UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 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.
---------------------------------------------------
Exact name of Registrant as specified in its charter
Colorado 84-0631765
- -------- ------------------
State or other jurisdiction of I.R.S. Employer
incorporation or organization Identification No.
99 INVERNESS DRIVE EAST, ENGLEWOOD, CO 80112
- -------------------------------------- --------
Address of principal executive offices Zip Code
Registrant's telephone number, including area code: 303-790-2990
Former name, former address and former fiscal year, if changed since last
report: NA
Indicate by check mark whether the Registrant (1) has filed all annual,
quarterly and other reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the Registrant was required to file such reports) and (2)
has been subject to such filing requirements for the past 90 days.
YES X NO
The number of shares outstanding of each of the issuer's classes of common
stock, as of February 11, 2000 were 13,184,126 shares, $.001 par value.
-1-
<PAGE>
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements.
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
ASSETS 12/31/99 9/30/99
----------- -----------
CURRENT ASSETS:
<S> <C> <C>
Cash and equivalents $ 260,300 $ 180,000
Trade receivables, less allowance for
doubtful accounts of $67,300 and $67,300 195,400 254,400
Inventories 98,500 189,200
Prepaid expenses 8,900 21,100
----------- -----------
Total Current Assets 563,100 644,700
----------- -----------
SOFTWARE DEVELOPMENT AND SUPPORT:
Software development costs, net of
accumulated amortization of $971,700
and $856,200 2,278,100 2,345,600
Technical support contracts, net of
accumulated amortization of $668,000
and $593,800 816,500 890,700
----------- -----------
Total Software Development and Support 3,094,600 3,236,300
----------- -----------
PROPERTY AND EQUIPMENT:
Demonstration equipment 438,200 438,200
Machinery and equipment 606,100 606,100
Furniture and fixtures 235,600 235,600
Leasehold improvements 54,500 54,500
----------- -----------
1,334,400 1,334,400
Less accumulated depreciation and
Amortization (942,900) (913,300)
----------- -----------
Property and Equipment, Net 391,500 421,100
----------- -----------
OTHER ASSETS:
Goodwill, net of accumulated
Amortization of $161,300 and $139,900 1,114,800 1,136,200
Non-compete agreement's net of accumulated
Amortization of $159,200 and $151,700 40,000 47,500
Debt issuance costs, net of accumulated --
Amortization of $522,300 and $481,000 38,800 80,100
Patents and trademarks, net of accumulated
Amortization of $795,400 and $785,900 3,200 12,800
Deposits and other 24,400 24,300
----------- -----------
Total Other Assets 1,221,200 1,300,900
----------- -----------
TOTAL ASSETS $ 5,270,400 $ 5,603,000
=========== ===========
-2-
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS, Continued
LIABILITIES AND STOCKHOLDERS' EQUITY
12/31/99 9/30/99
------------- ------------
CURRENT LIABILITIES:
Current maturities of notes payable &
convertible debentures $ 1,166,400 $ 943,700
Accounts payable 301,100 622,000
Accrued expenses 545,200 497,600
Unearned revenue 391,300 368,500
------------ ------------
Total Current Liabilities 2,404,000 2,431,800
------------ ------------
NOTES PAYABLE, net 197,600 207,600
CONVERTIBLE DEBENTURES, net 187,600 370,800
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value;
Authorized 5,000,000 shares; none
Issued and outstanding -- --
Common stock, $.001 par value; authorized
30,000,000 shares; issued & outstanding
12,866,300 and 12,214,300 shares 12,900 12,200
Additional paid-in capital 28,107,800 27,771,700
Accumulated deficit (25,639,500) (25,191,100)
------------ ------------
Total Stockholders' Equity 2,481,200 2,592,800
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 5,270,400 $ 5,603,000
============ ============
See Notes to Consolidated Financial Statements.
