SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10-KSB
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended: September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ___________
Commission file number: 0-8632
MEDICAL DYNAMICS, INC.
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(Exact name of Registrant as specified in its charter)
Colorado 84-0631765
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
99 Inverness Drive East
Englewood, Colorado 80112
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 790-2990
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 Par Value
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
(1) Yes X No
(2) Yes X No
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B, and no disclosure will be contained, to the best of Registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-KSB or any amendments to this Form
10-KSB.[XX ]
The issuer's revenues for its most recent fiscal year were $10,958,700.
The aggregate market value of the voting stock held by nonaffiliates computed by
reference to the price at which the stock was sold, or the average bid and asked
prices of such stock, as of December 23, 1999 was approximately $13,670,000.
Class Outstanding at December 23, 1999
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Common Stock 12,866,269 shares
Documents incorporated by reference: None
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MEDICAL DYNAMICS, INC.
FORM 10-KSB
PART I
Item 1. Business.
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(a) Business Development
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Medical Dynamics, Inc., a Colorado corporation ( NASDAQ Small Cap - MEDY)
incorporated in March 1971 ("MEDY" or the "Company"), is engaged in the
development and marketing of practice management software and related products
for the dental profession. MEDY'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.
During fiscal 1998, MEDY changed its business focus significantly to the
dental practice management software industry through three acquisitions.
Effective October 1, 1997 MEDY acquired 100% of the outstanding capital
stock Computer Age Dentist, Inc. (CADI), a California corporation based in
Los Angeles, California. CADI is engaged in the development and sale of
Practice Management Software and related electronic services to the dental
industry.
Effective on February 1, 1998, CADI merged with Information Presentation
Systems, Inc. (IPS) of Marietta, Georgia. IPS is an eight year old company
supplying customized multimedia systems for use in a variety of dental
operatory environments. IPS's product line included the sales of MEDY's
intra oral camera, video and computer image storage systems, patient
management systems, digital radiography and micro-abrasion instruments.
Effective April 1, 1998, CADI purchased 100% of the outstanding common
stock of Command Dental Systems, Inc. of Farmington Hills, Michigan.
Command's primary business is the development, marketing and installation
of dental practice management systems. Command had an in house staff of
programmers, sales professionals, installers, trainers, and support
technicians along with 550 clients ranging from small dental offices to
large clinics, of which approximately 150 converted to CADI's dental
practice management software.
As a result of the acquisitions, MEDY is now operating through CADI, and
CADI is operating the businesses previously operated by IPS and Command, both of
which were merged into CADI. As a result of the CADI, IPS and Command
acquisitions, MEDY has integrated the hardware and software necessary to manage
a dental practice. Since MEDY and CADI's products being offered for sale are all
Year 2000 (Y2k) compliant, MEDY has marketed CADI's products to the dental
practices with MS-DOS and UNIX based software that may not be Y2K compliant.
MEDY's principal executive offices are at 99 Inverness Drive East, Englewood,
Colorado, 80112. Its telephone number at that address is (303) 790-2990.
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During the fiscal year ended September 30, 1999, MEDY was not involved in
any bankruptcy, receivership or similar proceeding nor did it engage in any
material reclassification, or consolidation. During that period, MEDY did not
dispose of any material amounts of its assets other than in the ordinary course
of its business. MEDY did enter into a settlement agreement with the former
principals of Command to settle litigation; the settlement resulted in the
disposition of certain assets that MEDY did not consider material to its
continuing operations.
As a result of significant losses from operations and working capital
shortages, MEDY's independent accountants have included a going concern
qualification in their audit opinion. See "Management's Discussion and Analysis"
(Item 6) for MEDY's discussion of its financial condition and results of
operations, and its plan to address the issues raised by the going concern
qualification.
During the fiscal year 1995 MEDY entered into a distribution agreement with
Micro-Medical Devices, Inc. (MMD), of Castle Rock, Colorado. MMD is a
corporation formed by and 100% wholly-owned by MEDYs Chairman. MMD manufactures
and sells minimal quantities of various medical products to MEDY. See Item 12 -
"Certain Relationships and Related Transactions, Distribution Agreement."
As discussed in Note 2 to the financial statements, the Company has
suffered recurring losses and negative cash flows from operations and, at
September 30, 1999, had a working capital deficit of approximately $1,787,000.
Except for events described in the following paragraph, this would raise
substantial doubt about the Company's ability to continue as a going concern.
During fiscal 1999, MEDY sold convertible debentures to The Tailwind Fund, Ltd.,
an unaffiliated entity, pursuant to Regulation D. MEDY sold convertible
debentures in the amount of $400,000 on November 16, 1998. On March 18, 1999
Resonance Ltd. purchased 523,834 shares of MEDY common stock for $800,000.
Management's further plans in regard to these matters are also described in Note
2 and in Item 6 - "Management's Discussion and Analysis of Financial Condition
and Results of Operations". The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
On December 21, 1999 the Company entered into an Agreement and Plan of
Merger and Reorganization with InfoCure Corporation (NASDAQ National Market
System - INCX) wherein INCX will exchange its shares for 100% of the outstanding
common stock of Medical Dynamics. If the MEDY shareholders approve the
transaction when presented, MEDY shareholders will receive one share of INCX
common stock for each .05672 shares of MEDY common stock held. This conversion
ratio will be subject to certain adjustments to the extent the price of InfoCure
common stock in the public market increases above $22.04 per share or decreases
below $13.22 per share ( On January 10, 2000, the price of InfoCure stock was
$28.063 per share). INCX will assume all options, warrants and debentures of
MEDY outstanding on the Closing Date, adjusted for the appropriate exchange
rate. The transaction will require MEDY's shareholder approval at a meeting
expected to be held in February 2000. Shareholder approval will only be
solicited pursuant to a proxy statement to be filed with the Securities and
Exchange Commission, which will be incorporated into a registration statement on
Form S-4 to be filed by INCX.
Since October 28, 1999, INCX has lent the Company a total of $500,000 at an
interest rate of 12%, due at maturity, for the purpose of repayment of debt and
for working capital. Unless further extended by INCX, this loan will come due
March 28, 2000. As collateral for said loan, the Company pledged substantially
all of its assets. As part of the Merger Agreement, Infocure has agreed to lend
MEDY an additional $500,000 for working capital purposes by January 15, 2000 and
amend the maturity date on the total of $1,000,000 in debt to the later of 120
days from any termination date by InfoCure, or July 31, 2000.
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There can be no assurances that the transaction with InfoCure will be
completed as contemplated. The transaction is subject to shareholder approval
and other risks associated with complex transactions of this nature.
(b) Business of the Issuer
--------------------------
As a result of the acquisition of CADI, IPS and Command during fiscal 1998
and the change in MEDY's business focus in 1999, MEDY only participates in a
single business segment: the design, development, manufacture and marketing of
dental intra oral cameras, practice management software, related electronic
services and other technology products to be integrated into those software
systems("The Dental Products Segment").
Previously MEDY had a second business segment, the marketing of disposable
camera drapes for the medical markets ("The Medical Products Segment"). These
products are used in surgical applications by physicians and other health care
professionals and has historically been the business of MEDY. During the 1999
fiscal year, MEDY generated only a minimal amount of revenue from the Medical
Products Segment, and MEDY does not expect that it will receive any material
revenues from operations in this segment in future years.
The Dental Products Segment
MEDY's principal product is practice management software that streamlines
the operation of dental practices by integrating such tasks as billing,
scheduling, report generation and insurance tracking in a single application. It
also provides support for the software product via technical support contracts
with its clients and other integrated technology solutions such as electronic
claims processing.
Existing Products and New Products. MEDY's principal dental products and
their markets, and new products which are under development, are as follows:
practice management software and hardware, third party software, digital x-ray
systems and patient education systems. These products are primarily sold through
CADI's direct sales force and a Value Added Reseller (VAR) network. MEDY has
engaged in marketing and advertising its products at dental conventions and
through direct sales representatives or a distributor network. During the years
ended September 30, 1999 and 1998, MEDY spent $3,679,800 and $2,078,900,
respectively, on sales, marketing and advertising expenses related to its dental
products.
Through CADI, MEDY now offers software for the dental office that provides
patient scheduling, patient education, graphical charting, image capture, word
processing, accounting, camera and digital x-ray integration, and insurance
benefits database. The Company also offers third party products that it resells
and integrates with the practice management software it sells. These products
that CADI acquires from third parties consist of computer hardware, digital
x-ray systems, image capture software and patient education systems.
The software allows the scheduling of patients and dental professionals,
and ties scheduled patients directly to their dental records; integrates with
all intra oral dental cameras, allowing the dentist to include intra-oral
pictures directly on the patient's computerized chart; provides for computer
based charting and digitized x-rays to be automatically attached to the
patient's chart for easy viewing and printing; integrates the patient's chart
directly with word processor, spreadsheet, and database functions, allowing the
dentist and his or her staff to create correspondence, charts, and reports based
on the patient's information; and provides the ability to submit claims to
insurance companies electronically, tracks laboratory requests and results, and
many other services useful to the modern dental office.
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CADI's current product is a Windows 95/98/NT based application and is a
flexible open architecture design and can be used either through a computer
keyboard, mouse, or light pen. Charts, reports, statements, x-rays, and pictures
can be printed on plain paper laser printers. This product is fully Y2k
compliant.
No Principal Customers. CADI has over 2,700 customer installations
throughout the United States serving in excess of 4,000 dental professionals. No
single customer accounts for a material portion of MEDY's revenues, and,
therefore, MEDY is not dependent on sales to any principal customer.
Inventory and Raw Materials Requirements. In cases where CADI provides the
dental office with the computer hardware to support its software applications,
the Company is required to inventory those computer hardware components.
Currently the inventory is ordered on a "just in time basis" and is only ordered
on a custom basis for each sales order received. As sales revenues increase, the
inventory component required will increase proportionately. Because of the
widespread availability of the third party hardware and software CADI acquires
and resells in connection with the Dental Products Segment, MEDY does not
believe that it is dependent on any single source of supply.
Distribution Methods. Distribution for CADI's software and related third
party products is conducted with direct sales professionals employed by the
Company and a Value Added Reseller network. The Windows 95/98/NT based
multi-user product sells for approximately $7,000 each. Upgrades to CADI's most
recent CadWin product are provided to customers at no charge provided the
customer is under a technical support contract.
Competition. Principal competitors in the dental camera field are Patterson
Dental, Dentsply and Dental/Medical Diagnostic Systems. Principal competitors in
the dental software business are Dentrix, Softdent and Practice Works. In
addition, there are a large number of small companies which offer dental
practice management software and related electronic services of their own
design. MEDY believes that CADI's software is among the more highly integrated
and easier to use software available to the dental office. Management believes
CADI's software and related hardware products are equitably priced in comparison
to that of its primary competitors which offer similar features. Furthermore,
the software offered by some smaller competitors may not be Y2k compliant,
whereas the dental practice management software offered by CADI is believed to
be fully Y2k compliant.
Research and Development. During the fiscal years ended September 30, 1999
and 1998, MEDY spent approximately $2,900 and $46,700, respectively, on
company-sponsored research and development activities related primarily to the
dental intra oral camera product line. CADI is continually seeking to improve
its dental practice management software and related electronic services. The
software industry is characterized by continual changes and improvements and, in
some cases, startling new designs (such as the changes from DOS-based
applications to Windows, and from Windows 3.1 to Windows 95). CADI must keep its
software current for new versions of software being published by third parties,
as well as maintain existing software which may be running on older computers.
CADI has spent approximately $229,100 on research and development, in the form
of programming salaries in the fiscal year ended September 30, 1999.
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Warranty. MEDY's previously suppplied medical and dental cameras are
warranted for a one-year period with respect to parts and labor required as a
result of defects in material and workmanship. Defects or malfunctions are
corrected by MEDY at MEDY's cost, if the applicable conditions to the warranty
are satisfied. Failures normally occur during the early life of the cameras, and
repair expenses usually occur in the same year in which the camera is initially
placed in service. MEDY estimates future warranty costs and records the
estimated cost into its results of operations based upon historical experience
and revenues currently reported. The estimated warranty reserve for medical and
dental cameras at fiscal year end September 30, 1999 and 1998 was $15,000 and
$31,000, respectively.
Government Regulation. The United States Food and Drug Administration (the
"FDA"), pursuant to the Medical Device Amendments of 1976 to the Food, Drug and
Cosmetic Act (the "Act") and regulations promulgated thereunder, regulates the
testing, manufacturing, packaging, distribution and marketing of medical devices
in the United States. Because MEDY no longer manufactures medical or dental
devices for sale, it is no longer subject to such regulation. MEDY does ensure
that third party medical and dental devices CADI resells to its comply with the
Act.
There is no governmental regulation which impacts the development and sale
of CADI's dental practice management software. Because the dental industry is so
dependent on government and private insurance company oversight, however, it is
important for the CADI software to be able to allow dentists and their offices
to show compliance with governing rules and regulations. Consequently, CADI has
developed its dental practice management software to allow dentists and dental
offices to maintain accountability in accordance with these requirements.
Other Information
Patents, Trademarks, etc. Patents. MEDY holds an exclusive license on three
patents related to its Optical Catheter System(TM). United States Patents No.
4,782,819, No. 4,736,733, and No. 4,754,328 expiring November 8, April 12, and
June 28, 2005, respectively, relating to the Optical Catheter(TM)are owned by
Dr. and Mrs. Adair and are licensed on an exclusive basis to MEDY. The terms of
the license agreement are described under "Licenses" below.
In addition to the above referenced patents, the following patents are also
licensed to MEDY from its Chairman. Neither the Optical Catheter(TM) nor any of
the following patents are material to MEDY or its operations at the current
time.
