net loss to
net cash used in operating activities:
Common stock options granted for compensation
and other services 27,500 --
Depreciation expense 77,300 86,400
Amortization of intangible assets 469,100 211,800
Amortization of debt discount and issuance costs 227,200 171,000
Conversion of accrued interest on debentures
to common stock 33,000 --
Provision for obsolete and slow-moving inventories 200,000 --
Changes in operating assets and
liabilities, net of effects
of acquisitions:
Decrease (increase) in:
Trade receivable 88,200 44,800
Inventories (325,400) (182,900)
Prepaid expenses and other assets (9,700) 18,900
Deposits and other 22,200 56,100
Increase (decrease) in:
Accounts payable 393,700 (128,400)
Accrued expenses 352,800 40,300
Unearned revenue 37,100 (10,700)
Net cash used in operating activities (708,900) (299,500)
----------- -----------
Cash Flows From Investing Activities:
Payment for acquisition of businesses -- (564,400)
Software development costs (145,100) --
Purchase of property and equipment (77,200) (226,500)
Patents -- (10,900)
----------- -----------
Net cash used in investing activities (222,300) (801,800)
----------- -----------
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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 (426,800) (26,300)
Capital lease obligations (18,400) --
Debt Issuance costs (53,300) --
Proceeds from exercise of common stock
options 89,100 29,600
Proceeds from issuance of common stock 767,100 --
Net cash provided by (used in) financing
activities 1,029,500 989,600
----------- -----------
Net Increase/(decrease) in Cash and Equivalents 98,300 (111,700)
Cash and Equivalents, beginning of period 553,100 836,400
----------- -----------
Cash and Equivalents, end of period $ 651,400 $ 724,700
=========== ===========
Supplemental Disclosures of Cash Flow
Information:
Cash paid for interest $ 36,500 $ --
=========== ===========
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 $ 640,000 $ 110,000
=========== ===========
Fair value of warrants issued for debt
issuance costs $ -- $ 120,000
=========== ===========
Issuance of common stock for acquisition of
business $ -- $ 5,168,100
=========== ===========
Notes payable incurred for acquisition of
business, net of discounts
$ -- $ 372,000
=========== ===========
Debt assumed in business acquisitions $ -- $ 59,900
=========== ===========
See Notes to Consolidated Financial Statements
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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 March 31, 1999 and March 31, 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 March 31, 1999, MEDY had 3,063,000 of vested common stock
options and warrants outstanding. Total common stock options and warrants
outstanding (including both vested and unvested) were 4,573,000 at March 31,
1999.
NOTE 3. INVENTORIES
Inventories consist of the following at March 31, 1999 and September 30,
1998:
March 31 September 30
1999 1998
-----------------------------
Raw materials and replacement parts $ 76,800 $ 313,900
Finished goods 1,016,900 601,000
Work in progress 12,800 --
Show Stock 167,200 186,000
Allowance for obsolescence (268,700) (221,300)
----------- -----------
$ 1,005,000 $ 879,600
=========== ===========
At March 31, 1999 medical products inventories have decreased $237,100,
($200,000 of which is a write off of raw materials, see Item 2 MD & A page 10),
while other inventories have increased $362,500 due to the on going business of
Computer Age Dentist, Inc. (CADI), MEDY's wholly owned subsidiary, for a net
inventory increase of $125,400. Management continues its efforts to reduce
inventory and inventory carrying costs, while maintaining inventory levels
needed to meet sales requirements.
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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.
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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.
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. Even though
the Company has seen significant sales increases over the last fiscal year end
and the last two 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, costs of sales, and selling & marketing expenses
Corporate Summary
- -----------------
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, through CADI, 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
professionals, installers, trainers, and support technicians with more than 550
clients ranging from small offices to large clinics like the University of
Michigan Dental School. MEDY, through CADI, acquired Command in April, 1998.
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ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. (Continued)
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 management believes that all of it's products
are 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
Year 2,000 compliant. The acquisitions of CADI, IPS, and Command have already
resulted in a significant increase in revenues to MEDY. Due to the 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. 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 be 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.
