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, 2000
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 (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]
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The issuer's revenues for its most recent fiscal year were $3,699,300.
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 12, 2000 was approximately $2,910,425.
Class Outstanding at December 12, 2000
----- ---------------------------------
Common Stock 13,229,206 shares
Documents incorporated by reference: None
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MEDICAL DYNAMICS, INC.
FORM 10-KSB40
PART I
Item 1. Business.
(a) Business Development
-------------------------
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. MEDY's principal executive offices are at 99 Inverness Drive
East, Englewood, Colorado, 80112. Its telephone number at that address is (303)
790-2990.
During the fiscal year ended September 30, 2000, 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. As noted below, MEDY has entered into an agreement to merge
with InfoCure Corporation.
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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, 2000, had a working capital deficit of approximately $2,560,600.
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".
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 agreed to exchange its shares for 100% of the
outstanding common stock of Medical Dynamics. This agreement has been amended
several times, restated in its entirety in October 2000, and again amended.
Based on the amendment which became effective on December 19, 2000, if the MEDY
shareholders approve the transaction when presented, MEDY shareholders will
receive consideration from both InfoCure and PracticeWorks, currently a division
of InfoCure but to be spun off to the InfoCure shareholders at the rate of one
share of PracticeWorks common stock for each four shares of InfoCure common
stock held at the time of the spin-off. After the spin-off InfoCure (to become
known as "VitalWorks" and retaining InfoCure's assets and operations in the
medical products industry) and PracticeWorks (which will acquire and continue
InfoCure' dental products applications) will be entirely independent. MEDY has
consented to the spin-off and InfoCure's assignment of the merger agreement to
PracticeWorks. If the MEDY shareholders approve the transaction:
Persons owning 100 shares, or less, of MEDY common stock, and persons
who dissent from the transaction, will receive cash at the rate of $.75
per share of MEDY common stock held;
InfoCure will issue to all remaining MEDY shareholders 0.06873 shares
of InfoCure common stock for each share of MEDY common stock held;
PracticeWorks will issue to all remaining MEDY shareholders 0.0171825
shares of PracticeWorks common stock for each share of MEDY common
stock, as well as 0.07558 of a share of PracticeWorks preferred stock
for each share of MEDY common stock held. The PracticeWorks preferred
stock will have a liquidation preference of $5.44 per share, and will
be convertible into PracticeWorks common stock in the discretion of the
holder.
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If InfoCure does not complete the spin-off by February 28, 2000, InfoCure will
pay all of the merger consideration and will issue the preferred stock. Neither
transaction will be a tax-free reorganization.
Since October 28, 1999, INCX has lent the Company a total of $1,550,000
at an interest rate of 12%, due at maturity, for the purpose of repayment of
debt and for working capital and has committed to loan MEDY an additional
$100,000. Unless further extended by INCX, this loan will come due December 31,
2001. As collateral for the loan, the Company pledged substantially all of its
assets and certain of MEDY's principal shareholders who are also significant
creditors have agreed to subordinate their claims to InfoCure.
There can be no assurances that the transaction with InfoCure will be
completed as contemplated, either with InfoCure or with PracticeWorks. The
transaction is subject to shareholder approval and other risks associated with
complex transactions of this nature.
(b) Business of the Issuer
--------------------------
MEDY participates in a single business segment: 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 recent fiscal years, 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 are primarily sold through CADI's direct
sales force. 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, 2000 MEDY significantly reduced
its marketing expenses to $608,000 as compared to $3,679,800 spent the prior
year for sales, marketing and advertising expenses related to its dental
products. These reductions were accomplished to reduce MEDY's negative cash flow
and because MEDY and CADI began to depend on InfoCure's marketing activities.
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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,
including 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.
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. Currently inventory is
ordered on a "just in time basis" and is only ordered on a custom basis for each
sales order received. 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. 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.
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Research and Development. During the fiscal years ended September 30,
2000 and 1999, MEDY has significantly reduced its research and development
expenditures to amounts which are no longer material: $0 in 2000 and $2,900 in
fiscal 1999. CADI is seeking to improve its software, and it spent approximately
$68,200 on software development costs, capitalized in the form of programming
salaries, in the fiscal year ended September 30, 2000 as compared to $204,000
during the previous year.