TITLE ISSUE DATE PATENT NUMBER
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"Laser Endoscope" 5/20/86 4,589,404
"Laser Endoscope" (Divisional) 6/28/88 4,754,328
"Endoscope with Removable Eyepiece" 4/12/88 4,736,733
"Gas Insufflation Needle with Instrument
Port" (Adair Veress Needle) 9/26/89 4,869,717
"Rigid Video Endoscope with Heat
Sterilizable Sheath" (EVL and lap-Wrap) 11/7/89 4,878,485
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TITLE ISSUE DATE PATENT NUMBER
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Reissue 3/24/92 RE 33,854
"Deformable and Removable sheath for
Optical Catheter" 3/30/93 5,197,457
"Deflectable Sheath for Optical Catheter" 6/30/92 5,125,395
"Heat Sterilizable Electronic Video
Endoscope" (Autoclavable EVL) 2/23/93 5,188,094
Steerable sheath for Use With Selected
Removable Optical Catheter" 7/5/94 5,325,845
"Imaging Tissue or Stone Removal Basket" 5/17/94 5,311,858
"Stereoscopic Endoscope" (3-D EVL) 1/17/95 5,381,784
"Stereoscopic Endoscope With Miniaturized
Electronic Imaging Chip" 2/27/96 5,494,483
"Miniaturized Electronic Imaging Chip"
(For Reduced Diameter Electronic Endoscopes) 2/27/96 5,495,114
The Bayne Pap Brush(TM)is subject to United States Patents No. 4,762,133,
4,754,764 and 4,873,992 expiring August 9, 2005 through October 17, 2006. Dr.
Bayne, a director of MEDY, assigned these patents to MEDY and is entitled to
receive a royalty of two percent of net sales of the product after recovery of
certain expenses. No royalties have been accrued or paid to Dr. Bayne on this
product, and MEDY is no longer marketing this product.
Trademarks. MEDY is also the holder of United States Trademarks,
registration numbers 1,299,413, 1,299,414, 1,719,664, and 2,111,413 which relate
to the name "Medical Dynamics", the corporate logo of MEDY, the Adair/Veress
Needle, and True Vision, respectively. The trademarks are granted for a term of
20 years and expire on those terms beginning October 8, 2004, and if still in
use at that time may be renewed for successive 20-year periods by application.
In addition, MEDY claims rights in numerous unregistered trademarks which it
uses in interstate commerce, and which are subject only to common law
protection. Additionally, MEDY holds trademark registration number 1,282,319
which relates to the name "MedPacific Corporation" and its corporate logo. This
Trademark was renewed for a 20 year term in June 1990. CADI holds United States
Trademark, registration numbers 2,034,684 and 1,930,685 which relate to the name
"Computer Age Dentist" and "O.M.S. Plus", respectively, and were registered on
February 4, 1987 and October 31, 1995, respectively.
Licenses. MEDY entered into an exclusive revocable license agreement with
Dr. Edwin Adair effective June 3, 1987, as amended, relating to use of certain
technology invented and developed by Dr. Adair. Before an amendment negotiated
in September 1997, MEDY was obligated to pay Dr. Adair a minimum annual royalty
of $120,000. Additionally, Dr. Adair was obligated to give MEDY a right of first
refusal for his inventions. Actual royalties never exceeded the minimum annual
royalty. As a result of negotiations between the disinterested directors and Dr.
Adair, the parties amended the license agreement to waive the minimum annual
royalty due September 30, 1997 for the year then ended, and any future minimum
annual royalty, and to waive Dr. Adair's obligation to provide MEDY with a right
of first refusal on future technology. This license is no longer material to
MEDY.
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Compliance With Environmental Laws. MEDY is not materially affected by
federal, state and local provisions which have been enacted or adopted
regulating the discharge of materials into the environment or otherwise relating
to the protection of the environment.
Employees. At December 2, 1999, MEDY (not including CADI) employed 1 person
in executive management. At that date, CADI employed approximately 70 people in
sales, training, installation, customer service, and administrative functions.
These employees are based in CADI's offices in Los Angeles, California, as well
as salespeople located in the territories they represent.
Item 2. Description of Property.
MEDY leases 11,085 square feet of space at $7,390 per month at 99 Inverness
Drive East, Englewood, Colorado, where its principal executive offices are
located and its business activities, including research, assembly, storage and
customer service, were previously conducted. MEDY has used the bulk of these
facilities since 1981. This lease has been renewed through December 31, 2000 at
a base rental rate (during 1999 and 2000) of $7,390 per month. MEDY also pays
certain maintenance, insurance, common area and other expenses with respect to
the property to the extent that the lessor's costs for such items exceed a
specified amount. MEDY pays any increases in property taxes due to improvements
on the property and pays for utilities.
MEDY has subleased approximately 80% of its office and manufacturing space
to its Chairman, Dr. Edwin Adair, for an indefinite term on a month-to-month
basis. Either party may terminate this sublease at any time. Dr. Adair pays MEDY
$9,000 per month for the sublease.
CADI leases 5,002 square feet of office space in Los Angeles, California at
11300 W. Olympic, Suite 600. The lease runs for five years from November, 1997
to October, 2002 at a rate of $9,003.60 per month which includes parking,
operating costs and property taxes. CADI also leases 1,348 square feet in at the
same address, Suite 615, at $2,359 per month from March 1998 through March of
2001, and 3,610 square feet in Marietta, Georgia at $2,030 per month, from June
1, 1997 through May 31, 2000,
Item 3. Legal Proceedings.
Except as described below, there are no material pending legal or
regulatory proceedings against MEDY or CADI, and neither is aware of any that
are known to be contemplated. From time to time, CADI receives threatened or
actual litigation from clients and suppliers. In most instances, these cases are
settled amicably for minimal dollar amounts or for the additional contribution
of CADI staff's time and are considered to be in the ordinary course of CADI's
business. Management has created a Legal Reserve for such instances in the
amount of $66,500, which it believes is more than sufficient to cover these
miscellaneous items.
MEDY and CADI filed litigation against Sally Marcotte, Oliver Marcotte,
Eric Heverly, and ADG, Inc. (the former Command principals) on March 31, 1999 in
the U.S. District Court for the District of Colorado. The litigation sought,
among other things, rescission of the April 1998 merger agreement by which CADI
acquired the assets of Command Dental Systems, Inc. from the Command
shareholders, rescission of the employment agreement between CADI and Sally
Marcotte, damages, and other affirmative relief in favor of MEDY and CADI. Dr.
and Mrs. Marcotte filed actions against MEDY and CADI in courts in Michigan for
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breach of an office lease and breach of Mrs. Marcotte's employment agreement,
and for other claims. Both of these suits were settled in August 1999. As a
result of the settlement, MEDY reduced its indebtedness to the former Command
principals from approximately $500,000 (which was current indebtedness) to
$250,000 of long-term indebtedness; MEDY retained the approximately 150 former
Command clients who had converted to the CADI software; and MEDY terminated all
lease obligations on the Michigan office space and the Employment Agreement with
Mrs. Marcotte. In addition, the parties entered into mutual, general releases
and stipulations to dismiss the litigation.
Item 4. Submission of Matters to a Vote of Security Holders.
MEDY held its 1998 annual meeting of shareholders on September 30, 1999 at
which meeting the shareholders re-elected MEDY's existing seven directors. No
other matters were put to a vote of the security holders during the fourth
quarter of the fiscal year ended September 30, 1999.
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PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
(a) Market Information
----------------------
For more than the past twenty years, MEDY's common stock has been publicly
traded under the symbol "MEDY" on the Nasdaq SmallCap Market which is operated
by the National Association of Securities Dealers, Inc. The Nasdaq SmallCap
Market is one of two distinct market tiers comprising the Nasdaq Stock Market
which is a highly regulated electronic quotation service utilizing a
sophisticated computer and telecommunications network, Market participants
comprise competing Market Makers, independent dealers who commit capital to
stocks and compete with each other for orders, and Electronic Communications
Networks, trading systems recently integrated into Nasdaq which bring additional
orders into the market. The market structure provides visibility of orders and
allows market participants to compete for order flow. Trading is supported by a
communications network linking the market participants to quotations
dissemination, trade reporting and order execution systems. This market also
provides specialized automation services for screen based negotiations of
transactions, online comparison of transactions, and a range of information
services tailored to the needs of the securities industry, investors and
issuers.
The quotations shown below were compiled by MEDY from monthly statistical
reports supplied by NASD. All quotes represent inter-dealer quotations, without
retail markup, mark-down or commission and may not necessarily represent actual
transactions in common stock.
High Bid Low Bid
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Fiscal Year Ended
September 30, 1998
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First Quarter $ 3.94 $ 2.13
Second Quarter 3.50 3.06
Third Quarter 3.00 2.13
Fourth Quarter 3.00 2.00
Fiscal Year Ended
September 30, 1999
- ------------------
First Quarter 2.56 2.31
Second Quarter 2.72 2.56
Third Quarter 2.19 .84
Fourth Quarter .94 .63
(b) Holders
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The number of record holders of the Common Stock, as of September 30, 1999,
was approximately 11,750 not including an unknown number of beneficial holders
in street name.
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(c) Dividends
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(c)(1) Payment of Dividends.
Because of its need to retain its cash for operations and the lack of a
positive cash flow, MEDY has never paid a dividend with respect to its common
stock and does not intend to pay such a dividend in the foreseeable future.
(c)(2) Restrictions on the payment of dividends.
There are contractual restrictions on the Company's present or future
ability to pay dividends in MEDY's Convertible Debenture Agreement with The Tail
Wind Fund, Ltd.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
This report on form 10-KSB, 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. These risks are described in
this Item 6, and also elsewhere in this form 10-KSB. 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.
As discussed in Note 2 to the financial statements, the Company has
suffered recurring losses, negative cash flows from operations and resulting
working capital shortages and, as a result of significant negative cash flow
during fiscal 1999 had, at September 30, 1999, a working capital deficit of
approximately $1,787,000. The opinion of the Company's auditors that
acccompanies the financial statements contains a going concern qualification.
Unless the Company can obtain additional debt, raise additional equity, or
complete the transaction contemplated with InfoCure Corporation as described in
Section 1(a.), there is substantial doubt as to the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
described in this Item 6 and also in Note 2. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
Management has taken a number of steps to restructure the Company's product
and expense structure to better match its revenues. Effective April 15, 1999 the
manufacturing of intra oral cameras was ceased and eight employees were
terminated. Additional employees were also terminated during the June 1999
quarter. In addition, MEDY took a $200,000 write off of raw material inventory
in the March quarter to reflect any possible losses the Company might incur from
the liquidation of unused raw material inventory. The Company is in the process
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of liquidating its current finished goods inventory of intra oral cameras in the
ordinary course of business and then will represent other camera manufacturer's
products in the market place on a non-exclusive distributor basis. Gross margins
on cameras distributed are not expected to differ materially from the margins
obtained on cameras manufactured by the Company, but the overall profitability
of the camera product line is expected to improve since, as a distributor, MEDY
will not be required to incur the overhead expenses associated with
manufacturing; MEDY cannot offer any assurance, however, that profitability
will, in fact, increase. This is in line with the Company's overall strategy,
which is to be a systems integrator of hardware components in connection with
the sales of our proprietary software products. Concurrent with the decision to
cease the manufacturing operation and throughout the third and fourth quarter
and beyond, management has continued to make other substantive expense cuts in
the areas of management compensation, personnel, consulting and advertising.
The Company has also consolidated its dental products segment into its Los
Angeles office and has reduced the staff and is eliminating the expense
associated with its operations in both Detroit and Atlanta. These cuts took
effect in the Company's fiscal third quarter ending June 30, 1999 and continued
throughout the Company's fourth quarter. These cuts and consolidations are
projected to have a positive effect on net operating cash flow, but no assurance
of that fact can be given.
Finally, the Company has also obtained loans totaling $500,000 from
InfoCure Corporation, a commitment to lend an additional $500,000 by January 15,
2000 under the same terms and conditions, and has entered into a merger
agreement with InfoCure. If MEDY's shareholders approve the merger and the
merger is thereafter completed, MEDY will become a wholly-owned subsidiary of
InfoCure. If MEDY does not complete the contemplated merger with InfoCure, MEDY
will seek other means of meeting its current obligations which significantly
exceed its current assets at the present time. Unless MEDY completes the merger
with InfoCure, there can be no assurance that MEDY will be able to meet its
current obligations or, therefore, survive as a going concern.
Liquidity and Capital Resources.
During the fiscal year ended September 30, 1999, MEDY's current ratio
declined to 0.3 as compared to 1.2 at September 30, 1998. Net working capital
decreased from $448,900 September 30, 1998 to ($ 1,787,100) at September 30,
1999. Likewise, MEDY's cash balances decreased from $553,100 at September 30,
1998 to $180,000 at September 30, 1999.