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. An additional two employees will be terminated May 15. A $200,000
write off of raw material inventory has been taken in the March quarter to
reflect any possible losses the Company might incur from the liquidation of
unused raw material inventory. The Company will liquidate its current finished
goods inventory of intra oral cameras in the ordinary course of business and
then will begin to represent any number of other camera manufacturer's products
in the market place on a 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 absent all of the manufacturing overhead, although
no assurances of that fact can be given. 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, management also made other
expense cuts in the areas of management compensation, personnel, consulting and
advertising. These cuts will take effect in the Company's fiscal third quarter
ending June 30, 1999 and are projected to have a positive effect on net
operating cash flow, but no assurance of that fact can be given.
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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, 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.
Financial Condition. (March 31, 1999 as compared to September 30, 1998)
During the six month period ended March 31, 1999, MEDY's net working capital
decreased approximately $521,200 and, consequently, at March 31, 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 six months ended March 31, 1999 consist of:
March 31 September 30 W/C
1999 1998 Effect
------------------------------------------
Cash & Equivalents $ 651,400 $ 553,100 $ 98,300
Restricted Cash 50,000 50,000 --
Trade Receivables 791,200 879,400 (88,200)
Inventories 1,005,000 879,600 125,400
Pre-paid Expenses 34,500 24,800 9,700
----------- ----------- -----------
Total Current Assets 2,532,100 2,386,900 145,200
Current maturities of notes
payable 463,400 546,100 82,700
Current maturities of
under capital lease 46,800 40,000 (6,800)
Accounts payable 942,200 565,800 (376,400)
Accrued expenses 744,800 416,000 (328,800)
Deferred Revenue 407,200 370,100 (37,100)
----------- ----------- -----------
Current liabilities: 2,604,400 1,938,000 (666,400)
----------- ----------- -----------
Working capital $ (72,300) $ 448,900 $ (521,200)
=========== =========== ===========
Cash Used In Operating Activities. Cash used in operating activities for
the six months ended March 31, 1999 amounted to $708,900 compared to $299,500
for the six months ended March 31, 1998. This 140% increase in cash used in
operations was due in large part to the significant operating losses suffered by
MEDY and MEDY's using it's cash to finance those losses.
The Company's net loss amounted to $2,301,900 for six months ended March
31, 1999 which includes $1,063,600 of non-cash charges for depreciation,
amortization and stock compensation expense. Exclusive of a $200,000 write off
of raw materials, in March 1999, inventory increases required resources cash of
$325,400. This amount was offset by a 70% increase in accounts payable, accrued
expenses and other of $854,800 which had a positive impact on operating cash
flows.
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ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. (Continued)
Cash Used In Investing Activities. For the six months ended March 31, 1999,
the Company used cash in investing activities of $222,300. This amount was
comprised of the acquisition of computers and other equipment of $77,200 and
enhancements to the Company's dental practice management software of $145,100.
For the comparable period of the preceding year the Company utilized $801,800 of
cash in investing activities, primarily due to cash payments of $564,400 in
connection with the CADI and IPS acquisitions. MEDY is seeking to cancel a
portion of the accrued indebtedness incurred to acquire Command through
litigation against the former principals of Command which is pending, and is
described in more detail in a current report on Form 8-K reporting an event of
April 13, 1999.
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
$89,100 from the exercise of employee stock options. Uses of cash for financing
activities were $445,200 for principal payments on debt obligations and $53,300
for debt issuance costs.
During February and March 1999 MEDY experienced decreased and negative
working capital as its sales and marketing activities increased. 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 agreed to file a
registration statement related to these shares not later than April 16, 1999 and
to obtain effectiveness of that registration statement by no later than July 30,
1999. The Company has since obtained the effectiveness of that registration
statement as of May 5, 1999. 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 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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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. The debt currently accrues
interest at Prime plus 6% 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. Among other covenants, the loan agreement has
affirmative covenants requiring the Company to maintain certain levels of net
worth and to limit negative EBITDA (Earnings Before Interest, Taxes,
Depreciation and Amortization) to certain levels. As of December 15, 1998 the
lender informed the Company that the Company was in technical default of the net
worth covenant of the credit agreement. Effective May 7, 1999, the lender waived
the financial covenant defaults that occurred under the above referenced credit
agreement through and including March 31, 1999.
