SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 8-K
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report: November 30, 2000
MEDICAL DYNAMICS, INC.
----------------------------------------------------
(Exact name of Registrant as specified in its charter)
Commission file number: 0-8632
Colorado 84-0631765
------------------------------- ------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification
Number)
99 Inverness Drive East
Englewood, Colorado 80112
---------------------------------------- --------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(303) 790-2990
not applicable
--------------------------------------------
former name or former address, if applicable
<PAGE>
Item 5: Other Events
Medical Dynamics, Inc. (the "Company") is filing herewith its audited
financial statements as of September 30, 2000, the Company's fiscal year end
together with the report from its independent certified public accountants.
These financial statements and the report will also be included in the Company's
annual report on From 10-KSB for the year ended September 30, 2000, to be filed
in the near future.
Item 7 - Financial Statements and Exhibits
1. Report of Hein + Associates LLP and financial statements for the year
ended September 30, 2000
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
MEDICAL DYNAMICS, INC.
By /s/ Van A. Horsley
---------------------
Van A. Horsley, President
-2-
<PAGE>
Medical Dynamics, Inc. and Subsidiaries
Consolidated Financial Statements
For the Years Ended
September 30, 2000 and 1999
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Independent Auditor's Report.................................................F-2
Consolidated Balance Sheet - September 30, 2000..............................F-3
Consolidated Statements of Operations - For the Years
Ended September 30, 2000 and 1999...................................F-4
Consolidated Statements of Stockholders' Equity - For the Years
Ended September 30, 2000 and 1999...................................F-5
Consolidated Statements of Cash Flows - For the Years
Ended September 30, 2000 and 1999...................................F-6
Notes to Consolidated Financial Statements...................................F-8
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Medical Dynamics, Inc.
Englewood, Colorado
We have audited the accompanying consolidated balance sheet of Medical Dynamics,
Inc. and subsidiaries (the "Company") as of September 30, 2000, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years ended September 30, 2000 and 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Medical Dynamics,
Inc. and subsidiaries as of September 30, 2000, and the results of their
operations and their cash flows for the years ended September 30, 2000 and 1999,
in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses and negative
cash flows from operations. This raises substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 2. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/ HEIN + ASSOCIATES LLP
-------------------------
HEIN + ASSOCIATES LLP
Denver, Colorado
November 30, 2000
F-2
<PAGE>
<TABLE>
<CAPTION>
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2000
ASSETS
------
<S> <C>
CURRENT ASSETS:
Cash and equivalents $ 330,800
Trade receivables, less allowance for doubtful accounts of $19,600 43,300
Inventories 2,500
Prepaid expenses and other 700
------------
Total current assets 377,300
------------
SOFTWARE DEVELOPMENT AND SUPPORT:
Software development costs, net of accumulated amortization of $1,321,800 1,948,200
Technical support contracts, net of accumulated amortization of $890,700 593,800
------------
Total software development and support 2,542,000
------------
PROPERTY AND EQUIPMENT:
Demonstration equipment 143,000
Machinery and equipment 606,100
Furniture and fixtures 235,600
Leasehold improvements 54,500
------------
1,039,200
Less accumulated depreciation and amortization (753,900)
------------
Property and equipment, net 285,300
------------
OTHER ASSETS:
Goodwill, net of accumulated amortization of $225,500 1,050,600
Deposits and other 42,500
------------
Total other assets 1,093,100
------------
TOTAL ASSETS $ 4,297,700
============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Current maturities of notes payable $ 2,002,200
Accounts payable and accrued expenses 665,900
Unearned revenue 269,800
------------
Total current liabilities 2,937,900
------------
NOTES PAYABLE, net of current portion 135,900
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value; authorized 5,000,000 shares; none issued --
Common stock, $.001 par value; authorized 30,000,000 shares, issued and
outstanding 13,229,206 shares 13,200
Additional paid-in capital 28,353,200
Accumulated deficit (27,142,500)
------------
Total stockholders' equity 1,223,900
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,297,700
============
See accompanying notes to these consolidated financial statements.