11
<PAGE>
Principal changes in the components of net working capital for the fiscal
year ended September 30, 1999 as compared to fiscal year ended September 30,
1998 consist of:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
1999 1998 W/C Effect
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash and Cash Equivalents $ 180,000 $ 603,100 $ (423,100)
- -------------------------------------------------------------------------------------------------
Trade Receivables 254,400 879,400 (625,000)
- -------------------------------------------------------------------------------------------------
Inventories 189,200 879,600 (690,400)
- -------------------------------------------------------------------------------------------------
Pre-paid Expenses 21,100 24,800 (3,700)
------- --------- -----------
- -------------------------------------------------------------------------------------------------
Current Assets: 644,700 2,386,900 (1,742,200)
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
Current Maturities of Notes Payable 943,700 586,100 (357,600)
- -------------------------------------------------------------------------------------------------
Accounts Payable 622,000 565,800 (56,200)
- -------------------------------------------------------------------------------------------------
Accrued Expenses 497,600 416,000 (81,600)
- -------------------------------------------------------------------------------------------------
Unearned Revenue 368,500 370,100 1,600
------- ----------
- -------------------------------------------------------------------------------------------------
Current Liabilities: 2,431,800 1,938,000 (493,800)
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
Working Capital: $(1,787,100) $ 448,900 $(2,236,000)
=========== ========== ===========
- -------------------------------------------------------------------------------------------------
</TABLE>
The principal reason for the significant decrease in working capital during
1999 include negative cash flows from operating activities primarily due to
acquisitions of IPS and Command and their related expense streams and inventory
write offs due to the closure of the IPS operation in Georgia, the Command
operation in Michigan and the MEDY manufacturing operation in Colorado which is
consistent with MEDY's change in business focus from computer hardware to
software. Additionally, working capital further decreased due to increases in
current maturities of notes payable, convertible debentures, accounts payables
and accrued expenses to help fund operating expenses.
Throughout the third and fourth quarter of fiscal 1999, Management has taken
substantive measures to reduce expenses by the reduction of the number of sales,
marketing, administrative, and manufacturing personnel, the closure of offices,
operational and manufacturing locations along with expense cuts in management
compensation, consulting and advertising. MEDY cannot offer any assurance,
however, that profitability will, in fact, increase due to these measures.
Tail Wind Convertible Debentures.
- ---------------------------------
Offsetting the expenditures of cash used for operating and investing
activities, were net proceeds of $376,000 received from the sale of $400,000 of
convertible debentures. During the year ended September 30, 1999, the holder of
the outstanding debentures elected to convert $1,240,000 of the debentures to
common stock, resulting in an outstanding principal balance on debentures
(excluding discount) of $700,000 at the fiscal year ended September 30, 1999. In
each case, the debentures contain a contractual restriction preventing Tailwind
from converting the debentures or exercising warrants such that at any time it
owns more than 4.99% of the Company's outstanding common stock. Terms of the
three series of debentures purchased by Tail Wind during 1997 and 1998 are as
follows:
12
<PAGE>
The Tail Wind Fund, LTD. #1. $1,100,000, 8% Convertible Debentures issued
pursuant to Regulation D, due October 31, 2000. As of October 31, 1998 all of
these debentures, and the related accrued interest, have been converted into a
total of 567,983 shares of MEDY common stock. The debenture holder was also
issued warrants to purchase 84,615 shares of MEDY common stock at an exercise
price of $3.375 per share which were later cancelled.
The Tail Wind Fund, LTD. #2. $1,100,000, 8% Convertible Debentures issued
pursuant to Regulation D, due July 31, 2002. Debentures outstanding at maturity
will automatically convert into common stock, at the Company's option. Interest
is payable in cash or MEDY common stock at Company's option on each 5th day of
January and July during the term. The Debenture is convertible into MEDY common
stock, and as of October 11, 1999 (the last conversion date after fiscal year
end) $1,000,000 has been converted into 1,328,451 shares. In addition, MEDY has
issued 83,692 shares of common stock in lieu of interest.
The Tail Wind Fund, LTD. #3. $400,000, 8% Convertible Debentures issued pursuant
to Regulation D, due November 16, 2003. Debentures outstanding at maturity will
automatically convert into common stock, at the Company's option.
MEDY and Tail Wind agreed that, notwithstanding any decrease in Market
Price, Tail Wind may not convert 1998 Debentures (#2 and 3 above) 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.
If the current balance of $500,000 of debentures plus approximately $40,000
of accrued interest were converted on January 10,2000 at a "Market Price" of
$.6375 per share, the resulting issuance of additional common stock would be in
the amount of 847,059 shares. However, due to the 1,880,000 "Future Priced
Securities" limitation, the Company would only be able to issue the difference
between the 1,880,000 shares and the 1,412,143 shares already issued for
conversion of principal and interest, plus the 150,000 shares reserved for
issuance under the Warrrants; leaving 317,857 shares available for issuance. At
the current "Market Price", Tail Wind could only convert approximately $202,634,
leaving the balance of $297,366 required to be repaid at the 15% premium, plus
interest, within six months of notification by Tail Wind. As of January 6, 2000,
Tail Wind has notified the Company of its desire to convert the maximum
available to common stock and seek repayment of the balance of principal,
interest and the 15% premium within the prescribed six month time frame.
Line of Credit. In November, 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 pledged substantially all
of its assets to the loan, but only borrowed approximately $350,000 at any given
time. The Company paid of this credit facility in full in August, 1999 from the
13
<PAGE>
proceeds of a loan from the Company's Chairman and Secretary, Edwin L. and Pat
Horsley Adair that is further described in Item 12, "Transactions with
Management and Others".
On March 18, 1999, Resonance Ltd., an unaffiliated company located in the
Isle of Man, British Isles, purchased 523,834 shares of MEDY common stock for
$800,000. MEDY subsequently obtained effectiveness of a registration statement
related to those shares. In addition, MEDY agreed to issue restricted
"additional shares" to Resonance at various "determination dates." The
determination dates are two, four, and six months after the registration
statement for the shares originally issued to Resonance becomes effective. The
number of additional shares to be issued to Resonance are intended to compensate
Resonance for one-third of the decrease (if any) in market price of MEDY common
stock during the period following the original purchase. MEDY is obligated to
issue no more than 2,060,033 shares and warrants pursuant to this obligation
(the "Future Priced Securities Cap"). As of the "determination dates", July 5,
1999, September 5, 1999 and November 5, 1999, MEDY has issued Resonance, Ltd.
80,108, 231,707 and 77,866 additional shares, respectively, for a total of
389,681 in additional shares. Subsequent to year end, MEDY issued to Resonance
its Warrant to purchase 523,834 shares of restricted common stock at an exercise
price of $1.527 dated November 5, 1999 and expiring May 5, 2000.
Also, there are 3,352,071 vested common stock options outstanding as of
December 23, 1999, at prices ranging from $.875 to $5.00 per share. If exercised
(of which there can be no assurance), these options would provide additional
working capital to MEDY.
Due to the fundamental requirement for MEDY to achieve positive cash flow
from operations and positive net income, MEDY will continue to direct it's
efforts toward reviewing and improving product profit margins, and increasing
revenues from the sale of products with higher profit margins such as those now
offered by CADI.
To continue MEDY's objective of curtailing operating losses, negative cash
flow from operations and further liquidity erosion, management is continually
reviewing product profit margins and general expense accounts, and will reduce
or eliminate all non-essential expenditures. Purchasing procedures are also in
place to ensure minimized product costs and to avoid excess inventory levels.
The Company anticipates negative cash flow from operations for the first
quarter of fiscal 2000 and possibly beyond. During fiscal 1999, cash flow
deficits were funded by the sale of convertible debentures and common stock. The
Company's ability to fund its future operations will be dependent upon achieving
profitability, generating positive cash flow from operations or by raising
additional debt or equity. Unless the Company is able to accomplish one or more
of the above, it may be facing significant working capital shortages continuing
through fiscal 2000. Management of the Company does not believe that its
existing capital resources are sufficient for the 2000 fiscal year if it
continues to grow revenues and expenses in proportion to what it experienced
during fiscal 1999 and is required to repay its debt according to existing
maturities. The Company is currently seeking additional debt or equity capital
to augment its working capital position, or an arrangement with another company
such as the one described with InfoCure in Section 1.(a.), although no
14
<PAGE>
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, or if a transaction such as the one described with
InfoCure can be completed. 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 restructuring efforts result in a level of positive cash flow
or profitability, although no assurance of that fact can be given.
If the Company is not able to obtain additional debt or equity capital it
will continue its efforts in reducing the size and operating expense of the
organization in the form of personnel and facilities in order to slow its growth
and downsize the operation to such an extent that it can continue to operate off
its own internally generated cash flow. No assurance can be given as to the
success of such measures or whether they could be accomplished in a time frame
that would allow the Company to remain an ongoing entity.
Results of Operations. Beginning in the third quarter of fiscal 1999, the
Company has made efforts to delete non-profitable operations and reduce expenses
as a method of creating positive cash flow and eventual profitability in the
future. In April of 1999, the Company ceased the manufacture of its intra oral
camera products at its Englewood, Colorado facility resulting in the termination
of ten employees and a $200,000 write down of impaired inventory. The Company
intends to purchase third party products from other vendors as opposed to
manufacturing its own brand. Gross Margins resulting from the sale of third
party products are expected to be similar, if not higher, than the Company was
able to generate from its own manufacturing capability, although no assurance of
that fact can be given.
In June and July of 1999 the Company ceased the majority of its operations
in its Marietta, Georgia facility where order fulfillment and installation was
coordinated for Dental Equipment Sales. The Company was able to eliminate seven
employees at the Marietta facility and additional employees throughout the
country involved in the installation and service of Dental Equipment including
computer hardware. These operations were consolidated into the Company's Los
Angeles operation utilizing significantly less personnel and the Company intends
to downsize the Dental Equipment portion of its revenues and related operating
expenses during the upcoming fiscal year. As a result of the downsizing of the
Dental Equipment portion of the business, the Company has taken a write down of
$655,200 related to the Goodwill still existing from the original purchase of
IPS.
As a result of the litigation settlement with the previous owners of
Command Dental Systems, as described in Item 3. Legal Proceedings, the Company
has written off $286,800 of its original capital investment to reflect its
current value.
In August of fiscal 1999, the Company consolidated its accounting
operations into its Los Angeles office creating a decrease of three accounting
personnel. All of these efforts, along with a general attempt to decrease
company wide operating expenses, are designed to downsize the Company's lower
margin revenues and related expenses in such a fashion as to return it to
positive cash flow and eventual profitability, although no assurance of that
fact can be given.
15
<PAGE>
Additionally, as an aid to understanding trends of the Company, the
following ratios describe historical summaries of liquidity, activity and
profitability for the fiscal years ended September 30, 1999 and 1998.
- --------------------------------------------------------------------------
1999 1998
-------------------------------------------------------------------------
Liquidity
- --------------------------------------------------------------------------
Current Ratio 0.3 1.2
- --------------------------------------------------------------------------
Current Ratio less inventory 0.2 0.8
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
Activity
- --------------------------------------------------------------------------
Trade receivables turnover 43.1 8.9
- --------------------------------------------------------------------------
Inventory turnover 23.8 8.9
- --------------------------------------------------------------------------
Profitability
- --------------------------------------------------------------------------
Return on assets (96.4)% (27.5)%
- --------------------------------------------------------------------------
Return on equity (208.2)% (46.1)%
- --------------------------------------------------------------------------
Return on sales (49.3)% (32.1)%
- --------------------------------------------------------------------------
Revenues
- --------
Medical product sales for the fiscal years 1999 and 1998 were $130,600 and
$271,800 respectively, for a decrease of $141,200 or 51.9%. Medical product
sales account for 1.2% and 3.5% of total sales in fiscal years 1999 and 1998,
respectively. Decreased sales are attributable to the planned sale of the last
disposable product line, Cam Wrap, as of fiscal year end 1999.
Software, Training and Installation sales for fiscal years 1999 and 1998 were
$3,809,700 and $2,906,900 respectively, for an increase of $ 902,800 or 31.1%.
Software Support sales for the fiscal years 1999 and 1998 were $2,522,400 and
$1,831,300 respectively, for an increase of $691,100 or 37.7%. All of these
sales were attributable to CADI (as an integrated subsidiary - CADI, IPS &
Command). Increased sales are attributable to the Company's additional
expenditures on and the expansion in the number of sales/marketing personnel and
increased advertising expenditures. Additionally, the 1998 periods only include
sales and support revenues to customers for a six month period from the April
1998 Command acquisition (April 1998 through September 1998).
Dental equipment sales for the fiscal years 1999 and 1998 were $4,495,900 and
$2,836,700 respectively, for an increase of $ 1,659,200 or 58.5%. The increase
in sales was due to MEDY's sale of dental related computer hardware, intra oral
cameras, multi-operatory video / digital networks, and digital x-ray systems
("hardware"), which increases are also attributable to the Company's additional
expenditures on and the expansion in the number of sales/marketing personnel and
increased advertising expenditures.
MEDY management believes that profit from these activities will improve as
MEDY's general and administrative expenses are decreased and brought in line
with existing and projected revenue. There can be no assurance these positive
changes will ever result in an increase in cash flow from MEDY's operations or
net income (as compared to MEDY's historical net losses).
16
<PAGE>
Please refer to the schedule below for a summary of revenues and gross profit.