The following schedule outlines convertible debenture activity:
<TABLE>
<CAPTION>
Balance Balance
Debenture: 9/30/98 Additions Conversions Amortized 3/31/98
- ---------- ------- --------- ----------- --------- -------
<S> <C> <C> <C> <C> <C>
October 97 $ 440,000 $ -- $ (440,000) $ -- $ --
July 98 1,100,000 -- (200,000) -- 900,000
November 98 -- 400,000 -- -- 400,000
----------- ----------- ----------- ----------- -----------
Total 1,540,000 400,000 (640,000) -- 1,300,000
----------- ----------- ----------- ----------- -----------
Discount:
October 97 (33,300) -- 33,300 -- --
July 98 (99,600) -- 16,600 10,000 (73,300)
November 98 -- (40,000) -- 3,300 (36,700)
----------- ----------- ----------- ----------- -----------
Total (132,900) (40,000) 49,900 13,300 (109,700)
----------- ----------- ----------- ----------- -----------
Net: $ 1,407,100 $ 360,000 $ (590,100) $ 13,300 $ 1,190,300
=========== =========== =========== =========== ===========
</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 (and
are expected to continue to generate) significant increases in revenues to MEDY
during the current fiscal year and beyond, MEDY expects to continue to
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
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<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. (Continued)
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 positive operating cash flow 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 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 two quarters of fiscal 1999. 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 operating cash flow or profitability, although
no assurance of that fact can be given.
There are 3,063,000 vested common stock options and warrants outstanding as
of March 31, 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 $1.00 and $4.50
per share and at May 11, 1999 the price of MEDY's common stock was approximately
$1.4375. 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 and 1999. 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
compliment 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 and training sales for the six month period ended March
31, 1999 and 1998 were $2,334,900 and $1,165,000, respectively, for an increase
of $1,169,900 or 100.0%. Software and training sales for the three month period
ended March 31, 1999 and 1998 were $1,176,700 and $572,200, respectively, for an
increase of $604,500 or 105.6%. 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 do not include sales to customers from the April 1999 Command
acquisition.
-14-
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. (Continued)
Equipment and installation sales for the six months ended March 31, 1999
and 1998 were $2,773,200 and $1,042,600, respectively, for an increase of
$1,730,600 or 166.0%. Equipment and installation sales for the three months
ended March 31, 1999 and March 1998 were $1,401,200 and $454,800, respectively,
for an increase of $946,400 or 208.1%. 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 six months ended March 31, 1999 and
1998 were $1,156,400 and $639,400, respectively, for an increase of $517,000 or
80.9%. Software support services sales for the three months ended March 31, 1999
and 1998 were $604,900 and $310,700, respectively, for an increase of $294,200
or 94.7%. Increased support services sales can be attributed to increased
software sales. Also, sales are higher through March 1999 compared to March 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).
Please refer to the schedules below for a summary of revenues, cost of sales,
and gross margins.
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
--------------------------------------------------------------------
March 31, Percent March 31, Percent
1999 of Sales 1998 of Sales
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Software & training:
Sales $2,334,900 100.0% $1,165,000 100.0%
Cost of sales 570,700 24.4% 235,300 20.2%
---------- ----- ---------- -----
Gross margin $1,764,200 75.6% $ 929,700 79.8%
========== ===== ========== =====
Equipment & Installation:
Sales $2,773,200 100.0% $1,042,600 100.0%
Cost of sales 1,930,800 69.6% 802,100 76.9%
---------- ----- ---------- -----
Gross margin $ 842,400 30.4% $ 240,500 23.1%
========== ===== ========== =====
-15-
<PAGE>
Six Months Ended Six Months Ended
--------------------------------------------------------------------
March 31, Percent March 31, Percent
1999 of Sales 1998 of Sales
--------------------------------------------------------------------
Support Services:
Sales $1,156,400 100.0% $ 639,400 100.0%
Cost of sales 532,500 46.0% 148,500 23.2%
---------- ----- ---------- -----
Gross margin $ 623,900 54.0% $ 490,900 76.8%
========== ===== ========== =====
Total Sales $6,264,500 100.0% $2,847,000 100.0%
Total COS 3,034,000 48.4% 1,185,900 41.7%
---------- ----- ---------- -----
Total Gross Margin $3,230,500 51.6% $1,661,100 58.3%