F-3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED
SEPTEMBER 30,
----------------------------
2000 1999
------------ ------------
<S> <C> <C>
NET SALES:
Dental products:
Software, training, and installation $ 796,300 $ 3,809,700
Equipment 222,200 4,495,900
Support services 2,669,500 2,522,400
Medical products 11,300 130,700
------------ ------------
3,699,300 10,958,700
------------ ------------
COST OF SALES:
Dental products:
Software, training, and installation 616,200 1,133,000
Equipment 365,400 4,015,300
Support services 679,100 924,700
Medical products 54,500 34,600
------------ ------------
1,715,200 6,107,600
------------ ------------
GROSS PROFIT 1,984,100 4,851,100
------------ ------------
OPERATING EXPENSES:
Selling and marketing 608,000 3,679,800
General and administrative 2,945,500 4,983,300
Stock-based compensation 24,400 49,600
Research and development -- 2,900
Impairment of goodwill -- 655,200
------------ ------------
Total operating expenses 3,577,900 9,370,800
------------ ------------
OPERATING LOSS (1,593,800) (4,519,700)
OTHER INCOME (EXPENSE):
Other income 3,800 44,900
Interest income 14,300 13,500
Interest expense (375,700) (650,000)
Loss on Command settlement -- (286,800)
------------ ------------
(357,600) (878,400)
------------ ------------
NET LOSS $ (1,951,400) $ (5,398,100)
============ ============
BASIC AND DILUTED LOSS PER COMMON SHARE $ (.15) $ (.52)
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 13,087,200 10,312,700
============ ============
See accompanying notes to these consolidated financial statements.
F-4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 2000 AND 1999
COMMON STOCK Additional
------------------------ Paid-in
Shares Amount Capital
--------- ------------ -----------
<S> <C> <C> <C>
BALANCE, October 1, 1998 10,034,500 $ 10,000 $ 25,246,900
Conversion of debentures to common stock:
Principal, net of discount 1,144,900 1,200 1,142,200
Accrued interest 101,300 100 125,900
Fair value of warrants issued for debt discount and issuance costs -- -- 299,400
Proceeds from exercise of options 98,000 100 141,400
Proceeds from sale of common stock, net of offering costs of $32,900 523,800 500 766,600
Additional shares issued pursuant to terms of agreement 311,800 300 (300)
Attribution of compensation under stock options and warrants:
Employee -- -- 32,100
Non-employee -- -- 17,500
Net loss -- -- --
------------ ------------ ------------
BALANCE, September 30, 1999 12,214,300 12,200 27,771,700
Conversion of debentures to common stock:
Principal, net of discount 729,340 720 372,980
Proceeds from exercise of options 207,700 200 184,200
Additional shares issued pursuant to terms of agreement 77,866 80 (80)
Attribution of compensation under stock options and warrants:
Non-employee -- -- 24,400
Net loss -- -- --
------------ ------------ ------------
BALANCE, September 30, 2000 13,229,206 $ 13,200 $ 28,353,200
============ ============ ============
Table continues on following page.
See accompanying notes to these consolidated financial statements.
F-5
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 2000 AND 1999
(Continued)
Accumulated
Deficit Total
------------ ------------
<S> <C> <C>
BALANCE, October 1, 1998 $(19,793,000) $ 5,463,900
Conversion of debentures to common stock:
Principal, net of discount -- 1,143,400
Accrued interest -- 126,000
Fair value of warrants issued for debt discount and issuance costs -- 299,400
Proceeds from exercise of options -- 141,500
Proceeds from sale of common stock, net of offering costs of $32,900 -- 767,100
Additional shares issued pursuant to terms of agreement -- --
Attribution of compensation under stock options and warrants:
Employee -- 32,100
Non-employee -- 17,500
Net loss (5,398,100) (5,398,100)
------------ ------------
BALANCE, September 30, 1999 (25,191,100) 2,592,800
Conversion of debentures to common stock:
Principal, net of discount -- 373,700
Proceeds from exercise of options -- 184,400
Additional shares issued pursuant to terms of agreement -- --
Attribution of compensation under stock options and warrants:
Non-employee -- 24,400
Net loss (1,951,400) (1,951,400)
------------ ------------
BALANCE, September 30, 2000 $(27,142,500) $ 1,223,900
============ ============
See accompanying notes to these consolidated financial statements.