Warranty. MEDY's previously supplied 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, 2000 and 1999 was $15,000 and
$15,000, 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 customers
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 extremely 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. Management does not believe that either
the Optical Catheter(TM)_or any of the following patents are material to MEDY or
its operations at the current time, and management does not expect that these
will become material to MEDY at any time in the future.
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TITLE ISSUE DATE PATENT NUMBER
--------------------------------------------------------------------------------
"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
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
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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.
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 12, 2000, MEDY (not including CADI) employed 1
person in executive management. As of that date, CADI employed approximately 30
people in sales, training, 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 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.
CADI leases 5,002 square feet of office space in Los Angeles,
California at 11300 W. Olympic, Suite 600. The lease runs until October, 2002 at
a rate of $9,003.60 per month which includes parking, operating costs and
property taxes. CADI believes that the current space its sufficient for its
foreseeable operations.
Item 3. 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 4. Submission of Matters to a Vote of Security Holders.
MEDY did not hold a 1999 annual meeting of shareholders. MEDY did hold
a special meeting of shareholders in August 2000 to consider approval of the
proposed merger with InfoCure. For various reasons, the merger was not presented
to the shareholders at that time and no vote was taken.
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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 and until October 2000, MEDY's
common stock was publicly traded under the symbol "MEDY" on the Nasdaq SmallCap
Market which is operated by the National Association of Securities Dealers, Inc.
Commencing in October 2000, MEDY's common stock was transferred to the OTC
Bulletin Board.
The quotations shown below were compiled by MEDY from monthly
statistical reports supplied by the National Association of Securities Dealers,
Inc., which operates both the Nasdaq SmallCap Market and the OTC Bulletin Board.
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
---------------------------------
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
Fiscal Year Ended
September 30, 2000
------------------
First Quarter $ 1.625 $ .75
Second Quarter 1.50 .935
Third Quarter .875 .3125
Fourth Quarter .6563 .1875
(b) Holders
-----------
The number of record holders of the Common Stock, as of September 30,
2000, was approximately 11,600 not including an unknown number of beneficial
holders in street name.
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(c) Dividends
-------------
(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 and 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
and marketing of existing products, the financial condition of MEDY (including
its negative working capital and negative cash flow), the ability to increase
distribution of MEDY's products, 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, and whether the contemplated
merger with InfoCure or PracticeWorks occurs as contemplated. 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 2000 had, at September 30, 2000, a working capital deficit of
approximately $2,560,600. Unless the Company can obtain additional debt, raise
additional equity, or complete the transaction with InfoCure Corporation as
described in Section 1(a.), 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 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. These actions have
included significant reduction of marketing, research and development, and
software development expenses. Effective April 15, 1999, MEDY ceased the
manufacturing of intra oral cameras and laid-off eight employees. MEDY
terminated additional employees during the June 1999 quarter and these lay-offs
continued throughout fiscal year 2000. During fiscal year 2000, the Company
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liquidated its current finished goods inventory of intra oral cameras in the
ordinary course of business and then eliminated that product line. This is in
line with the Company's overall strategy, which is to be a systems integrator of
hardware components in connection with the sales of our proprietary software
products. Concurrent with the decision to cease the manufacturing operation,
management 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 lease expense, and has
eliminated 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, 1999.
Management believes that these cuts and consolidations may 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 and commitments totaling
$1,650,000 from InfoCure Corporation with $1,300,000 advanced as of September
30, 2000. MEDY received $250,000 during the first quarter of the current fiscal
year and expects to receive the remaining $100,000 in January 2001. These loans
have alleviated MEDY's short-term cash requirements, but must be repaid by
December 31, 2001, if the merger is not completed. If MEDY's shareholders
approve the merger and the merger is thereafter completed, MEDY will become a
wholly-owned subsidiary of PracticeWorks. If MEDY does not complete the
contemplated merger with PracticeWorks, 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 PracticeWorks, 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, 2000, the Registrant's
current ratio declined to 0.1 as compared to 0.3 at September 30, 1999. Net
working capital decreased from $(1,787,100) at September 30, 1999 to
($2,560,600) at September 30, 2000. In contrast, the Company's cash balances
increased from $180,000 at September 30, 1999 to $330,800 at September 30, 2000
due in large part to the receipt of the loan from InfoCure.