========== ===== ========== =====
Software & training:
Sales $1,176,700 100.0% $ 572,200 100.0%
Cost of sales 300,600 25.5% 101,700 17.8%
---------- ----- ---------- -----
Gross margin $ 876,100 74.5% $ 470,500 82.2%
========== ===== ========== =====
Equipment & Installation:
Sales $1,401,200 100.0% $ 454,800 100.0%
Cost of sales 1,042,700 74.4% 290,300 63.8%
---------- ----- ---------- -----
Gross margin $ 358,500 25.6% $ 164,500 36.2%
========== ===== ========== =====
Support Services:
Sales $ 604,900 100.0% $ 310,700 100.0%
Cost of sales 272,100 45.0% 74,200 23.9%
---------- ----- ---------- -----
Gross margin $ 332,800 55.0% $ 236,500 76.1%
========== ===== ========== =====
Total Sales $3,182,800 100.0% $1,337,700 100.0%
Total COS 1,615,400 50.8% 466,200 34.9%
---------- ----- ---------- -----
Total Gross Margin $1,567,400 49.2% $ 871,500 65.1%
========== ===== ========== =====
</TABLE>
Cost of Sales. Cost of sales of software and training for the six months
ending March 31, 1999 and 1998 as a percent of software and training revenue
were 24.4% and 20.2%, resulting in gross margin percentages of 75.6% and 79.8%,
respectively. Cost of sales of software and training for the three months ending
March 31, 1999 and 1998 as a percent of software and training revenue were 25.5%
and 17.8%, resulting in gross margin percentages of 74.5% and 82.2%,
respectively. The decline in gross margin percentage, for both the six and three
month periods ended March 1999, can be attributed to increased training
personnel and wages. 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 six months ended March
31, 1999 and 1998 as a percent of equipment and installation revenue were 69.6%
and 76.9%, resulting in gross margin percentages of 30.4% and 23.1%,
respectively. Cost of sales for equipment and installation for the three months
ended March 31, 1999 and 1998 as a percent of equipment and installation revenue
were 74.4% and 63.8%, resulting in gross margin percentages of 25.6% and 36.2%,
respectively. The increase in gross margin percentage, for the six month period
-16-
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. (Continued)
ended March 31, 1999, is due to lower margin camera and computer equipment sales
being augmented by the sale of higher margin dental equipment sales. These
higher margin dental equipment sales were a result of the acquisition of IPS in
February of 1998. The decline in the gross margin percentage in the three month
period ending March 31, 1999 is due to a $200,000 charge to cost of sales in
March 1999 to reflect the write off of raw material inventory (please refer to
item 2, MD & A page 10). Cost of sales as a percent of equipment and
installation revenue, exclusive of the $200,000 inventory write off, for the six
month period ended March 31, 1999 is 62.4% resulting in a gross margin
percentage of 37.6%. Cost of sales as a percent of equipment and installation
revenue, exclusive of the $200,000 inventory write off, for the three month
period ended March 31, 1999 is 60.1% resulting in a gross margin percentage of
39.9%
Cost of sales for software support for the six months ended March 31, 1999
and 1998 as a percent of support services revenue were 46.0% and 23.2%,
resulting in gross margin percentages of 54.8% and 76.8%, respectively. Cost of
sales for software support for the three months ended March 31, 1999 and 1998 as
a percent of support services revenue were 45.0% and 23.9%, resulting in gross
margin percentages of 55.0% and 65.1%, 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.
Selling & Marketing Expenses. Selling and marketing expenses for the six
month periods ended March 31, 1999 and 1998 were $1,784,800 and $759,300,
respectively, for an increase of $1,025,500 or 135.1%. Selling and marketing
expenses for the three month periods ended March 31, 1999 and March 31, 1998
were $839,700 and $371,700, respectively, for an increase of $468,000 or 125.9%.
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.
General and Administrative Expenses (G & A). G & A expenses for the six
month period ended March 31, 1999 and 1998 were $3,405,600 and $1,427,100,
respectively, for an increase of $1,978,500 or 138.6%. G & A expenses for the
three month period ended March 31, 1999 and 1998 were $1,805,700 and $690,400,
respectively, for an increase of $1,115,300 or 161.5%. 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.
Research and Development Costs (R & D). For the six months ended March 31,
1999 and 1998, R & D expenses were $2,700 and $19,200, respectively, for a
decrease of $16,500 or 85.9%. For the three months ended March 31, 1999 and
-17-
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. (Continued)
1998, R & D expenses were $2,100 and $15,100, respectively, for a decrease of
$13,000 or 86.1%. 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 six months ended March 31, 1999 and 1998,
software development costs capitalized were $145,100 and $81,800, respectively.