<TABLE>
<CAPTION>
For The Years Ended September 30,
- -----------------------------------------------------------------------------------------------------
1999 1998
- -----------------------------------------------------------------------------------------------------
Amount % Amount %
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Medical Sales 130,700 100.0% 271,800 100.0%
- -----------------------------------------------------------------------------------------------------
COGS - Medical Sales 34,600 26.5% 246,300 90.6%
- -----------------------------------------------------------------------------------------------------
Gross Profit - Medical Sales 96,100 73.5% 25,500 9.4%
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
Dental Equipment Sales 4,495,900 100.0% 2,836,700 100.0%
- -----------------------------------------------------------------------------------------------------
COGS - Dental 4,015,300 89.3% 2,542,100 89.6%
- -----------------------------------------------------------------------------------------------------
Gross Profit - Dental 480,600 10.7% 294,600 10.4%
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
Software, Training & Installation 3,809,700 100.0% 2,906,900 100.0%
- -----------------------------------------------------------------------------------------------------
COGS - S, T & I 1,133,000 29.7% 687,200 23.6%
- -----------------------------------------------------------------------------------------------------
Gross Profit - S, T & I 2,676,700 70.3% 2,219,700 76.4%
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
Software Support Sales 2,522,400 100.0% 1,831,300 100.0%
- -----------------------------------------------------------------------------------------------------
COGS - Software Support 924,700 36.7% 583,200 31.8%
- -----------------------------------------------------------------------------------------------------
Gross Profit - Software Support 1,597,700 63.3% 1,248,100 68.2%
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
Total Sales 10,958,700 100.0% 7,846,700 100.0%
- -----------------------------------------------------------------------------------------------------
Total COGS 6,107,600 55.7% 4,058,800 51.7%
- -----------------------------------------------------------------------------------------------------
Total Gross Profit 4,851,100 44.3% 3,787,900 48.3%
- -----------------------------------------------------------------------------------------------------
</TABLE>
Cost of Sales
- -------------
Cost of sales for medical products for the fiscal years 1999 and 1998 as a
percent of gross medical sales were 26.5% and 90.6% respectively. The decrease
in cost of sales percentage is primarily due to an obsolete inventory reserve
adjustment in the fiscal year 1998 with no such adjustment this fiscal year.
Without such adjustment in 1998, Cost of Sales would have been approximately
comparable between the two fiscal years.
Cost of sales for dental equipment for fiscal years 1999 and 1998, as a percent
of gross dental sales were 89.3% and 89.6% respectively, creating very similar
gross profitability in this category between the two periods.
Cost of sales for Software, Training and Installation for fiscal years 1999 and
1998 as a percent of gross Software, Training and Installation sales were 29.7%
and 23.6% respectively. The increase in the cost of sales percentage is due
mainly to an increase in sales of third-party software with lower gross profit
margins than internally generated software and a more than proportional increase
in trainer wages that are included in Cost of Sales relative to sales.
17
<PAGE>
Cost of sales for Software Support for the fiscal years 1999 and 1998, as a
percent of gross Software Support sales were 36.7% and 31.8% respectively. The
increase in the cost of sales percentage is due to a more than proportional
increase in software support salaries relative to sales. This is due to the
Company's concerted effort to raise the quality of its support operations by
increasing the number and relative compensation of the employees dedicated to
that task.
Selling & Marketing
- -------------------
Selling and marketing expenses for fiscal year 1999 totaled $3,679,800 or 33.6 %
of sales as compared to $2,078,900 or 26.5 % of sales for fiscal year 1998. The
$1,600,900 increase in selling and marketing expenses in fiscal year 1999 was
attributable to the expansion of sales/marketing personnel and increased
marketing expenditures. During the last quarter of this fiscal year, the number
of sales/marketing personnel have been reduced as well as marketing expenditures
in an effort to reduce the more than proportional increase in selling and
marketing expenses relative to sales.
General & Administrative Expenses
- ---------------------------------
General and administrative expenses for the fiscal year 1999 totaled $4,983,300
or 45.5 % of sales as compared to $3,932,800 or 50.1 % of sales for fiscal year
1998. The $1,050,500 increase in general & administrative expenses in fiscal
year 1999 is primarily attributable to the acquisitions of IPS and Command and
their related expense streams being included in operations for a full year.
Stock-based Compensation
- ------------------------
Stock-based compensation for the fiscal years 1999 and 1998 were $0 and $33,900,
respectively, for a decrease of $33,900 or 100%. The decrease is due to a
decrease of in the money stock options granted to employees and consultants in
fiscal 1999 as compared with similar grants in 1998.
Research & Development Costs
- ----------------------------
For the fiscal years 1999 and 1998, R & D costs were $2,900 and $46,700
respectively, for a decrease of $43,800 or 93.8%. The decrease is a result of
additional R&D and modifications to the intra oral camera having been
substantially completed in fiscal 1998. The Company's policy is to fund research
and development as it deems appropriate to maintain or gain a competitive
advantage. Note that all software development costs are not included in R & D
costs. Qualifying software development costs are capitalized, then amortized to
costs of sales. Capitalized software development costs for the fiscal year 1999
were $229,100.
Other Income
- ------------
Other income for the fiscal years 1999 and 1998 was approximately $44,900 and
$51,200 respectively, for a decrease of $6,300 or 12%.
Interest Income and Expense
- ---------------------------
Interest income is a function of current cash invested for the period. Interest
income for the fiscal years 1999 and 1998 was $13,500 and $55,000 respectively.
The decrease of $41,500 in interest income was due primarily to less funds
invested.
18
<PAGE>
Interest expense for the fiscal years 1999 and 1998 totaled $650,000 and
$305,700 respectively or an increase of $ 344,300 or 112.6%. Interest expense
increased due to borrowing from convertible debenture debt and debt incurred to
supplement cash flow. Interest was imputed at an effective rate of 15% for the
acquisition debt. Interest expense includes non-cash charges for amortization of
debt discounts and issuance costs.
Loss on Impairment of Goodwill
- ------------------------------
Loss on Impairment of goodwill for fiscal year 1999 of $655,200 is due to a
re-evaluation of goodwill. During fiscal year 1998, goodwill was created when
CADI purchased Information Presentation Systems, Inc. (IPS) of Marietta,
Georgia. At the time of the purchase, CADI acquired approximately 1000 customers
from IPS and goodwill was created based on the estimated future revenues from
these customers. As of July 1999, the IPS operation in Georgia was closed and
the breadth of hardware to meet future customer sales orders was significantly
reduced. Since these future customer revenues are no longer certain, the
goodwill created based on these revenues was deemed to be impaired and was
written off.
Year 2000 Compliance. Although there can be no assurance, MEDY does not
anticipate that it will suffer any adverse impact as a result of Year 2000 (Y2k)
computer software issues either as a result of third party non-compliance or as
a result of internal matters. MEDY has suffered no impact through January 10,
2000. None of the information technology or other software and hardware systems
utilized by MEDY and its subsidiaries incorporates technology that is incapable
of recognizing dates beyond December 31, 1999. CADI, through its internal staff,
has developed its dental practice management software for the Windows platform
and, consequently, such software recognizes dates beyond December 31, 1999.
While CADI is still supporting some software which is DOS-based or otherwise may
not be Y2k compliant, the customers using this software have been advised of
their need to upgrade their office software in anticipation of Y2k. Even if MEDY
or CADI were to provide the necessary software upgrade to these customers at no
cost (which CADI does not have an obligation to do), the total loss to MEDY
would be less than $60,000 and is not considered to be material. Because CADI's
dental practice management software is believed to be Y2k compliant, CADI and
MEDY believe that this offers them a marketing opportunity in that much of their
competitors' software currently being utilized by dental offices is not Y2k
compliant and will need to be replaced by those offices before December 31,
1999. There can be no assurance, however, that these offices will all purchase
dental practice management systems from CADI.
In making the foregoing determination, MEDY and CADI have assessed embedded
systems contained in their office buildings, equipment, and other
infrastructures. As a result, MEDY and CADI have not established a contingency
plan to come into effect in the event of a Y2k catastrophe and management does
not believe that such a plan is necessary. Of course, MEDY and CADI are both
dependant on facilities outside of their control, such as electrical power
supplies, banking facilities, transportation facilities (such as airlines) and
communication facilities. While MEDY and CADI believe, based on public reports
and some notifications it has received, that these outside facilities are or
will be Y2k compliant, neither MEDY or CADI has any other basis for determining
their compliance. The operations of MEDY and CADI would be significantly and
adversely affected if any of these outside facilities are adversely affected by
the millenium and other issues related to Y2k.
19
<PAGE>
Effect of Changing Prices and Inflation
Generally, inflation has not been a significant factor on MEDY's operations.
Item 7. Financial Statements.
The following consolidated financial statements are filed as a part of this Form
10-KSB and are included immediately following the signature page.
Report of Independent Certified Public Accountants (Page F-2)
Consolidated Balance Sheet - September 30, 1999 (Page F3)
Consolidated Statements of Operations - Years ended September 30, 1999 and
1998 (Page F4)
Consolidated Statements of Stockholders' Equity - Years ended September 30,
1999 and 1998 (Page F5)
Consolidated Statements of Cash Flows - Years ended September 30, 1999 and
1998 (Page F6 and F7)
Notes to Consolidated Financial Statements (Page F8)
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not Applicable.
20
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons of the
Company; Compliance With Section 16(a) of the Exchange Act.
(a) Identification of Directors and Executive Officers.
-------------------------------------------------------
The following table sets forth certain information regarding the directors and
executive officers of MEDY:
Name Age Position
- ---- --- --------
Edwin L. Adair, M.D. (1) 69 Chairman of the Board and
Treasurer of MEDY
Van A. Horsley (2) 47 Director, President, Chief
Financial Officer and Chief
Executive Officer of MEDY;
Director and Vice President of
CADI
Daniel L. Richmond 38 Director of MEDY; Director and
Chief Executive Officer of CADI
Chae U. Kim 38 Director of MEDY; Director and
President of CADI
Pat Horsley Adair (1) 71 Director and Secretary of MEDY
I. Dean Bayne, M.D. (2) 72 Director and Assistant Secretary
of MEDY
Leroy Bilanich (2) 49 Director of MEDY
(1) Members of the Compensation Committee.
(2) Members of the Audit Committee
No arrangement exists between any of the above officers and directors
pursuant to which any one of those persons was elected to such office or
position except that Messrs. Kim and Richmond were appointed to the MEDY Board
as a result of the acquisition of CADI. All directors were reelected by the
shareholders at a meeting held in September, 1999.
Directors hold office until the next meeting of shareholders and until a
successor is elected and qualified, or until their resignation. Executive
officers are elected at annual meetings of the Board of Directors. Each such
officer holds office for one year or until a successor has been duly elected and
qualified or until death, resignation or removal. No director of the Company is
a director of another company having securities registered under Section 12 of
the Securities Exchange Act of 1934 or a company registered under the Investment
Company Act of 1940.
21
<PAGE>
Edwin L. Adair, M.D. has been a director of MEDY since June 30, 1971, Chairman
of the Board since September 8, 1981 and Treasurer since March 27, 1973. From
February 6, 1986 until July 13, 1990, Dr. Adair also served as Chief Executive
Officer of MEDY. Dr. Adair received B.S. and M.D. degrees from the University of
Colorado in 1951 and 1955, respectively. He practiced medicine from 1956 until
1983 and is a board-certified urologist who discontinued the practice of
medicine due to a physical disability resulting from an accident. Dr. Adair has
published articles in medical journals and has taught at the University of
Colorado School of Medicine. Dr. Adair is a member of the American Medical
Association, American Board of Urology, the American Urological Society and the
American College of Surgeons.
Van A. Horsley has been a director, President and Chief Executive Officer of
MEDY since July 13, 1990. Mr. Horsley holds a B.S.B.A. degree in finance from
the University of Denver and a graduate degree from the School of Banking at the
University of Colorado. From 1974 to February, 1990, Mr. Horsley was employed in
various capacities by Affiliated Denver National Bank in Denver, Colorado and
from 1985 through February, 1990 served as executive vice president - head of
lending.
Pat Horsley Adair has been a director and Secretary of MEDY since September 8,
1981. Mrs. Adair attended McMurray College in Abilene, Texas, taking courses in
English and business which did not lead to a degree. From June 1974 to July
1983, Mrs. Adair was employed by MEDY as office manager. Since that time, Mrs.
Adair has served as Corporate Secretary to MEDY. From 1964 to 1975, Mrs. Adair
served as executive director of the Arapahoe County Medical Society and from
1976 to 1980 she served as executive director of the Metro Denver Foundation for
Medical Care, an organization which serves Arapahoe, Denver, Boulder, Jefferson
and Adams counties, Colorado.
I. Dean Bayne, M.D. has been a director of MEDY since July 1987 and Assistant
Secretary since October 1988. Dr. Bayne received B.S. and M.D. degrees from
Louisiana State University in 1949 and 1953, respectively, and has been engaged
in private medical practice since 1958. Dr. Bayne was a resident in obstetrics
at Herman Kiefer Hospital, Detroit, Michigan, and a resident in gynecology at
Detroit Receiving Hospital, Detroit, Michigan. He is a member of the Board of
Obstetrics and Gynecology and the American College of Obstetrics and Gynecology.
Leroy Bilanich, Ed.D. has been a director of MEDY since September 13, 1990. Dr.
Bilanich has a B.S. in journalism and broadcasting from Pennsylvania State
University, an M.A. in communication from the University of Colorado and has an
Ed.D. in organizational behavior from Harvard University. Dr. Bilanich currently
works as a consultant to large corporations in the area of organizational
development and in the past has held various positions in the Human Resource
Departments at Pfizer, Inc. from 1983 to March of 1988 and the Olin Corporation.
Daniel L. Richmond has been a director of MEDY since October 1997. In June 1984,
Mr. Richmond graduated from UCLA with a B.S. degree in Math/Computer Science.
From 1983 through 1985, Mr. Richmond founded and then served as President of
Compulink, a software company that sells to retail jewelry stores. From 1986
until 1987, Mr. Richmond, along with Mr. Chae Kim headed up the technical team
for Emory & Associates, a software development company specializing in custom
accounting packages for large manufacturers and distributors. In June 1987 Mr.
Richmond co-founded CADI. He has served as Chief Executive Officer of CADI from
June 1987 until present.
22
<PAGE>
Chae U. Kim has been a director of MEDY since October 1997. In June 1985, Mr.
Kim Graduated from UCLA with a B.A. degree in Biology. From 1986 until 1987, Mr.
Kim, along with Dan Richmond headed up the technical team for Emory &
Associates, a software development company specializing in custom accounting
packages for large manufacturers and distributors. In June 1987 Mr. Kim
co-founded CADI. He has served as President of CADI from June 1987 until
present.