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As noted, working capital decreased significantly during the fiscal
year ended September 30, 2000. Principal changes in the components of net
working capital for the fiscal year ended September 30, 2000 as compared to
fiscal year ended September 30, 1999 consist of:
2000 1999 W/C Effect
---- ---- ----------
Cash and Cash Equivalents $ 330,800 $ 180,000 $ 150,800
Trade Receivables 43,300 254,400 (211,100)
Inventories 2,500 189,200 (186,700)
Pre-paid Expenses 700 21,100 (20,400)
----------- ----------- -----------
Current Assets: 377,300 644,700 (267,400)
Current Maturities of Notes Payable 2,002,200 943,700 (1,058,500)
Accounts Payable 66,000 622,000 556,000
Accrued Expenses 599,900 497,600 (102,300)
Unearned Revenue 269,800 368,500 98,700
----------- ----------- -----------
Current Liabilities: 2,937,900 2,431,800 (506,100)
Working Capital: $(2,560,600) $(1,787,100) $ (773,500)
=========== =========== ===========
The principal reason for the significant decrease in working capital
during 2000 include negative cash flows from operating activities of liquidating
inventories and inventory write offs from the closure of the IPS operation in
Georgia 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 and accrued expenses to help fund expenses incurred
for professional services necessary to complete the proposed transaction with
InfoCure and severance package payments to terminated employees when positions
were eliminated as part of continuing cost cutting measures.
Throughout the third and fourth quarter of fiscal 1999 and continuing
throughout fiscal 2000, Management has taken substantive measures to reduce
expenses by the reduction of the number of sales, marketing and administrative,
and manufacturing personnel, the closure of offices, operational and
manufacturing locations along with expense cuts in management compensation,
consulting and advertising. MEDY has continued to implement these and other
cost-savings measures into the current fiscal year. MEDY cannot offer any
assurance, however, that profitability will, in fact, increase due to these
measures.
Tail Wind Convertible Debentures.
---------------------------------
During fiscal year 2000, the holder of the outstanding debentures
converted $373,700 of the debentures to common stock, net of discount, resulting
in an outstanding principal balance on debentures of $297,400 at the fiscal year
ended September 30, 2000. In January 2000 the debenture holder attempted to
convert all remaining 1998 debentures but was precluded from doing so due to 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. In satisfaction of previous conversion
requests, Tailwind has received 1,880,000 shares (including 317,857 shares
issued on conversion in January 2000). Tail Wind continues to hold debentures
13
<PAGE>
with a remaining balance of $297,400 which are not convertible and, therefore,
are now due on demand. In addition, because of MEDY's contractual inability to
permit Tailwind to convert all of the debentures in January 2000, the Company
was also required to pay a premium of 15% of the demand note; plus interest at
8% per annum on the outstanding balance of the demand note. This amount of
$44,600 is included in accrued expenses as of September 30, 2000 In the
financing, Tail Wind also acquired (and continues to hold) warrants to acquire
150,000 shares of MEDY common stock exercisable at $1.832 per share.
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 this credit facility in full in August, 1999 from the
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".
To assist the Company in its working capital shortages, 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" which resulted in the issuance of an
additional 389,681 shares. MEDY also 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, which warrant expired unexercised.
Also, there are 2,356,837 vested common stock options outstanding as of
December 12, 2000, at prices ranging from $1.125 to $4.50 per share. If
exercised (which is unlikely at the current price of MEDY common stock), 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 continuing negative cash flow from operations
during the fiscal year ending September 30, 2001. During fiscal 2000, cash flow
deficits were funded by the exercise of employee stock options and loans from
InfoCure Corporation. 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, or completing the merger
with InfoCure or PracticeWorks. Unless the Company is able to accomplish one or
14
<PAGE>
more of the above, it will likely be facing significant working capital
shortages continuing through fiscal 2001. Management of the Company does not
believe that its existing capital resources are sufficient for the 2001 fiscal
year if it is required to repay its debt according to existing maturities. The
Company is not currently seeking additional debt or equity capital to augment
its working capital position, due to its arrangement with InfoCure described in
Section 1.(a.), although no assurances can be made as to the success or
consummation of a transaction such as the one described with InfoCure.
The Company 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 and continuing throughout
fiscal year 2000 and into the current fiscal year, 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. By
September 30, 2000 all impaired inventory was sold through liquidation or fully
reserved for through the obsolete inventory reserve account. Currently,
inventory is ordered on a "just in time basis" when sales orders are received.
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 downsized the Dental Equipment portion of its revenues and related
operating expenses during the fiscal year 2000.
In August 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.