For the three months ended March 31, 1999 and 1998, software development costs
capitalized to costs were $60,000 and $42,600, respectively.
Interest Income and Expense. Interest income is a function of current cash
invested for the period. Interest income for the six months ended March 31, 1999
and 1998 was $6,400 and 26,100, respectively. Interest income for the three
months ended March 31, 1999 and 1998 was $3,300 and $12,200, respectively.
Interest expense for the six months ended March 31, 1999 totaled $343,400.
Interest expense for the three months ended March 31, 1999 totaled $241,500.
The following table illustrates interest expense for these periods.
Six Months Three Months
Ended March Ended March
Description: 31, 1999 31,1999
- ------------ ---------------------------
Related Party Notes $ 26,800 $ 11,300
Convertible Debentures 62,100 40,300
Line of Credit 15,900 13,500
Capitalized Lease 11,400 5,400
Debt Issuance / Discount Amortization 227,200 171,000
-------- --------
Total Interest Expense: $343,400 $241,500
======== ========
-18-
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
MEDY and its wholly-owned subsidiary Computer Age Dentist, Inc.have filed
litigation against Sally Marcotte, Oliver Marcotte, and ADG, Inc. in the
District Court for Arapahoe County, Colorado. The litigation seeks, among other
things, rescission of an April 1998 merger agreement by which Computer Age
Dentist acquired the assets of Command Dental Systems, Inc. from the Command
shareholders. The complaint also seeks rescission of the employment agreement
between Computer Age Dentist and Sally Marcotte, damages, and other affirmative
relief in favor of Medical Dynamics and Computer Age Dentist and against Sally
and Oliver Marcotte and ADG, Inc. The complaint alleges that, in completing the
transaction with Medical Dynamics in April 1998, the principals and shareholders
of Command Dental failed to disclose certain material facts to Medical Dynamics,
and misrepresented certain other facts to Medical Dynamics and Computer Age
Dentist. In the complaint, Medical Dynamics and Computer Age Dentist also allege
that Sally Marcotte breached her obligations under her employment agreement with
Computer Age Dentist.
Medical Dynamics and Computer Age Dentist have initiated discussions with
Dr. and Mrs. Marcotte, and with ADG, Inc., in an effort to settle this matter
outside of litigation. There can be no assurance, however, that they will be
able to do so. It should be noted that litigation is expensive and
unpredictable. While management of Medical Dynamics and Computer Age Dentist
believes that they have a meritorious case against these defendants, no
assurances may be given as to the outcome of this case. Medical Dynamics does
not believe that any resolution of this matter will have a material adverse
impact on its financial condition or operations. The defendants have asserted
that MEDY has defaulted on the $445,300 indebtedness to the former shareholders
of Command which remains outstanding, but the defendants have not otherwise
answered the complaint.
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 agreed to file a registration statement related to these shares
not later than April 16, 1999 and to obtain effectiveness of that registration
statement no later than July 30, 1999. The Company has since obtained the
effectiveness of that registration statement as of May 5, 1999. 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
-19-
<PAGE>
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").
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 $400,000 of the debentures into 301,790 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.
(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.
-20-
<PAGE>
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.
(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.
-21-
<PAGE>
Addtional 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 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 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: May 14, 1999 /s/ Van A. Horsley
------------------------------------
Van A. Horsley, President,
Principal Executive Officer, and
Principal Financial Officer
-22-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> MAR-31-1999
<CASH> 651,400
<SECURITIES> 50,000
<RECEIVABLES> 896,900
<ALLOWANCES> (105,700)
<INVENTORY> 1,005,000
<CURRENT-ASSETS> 2,532,100
<PP&E> 1,516,800
<DEPRECIATION> (876,700)
<TOTAL-ASSETS> 9,151,300
<CURRENT-LIABILITIES> 2,604,400
<BONDS> 1,190,300
0
0
<COMMON> 11,000
<OTHER-SE> 4,973,400
<TOTAL-LIABILITY-AND-EQUITY> 9,151,300
<SALES> 3,182,800
<TOTAL-REVENUES> 3,206,900
<CGS> 1,615,400
<TOTAL-COSTS> 4,267,900
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 241,500
<INCOME-PRETAX> (1,302,500)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,302,500)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,302,500)
<EPS-PRIMARY> (.13)
<EPS-DILUTED> (.13)
</TABLE>