F-5(Con't)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
SEPTEMBER 30,
--------------------------
2000 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,951,400) $(5,398,100)
Adjustments to reconcile net loss to net cash used in
operating activities:
Common stock options granted for compensation
and other services 24,400 49,600
Depreciation expense 135,900 191,800
Amortization of intangible assets 887,900 937,000
Amortization of debt discount and issuance costs 123,000 446,500
Conversion of accrued interest on debentures to common stock -- 126,000
Bad debt expense -- 82,300
Impairment of goodwill -- 655,200
Loss on disposal of Command, less cash received -- 279,500
Provision for obsolete and slow-moving inventories -- 23,700
Other -- (23,200)
Changes in operating assets and liabilities, net of
effects of acquisitions:
Decrease (increase) in:
Trade receivables 211,100 454,000
Inventories 186,700 621,700
Prepaid expenses and other 22,700 13,100
Increase (decrease) in:
Accounts payable and accrued expenses (453,700) 263,500
Unearned revenue (98,700) (1,600)
----------- -----------
Net cash used in operating activities (912,100) (1,279,000)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in restricted cash -- 50,000
Software development costs (68,200) (229,100)
Purchase of property and equipment -- (85,800)
----------- -----------
Net cash used in investing activities (68,200) (264,900)
----------- -----------
See accompanying notes to these consolidated financial statements.
F-6
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
FOR THE YEARS ENDED
SEPTEMBER 30,
--------------------------
2000 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on notes payable (353,300) (453,900)
Payment of debt issue costs -- (90,900)
Proceeds from issuance of common stock -- 767,100
Proceeds from exercise of common stock options 184,400 141,500
Proceeds from issuance of convertible debentures -- 400,000
Proceeds from shareholder loan -- 400,000
Proceeds from short-term borrowings 1,300,000 5,991,500
Repayment of short-term borrowings -- (5,984,500)
------------ ----------
Net cash provided by financing activities 1,131,100 1,170,800
------------ ----------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 150,800 (373,100)
CASH AND EQUIVALENTS, beginning of year 180,000 553,100
------------ ----------
CASH AND EQUIVALENTS, end of year $ 330,800 $ 180,000
============ ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION -
Cash paid for interest $ 161,900 $ 100,500
============ ==========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Conversion of accounts payable to debt $ -- $ 118,600
============ ==========
Conversion of debentures to common stock, net of discount $ 373,700 $1,143,400
============ ==========
Conversion of accrued interest to notes payable $ -- $ 9,200
============ ==========
Fair value of warrants issued for debt discount $ -- $ 40,000
============ ==========
Debt issuance costs incurred for convertible debentures $ -- $ 259,400
============ ==========
See accompanying notes to these consolidated financial statements.
F-7
</TABLE>
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES:
-------------------------------
Nature of Business Operations - Medical Dynamics, Inc. (the "Company") is
engaged in the development and marketing of practice management software
and related products for the dental profession. The Company's principal
products are practice management software, patient education systems,
digital x-ray systems and a wide variety of ancillary products utilized
by the dental profession.
Principles of Consolidation - The consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries,
Computer Age Dentist, Inc. (CADI), Information Presentation Systems, Inc.
(IPS) and DOM, Inc., d/b/a Command Dental Systems (Command). All
significant intercompany accounts and transactions have been eliminated
in the accompanying consolidated financial statements.
Use of Estimates - The preparation of the Company's consolidated
financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying
notes. The actual results could differ from those estimates.
The Company's consolidated financial statements are based on a number of
estimates, including the allowance for doubtful accounts, the provision
for obsolete and slow-moving inventories, the selection of estimated
useful lives of intangible assets and property and equipment, realization
of long-lived assets, assumptions affecting the valuation of common stock
issued in business combinations, and stock options and warrants granted
to non-employees. It is reasonably possible that estimates affecting the
provision for obsolete and slow-moving inventories and realization of
long-lived assets will change in the forthcoming year and such revisions
could be material.
Cash Equivalents - The Company considers all highly liquid debt
instruments purchased with an original maturity of three months or less
to be cash equivalents. At September 30, 2000, cash equivalents include a
mutual fund that invests in money market instruments.