-3-
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
Quarter Ended
December 31
--------------------------------
1999 1998
------------ ------------
NET SALES:
Software & training $ 530,100 $ 1,158,200
Equipment & Installation 173,900 1,372,000
Support services 645,100 551,500
------------ ------------
1,349,100 3,081,700
------------ ------------
COST OF SALES:
Software & training 169,200 270,100
Equipment & Installation 250,700 888,100
Support services 188,300 260,400
------------ ------------
608,200 1,418,600
------------ ------------
GROSS PROFIT 740,900 1,663,100
------------ ------------
OPERATING EXPENSES:
Selling & marketing 199,900 945,100
General & administrative 877,400 1,599,900
Stock based compensation 24,400 22,500
Research & development -- 600
------------ ------------
Total operating expenses 1,101,700 2,568,100
------------ ------------
OPERATING LOSS (360,800) (905,000)
OTHER INCOME (EXPENSE):
Other income 0 4,100
Interest income 2,500 3,100
Interest expense (90,100) (101,900)
------------ ------------
NET LOSS $ (448,400) $ (999,700)
============ ============
Earnings per share $ (0.04) $ (0.10)
============ ============
Weighted average number
Of shares outstanding 11,047,800 10,220,900
============ ============
See Notes to Consolidated Financial Statements.
-4-
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended December 31
------------------------------
1999 1998
--------- ---------
Cash Flows From Operating Activities:
Net Loss $(448,400) $(999,700)
Adjustments to reconcile net loss to
Net cash used in operating activities:
Common stock options granted for compensation
and other services
24,400 22,500
Depreciation expense 29,600 47,000
Amortization of intangible assets 228,200 240,500
Amortization of debt discount and issuance costs 47,900 56,300
Conversion of accrued interest on
debentures to common stock 33,000
Changes in operating assets and
Liabilities, net of effects
Of acquisitions:
Decrease (increase) in:
Trade receivable 59,000 (12,800)
Inventories 90,700 (249,200)
Prepaid expenses and other assets 12,100 6,600
Increase (decrease) in:
Accounts payable (320,900) 227,400
Accrued expenses 47,600 391,200
Deferred revenue 22,800 59,600
--------- ---------
Net cash used in operating activities (207,000) (177,600)
--------- ---------
Cash Flows From Investing Activities:
Software development costs (48,000) (75,100)
Purchase of property and equipment -- (61,000)
--------- ---------
Net cash used in investing activities (48,400) (136,100)
--------- ---------
-5-
<PAGE>
Three Months Ended December 31
------------------------------
1999 1998
---------- ---------
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
Cash Flows From Financing Activities:
Principal payments related to:
Notes Payable (279,300) (318,700)
Capital lease obligations (12,100) (8,800)
Proceeds from exercise of options to
Purchase common stock 126,700 22,300
Net proceeds from issuance of
Convertible debenture -- 339,800
Proceeds from notes payable 500,000 294,900
--------- ---------
Net cash provided by (used in) financing activities
335,300 329,500
--------- ---------
Net Increase/(decrease) in Cash and Equivalents
80,300 15,800
Cash and Equivalents, beginning of period 180,000 553,100
--------- ---------
Cash and Equivalents, end of period $ 260,300 $ 568,900
========= =========
Supplemental Disclosures of Cash Flow
Information:
Cash paid for interest $-0- $ 10,000
========= =========
Supplemental Schedule of Non-cash
Investing and Financing Activities:
Conversion of debentures to common stock,
Net of discount $ 185,700 $ 406,700
Fair value of warrants issued for debt
Discount -- $ 40,000
Debt issuance costs incurred for
Convertible debenture -- $ 60,200
See Notes to Consolidated Financial Statements
-6-
</TABLE>
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these financial statements
be read in conjunction with Medical Dynamics, Inc.'s (`MEDY' or the `Company')
Form 10-KSB for the year ended September 30, 1999. The results of operations for
the periods ended December 31, 1999 and December 31, 1998 are not necessarily
indicative of operating results for the full years.