(b) Identification of Certain Significant Employees.
----------------------------------------------------
There are no significant employees who are not also directors or executive
officers, described above.
(c) Family relationships.
-------------------------
Dr. Edwin L. Adair and Pat Horsley Adair are married. Van A. Horsley is the
son of Pat Horsley Adair. There are no other family relationships among the
officers or directors.
(d) Involvement in Certain Legal Proceedings.
---------------------------------------------
During the past five years, no director or officer of the Company has:
(1) Filed or has had filed against him a petition under the federal
bankruptcy laws or any state insolvency law, nor has a receiver,
fiscal agent or similar officer been appointed by a court for the
business or property of such person, or any partnership in which he
was a general partner, or any corporation or business association of
which he was an executive officer at or within two years before such
filings;
(2) Been convicted in a criminal proceeding or is a named subject of a
pending criminal proceeding (excluding traffic violations and other
minor offenses);
(3) Been the subject of any order, judgment, or decree, not subsequently
reversed, suspended or vacated, of any court of competent
jurisdiction, permanently or temporarily enjoining such person from,
or otherwise limiting his involvement in any type of business,
securities or banking activities.
(4) Been found by a court of competent jurisdiction in a civil action, the
Securities and Exchange Commission or the Commodity Futures Trading
Commission to have violated any federal or state securities or
commodities law, which judgment has not been reversed, suspended, or
vacated.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires the Company's directors and officers and persons who own more than ten
percent of the Company's equity securities, to file reports of ownership and
changes in ownership with the Securities and Exchange Commission (the "SEC").
Directors, officers and greater than ten-percent shareholders are required by
SEC regulation to furnish the Company with copies of all Section 16(a) reports
filed.
Based solely on its review of the copies of the reports it received from
persons required to file, the Company believes that during the period from
October 1, 1998 through December 1, 1999 all filing requirements applicable to
its officers, directors and greater than ten-percent shareholders were complied
with.
23
<PAGE>
Item 10. Executive Compensation.
-----------------------
Summary Compensation Table
The following table sets forth information regarding compensation paid to
the chief executive officer of MEDY for the three years ending September 30,
1999 and to the other executive officers whose salary exceeded $100,000 in
fiscal 1999. Messrs. Kim and Richmond, included in the following table for
fiscal 1999, were not employees of MEDY during fiscal year 1997.
<TABLE>
<CAPTION>
Annual Compensation ($$) Long Term Compensation
------------------------ ----------------------
Awards Payouts
------ -------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Restricted
Stock Options LTIP Other
Name and Position Year Salary Bonus Other Awards & SARs Payouts Compensation
- ----------------- ---- ------ ----- ----- ------ ------ ------- ------------
($$) ($$) ($$) ($$) ($$) ($$) ($$)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Van A. Horsley, President
& Chief Executive Officer 1999 122,500 0 15,000 0 500,000* 0 1,610
1998 123,333 0 5,465 0 0* 0 306
1997 110,000 0 0 0 0* 0 272
Chae U. Kim, Director
and President CADI 1999 129,380 0 12,000 0 0* 0 900
1998 105,000 0 6,000 600,000** 0 1,393
Dan L. Richmond, Director
and CEO CADI 1999 129,380 0 12,000 0 0* 0 1,688
1998 105,000 0 6,000 0 600,000** 0 1,400
</TABLE>
* 500,000 options were granted to Mr. Horsley in 1999 at an exercise price of
$3.25. 100,000 of the options vested in fiscal 1999. The balance of the
400,000 options vest upon certain vesting requirements, or the termination
of Mr. Horsley from the position of President and CEO.
** 600,000 options to purchase common stock were granted in 1998 and are
exercisable at $3.25. 150,000 of the options vested in fiscal 1998 and
300,000 options vested in fiscal 1999 and are currently exercisable.
150,000 shares, exercisable at $3.25, vest upon defined performance goals.
401(k) Plan. On January 1, 1990, MEDY adopted an employee benefit plan under
Internal Revenue Code Section 401(k). The 401(k) plan is a profit sharing plan
under which both employees and MEDY are entitled (at their own discretion) to
contribute a portion of compensation and earnings, respectively, to investment
funds to supplement employee retirement benefits. At September 30, 1999, MEDY's
matching contributions to the plan for the accounts of Van Horsley totaled
approximately $1,610 and the matching contribution under the plan for the
accounts of all executive officers as a group totaled $3,478. These amounts are
included in column (i) of the Summary Compensation Table.
24
<PAGE>
When acquired, CADI had a Salary Reduction Simplified Employee Pension Plan
(SARSEP) in place whereby CADI employees were able to defer compensation into
the Plan and CADI would match 20% of the employee's contributions. At September
30, 1999, CADI's matching contributions to the Plan for the accounts Chae Kim
and Dan Richmond totaled approximately $720. These amounts are included in
column (I) of the Summary Compensation Table. Effective December 1, 1998 CADI
canceled the SARSEP plan and has adopted a 401-K plan. The 401(k) plan is a
profit sharing plan under which both employees and CADI are entitled (at their
own discretion) to contribute a portion of compensation and earnings,
respectively, to investment funds to supplement employee retirement benefits.
Employment Agreements. Effective October 1, 1997 CADI, in conjunction with its
purchase by MEDY, entered into employment agreements with Dan Richmond (CEO) and
Chae Kim (President). The term of the agreements are five years and call for
annual compensation of $105,000 each, car allowances of $500 per month and other
benefits customarily extended to other CADI employees. Compensation and benefits
may be increased over and above contractual terms upon the approval of the CEO
of MEDY.
(b) Stock Option Plans.
Options and Option Plans. On April 10, 1988 the Board of Directors adopted and
authorized the 1988 Stock Option Plan (the "1988 Plan") and directed that
management prepare the documents formally defining the plan. At that time the
Board also authorized the issuance of certain options under the 1988 Plan. The
Board formally approved the 1988 Plan on July 14, 1988 and the shareholders
approved the 1988 Plan on September 28, 1988. The 1988 Plan has expired in
accordance with its terms; 52,174 options remain outstanding under the 1988
Plan.
On September 15, 1997 the Board of Directors in conjunction with MEDY's
purchase of Computer Age Dentist, Inc, approved the CADI Stock Option Plan as
called for by the merger agreement. 250,000 shares of the Company's common stock
were reserved for issuance upon exercise of options which may be granted
pursuant to the Employee Stock Option Plan. As of December 23, 1999, 212,500
options are outstanding under the plan to employees of CADI who are not
officers.
On June 11, 1998 the shareholders of MEDY approved the adoption of the
Medical Dynamics, Inc. 1998 Stock Option Plan. Under the plan as approved by the
Board of Directors and the shareholders, 1,500,000 shares are reserved for
issuance to employees, officers, directors and consultants of Medical Dynamics
and its subsidiaries. As of December 15, 1999, 395,800 options have been issued
under this plan.
Allocations of options under MEDY's stock option plans are made by the
Compensation Committee based on the duties, contributions and value of the
services of the respective optionee. The Committee has the authority to
determine to whom options were granted, the number of shares covered by each
option, when each option was to be granted, date of initial ability to exercise,
exercise price and certain other terms, and to prescribe, interpret, amend and
rescind rules and regulations relating to each plan. Any options canceled or not
exercised within the option period became available for grants of new options
under the plans. The Board also has the power to select committees consisting of
not less than two members to administer each plan.
25
<PAGE>
All of the options granted under MEDY's plans may be exercised through
payment of the exercise price with shares of MEDY's Common Stock or cash, or
both. The ability to exercise options through surrendering shares of Common
Stock enables holders of options to exercise the entire amount of an option by
first exercising a small number of options, followed by successively larger
option exercises which the optionee is able to effect by surrendering the
increasing number of shares obtained thereby. For little or no initial cash
payment, repeated exercises of options by surrendering stock having a market
price in excess of the option exercise price, enable an optionee to provide
sufficient consideration to MEDY to exercise his entire stock option. The
exercise of options might otherwise require substantial cash consideration. This
procedure is often referred to as pyramiding.
The following table sets forth certain information regarding stock options
granted by MEDY to the Chief Executive Officer and the other executive officers
that received total annual salary and bonus in excess of $100,000 during 1999.
No stock appreciation rights were granted.
<TABLE>
<CAPTION>
Option Grants in Fiscal 1999
(a) (b) (c) (d) (e)
Number of Securities % of Total
underlying Options Granted Exercise or
Options to Employees in Base Price Expiration
Name Granted (#) Fiscal Year ($/sh) Date
- ---- -------------------- --------------- ------------ ----------
<S> <C> <C> <C> <C>
Van A. Horsley 500,000* 53.5% $3.25 Oct. 2005
</TABLE>
* Includes 100,000 options that are currently vested. Options for 400,000
shares vest when certain revenue, cash flow, and stock price criteria are
met, or in the event of Mr. Horsley's termination as President and CEO.
26
<PAGE>
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option
Values.
- --------------------------------------------------------------------------------
The following table sets forth information regarding stock options
exercised by the chief executive officer and certain other officers or directors
during the 1999 fiscal year as well as the year-end value of options held by
such persons on September 30, 1999: No Stock Appreciation Rights have been
granted, or are held by, any such person:
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
Number of Value of
Unexercised In-the-Money Options
Shares Options at FY End at FY End @ $.874
Acquired on Value (Exercisable/ (Exercisable/
Name Exercise Realized Unexercisable) Unexercisable)
- ---- ----------- -------- ----------------- ---------------------
<S> <C> <C> <C> <C>
Van A. Horsley 0 $ 0 429,780 / 400,000 $ 0 / 0
Edwin L. Adair 0 $ 0 295,000/ 0 $ 0 / 0
Pat H. Adair 0 $ 0 0 / 0 $ 0 / 0
I. Dean Bayne 0 $ 0 20,000 / 20,000 $ 0 / 0
Leroy Bilanich 0 $ 0 20,000 / 20,000 $ 0 / 0
Chae U. Kim 0 $ 0 450,000 / 150,000 $ 0 / 0
Dan L. Richmond 0 $ 0 450,000 / 150,000 $ 0 / 0
</TABLE>
(c) MEDY has no long term incentive compensation plans.
(d) Other Compensation
----------------------
There are no plans to pay bonuses or deferred compensation to employees of
the Company.
The Company provides access to a medical insurance plan for its employees
and provides access to other types of coverage such as life, disability, and
other insurance plans for the benefit of its employees, but at the employees
expense.
(e) Compensation of Directors
-----------------------------
General. MEDY's directors are authorized to receive $200 for each directors'
meeting attended by them. To date, the directors have waived their right to
receive directors fees. In 1993, Dr. Bayne was granted an incentive stock option
to acquire 20,000 shares of common stock at $4.00 per share, expiring June 11,
2003. In October of 1998 Dr. Bayne was granted an option to acquire 20,000
shares of common stock at $2.00 per share, expiring October 15, 2003. Leroy
Bilanich owns an incentive stock option to acquire 20,000 shares of common stock
at $1.50 per share, expiring June 11, 2003. In October of 1998 Mr. Bilanich was
granted an option to acquire 20,000 shares of common stock at $2.00 per share,
expiring October 15, 2003.
No options were granted during fiscal 1999 to board members other than as
disclosed above regarding options issued to Van Horsley.
27
<PAGE>
Royalty Agreements. Dr. Adair and Dr. Bayne, directors of MEDY, are each
entitled to receive royalties equal to two percent of the net sales of products
each assigned to the Company. No royalties have been accrued or paid to Dr.
Bayne. $600,000 has been paid to Dr. Adair through fiscal 1997, but as a result
of the renegotiation of his license to the Company, no amounts have been paid or
accrued for subsequent years. See Item 13 - "Certain Relationships and Related
Transactions" for further information regarding the royalty agreement.
Indemnification Agreements. MEDY has entered into indemnification agreements
with each of its directors and officers providing for indemnification of each
such director by MEDY to the full extent permitted by the Colorado Business
Corporation Act. The agreements provide that in all circumstances in which a
director or officer may receive indemnification by statute, such indemnity shall
be provided.
MEDY has no other arrangements pursuant to which it compensates its
directors for acting in their capacities as such.
(f) Employee Contracts and Change of Control Provisions
MEDY has employment contracts with two executive officers as was described
in Item 10, Executive Compensation. MEDY has no compensatory arrangement which
may result from a change-of-control of MEDY or a change in any executive
officers responsibilities, except with Van Horsley, president and CEO. In that
agreement, if Mr. Horsley is removed from his duties as President and CEO of
MEDY, whether by sale of all, or a portion of MEDY, or the merger of MEDY into
another entity, or the removal of Mr. Horsley from those positions of
responsibility for any reason, then he is to be compensated with one years
salary at the rate of $135,000 plus accrued vacation pay of $12,981. In
addition, in the event of one of the above occurrences, Mr. Horsley will
automatically vest any unvested Options and any clause in the Option Agreements
referencing the termination of the Options upon termination of employment shall
be waived. Also, the contracts for both Mr. Richmond and Mr. Kim are terminable
for cause by either if they are not reelected to CADI's Board of Directors or if
CADI's Board is increased in number other than by a vote of the Directors.
(g) Re-pricing of Options
No options were re-priced during the fiscal year.
28
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management.
(a) and (b) Security ownership of certain beneficial owners and management.
---------------------------------------------------------------------------
At September 30, 1999, MEDY had only one class of outstanding voting
securities, its common stock. The following table sets forth information as of
December 23, 1998 with respect to the ownership of the Company's Common Stock
for all directors, individually, all officers and directors as a group, and all
beneficial owners of more than five percent of the Common Stock. The following
shareholders have sole voting and investment power with respect to the shares,
unless it has been indicated otherwise.