Inventories - Inventories are stated at the lower of cost (first-in,
first-out method) or market and consist primarily of miscellaneous
computer hardware.
Property and Equipment - Property and equipment is stated at cost.
Depreciation is computed principally by the straight-line method over the
following estimated useful lives:
Years
-------
Demonstration equipment 3
Machinery and equipment 3 - 10
Furniture and fixtures 3 - 10
Leasehold improvements are amortized over the lesser of the life of the
lease or the estimated useful life of the improvement.
F-8
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Software Development Costs - The Company capitalizes costs of producing
software to be sold, leased, or otherwise marketed, incurred subsequent
to establishing technological feasibility in accordance with Statement of
Financial Accounting Standards No. 86.
Amortization of capitalized software development costs is computed on a
product-by-product basis. The annual amortization is the greater of the
amount computed using the ratio of current gross revenue for a product to
the total of current and anticipated future gross revenue for that
product or the straight-line method, not to exceed 7 years. In addition,
management periodically compares the unamortized capitalized costs for
each product to the net realizable value of that product. If the
unamortized capitalized costs exceed the net realizable value, the excess
will be charged to operations.
The total amount charged to expense in the statements of operations for
amortization of capitalized software costs was $465,700 and $446,100 for
the years ended September 30, 2000 and 1999, respectively, and is
included in cost of sales.
Costs incurred in researching, designing and planning for the development
of new software are classified as research and development expenses and
are charged to operations as incurred.
Other Intangible Assets - Other intangible assets are stated at cost and
are amortized utilizing the straight-line method over the following
estimated useful lives:
Years
-------
Technical support contracts 5
Goodwill 15
Non-compete agreements 5
Patents and trademarks 3 - 10
Debt Issuance Costs - Debt issuance costs are amortized using the
interest method over the term of the related debt.
Impairment of Long-Lived Assets - Management of the Company assesses
impairment whenever events or changes in circumstances indicate that the
carrying amount of a long-lived asset may not be recoverable. If the net
carrying value exceeds the net cash flows, then impairment will be
recognized to reduce the carrying value to the estimated fair value.
During the year ended September 30, 1999, management determined that
certain goodwill was impaired due to the closing of certain regional
operations, and recorded a loss on impairment of $655,200. No loss on
impairment was recorded during the year ended September 30, 2000.
Research and Development - Research and development costs are charged to
operations in the period incurred.
Advertising - Advertising costs are expensed the first time the
advertisement is run. Total advertising costs charged to operations
amounted to $74,200 and $503,400 for the years ended September 30, 2000
and 1999, respectively.
F-9
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Earnings Per Share - Net loss per common share is presented in accordance
with the provisions of Statement of Financial Accounting Standards (SFAS)
No. 128, Earnings Per Share. SFAS No. 128 replaces the presentation of
primary and fully diluted earnings per share (EPS), with a presentation
of basic EPS and diluted EPS. Under SFAS No. 128, basic EPS excludes
dilution for potential common shares and is computed by dividing the net
loss by the weighted average number of common shares outstanding for the
year. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or
converted into common stock and resulted in the issuance of common stock.
Basic and diluted EPS are the same in 1999 and 2000 as all potential
common shares were antidilutive.
Income Taxes - The Company accounts for income taxes under the liability
method, which requires recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this method,
deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates.
Revenue Recognition - The Company recognizes sales when finished goods
are shipped to a customer. Revenue from the sale of the Company's
proprietary software is recognized when the software is delivered and the
Company has substantially performed all material obligations relating to
the sale agreement and collectibility is deemed probable by management.
Revenue from software services is recognized ratably over the contractual
period or as the services are performed.
Unearned revenue primarily represents payments received on deferred
maintenance contracts that has not been earned. The amounts are amortized
into revenue on a monthly basis using the straight-line method over the
life of the contracts.
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.
Stock-Based Compensation - The Company accounts for stock-based
compensation for employees using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued
to Employees, and related interpretations. Accordingly, compensation cost
for stock options granted to employees is measured as the excess, if any,
of the quoted market price of the Company's common stock at the
measurement date (generally, the date of grant) over the amount an
employee must pay to acquire the stock.