The Consolidated Financial Statements and other information furnished
herein reflect all adjustments which are, in the opinion of management of MEDY,
necessary for a fair presentation of the results of the interim periods covered
by this report. Adjustments to the financial statements were of a normal
recurring nature.
NOTE 2. EARNINGS PER SHARE
Shares issuable under common stock options and warrants were excluded from
the computation of fully diluted earnings per share because the effect was
anti-dilutive. At December 31, 1999, MEDY had 3,352,071 of vested common stock
options and warrants outstanding. Total common stock options and warrants
outstanding (including both vested and unvested) were 4,017,071 at December 31,
1999.
NOTE 3. INVENTORIES
Inventories consist of the following at December 31, 1999 and September 30,
1999:
December 31 September 30
1999 1999
----------- -----------
Raw materials and replacement parts $ 186,700 $ 186,700
Finished goods 215,800 247,500
Allowance for obsolescence (304,000) (245,000)
============ ===========
$ 98,500 $ 189,200
============ ===========
At December 31, 1999 total inventories have decreased $ 90,700 due to sales
of finished goods inventories and an increase in the allowance for obsolete
inventory. Management continues its efforts to further reduce inventory through
sales.
NOTE 4. UNEARNED REVENUE
Unearned revenue represents payments received on deferred software support
contracts, installation charges and training that have not been earned. The
amounts for deferred software support contracts are amortized into revenue on a
monthly basis using the straight-line method over the life of the contract.
Deferred amounts for installation and training are recognized when the services
are performed.
-7-
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Costs for software support contracts, installation and training, are
charged to expense when those costs are incurred.
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation.
General Discussion
- ------------------
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.
As discussed in Note 2 to the audited financial statements as of September
30, 1999, (see MEDY's form 10-KSB for the year ended September 30, 1999 and the
accompanying audited 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 December 31, 1999, a working capital deficit of $1,840,900. Unless the
Company can obtain additional debt, raise additional equity, or complete the
announced transaction with InfoCure Corporation as described below, this raises
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 Item 6 of the
September 30, 1999 Form 10-KSB, in Note 2 of the above noted audited financial
statements and also in the following paragraphs. 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 February 11, 2000, the price of InfoCure stock was
$24.625 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 March, 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.
-8-
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation. (Continued)
Since October 28, 1999, INCX has lent the Company $500,000 at an interest
rate of 12%, due at maturity, for the purpose of repayment of debt and for
working capital. As collateral for said loan, the Company pledged substantially
all of its assets. As part of the Merger Agreement, Infocure agreed to lend MEDY
an additional $500,000 for working capital purposes. The $500,000 additional
loan was completed on January 25, 2000 and therefore the total of $1,000,000
plus accrued interest owed to InfoCure will be due and payable on the earlier of
(I) the date which is 120 days from the termination date of the Agreement by
MEDY or (II) November 30, 2000.
This report on form 10-QSB, including the information incorporated by
reference herein, contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Certain statements contained
in this report using the term "may", "expects to", and other terms denoting
future possibilities, are forward looking statements. These statements include,
but are not limited to, those statements relating to development of new
products, the financial condition of MEDY, the ability to increase distribution
of MEDY's products, integration of new businesses MEDY has acquired during the
1998 fiscal year, approval of MEDY's products as and when required by the Food
and Drug Administration ("FDA") in the United States and similar regulatory
bodies in other countries. The accuracy of these statements cannot be guaranteed
as they are subject to a variety of risks which are beyond the Company's ability
to predict or control and which may cause actual results to differ materially
from the projections or estimates contained herein. The business and economic
risks faced by MEDY and MEDY's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors
as described herein.