Name of beneficial owner Shares owned beneficially (1) * Percent of class
- ------------------------ ----------------------------- ------------------
Edwin L. Adair, M.D.
and Pat Horsley Adair 1,174,290 (2) 8.9%
317 Paragon Way
Castle Pines Village
Colorado, 80104
Daniel L. Richmond 1,097,760 (4) 8.2%
17052 Oak View Drive
Encino, CA. 91436
Chae U. Kim 1,097,760(4) 8.2%
3231 Cheviot Vista Place
Los Angeles, CA. 90034
I. Dean Bayne, M.D. 40,000 .3%
Van A. Horsley 555,586 (3) 4.2%
Leroy Bilanich, Ed.D. 40,000 .3%
All officers and directors
as a group (7 persons) 4,005,396 (5) 27.4%
* Percent of class based upon shares outstanding on December 23, 1999 of
12,866,269.
(1) As used in this section, the term beneficial ownership with respect to a
security is defined by Rule 13d-3 under the Securities Exchange Act of 1934
as consisting of sole or shared voting power (including the power to vote
or direct the vote) and/or sole or shared investment power (including the
power to dispose or direct the disposition) with respect to the security
through any contract, arrangement, understanding, relationship or
otherwise. Unless otherwise indicated, beneficial ownership is of record
and consists of sole voting and investment power.
(2) Includes 175,000 stock options held by Dr. Adair of which all are presently
exercisable. Also includes 120,000 options held by Dr. Adair issued in
consideration for cancellation of fiscal 1996 royalty payments due him
totaling $120,000, also presently exercisable.
29
<PAGE>
(3) Includes 470,680 shares under presently exercisable stock options. Does not
include options to acquire 400,000 shares exercisable at a price of $3.25
per share which vest based upon defined performance goals.
(4) Includes 450,000 shares under presently exercisable stock options. Does not
include option to acquire 150,000 shares exercisable at $3.25, which vest
upon defined performance goals.
(5) Includes shares referenced in notes (2) through (5).
(c) Changes in Control.
-----------------------
The Company knows of no arrangement, the operation of which may, at a
subsequent date, result in change in control of the Company.
Item 12. Certain Relationships and Related Transactions.
(a) and (b) Transactions With Management and Others.
----------------------------------------------------
MEDY has engaged in certain transactions with members of its Board of
Directors. In each case, the Board believed that the transaction was in MEDY's
best interests and the terms of the transaction were at least as fair to MEDY as
could have been obtained from an independent person, and the transaction was
approved by the disinterested directors. MEDY will continue to follow this
procedure in approving any transactions with affiliated persons. No such
transactions are contemplated at this time.
Acquisition of Computer Age Dentist, Inc. Effective October 1, 1997, MEDY
purchased all of the outstanding stock of Computer Age Dentist, Inc. of which
Dan Richmond and Chae Kim were the majority owners. It was as a result of that
transaction that Mr. Richmond and Mr. Kim became Directors of the Company. The
business of CADI is further described in Item 1.
The acquisition was accomplished pursuant to a reverse triangular merger by
which MEDY paid Mr. Richmond and Mr. Kim, the two former shareholders of CADI:
1,295,520 shares of its restricted common stock, promissory notes aggregating
$300,000, and $254,697 in cash. In addition, MEDY assumed certain obligations of
CADI to an unaffiliated person who was formerly a shareholder of CADI and paid
such person 304,480 shares of restricted common stock, $45,303 in cash, and a
$100,000 promissory note. This note to the unaffiliated party has been paid in
full.
The promissory notes to Messrs. Richmond and Kim were originally due on
October 23, 1998. Because of working capital shortages, Mr. Richmond and Mr. Kim
agreed to extend the maturity date of the remaining amounts due under the notes
($46,246.92 in the case of Mr. Richmond and $80,406.17 in the case of Mr. Kim)
until their current maturity, July 29, 2000. These notes continue to bear
interest at 12% per annum.
30
<PAGE>
There was no prior relationship between MEDY and either CADI or its
shareholders. As a result of the acquisition, the two former CADI shareholders,
Dan Richmond and Chae Kim, were named to the Board of Directors of MEDY. MEDY's
president and Chief Executive Officer, Van Horsley, became a Director and Vice
President of CADI.
License Agreement with Dr. Adair. MEDY entered into an exclusive revocable
license agreement with Dr. Edwin Adair effective June 3, 1987, as amended,
relating to use of certain technology invented and developed by Dr. Adair.
Before an amendment negotiated in September 1997, MEDY was obligated to pay Dr.
Adair a minimum annual royalty of $120,000. Additionally, Dr. Adair was
obligated to give MEDY a right of first refusal for his inventions. Actual
royalties never exceeded the minimum annual royalty. As a result of negotiations
between the disinterested directors and Dr. Adair, the parties agreed to amend
the license agreement to waive the minimum annual royalty due September 30, 1997
for the year then ended and any future minimum annual royalty, and to waive Dr.
Adair's obligation to provide MEDY with a right of first refusal on future
technology.
Sub Lease Agreement with Dr. Adair. MEDY has subleased approximately 80% of its
office and manufacturing space to its Chairman, Dr. Edwin Adair, for an
indefinite term on a month-to-month basis. Either party may terminate this
sublease at any time. Dr. Adair pays MEDY $9,000 per month for the sublease.
Distribution Agreement. MEDY entered into a distribution agreement with
Micro-Medical Devices, Inc. ("MMD"), a corporation wholly-owned by Dr. Adair
during June of fiscal year 1995. The distribution agreement includes all
products developed by Dr. Adair related to his Universal Sterile Endoscopy
System(TM)("USES").
MMD has appointed MEDY as its exclusive worldwide distributor for the USES
products through June 30, 2000. MMD also granted MEDY a right of first refusal
to distribute any further products MMD may develop. There are no minimum
performance requirements under the distribution agreement, and MEDY need only
purchase products at a discount to the list price it has already sold to third
parties. The distribution agreement is attached as exhibit 10.16(*).
MMD also agreed to sublease space from MEDY for administration purposes at
cost. The rental payment and reimbursement to MEDY for employees MMD may utilize
are intended to compensate MEDY for all associated expenses, including rent on a
per-square-foot basis. During the fiscal year ended September 30, 1998, MEDY
purchased no products from MMD, and MMD has not needed any leased space.
Other Related Party Transactions.
- ---------------------------------
In October 1987, I. Dean Bayne, M.D., a director, assigned his rights and
interest in a then pending patent application related to the Bayne Pap Brush(TM)
described in "Item 1 - Business -Patents, Trademarks and Licenses." To reimburse
him for his expenses in developing that product and as compensation for the
assignment, MEDY paid Dr. Bayne 10,000 shares of restricted common stock and
will pay him a royalty for the duration of the patent equal to two percent of
the net sales of the Bayne Pap Bruch (TM), less certain expenses. As of
September 30, 1998, no royalties have been accrued or paid since the inception
of this arrangement and the Bayne Pap Brush has been discontinued and has not
been marketed by the Company since 1992.
31
<PAGE>
MEDY employs Van Horsley, a son of Pat Horsley Adair, on terms described
above in Item 10. Executive Compensation.
Except as otherwise stated above, since October 1, 1998, MEDY has not been
a party to any transaction involving in excess of $60,000, in which any director
or executive officer, nominee for election as a director, security holder of
record or beneficially of more than five percent of any class of MEDY's
securities, or any member of the immediate family of the foregoing had or will
have a direct or indirect material interest.
MEDY is not aware of any other relationship between nominees for election
as directors or its directors and MEDY that are similar in nature and scope to
those relationships listed in this Item 12.
(c) Parents of the Company
--------------------------
Not applicable, inasmuch as there are no "Parents" of MEDY.
(d) Transactions with Promoters
-------------------------------
Not applicable, inasmuch as the Company was organized more than five years
ago.
Item 13. Exhibits and Reports on Form 8-K.
(a) Exhibits
------------
The following is a complete list of exhibits filed as part of this Annual
Report on Form 10-KSB, which Exhibits are incorporated herein.
Exhibit
Number Description
- ------ -----------
3.1(k) Restated Articles of Incorporation (December 30, 1988)
3.2(n) Bylaws, as amended
10.1(m) Amendment Number Five to Lease Agreement - Englewood Office Space
10.2(a) Stock Option Plan - Consultant's
10.3(j) 1988 Stock Option Plan
10.4(d) Sales Representative Agreement - Form
10.5(3) International Distributor Agreement
10.6(f) Indemnification Agreement - Edwin L. Adair, M.D.
10.7(f) Indemnification Agreement - Pat Horsley Adair
32
<PAGE>
10.8(h) Indemnification Agreement - I. Dean Bayne
10.9(b) Indemnification Agreement - Van A. Horsley
10.10(b) Indemnification Agreement - Leroy A. Bilanich
10.11(a) Employee Confidentiality Agreement - Form
10.12(b) Section 125 Cafeteria Plan
10.13(h) Patent Assignment - Bayne Pap Brush
10.14(o) Amended and restated License Agreement with Edwin L. Adair
10.15(n) 401(k) Plan
10.16(p) Micro Medical Distribution Agreement
10.17(p) Employment Agreement with Dan Richmond
10.18(p) Employment Agreement with Chae Kim
10.19(p) Merchant Capital Agreement
10.20(q) Amendment No. 3 to Purchase Agreement between Medical Dynamics,
Inc. and The Tail Wind Fund, Ltd.
10.21(q) Purchase Agreement between Medical Dynamics, Inc. and Resonance
Limited.
10.22(q) Registration Rights Agreement between Medical Dynamics, Inc. and
Resonance Limited.
10.23(r) Loan agreement between InfoCure Corporation and Medical Dynamics,
Inc., dated October 28, 1999.
10.24(r) Merger Agreement between InfoCure Corporation, Medical Dynamics,
Inc., and CADI Acquisition Corporation, dated December 21, 1999.
21.1 Subsidiaries of MEDY:
Computer Age Dentist, Inc., a California corporation
23.1* Consent of Hein & Associates, LLP
* Filed herewith.
(a) Incorporated by reference from Registration Statement on Form S-1,
SEC File No. 2-82856.
33
<PAGE>
(b) Incorporated by reference from MEDY's Form 10-K for the period
ended September 30, 1991.
(d) Incorporated by reference from MEDY's Form 10-K for the year ended
September 30, 1984.
(e) Incorporated by reference from MEDY's Form 8-K reporting an event
of February 8, 1985.
(f) Incorporated by reference from MEDY's Form 10-K for the year ended
September 30, 1986.
(h) Incorporated by reference from MEDY's Form 10-K for the fiscal
year ended September 30, 1987.
(j) Incorporated by reference from MEDY's Form 8-K reporting an event
of October 12, 1988.
(k) Incorporated by reference from MEDY's Form 10-Q for the quarter
ended December 31, 1988.
(m) Incorporated by reference from Amendment No. 1 to Registration
Statement on Form S-1, Commission File No. 33-29497, filed with
the Commission on July 26, 1989.
(n) Incorporated by reference from MEDY's Form 10-K for the fiscal
year ended September 30, 1990.
(o) Incorporated by reference from MEDY's Form 10-QSB for the quarter
ended June 30, 1995.
(p) Incorporated by reference from current report on Form 8-K
reporting an event of October 23, 1997, as amended.
(q) Incorporated by reference from current report on Form 8-K
reporting an event of March 18, 1999.
(r) Incorporated by reference from a report on Form 8-K
reporting an event of December 21, 1999.
(b) Reports on Form 8-K
During the period covered by this Report up to December 23, 1999, the
Company filed the following reports on Form 8-K:
March 4, 1999, reporting an event under Item 5 - Other Events
March 18, 1999, reporting an event under Item 5 - Other Events
April 13, 1999, reporting an event under Item 5 - Other Events
November 2, 1999, reporting an event under Item 5 - Other Events
December 23, 1999, reporting an event under Item 5 - Other Events
34
<PAGE>
SIGNATURES
- ----------
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MEDICAL DYNAMICS, INC.
By:/s/ Van A. Horsley
------------------------------------------
Van A. Horsley,
President
By:/s/ Peter Tatar
------------------------------------------
Peter Tatar,
Controller, Principal Accounting Officer
In accordance with the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates indicated.
January 12, 1999 /s/ Van A. Horsley
------------------------------------
Van A. Horsley, Principal Executive
Officer, Principal Financial Officer
and Director
January 12, 1999 /s/ Edwin L. Adair
------------------------------------
Edwin L. Adair, M.D., Chairman
of the Board and Director
January 12, 1999 /s/ Daniel L. Richmond
------------------------------------
Daniel L. Richmond, Director
January 12, 1999 /s/ Chae U. Kim
------------------------------------
Chae U. Kim, Director
January 12, 1999 /s/ I. Dean Bayne
------------------------------------
I. Dean Bayne, M.D., Director
January 12, 1999 /s/ Pat Horsley Adair
------------------------------------
Pat Horsley Adair, Director
January 12, 1999 /s/ Leroy Bilanich
------------------------------------
Leroy Bilanich, Director
35
<PAGE>
Medical Dynamics, Inc. and Subsidiaries
Consolidated Financial Atatements
For the Years Ended
September 30, 1999 and 1998
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Independent Auditor's Report.........................................F-2
Consolidated Balance Sheet - September 30, 1999......................F-3
Consolidated Statements of Operations - For the Years Ended
September 30, 1999 and 1998.................................F-4
Consolidated Statements of Stockholders' Equity - For the Year
Ended September 30, 1999 and 1998...........................F-5
Consolidated Statements of Cash Flows - For the Years Ended
September 30, 1999 and 1998.................................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, 1999, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years ended September 30, 1999 and 1998. 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, 1999, and the results of their
operations and their cash flows for the years ended September 30, 1999 and 1998,
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.