In October 1995, the Financial Accounting Standards Board issued a new
statement titled Accounting for Stock-Based Compensation (SFAS No. 123).
SFAS No. 123 requires that options, warrants, and similar instruments
which are granted to non-employees for goods and services be recorded at
fair value on the grant date. Fair value is generally determined under an
option pricing model using the criteria set forth in SFAS No. 123. The
Company did not adopt SFAS No. 123 to account for stock-based
compensation for employees but is subject to the pro forma disclosure
requirements.
Segment Disclosures - Operating segments are components of a company
about which separate financial information is available that is evaluated
regularly by the chief operating decisionmaker in deciding how to
F-10
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
allocate resources and in assessing performance. The only material
segment that the Company is currently engaged in is the dental products
segment. Accordingly, the accompanying financial statements do not
include disclosures for the immaterial medical products segment.
2. LIQUIDITY:
---------
Through September 30, 2000, the Company has incurred substantial
operating losses and negative cash flows from operations. The Company's
future viability depends on its ability to increase sales, curtail
expenditures and become profitable.
As discussed further in Note 8, the Company entered into an agreement to
be acquired, was successful in obtaining additional debt financing of
$250,000 in October 2000 and extended payments terms on certain notes
payable. However, management believes additional capital is necessary to
fund existing working capital requirements. The Company's ability to
continue as a going concern is dependent on completing the acquisition,
or raising additional capital.
3. LONG-TERM LIABILITIES:
---------------------
Convertible Debentures - In October 1997, the Company issued convertible
debentures totaling $1,100,000. The conversion price is equal to the
average of the two lowest closing bid prices of the Company's common
stock as reported by NASDAQ during the 60 trading days preceding the
conversion date. The Company received net proceeds of $986,000 from the
debentures, after paying all costs related to the issuance. Through
September 30, 1998, the holder had converted $660,000 of debentures to
315,700 shares of common stock. In October 1998, the holder converted the
remaining $440,000 of debentures to 234,667 shares of common stock.
The Company also granted the debenture holder a warrant to purchase
84,615 shares of the Company's common stock. The warrant is exercisable
until October 31, 2000 at an exercise price of $3.38. The estimated fair
value of this warrant of $120,000 was accounted for as a discount on the
convertible debentures. During 1999, these warrants were canceled.
In July 1998, the Company issued additional convertible debentures
totaling $1,100,000. The conversion price is equal to the average of the
two lowest closing bid prices of the Company's common stock as reported
by NASDAQ during the 60 trading days preceding the conversion date. The
Company received net proceeds of $1,003,000 from the debentures, after
paying all costs related to the issuance. Through September 30, 1999, the
holder had converted $800,000 of debentures to 910,200 shares of common
stock. In October 1999 and January 2000, the holder converted the
remaining $300,000 of debentures to 575,273 shares of common stock.
The Company also granted the Debenture holder a warrant to purchase
110,000 shares of the Company's common stock. The warrant is exercisable
until July 31, 2003 at an exercise price of $2.58. The estimated fair
value of this warrant of $100,000 was accounted for as a discount on the
convertible debentures.
F-11
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In November 1998, the Company issued an additional $400,000 of
convertible debentures with terms similar to the July 1998 issuance
described above. The Company also agreed to issue an additional warrant
for 40,000 shares exercisable until November 2003 at an exercise price of
$2.58 per share. The estimated fair value of the warrants of $40,000 was
accounted for as a discount on the convertible debenture.
During fiscal 1999, the Company entered into amendments to modify certain
terms and conditions of the debentures. The conversion price will be
equal to 85% of the average of the two lowest closing bid prices over a
60-day period immediately preceding the date of conversion. As a result
of the issuance of warrants in 1999 private placement, the exercise price
of the outstanding warrants to acquire 150,000 shares at $2.58 per share
was decreased to $1.832. As a result of the amendments, additional debt
issuance costs of approximately $260,000 were recorded.
In January 2000, the holder converted $102,600 of debentures to 154,067
shares of common stock. The debenture holder attempted to convert all
remaining 1998 debentures but was precluded from doing so due to a
provision under which a maximum of 1,880,000 total shares can be issued
to the debenture holder. As a result, the balance of $297,400 of
debentures were unable to be converted and this amount is now due on
demand. In addition, the Company was required to pay a premium of 15% of
the demand note to the debenture holder. This amount totaling
approximately $44,000 is included in accrued expenses as of September 30,
2000.