Financial Condition. (December 31, 1999 as compared to September 30, 1999)
During three months period ended December 31, 1999, MEDY's net working capital
decreased approximately $53,800 and, consequently, at December 31, 1999 MEDY had
a working capital deficit where its current assets were less than its current
liabilities. Principal changes in the components of net working capital (W/C)
for the three months ended December 31, 1999 consist of:
December 31 September 30 W/C
1999 1999 Effect
----------- ----------- -----------
Cash & Equivalents $ 260,300 $ 180,000 $ 80,300
Trade Receivables 195,400 254,400 (59,000)
Inventories 98,500 189,200 (90,700)
Pre-paid Expenses 8,900 21,100 (12,200)
----------- ----------- -----------
Total Current Assets 563,100 644,700 $ (81,600)
Current maturities of notes
payable 1,166,400 943,700 (222,700)
Accounts payable 301,100 622,000 320,900
Accrued expenses 545,200 497,600 (47,600)
Deferred Revenue 391,300 368,500 (22,800)
----------- ----------- -----------
Current liabilities: 2,404,000 2,431,800 27,800
----------- ----------- -----------
Working capital $(1,840,900) $(1,787,100) $ (53,800)
=========== =========== ===========
-9-
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation. (Continued)
Cash Used In Operating Activities. Cash used in operating activities for
the three months ended December 31, 1999 and 1998 were $207,000 and $177,600,
respectively, for an increase of $29,400 or 16.6%. This increase in cash used in
operations was due in large part to a decrease in accounts payable and accrued
expenses for three months ended December 31, 1999 over the same period last
year.
The Company's net loss amounted to $448,400 for three months ended December
30, 1999 which includes $282,200 of non-cash charges for depreciation,
amortization and stock compensation expense.
Cash Used In Investing Activities. For three months ended December 31,
1999, the Company used cash in investing activities of $48,000 solely for
software development costs. For the comparable period of the preceding year the
Company utilized $136,100 of cash in investing activities, primarily for the
purchase of property and equipment and software development costs.
Cash Generated in Financing Activities. Offsetting the expenditures of cash
used for operating and investing activities, were $500,000 from borrowings from
InfoCure and $126,700 from the exercise of employee stock options. Uses of cash
for financing activities included $279,300 for principal payments on debt
obligations.
The following schedule outlines convertible debenture activity:
<TABLE>
<CAPTION>
Balance Balance
Debenture: 9/30/99 Additions Conversions Amortized 12/30/99
--------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C>
July 98 300,000 -- (200,000) -- 100,000
November 98 400,000 -- -- -- 400,000
--------- -- --------- --------- ---------
Total 700,000 -- (200,000) -- 500,000
--------- ------ --------- --------- ---------
Discount:
July 98 (21,500) -- 14,300 500 (6,700)
November 98 (32,700) -- -- 2,000 (30,700)
--------- -- --------- --------- ---------
Total (54,200) -- 14,300 2,500 (37,400)
--------- ------- --------- --------- ---------
Net: $ 645,800 -- $(185,700) $ 2,500 $ 462,600
========= ======= ========= ========= =========
</TABLE>
-10-
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation. (Continued)
To continue MEDY's objective of curtailing operating losses, negative cash
flow from operations and further liquidity erosion, management is continually
reviewing product profit margins and general expense accounts, and will reduce
or eliminate all non-essential expenditures. However, MEDY anticipates that the
costs associated with finalizing and completing the announced InfoCure
transaction will result in a significant increase in its general and
administrative expenses during the next two fiscal quarters.
Although the decreases in lower margin revenues and the expenses associated
with those revenues have had a positive effect on net operating losses during
the current quarter, MEDY expects to continue to experience negative cash flow
from operations during the first six months of fiscal 2000 and possibly beyond.
During the first quarter of fiscal 2000, cash flow deficits were funded by
employee stock option exercises and by the loans from InfoCure. However, MEDY's
ability to fund its operations will be dependent upon achieving profitability
and generating a positive cash flow from operations in the future. Unless MEDY
is able to achieve and maintain positive operating cash flow during fiscal 2000,
MEDY may continue to face significant working capital shortages during the
fiscal year 2000. There can be no assurance that MEDY will be able to solve its
working capital shortage or that it will be able to finance working capital
shortages in the future.