HEIN + ASSOCIATES LLP
Denver, Colorado
December 20, 1999
F-2
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1999
ASSETS
------
CURRENT ASSETS:
Cash and equivalents $ 180,000
Trade receivables, less allowance
for doubtful accounts of $67,300 254,400
Inventories 189,200
Prepaid expenses and other 21,100
------------
Total current assets 644,700
------------
SOFTWARE DEVELOPMENT AND SUPPORT:
Software development costs, net of
accumulated amortization of $856,200 2,345,600
Technical support contracts, net of
accumulated amortization of $593,800 890,700
------------
Total software development and support 3,236,300
------------
PROPERTY AND EQUIPMENT:
Demonstration equipment 438,200
Machinery and equipment 606,100
Furniture and fixtures 235,600
Leasehold improvements 54,500
------------
1,334,400
Less accumulated depreciation and amortization (913,300)
------------
Property and equipment, net 421,100
------------
OTHER ASSETS:
Goodwill, net of accumulated
amortization of $139,900 1,136,200
Non-compete agreements, net of accumulated
amortization of $151,700 47,500
Debt issuance costs, net of accumulated
amortization of $481,000 80,100
Patents and trademarks, net of accumulated
amortization of $785,900 12,800
Deposits and other 24,300
------------
Total other assets 1,300,900
------------
TOTAL ASSETS $ 5,603,000
============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Current maturities of notes payable
and convertible debentures $ 943,700
Accounts payable 622,000
Accrued expenses 497,600
Unearned revenue 368,500
------------
Total current liabilities 2,431,800
------------
NOTES PAYABLE, net 207,600
CONVERTIBLE DEBENTURES, net 370,800
COMMITMENTS AND CONTINGENCIES (Notes 2, 5, and 8)
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 12,214,300 shares 12,200
Additional paid-in capital 27,771,700
Accumulated deficit (25,191,100)
------------
Total stockholders' equity 2,592,800
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,603,000
============
See accompanying notes to these consolidated financial statements.
F-3
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED
SEPTEMBER 30,
----------------------------
1999 1998
------------ ------------
NET SALES:
Dental products:
Software, training, and installation $ 3,809,700 $ 2,906,900
Equipment 4,495,900 2,836,700
Support services 2,522,400 1,831,300
Medical products 130,700 271,800
------------ ------------
10,958,700 7,846,700
------------ ------------
COST OF SALES:
Dental products:
Software, training, and installation 1,133,000 687,200
Equipment 4,015,300 2,542,100
Support services 924,700 583,200
Medical products 34,600 246,300
------------ ------------
6,107,600 4,058,800
------------ ------------
GROSS PROFIT 4,851,100 3,787,900
------------ ------------
OPERATING EXPENSES:
Selling and marketing 3,679,800 2,078,900
General and administrative 4,983,300 3,932,800
Stock-based compensation 49,600 33,900
Research and development 2,900 46,700
Impairment of goodwill 655,200 --
------------ ------------
Total operating expenses 9,370,800 6,092,300
------------ ------------
OPERATING LOSS (4,519,700) (2,304,400)
OTHER INCOME (EXPENSE):
Other income 44,900 51,200
Interest income 13,500 37,400
Interest expense (650,000) (305,700)
Loss on Command settlement (286,800) --
------------ ------------
(878,400) (217,100)
------------ ------------
NET LOSS $ (5,398,100) $ (2,521,500)
============ ============
NET LOSS PER COMMON SHARE $ (.52) $ (.27)
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 10,312,700 9,512,200
============ ============
See accompanying notes to these consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1999 AND 1998
COMMON STOCK Additional
------------------------ Paid-in Accumulated
Shares Amount Capital Deficit Total
------ ------ ------- ------- -----
<S> <C> <C> <C> <C> <C>
BALANCE, October 1, 1997 7,627,300 $ 7,600 $ 18,811,100 $(17,271,500) $ 1,547,200
Issuance of common stock for acquisition of:
Computer Age Dentist, Inc. 1,600,000 1,600 4,478,400 -- 4,480,000
Information Presentation Systems, Inc. 320,000 300 687,900 -- 688,200
DOM, Inc. 141,700 200 339,800 -- 340,000
Conversion of debentures to common stock:
Principal, net of discount 315,700 300 602,600 -- 602,900
Accrued interest 17,300 -- 35,800 -- 35,800
Fair value of warrants issued for debt discount -- -- 223,000 -- 223,000
Proceeds from exercise of stock options 12,500 -- 34,400 -- 34,400
Attribution of compensation expense
under stock options and warrants:
Employees -- -- 8,900 -- 8,900
Non-employees -- -- 25,000 -- 25,000
Net loss -- -- -- (2,521,500) (2,521,500)
------------ ------------ ----------- ----------- ----------
BALANCE, September 30, 1998 10,034,500 10,000 25,246,900 (19,793,000) 5,463,900
Conversion of debentures to common stock:
Principal, net of discount 1,144,900 1,200 1,142,200 -- 1,143,400
Accrued interest 101,300 100 125,900 -- 126,000
Fair value of warrants issued for debt
discount and issuance costs -- -- 299,400 -- 299,400
Proceeds from exercise of options 98,000 100 141,400 -- 141,500
Proceeds from sale of common stock, net
of offering costs of $32,900 523,800 500 766,600 -- 767,100
Additional shares issued pursuant
to terms of agreement 311,800 300 (300) -- --
Attribution of compensation under
stock options and warrants:
Employee -- -- 32,100 -- 32,100
Non-employee -- -- 17,500 -- 17,500
Net loss -- -- -- (5,398,100) (5,398,100)
------------ ------------ ------------ ------------ ------------
BALANCE, September 30, 1999 12,214,300 $ 12,200 $ 27,771,700 $(25,191,100) $ 2,592,800
============ ============ ============ ============ ============
See accompanying notes to these consolidated financial statements.
F-5
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
SEPTEMBER 30,
--------------------------------
1999 1998
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(5,398,100) $(2,521,500)
Adjustments to reconcile net loss to net cash used in
operating activities:
Common stock options granted for compensation
and other services 49,600 33,900
Depreciation expense 191,800 71,400
Amortization of intangible assets 937,000 955,500
Amortization of debt discount and issuance costs 446,500 166,000
Conversion of accrued interest on debentures to common stock 126,000 35,800
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 50,100
Other (23,200) --
Changes in operating assets and liabilities, net of
effects of acquisitions:
Decrease (increase) in:
Trade receivables 454,000 (295,000)
Inventories 621,700 (51,200)
Prepaid expenses and other 13,100 37,200
Increase (decrease) in:
Accounts payable 174,800 9,800
Accrued expenses 88,700 263,600
Unearned revenue (1,600) 5,400
----------- -----------
Net cash used in operating activities (1,279,000) (1,239,000)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in restricted cash 50,000 --
Software development costs (229,100) (238,100)
Purchase of property and equipment (85,800) (266,600)
Payments for acquisition of businesses, net of cash acquired -- (599,200)
Proceeds from sale of property and equipment -- 12,400
Other -- (11,500)
----------- -----------
Net cash used in investing activities (264,900) (1,103,000)
----------- -----------
See accompanying notes to these consolidated financial statements.
F-6
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
FOR THE YEARS ENDED
SEPTEMBER 30,
------------------------------
1999 1998
--------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on notes payable (453,900) (52,600)
Payment of debt issue costs (90,900) --
Proceeds from issuance of common stock 767,100 --
Proceeds from exercise of common stock options 141,500 34,400
Proceeds from issuance of convertible debentures 400,000 1,989,300
Proceeds from capital lease financing -- 87,600
Proceeds from shareholder loan 400,000 --
Proceeds from short-term borrowings 5,991,500 --
Repayment of short-term borrowings (5,984,500) --
----------- -----------
Net cash provided by financing activities 1,170,800 2,058,700
----------- -----------
NET DECREASE IN CASH AND EQUIVALENTS (373,100) (283,300)
CASH AND EQUIVALENTS, beginning of year 553,100 836,400
----------- -----------
CASH AND EQUIVALENTS, end of year $ 180,000 $ 553,100
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION -
Cash paid for interest $ 100,500 $ 13,300
=========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Conversion of accounts payable to debt $ 118,600 $ --
=========== ===========
Issuance of common stock for acquisition of business $ -- $ 5,508,200
=========== ===========
Notes payable incurred for acquisition of businesses, net of discounts $ -- $ 865,300
=========== ===========
Conversion of debentures to common stock, net of discount $ 1,143,400 $ 602,900
=========== ===========
Conversion of accrued interest to notes payable $ 9,200 $ --
=========== ===========
Fair value of warrants issued for debt discount $ 40,000 $ 223,000
=========== ===========
Debt issuance costs incurred for convertible debentures $ 259,400 $ 210,800
=========== ===========
Debt assumed in business acquisitions $ -- $ 67,900
=========== ===========
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. 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, and 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, 1999, 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.
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.
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.
F-8
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $446,100 and $417,800 for
the years ended September 30, 1999 and 1998, 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 2.5
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.
Warranty Reserve - The Company provides a warranty against defects in
materials and workmanship, generally for a period between one month and one
year following the date of sale of the equipment. Estimated future costs of
product warranties are included in accrued expenses in the accompanying
balance sheet.
Research and Development - Research and development costs are charged to
operations in the period incurred.
F-9
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Advertising - Advertising costs are expensed the first time the
advertisement is run. Total advertising costs charged to operations
amounted to $503,400 and $456,300 for the years ended September 30, 1999
and 1998, respectively.
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 1998 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.
F-10
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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, 1999, 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 and become profitable.
As discussed in Note 4, the Company completed three business acquisitions
during the year ended September 30, 1998. As a result of these activities,
the Company realized increases in sales in fiscal 1998 of approximately
$6.9 million and in fiscal 1999 of approximately $3.1 million. However,
despite the positive impact of increases in sales, the Company has
struggled to generate adequate working capital to finance this growth. At
September 30, 1999, the Company had negative working capital of
approximately $1.5 million. Management has devoted substantial efforts to
obtain additional capital to finance planned activities for fiscal 2000.
As discussed further in Note 5, the Company was successful in obtaining
additional debt financing of $500,000 in October 1999 and payment terms
were extended on certain notes payable to related parties. 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 raising additional capital and to ultimately
achieve profitable operations and positive cash flows from operating
activities.
3. INVENTORIES:
------------
Inventories consist of the following at September 30, 1999:
Raw materials and replacement parts $186,700
Finished goods 121,900
--------
Total inventory 308,600
Less provision for obsolete and slow-moving inventory (119,400)
--------
Net inventories $189,200
========
F-11
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. BUSINESS COMBINATIONS:
----------------------
During the year ended September 30, 1998, the Company completed three
acquisitions of businesses engaged in various aspects of the development
and sale of practice management systems for the dental profession. In
October 1997, the Company acquired 100% of the outstanding common stock of
Computer Age Dentist, Inc. (CADI). CADI, which is located in Los Angeles,
California, is engaged in the design, sale, and support of practice
management software for the dental profession. The Company paid total
consideration of $5,183,600 to acquire CADI, consisting of $334,300 in cash
payments, $369,300 (net of discount) in notes payable, and 1,600,000 shares
of the Company's common stock with an estimated fair value of $4,480,000.
In February 1998, the Company completed the acquisition of 100% of the
outstanding common stock of Information Presentation Systems, Inc. (IPS).
IPS is located in Marietta, Georgia, and is engaged in the sale of
customized multimedia systems for use in a variety of dental operatory
applications. The Company paid total consideration of $888,200 to acquire
IPS, consisting of $200,000 in cash payments, and 320,000 shares of the
Company's common stock with an estimated fair value of $688,200.
In April 1998, the Company completed the acquisition of 100% of the
outstanding common stock of DOM, Inc., d/b/a Command Dental Systems
(Command). Command is located in Farmington Hills, Michigan, and is engaged
in the development and sale of computer software and hardware systems for
the management of dental practices. The Company paid total consideration of
$719,600 to acquire Command, consisting of notes payable of $379,600 (net
of discount) and 141,700 shares of the Company's common stock with an
estimated fair value of $340,000.
The acquisitions were accounted for using the purchase method of accounting
for business combinations and, accordingly, the accompanying consolidated
financial statements include the results of operations of the acquired
businesses since the respective dates of acquisition. The Company recorded
goodwill of approximately $1,024,500, $731,000, and $257,600 related to the
acquisitions of CADI, IPS, and Command, respectively. In connection with
the acquisitions, IPS and Command were merged into CADI. The following
unaudited pro forma information assumes that the acquisitions had occurred
on October 1, 1997:
Year Ended
September 30,
1998
-----------
Revenue $ 9,327,000
Net loss $(2,478,000)
Net loss per share $ (.26)
In March 1999, the Company filed litigation against the former Command
principals. The litigation sought, among other things, rescission of the
April 1998 merger agreement by which the Company acquired the assets of
F-12
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Command Dental Systems, Inc. from the Command shareholders, rescission of
an employment agreement and damages. The Command principals filed actions
against the Company for breach of an office lease and breach of the
employment agreement, and for other claims. Both of these suits were
settled in August 1999. As a result of the settlement, the Company reduced
its indebtedness to the former Command principals from approximately
$500,000 (which was current indebtedness) to $250,000 of long-term
indebtedness; the Company retained approximately 150 former Command clients
who had converted to the Company's software; and the Company terminated all
lease obligations on the Command office space and the employment agreement
with the Command principal. In addition, the parties entered into mutual,
general releases and stipulations to dismiss the litigation. The Company
recognized a loss of approximately $287,000 which represented the excess of
assets surrendered over liabilities retained.