Notes Payable - At September 30, 2000, long-term debt consists of the
following:
Notes payable to InfoCure:
Interest at 12%, due September 2001 or upon sale of
the Company, collateralized by substantially all of
the Company's assets $1,300,000
Note payable to shareholder (former debenture holder):
Interest at 8%, due on demand, unsecured 297,400
Notes payable to former shareholders of CADI:
Interest at 12%, due September 2001 or upon sale of the
Company, subordinated to the note payable to InfoCure 126,700
Notes payable to former owners of Command:
Interest at 6%, due April 2003, unsecured 240,200
Discount for below-market interest, net of accumulated
amortization of $21,110 (26,500)
----------
Net 213,700
----------
Note payable to shareholder:
Interest at 12%, due September 2001 or upon sale of the
Company, collateralized by substantially all of the
Company's assets, subordinated to the note payable
to InfoCure 200,300
----------
Total notes payable 2,138,100
Less current maturities (2,002,200)
----------
Notes payable, less current maturities $ 135,900
==========
F-12
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The effective interest rate on the debt incurred under the notes payable
to the former owners of CADI and Command was 15% to 16%.
As of September 30, 2000, aggregate maturities of notes payable are as
follows:
Year Ending September 30, Principal Discount Net
------------------------- ---------- --------- ----------
2001 $2,018,000 $15,900 $2,002,100
2002 100,200 9,100 91,100
2003 46,400 1,500 44,900
---------- --------- ----------
Total $2,164,600 $26,500 $2,138,100
========== ======= ==========
4. STOCKHOLDERS' EQUITY:
---------------------
In March 1999, an unaffiliated entity purchased 523,800 shares of the
Company's common stock for $800,000. In addition, the Company agreed to
issue additional shares to this entity at various determination dates
which are intended to compensate the entity for one-third of any decrease
in the market price of the Company's stock. As of September 30, 2000, the
Company has issued an additional 389,666 shares under this agreement. The
Company has no further obligations under the agreement.
Stock Option Plan - The Company has two stock option plans under which
incentive and non-qualified stock options may be granted to officers,
directors, employees, and consultants. Incentive stock options are
required to have an exercise price which is not less than the fair market
value of the stock at the date of grant. Under the first plan which was
approved by shareholders in October 1988, an aggregate of 1,000,000
shares were reserved for issuance pursuant to the terms of the plan.
Under the second plan which was approved by shareholders in June 1998, an
F-13
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
aggregate of 1,500,000 shares were reserved for issuance pursuant to the
terms of the plan. The maximum term is 10 years for options granted under
both plans. Activity in the 1988 and 1998 stock option plans for the
years ended September 30, 2000 and 1999 is as follows:
<TABLE>
<CAPTION>
1998 Plan 1998 Plan
-------------------------- -------------------------
Weighted Weighted
Average Average
Number of Exercise Price Number of Exercise Price
Shares Per Share Shares Per Share
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Outstanding, October 1, 1998 57,200 $ 1.74 -- $ --
Granted -- -- 234,800 .93
Exercised -- -- -- --
Cancled (5,000) 3.00 -- --
--------- --------
Outstanding, September 30, 1999 52,200 1.61 234,800 .93
Granted -- -- 40,000 1.81
Exercised -- -- (207,700) .89
Canceled -- -- (44,100) 1.64
--------- ---------
Outstanding, September 30, 2000 52,200 $ 1.61 23,000 $ 1.47
========= =========
</TABLE>
Options available for future grant at September 30, 2000 totaled
1,225,200 shares under the 1998 plan. No shares were available for future
grants under the 1988 plan.