Management of the Company does not believe that its existing capital
resources are sufficient for the balance of the 2000 fiscal year if it doesn't
begin to generate positive operating cash flow. The Company's plan in this
regard is to complete the merger transaction described with InfoCure Corporation
to alleviate the ongoing need for additional capital. The Company will also seek
to continue its efforts in cost cutting and gross margin improvement to improve
cash flow from operations as described below. If the Company is unable to
complete the announced transaction with InfoCure or generate significant
additional cash flow, the Company's financial condition and working capital
deficit are likely to deteriorate significantly because of the costs associated
with attempting to complete the InfoCure transaction as well as normal business
expenses.
There are 3,352,071 vested common stock options and warrants outstanding as
of December 31, 1999, and if exercised (of which there can be no assurance),
these options would provide varying amounts of additional working capital to
MEDY. These options have various exercise prices which range between $.875 and
$5.00 per share and at February 11, 2000 the price of MEDY's common stock was
approximately $1.0938. If MEDY does obtain additional capital (of which there
can be no assurance), MEDY will be able to fund operating losses until such time
as positive cash flow can be achieved, although no assurances of that fact can
be given.
Results of Operations. The Company is continuing 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
-11-
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation. (Continued)
flow. No assurance can be given as to the success of such measures or whether
they can be accomplished in a time frame that would allow the Company to remain
an ongoing entity. 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 has
downsized the Dental Equipment portion of its revenues and related operating
expenses during the current quarter.
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.
Revenue. Software and training sales for the three month period ended
December 31, 1999 and 1998 were $530,100 and $1,158,200, respectively, for a
decrease of $628,100 or 54.3%. Equipment and installation sales also decreased
for the three months ended December 31, 1999 and 1998. Equipment and
installation sales were $173,900 and $1,372,000, respectively, for a decrease of
$1,198,100 or 87.4%
Decreased sales for both software/training and equipment/installation sales
are attributable to the elimination of a portion of the Company's direct sales
force and replacing them with a network of Value Added Resellers (VAR). This
action has had the temporary effect of decreasing sales, but at the same time
eliminating significant selling and overhead expenses. Decreased sales in these
-12-
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation. (Continued)
categories is also attributable to the closure of operations in Marietta,
Georgia in July of 1999 where order fulfillment and installation was
coordinated. These operations were significantly downsized with fewer hardware
product lines and consolidated into the Company's Los Angeles operation
utilizing considerably less personnel and related operating expenses with
planned reduced revenues.
Software support services sales for the three months ended December 31,
1999 and 1998 were $645,100 and $551,500, respectively, for an increase of
$93,600 or 17.0%. Increased support services sales can be attributed to the
increased installed base of software users utilizing support services over the
same period last year.
MEDY believes that profit from these activities will improve as MEDY's
general and administrative expenses are consolidated and decreased and it's
operations become more efficient. There can be no assurance these positive
changes will ever result in an increase in cash flow or net income from MEDY's
operations (as compared to MEDY's historical net losses). Because of MEDY's
significant working capital deficit and negative cash flow, MEDY is attempting
to make these adjustments quickly, although there can be no assurance that MEDY
will be able to do so.
Please refer to the schedules below for a summary of revenues, cost of
sales, and gross margins.