Revenues
--------
Medical product sales for the fiscal years 2000 and 1999 were $11,300
and $130,700 respectively, for a decrease of $119,400 or 91.4%. Medical product
sales account for 0.3% and 1.2% of total sales in fiscal years 2000 and 1999,
respectively. Decreased sales are attributable to the sale to a third party of
the last medical, disposable product line, Cam Wrap and MEDY's decision to
eliminate its participation in the medical products segment.
15
<PAGE>
Dental Software, Training and Installation sales for fiscal years 2000
and 1999 were $796,300 and $3,809,700 respectively, for a decrease of $
3,013,400 or 79.1%. Dental Equipment sales for fiscal years 2000 and 1999 were
$222,200 and $4,495,900 respectively, for a decrease of $4,273,700 or 95.1%.
Decreased sales for both dental software, training and installation and
decreased dental equipment sales are attributable to reductions to the Company's
sales force and a de-emphasis on marketing the CADI brand of software in
anticipation of MEDY's merger with InfoCure or PracticeWorks. Decreased sales in
these 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.
Dental Software Support Services sales for the fiscal years 2000 and
1999 were $2,669,500 and $2,522,400 respectively, for an increase of $147,100 or
5.5%. Increased support services sales are attributed to the increased installed
base of software users utilizing support services and additional service sales
efforts over the prior year to harvest more support sales from existing
customers.
MEDY management believes that profit 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>
<TABLE>
<CAPTION>
Please refer to the schedule below for a summary of revenues and gross profit.
For The Years Ended September 30,
----------------------------------------
2000 1999
----------------- -----------------
Amount % Amount %
------ ----- ------ -----
<S> <C> <C> <C> <C>
Medical Sales 11,300 100.0% 130,700 100.0%
COGS - Medical Sales 54,500 482.3% 34,600 26.5%
Gross Profit - Medical Sales (43,200) (382.3)% 96,100 73.5%
Dental Equipment Sales 222,200 100.0% 4,495,900 100.0%
COGS - Dental 365,400 164.5% 4,015,300 89.3%
Gross Profit - Dental (143,200) (64.5)% 480,600 10.7%
Dental Software, Training & Installation 796,300 100.0% 3,809,700 100.0%
COGS - S, T & I 616,200 77.4% 1,133,000 29.7%
Gross Profit - Dental S, T & I 180,100 22.6% 2,676,700 70.3%
Dental Software Support Sales 2,669,500 100.0% 2,522,400 100.0%
COGS - Software Support 679,100 25.4% 924,700 36.7%
Gross Profit - Dental Software Support 1,990,400 74.6% 1,597,700 63.3%
Total Sales 3,699,300 100.0% 10,958,700 100.0%
Total COGS 1,715,200 46.4% 6,107,600 55.7%
Total Gross Profit 1,984,100 53.6% 4,851,100 44.3%
</TABLE>
Cost of Sales
-------------
Cost of sales for medical products for the fiscal years 2000 and 1999
as a percent of gross medical sales were 482.3% and 26.5% respectively. Cost of
sales for dental equipment for fiscal years 2000 and 1999, as a percent of gross
dental equipment sales were 164.5% and 89.3%. The increase in cost of sales
percentage is primarily due to liquidation sales of inventory and establishing
obsolete inventory reserves for all remaining inventories. Currently, inventory
is ordered on a "just in time basis" when sales orders are received. As of
September 30, 2000 net inventory has been reduced to $2,500.
Cost of sales for Software, Training and Installation for fiscal years
2000 and 1999 as a percent of gross Software, Training and Installation sales
were 77.4% and 29.7% respectively. The increase in the cost of sales percentage
is due mainly to decreased sales. The decrease in sales decreased in much
greater proportion than decreases in cost of sale expenditures. Decreased sales
are attributable to reductions to the Company's sales force and a de-emphasis on
marketing the CADI brand of software in anticipation of MEDY's merger with
InfoCure or PracticeWorks.
Cost of sales for Software Support for the fiscal years 2000 and 1999,
as a percent of gross Software Support sales were 25.4% and 36.7% respectively.
The decrease in the cost of sales percentage is due to higher sales combined
with lower cost of sale expenditures due to cost cutting measures.
17
<PAGE>
Selling & Marketing
-------------------
Selling and marketing expenses for fiscal year 2000 totaled $608,000 or
16.4 % of sales as compared to $3,679,800 or 33.6 % of sales for fiscal year
1999. The $3,071,800 decrease in selling and marketing expenses in fiscal year
2000 over the prior period is due to reduction in sales personnel, the closure
of sales offices and reduced advertising expenditures.