As of September 30, 2000, all options outstanding under the 1988 plan are
vested and 23,000 are vested under the 1998 plan. If not previously
exercised, options outstanding at September 30, 2000, will expire as
follows:
1988 Plan 1998 Plan
--------------------- ---------------------
Number of Exercise Number of Exercise
Year Ending September 30, Shares Price Shares Price
------------------------- --------- --------- --------- ---------
2001 37,200 $ 1.38 -- $ --
2002 10,000 2.00 -- --
2003 5,000 2.63 -- --
2004 -- -- 20,000 1.50
2005 -- -- 3,000 1.25
--------- ---------
52,200 $ 1.61 23,000 $ 1.47
========= =========
F-14
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Non-Qualified Stock Options and Warrants - The Company has also granted
non-qualified stock options and warrants to officers, directors,
employees, consultants, and lenders. The following is a summary of
activity during the years ended September 30, 2000 and 1999:
Weighted
Average
Number of Exercise Price
Shares Per Share
--------- ---------
Outstanding, September 30, 1998 4,236,500 $ 3.28
Granted to:
Employees 610,800 3.04
Consultants 100,000 1.50
Convertible debenture holders 40,000 2.58
Canceled (1,468,700) 3.70
Exercised (98,000) 1.44
---------
Outstanding, September 30, 1999 3,420,600 2.99
Granted -- --
Canceled (161,000) 3.25
Exercised -- --
Expired:
Employees (160,900) 1.13
Consultants (75,000) 4.50
---------
Outstanding, September 30, 2000 3,023,700 3.03
=========
F-15
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
If not previously exercised, non-qualified options and warrants expire as
follows:
Weighted
Average
Year Ending Number of Exercise
September 30, Shares Price
------------ ---------- --------
2001 182,000 $ 1.73
2001 250,000 2.87
2001 115,000 3.75
2002 10,200 3.00
2003 52,000 1.50
2003 258,900 2.68
2003 274,800 3.84
2004 140,800 1.60
2004 40,000 2.58
2005 1,200,000 3.25
2006 500,000 3.25
----------
3,023,700
==========
At September 30, 2000, a total of 2,323,700 non-qualified stock options
and warrants are vested. Unvested employee performance options were
outstanding for 700,000 shares. These options vest when the Company
achieves various revenue levels. The Company also has 20,000 options
outstanding that vest at future dates. Vesting under most of these
options can be accelerated if various performance targets are achieved.
During the years ended September 30, 2000 and 1999, the Company
recognized compensation expense of $0 and $32,100, respectively, related
to employee performance options. The ultimate amount of compensation
expense related to the employee performance options will be determined
based on the market value of the Company's common stock on the date that
the options vest.
The fair value of options granted to non-employees in 1999 (no options
were granted to non-employees in 2000) was estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted
average assumptions:
Expected volatility 78.0%
Risk-free interest rate 6.0%
Expected dividends 0.0%
Expected terms (in years) .7
F-16
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended September 30, 2000 and 1999, options granted to
non-employees resulted in the recognition of approximately $24,400 and
$17,500, respectively, of compensation expense.
Pro Forma Stock-Based Compensation Disclosures - The Company applies APB
Opinion 25 and related interpretations in accounting for stock options
which are granted to employees. Accordingly, no compensation cost is
recognized for grants of options to employees if the exercise prices were
not less than the market value of the Company's common stock on the
measurement dates. Had compensation cost been determined based on the
fair value at the measurement dates consistent with the method of SFAS
No. 123, the Company's net loss and loss per share would have been
changed to the pro forma amounts indicated below.
Years Ended September 30,
--------------------------------
2000 1999
-------------- --------------
Net loss:
As reported $ (1,951,400) $ (5,398,100)
Pro forma (1,992,600) (6,739,100
Net loss per common share:
As reported $ (.15) $ (.52)
Pro forma (.15) (.65)
For purposes of the above pro forma amounts, the weighted average fair
value of options granted to employees for the years ended September 30,
2000 and 1999 was $1.25 and $1.00, respectively. The fair value of each
employee option granted in 2000 and 1999 was estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted average assumptions:
Years Ended September 30,
--------------------------
2000 1999
-------- --------
Expected volatility 100.8% 81.0%
Risk-free interest rate 6.0% 6.0%
Expected dividends 0.0% 0.0%
Expected terms (in years) 5.0 4.5
F-17
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. INCOME TAXES:
------------
The amounts which give rise to the net deferred tax asset at September
30, 2000, are as follows:
Net operating loss carryforwards $ 8,497,000
Compensation expense related to stock options 109,000
Research and development tax credit carryforwards 20,000
Other 137,000
------------
Total Deferred Tax Assets 8,763,000
Valuation Allowance (8,763,000)
------------
$ --
============
Management has determined that a valuation allowance equal to the
deferred tax assets is required since it is more likely than not that the
benefits of these assets will not be realized. The valuation allowance
decreased by approximately $175,000 and increased by approximately
$900,000 during the years ended September 30, 2000 and 1999,
respectively.