-13-
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation. (Continued)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
--------------------------------- ------------------------------
December 30, Percent of December 30, Percent of
1999 Sales 1998 Sales
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Software and training:
Sales $ 530,100 100.0% $ 1,158,200 100.0%
Cost of sales 169,200 31.9% 270,100 23.6%
----------- ------- ----------- -------
Gross margin $ 360,900 68.1% $ 888,100 76.7%
=========== ======= =========== =======
Equipment & installation:
Sales $ 173,900 100.0% $ 1,372,000 100.0%
Cost of sales 250,700 (144.2)% 888,100 64.7%
----------- ------- ----------- -------
Gross margin $ (76,800) (44.2)% $ 483,900 35.3%
=========== ======= =========== =======
Support services:
Sales $ 645,100 100.0% $ 551,500 100.0%
Cost of sales 188,300 29.2% 260,400 47.2%
----------- ------- ----------- -------
Gross margin $ 456,800 70.8% $ 291,100 52.8%
=========== ======= =========== =======
Total Sales $ 1,349,100 100.0% $ 3,081,700 100.0%
Total Cost of Sales 608,200 45.1% 1,418,600 46.0%
----------- ------- ----------- -------
Total Gross Margin $ 740,900 54.9% $ 1,663,100 54.0%
=========== ======= =========== =======
</TABLE>
Cost of Sales. Cost of sales of software and training for the three months
ended December 31, 1999 and 1998 as a percent of software and training revenue
were 31.9% and 23.6%, respectively. Although the cost of sales percentage
increased this period over the same period last year, actual cost of sales
expenditures decreased. For the three months ended December 31, 1999 and 1998
cost of sale expenditures were $169,200 and $270,100 respectively or a decrease
of $100,900. The decrease in the gross margin percentage this period over the
same period last year is attributable to decreased sales. Sales decreased in
greater proportion than the decrease in cost of sales expenditures.
Cost of sales for equipment and installation for the three months ended
December 31, 1999 and 1998 as a percent of equipment and installation revenue
were (144.2%) and 64.7%, resulting in gross margin percentages of (44.2%) and
35.3%, respectively. The decrease in the gross margin percentage is due to
liquidation sales of inventory at lower than list prices and increasing reserves
for obsolete inventory. At December 31, 1999 remaining net inventory was valued
at $98,600.
Cost of sales for software support services for the three months ended
December 31, 1999 and 1998 as a percent of support services revenue were 29.2%
and 47.2%, resulting in gross margin percentages of 70.8% and 52.8%,
respectively. The increase in the gross margin percentage is attributable to
higher sales combined with lower cost of sale expenditures due to cost cutting
measures.
-14-
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation. (Continued)
Selling & Marketing Expenses. Selling and marketing expenses as a
percentage of net sales for the three month period ended December 31, 1999 and
1998 were 14.7% and 30.7%, respectively or a decrease of $745,200. The decrease
in selling and marketing expenditures is due to a reduction in sales personnel,
the closure of sales offices and reduced advertising expenditures.
General and Administrative Expenses (G & A). G & A expenses for as a
percentage of net sales the three month period ended December 31, 1999 and 1998
were 65.1% and 52.0%, respectively. Although the percentage of G & A expenses
relative to sales increased this period over the same period last year, actual G
& A expenditures decreased. For the three months ended December 31, 1999 and
1998 G & A expenses were $877,400 and $1,599,900 or a decrease of $722,500.
Decreased costs are the result of the implementation of management's cost
cutting measures. Additional expense reductions have been implemented subsequent
to December 31, 1999 in proportion to decreased sales. General and
Administrative expenses will remain high, however, as the Company uses
management time and professional services necessary to complete the proposed
transaction with InfoCure.
Research and Development Costs (R & D). For the three months ended December
31, 1999 and 1998, R & D expenses were $0 and $600, respectively. The Company's
policy is to fund R & D as it deems appropriate to maintain or gain a
competitive advantage. Note that software development costs are not included in
R & D costs. After technological feasibility of products is established,
software development costs are capitalized then amortized to cost of sales. For
the three months ended December 31, 1999 and 1998 software development costs
capitalized were $48,000 and $60,000, respectively.
Interest Income and Expense. Interest income is a function of current cash
invested for the period. Interest income for the three months ended December 31,
1999 and 1998 was $2,500 and $3,100, respectively.
Interest expense for the three months ended December 31,1999 and 1999 were
$90,100 and $101,900, respectively. Decreased interest expense is due to
decreased debt. Interest expense includes non-cash charges for amortization of
debt discounts and debt issue costs.
-15-
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
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.