5. LONG-TERM LIABILITIES:
----------------------
Convertible Debentures - In October 1997, the Company issued convertible
debentures totaling $1,100,000. The debentures are uncollateralized and
bear interest at 8% per annum, payable semi-annually in cash or, at the
Company's option, in shares of the Company's common stock. The principal
balance is due October 2000 and the holder of the debentures has the option
to convert the debentures into shares of the Company's common stock. Any
unpaid principal and interest as of October 31, 2000 will automatically be
converted into shares of the Company's common stock. 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 debentures are uncollateralized and bear interest at 8% per
annum, payable semi-annually in cash or, at the Company's option, in shares
of the Company's common stock. The principal balance is due July 2003 and
the holder of the debentures has the option to convert the debentures into
shares of the Company's common stock beginning in November 1998, when
one-third of the principal balance may be converted, January 1999 when
two-thirds may be converted, and March 1999 when the entire balance may be
converted. Any unpaid principal and interest as of July 31, 2003 will
automatically be converted into shares of the Company's common stock. 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
F-13
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
related to the issuance. Through September 30, 1999, the holder had
converted $800,000 of debentures to 910,200 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.
In November 1998, the Company issued an additional $400,000 of convertible
debentures with terms similar to the July 1998 issuance described above,
except for a 3-month delay for the principal conversion privileges. 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. Up to one third of the July 1998 and November 1998
debentures is convertible from and after January 1, 1999, up to two thirds
is convertible after June 1, 1999 and the entire debenture is convertible
after January 1, 2000.
The debenture holder may not convert 1998 debentures which would result in
the issuance of more than 1,880,000 shares. If the holder is precluded from
converting any debentures because of this provision, it may demand, upon
six months' notice, that the Company redeem the remaining debentures for
115% of the principal amount. As of September 30, 1999, this limitation
would result in approximately $275,000 of the debentures (net of discount)
being potentially redeemable. This amount has been classified as a current
liability in the accompanying consolidated balance sheet.
As a result of the amendments, additional debt issuance costs of
approximately $260,000 were recorded.
F-14
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At September 30, 1999, convertible debentures consist of the following:
Interest at 8%, due July 2003, unsecured $ 300,000
Discount for fair value of warrant, net of accumulated
amortization of $6,600 (21,500)
---------
Net 278,500
---------
Interest at 8%, due November 2003, unsecured 400,000
Discount for fair value of warrant, net of accumulated
amortization of $7,300 (32,700)
---------
Net 367,300
---------
Convertible debentures 645,800
Less current maturities (275,000)
---------
Convertible debentures,
less current maturities $ 370,800
=========
Notes Payable - At September 30, 1999, long-term debt
consists of the following:
Notes payable to former shareholders of CADI:
Interest at 12%, due July 2000 or upon sale of the Company $ 126,700
Notes payable to former owners of Command:
Interest at 6%, due April 2003, unsecured 250,000
Discount for below-market interest, net of accumulated
amortization of $2,758 (44,900)
---------
Net 205,100
---------
Note payable to shareholder:
Interest at 12%, due July 2000 or upon sale of the Company,
collateralized by substantially all of the Company's assets 400,000
Notes payable to vendors:
Interest at 8%, due April 2000, unsecured 48,800
Interest at 8%, due December 1999, unsecured 40,300
Other 55,400
---------
Total notes payable 876,300
Less current maturities (668,700)
---------
Notes payable, less current maturities $ 207,600
==========
F-15
<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%.
Aggregate Maturities - As of September 30, 1999, aggregate maturities of
notes payable and convertible debentures are as follows:
Year Ending September 30, Principal Discount Net
------------------------- --------- -------- ---
2000 $1,002,500 $58,800 $ 943,700
2001 106,000 29,500 76,500
2002 106,000 22,700 83,300
2003 308,500 14,200 294,300
2004 125,000 700 124,300
---------- -------- ----------
Total $1,648,000 $125,900 $1,522,100
========== ======== ==========
Line-of-Credit - In October 1998, the Company entered into a line-of-credit
agreement with a financial institution. The line-of-credit provided for
maximum borrowings of $1.0 million with an initial borrowing base of
$400,000. In August 1999, all amounts due under the line were repaid and
the agreement was terminated.
6. 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. The Company is obligated to issue no
more than 2,060,033 shares and warrants pursuant to this obligation. As of
September 30, 1999, the Company has issued an additional 311,800 shares
under this agreement. In November 1999, the Company issued 77,866
additional shares and warrants to purchase 523,834 shares of restricted
common stock at $1.527 per share through May 2000. 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 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
F-16
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
plans. Activity in the 1988 and 1998 stock option plans for the years ended
September 30, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
1988 Plan 1998 Plan
---------------------------- ------------------------------
Weighted Weighted
Average Average
Number of Exercise Price Number Exercise Price
Shares Per Share Shares Per Share
------ --------- ------ ---------
<S> <C> <C> <C> <C>
Outstanding, September 30, 1997 61,700 $ 1.83 -- $ --
Granted 5,000 2.63 -- --
Exercised (7,500) 2.75 -- --
Canceled (2,000) 3.00 -- --
------- -------- --------- -----
Outstanding, September 30, 1998 57,200 1.74 -- --
Granted -- -- 234,800 .93
Exercised -- -- -- --
Canceled (5,000) 3.00 -- --
------- -------- --------- -----
Outstanding, September 30, 1999 52,200 $ 1.61 234,800 $ .93
======= =========
Options available for future grant at September 30, 1999 totaled 1,265,200
shares under the 1998 plan. No shares were available for future grants
under the 1988 plan.
As of September 30, 1999, all options outstanding under the 1988 plan are
vested and 214,800 are vested under the 1998 plan. If not previously
exercised, options outstanding at September 30, 1999, will expire as
follows:
1988 Plan 1998 Plan
------------------------ -----------------------
Number of Exercise Number of Exercise
Year Ending September 30, Shares Price Shares Price
------------------------- ------ ----- ------ -----
2000 -- $ -- 20,000 $ 1.50
2001 37,200 1.38 -- --
2002 10,000 2.00 -- --
2003 5,000 2.63 -- --
2004 -- -- 214,800 .88
------- --------
52,200 $1.61 234,800 $ .93
======= =========
</TABLE>
F-17
<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, 1999 and 1998:
Weighted
Average
Number of Exercise Price
Shares Per Share
------ ---------
Outstanding, September 30, 1997 1,593,900 $2.80
Granted to:
Employees 2,358,200 3.48
Consultants 300,000 4.42
Convertible debenture holders 194,600 2.93
Canceled (205,200) 3.22
Exercised (5,000) 2.75
----------
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 (1,566,700) 3.70
Exercised -- --
----------
Outstanding, September 30, 1999 3,420,600 2.99
==========
F-18
<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
------------- ------ -----
2000 160,900 $1.13
2000 40,000 2.58
2000 75,000 4.50
2001 82,000 2.00
2001 250,000 2.87
2001 115,000 3.75
2002 100,000 1.50
2002 10,200 3.00
2003 52,000 1.50
2003 258,900 2.68
2003 415,800 3.64
2004 140,800 1.60
2004 20,000 3.25
2005 1,200,000 3.25
2006 500,000 3.25
---------
3,420,600
=========
At September 30, 1999, a total of 2,715,600 non-qualified stock options and
warrants are vested. Unvested employee performance options were outstanding
for 550,000 shares. These options vest when the Company achieves various
revenue levels. The Company also has 175,000 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, 1999 and 1998, the Company recognized
compensation expense of $32,100 and $8,900, 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.
F-19
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair value of options granted to non-employees in 1999 and 1998 was
estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted average assumptions:
Years Ended September 30,
-------------------------
1999 1998
---- ----
Expected volatility 78.0% 70.0%
Risk-free interest rate 6.0% 5.7%
Expected dividends .0% .0%
Expected terms (in years) .7 1.5
For the years ended September 30, 1999 and 1998, options granted to
non-employees resulted in the recognition of approximately $17,400 and
$25,000, 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,
-------------------------
1999 1998
---- ----
Net loss:
As reported $(5,398,100) $(2,521,500)
Pro forma (6,739,100) (4,838,700)
Net loss per common share:
As reported $ (.52) $ (.27)
Pro forma (.65) (.51)
F-20
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For purposes of the above pro forma amounts, the weighted average fair
value of options granted to employees for the years ended September 30,
1999 and 1998 was $1.00 and $1.67, respectively. The fair value of each
employee option granted in 1999 and 1998 was estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted
average assumptions:
Years Ended September 30,
-------------------------
1999 1998
---- ----
Expected volatility 81.0% 70.0%
Risk-free interest rate 6.0% 5.7%
Expected dividends .0% .0%
Expected terms (in years) 4.5 4.0
7. INCOME TAXES:
-------------
The amounts which give rise to the net deferred tax asset at September 30,
1999, are as follows:
Current Assets:
Allowance for doubtful accounts $ 25,100
Provision for obsolete and slow-moving inventories 100,900
Accrued expenses 11,200
-----------
Total current assets 137,200
-----------
Long-term Assets:
Property and equipment 29,700
Patents, patents pending, and trademarks 3,500
Compensation expense related to stock options 145,100
Net operating loss carryforwards 8,600,000
Research and development tax credit carryforwards 23,100
------------
Total long-term assets 8,801,400
------------
Total Deferred Tax Assets 8,938,600
Valuation Allowance (8,938,600)
------------
$ --
============
F-21
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 increased by
$900,000 and $397,000 during the years ended September 30, 1999 and 1998,
respectively, due to the increase in the deferred tax asset balances which
were completely offset by a valuation allowance at each of those dates.
At September 30, 1999, the Company has approximately $23,100,000 of net
operating loss carryforwards, and approximately $62,000 of research and
development tax credit carryforwards, both of which expire in varying
amounts from 2000 through 2019. Usage of the net operating loss
carryforwards may be limited by Section 382 of the Internal Revenue Code.
8. 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.
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, 1999 and 1998, 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.
Distribution Agreement - During the year ended September 30, 1995, the
Company transferred to an entity owned by the Chairman the rights to
patents with a net book value of approximately $21,000. The patents had
originally been obtained from the Chairman under the license agreement
described above, and were transferred because the Company was unable to
obtain FDA approval for products using the patents. The related entity has
since obtained FDA approval and has entered into an exclusive agreement to
have the Company distribute all products it manufactures. The agreement
expires in June 2000. The Company did not purchase any product under the
agreement through September 30, 1999.
Regulatory Matters - The Company's medical products are regulated by the
Federal Food and Drug Administration (FDA). The Company cannot ensure that
an adverse financial impact will not occur should the FDA find the
Company's Good Manufacturing Practices are in non-compliance with current
Federal regulations. If the FDA finds that a manufacturer is not in
compliance, the manufacturer may be prohibited from marketing the products
for which they are not in compliance, until such time as the manufacturer
complies with the applicable FDA regulation.
F-22
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. The Company has subleased a portion of its Englewood, Colorado
office space to its chairman for $9,000 per month on a month-to-month
basis. 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,
2000 $256,200
2001 170,900
2002 23,200
2003 --
--------
$450,300
========
Total rent expense was $430,400 and $421,900, net of sublease rentals
received, for the years ended September 30, 1999 and 1998, 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, 1999, the agreements were effective for a period of three
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.
9. SUBSEQUENT EVENTS (UNAUDITED):
------------------------------
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 shares of InfoCure.
In October 1999, InfoCure lent the Company a total of $500,000 at an
interest rate of 12%, due at maturity, for the purpose of repayment of debt
and for working capital. Unless further extended by InfoCure, this loan
will come due March 28, 2000. As collateral for the loan, the Company
pledged substantially all of its assets. As part of the Merger Agreement,
InfoCure has agreed to lend the Company an additional $500,000 for working
capital purposes by January 15, 2000 and amend the maturity date on the
total of $1,000,000 in debt to the later of 120 days from any termination
date by InfoCure, or July 31, 2000.
F-23
INDEPENDENT AUDITOR'S CONSENT
We consent to the incorporation by reference in the registration statement
of Medical Dynamics, Inc. on Form S-8 of our report dated December 29, 1998, on
our audits of the consolidated financial statements of Medical Dynamics, Inc. as
of September 30, 1998, and for the years ended September 30, 1998 and 1997,
which report is included in the Company's Annual Reprot on Form 10-KSB. We also
consent to the reference to our firm under the caption "Experts."
HEIN + ASSOCIATES LLP
Denver, Colorado
January 12, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the Annual
Report - 10KSB and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> SEP-30-1999
<CASH> 180,000
<SECURITIES> 0
<RECEIVABLES> 321,700
<ALLOWANCES> (67,300)
<INVENTORY> 189,200
<CURRENT-ASSETS> 644,700
<PP&E> 1,334,400
<DEPRECIATION> (913,300)
<TOTAL-ASSETS> 5,603,000
<CURRENT-LIABILITIES> 2,431,800
<BONDS> 370,800
0
0
<COMMON> 12,200
<OTHER-SE> 2,580,600
<TOTAL-LIABILITY-AND-EQUITY> 5,603,000
<SALES> 10,958,700
<TOTAL-REVENUES> 11,017,100
<CGS> 6,107,600
<TOTAL-COSTS> 15,478,400
<OTHER-EXPENSES> 286,800
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 650,000
<INCOME-PRETAX> (5,398,100)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,398,100)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,398,100)
<EPS-BASIC> (.52)
<EPS-DILUTED> (.52)
</TABLE>