At September 30, 2000, the Company has approximately $22,879,000 of net
operating loss carryforwards, and approximately $20,000 of research and
development tax credit carryforwards, both of which expire in varying
amounts from 2001 through 2020. Usage of the net operating loss
carryforwards may be limited by Section 382 of the Internal Revenue Code.
6. EMPLOYEE BENEFIT PLAN:
----------------------
The Company maintains a defined contribution 401(k) plan which covers
eligible employees as defined in the plan document. Matching
contributions are at the discretion of the Company. For the years ended
September 30, 2000 and 1999, matching contributions totaled approximately
$8,800 and $11,000, respectively.
7. COMMITMENTS AND CONTINGENCIES:
-----------------------------
License Agreement - The Company has various agreements to pay royalties
to both a former officer and current directors of the Company. These
royalties are based on the sales of specified products, some of which are
no longer manufactured by the Company. In June 1987, the Company entered
into a license agreement with its then CEO and Chairman relating to the
use of certain technology invented and developed by the Chairman. In
connection with the agreement, the Company agreed to pay royalties based
on the greater of 2% of sales of products which relate to this technology
or minimum annual royalties of $120,000.
F-18
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During 1997, the license agreement was amended to eliminate the minimum
annual royalty and to provide for future royalties generally equal to 2%
of sales of the products that relate to the technology. For the years
ended September 30, 2000 and 1999, the Company did not incur any royalty
expense related to this agreement. The license agreement may be
terminated by the Chairman in certain circumstances and the rights to the
patents may revert to him if commercial development of the related
products does not occur within prescribed deadlines.
Operating Leases - The Company conducts its operations from leased
facilities and leases certain equipment. The terms of the facilities
leases require the Company to pay all maintenance, utilities, property
taxes and insurance. Rent expense has been recorded on a straight-line
basis over the life of the lease. Following is a schedule of future
minimum commitments under operating leases having an initial or remaining
term of more than one year.
Years Ending September 30,
--------------------------
2001 $ 155,600
2002 108,000
2003 9,000
-----------
$ 272,600
===========
Total rent expense was $321,500 and $430,400, net of sublease rentals
received, for the years ended September 30, 2000 and 1999, respectively.
Employment Agreements - The Company has employment agreements with two
individuals who are officers or directors of the Company or CADI. As of
September 30, 2000, the agreements were effective for a remaining period
of two years with an annual aggregate compensation of $210,000.
Contingencies - The Company may from time to time be involved in various
claims, lawsuits, disputes with third parties, actions involving
allegations of discrimination, or breach of contract incidental to the
operations of its business. The Company is currently involved in some
incidental litigation which it believes will not have a material adverse
effect on its financial condition or results of operations. Management
has created a legal reserve for this litigation which it believes is
sufficient to cover these claims.
During the year ended September 30, 1999, the Company settled litigation
against the former principals of Command Dental Systems, a business
acquired by the Company in April 1998, resulting in a loss of
approximately $287,000.
F-19
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. SUBSEQUENT EVENTS:
------------------
In December 1999, the Company entered into an Agreement and Plan of
Merger and Reorganization with InfoCure Corporation (InfoCure) wherein
InfoCure will acquire 100% of the outstanding common stock of the Company
in exchange for common and preferred shares of InfoCure. This agreement
was amended in October 2000 and the Company anticipates closing the
transaction during fiscal year 2001. If the agreement is breached by the
Company, the Company may, pursuant to specific details outlined in the
agreement, be responsible for reimbursement of InfoCure's costs and
expenses incurred in connection with the agreement and payment of a
$250,000 termination fee.
In October 2000, InfoCure advanced the Company an additional $250,000 at
an interest rate of 12% and extended the maturity of the entire
indebtedness until September 30, 2001.
F-20