Item 2. Changes in Securities and Use of Proceeds.
On March 18, 1999, Resonance Ltd., an unaffiliated company located in the
Isle of Man, British Isles, purchased 523,834 shares of MEDY common stock for
$800,000. MEDY subsequently obtained effectiveness of a registration statement
related to those shares and additional shares of common stock underlying
warrants issued to Resonance. In addition, MEDY agreed to issue "additional
shares" to Resonance at various "determination dates." The determination dates
are two, four, and six months after the registration statement for the shares
issued to Resonance becomes effective. The number of additional shares to be
issued to Resonance are intended to compensate Resonance for one-third of the
decrease (if any) in market price of MEDY common stock during the period
following the original purchase. MEDY is obligated to issue no more than
2,060,033 shares and warrants pursuant to this obligation (the "Future Priced
Securities Cap"). On the third "determination date", November 5, 1999, MEDY
issued Resonance, Ltd. 77,866 additional shares. No underwriter was involved in
this transaction; no compensation was paid, and the Company received no proceeds
from this transaction.
Convertible Securities Issued To Tail Wind
- ------------------------------------------
On December 31, 1999 there were $500,000 in Convertible Debentures outstanding.
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:
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.
-16-
<PAGE>
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.
On January 6, 2000, Tail Wind notified MEDY that it wanted to convert the
current balance of $500,000 of debentures plus approximately $40,000 of accrued
interest. At the current "Market Price" of $.6375 per share, the resulting
issuance of additional common stock would have been in the amount of 847,059
shares. Due to the 1,880,000 "Future Priced Securities" limitation, the Company
was only 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 Warrants; resulting in
317,857 shares being issued. At the current "Market Price", Tail Wind was only
able to convert $202,634, leaving the balance of $297,366 required to be repaid
at the 15% premium, plus interest, within six months of the notification by Tail
Wind or July 6, 2000. The Company has carried this amount ($275,000 on a
discounted basis) as a current liability on its Consolidated Balance Sheets for
both its fiscal year ended September 30, 1999 and for the quarter ended December
31, 1999.
Both Resonance and Tail Wind are domiciled outside the United States and
have represented to MEDY that each is an accredited investor. All securities
issued to either Resonance or Tail Wind have been issued pursuant to Regulation
D or S under the Securities Act of 1933.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27. Financial data schedule.
(b) Reports on Form 8-K:
The Company's Current Report on Form 8-K reporting events of:
-17-
<PAGE>
November 2, 1999 describing a Letter of Intent with InfoCure
Corporation detailing its desire to obtain 60% ownership in
MEDY in exchange for Cash and Assets.
December 23, 1999 describing a Definitive Merger Agreement
with InfoCure Corporation wherein InfoCure will exchange their
common stock to obtain 100% ownership of MEDY.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: February 15, 2000 /s/ Van A. Horsley
-----------------------------------
Van A. Horsley, President,
Principal Executive Officer,
and Principal Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 10-QSB,
DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-END> DEC-31-1999
<CASH> 260,300
<SECURITIES> 0
<RECEIVABLES> 262,700
<ALLOWANCES> 67,300
<INVENTORY> 98,500
<CURRENT-ASSETS> 563,100
<PP&E> 1,334,400
<DEPRECIATION> (942,900)
<TOTAL-ASSETS> 5,270,400
<CURRENT-LIABILITIES> 2,404,000
<BONDS> 0
0
0
<COMMON> 12,900
<OTHER-SE> 2,468,300
<TOTAL-LIABILITY-AND-EQUITY> 5,270,400
<SALES> 1,349,100
<TOTAL-REVENUES> 1,351,600
<CGS> 608,200
<TOTAL-COSTS> 1,709,900
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 90,100
<INCOME-PRETAX> (448,400)
<INCOME-TAX> 0
<INCOME-CONTINUING> (448,400)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (448,400)
<EPS-BASIC> .04
<EPS-DILUTED> .04
</TABLE>