General & Administrative Expenses
---------------------------------
General and administrative expenses for the fiscal year 2000 totaled
$2,945,500 or 79.6% of sales as compared to $4,983,300 or 45.5 % of sales for
fiscal year 1999. Although the percentage of G & A expenses relative to sales
increased over the same period last year, actual expenditures decreased by
$2,037,800. Decreased costs are the results of the implementation of
management's cost cutting measures, however, G & A expenses will remain high
with the use of professional services necessary to complete the proposed
transaction with InfoCure or PracticeWorks.
Stock-based Compensation
------------------------
Stock-based compensation for the fiscal years 2000 and 1999 were
$24,400 and $49,600, respectively, for a decrease of $25,200. The decrease is
due to a decrease of in the money stock options granted to employees and
consultants in fiscal 2000 as compared with similar grants in 1999.
Research & Development Costs
----------------------------
For the fiscal years 2000 and 1999, R & D costs were $0 and $2,900
respectively. The Company has eliminated its research and development expenses
as a cost-savings measure in light of the cash flow and working capital
deficiencies discussed above. MEDY has also significantly reduced its software
development expenditures from $204,000 in fiscal 1999 to $68,200 during fiscal
2000. MEDY does not anticipate that it will be able to increase these expenses
in the near future.
Other Income
------------
Other income for the fiscal years 2000 and 1999 were $3,800 and $44,900
respectively.
18
<PAGE>
Interest Income and Expense
---------------------------
Interest income is a function of current cash invested for the period.
Interest income for the fiscal years 2000 and 1999 was $14,300 and $13,500
respectively. MEDY does not expect that these amounts will increase
significantly.
Interest expense for the fiscal years 2000 and 1999 totaled $375,700
and $650,000 respectively or a decrease of $ 274,300 or 42.2%. Interest expense
includes non-cash charges for amortization of debt discounts and issuance costs.
The decrease is primarily attributable to higher non-cash charges during fiscal
year 1999 as compared to the fiscal year 2000. We anticipate that interest
expense will increase in fiscal 2001 because of larger amounts that have been
borrowed in the first quarter of this year, as well as additional amounts that
we may borrow.
Loss on Impairment of Goodwill
------------------------------
Loss on Impairment of goodwill for fiscal year 1999 of $655,200 is due
to a re-valuation of goodwill. During fiscal year 1998, goodwill was created
when CADI merged with 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.
---------------------
MEDY did not suffer any adverse impact as a result of the Year 2000
computer software issues after January 1, 2000, and it does not anticipate that
it will suffer any adverse impact from this issue in the future.
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 Auditor (Page F-2)
Consolidated Balance Sheet - September 30, 2000 (Page F-3)
Consolidated Statements of Operations - Years ended September 30, 2000
and 1999 (Page F-4)
Consolidated Statements of Stockholders' Equity - Years ended September
30, 2000 and 1999 (Page F-5)
Consolidated Statements of Cash Flows - Years ended September 30, 2000
and 1999 (Page F-6)
Notes to Consolidated Financial Statements (Page F-8)
19
<PAGE>
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not Applicable.
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) 70 Chairman of the Board and Treasurer of
MEDY
Van A. Horsley (2) 48 Director, President, Chief Financial
Officer and Chief Executive Officer of
MEDY; Director and Vice President of
CADI
Daniel L. Richmond 39 Director of MEDY; Director and Chief
Executive Officer of CADI
Chae U. Kim 39 Director of MEDY; Director and
President of CADI
Pat Horsley Adair (1) 72 Director and Secretary of MEDY
I. Dean Bayne, M.D. (2) 73 Director and Assistant Secretary of
MEDY
Leroy Bilanich (2) 50 Director of MEDY
(1) Members of the Compensation Committee.
(2) Members of the Audit Committee
20
<PAGE>
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.
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
21
<PAGE>
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.
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.
22
<PAGE>
(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, 1999 through December 1, 2000 all filing requirements applicable to
its officers, directors and greater than ten-percent shareholders were complied
with.
Item 10. Executive Compensation.
(a) 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,
2000 and to the other executive officers whose salary exceeded $100,000 in
fiscal 2000.
<TABLE>
<CAPTION>
Annual Compensation ($$) Long Term Compensation
------------------------ ----------------------
Awards Payouts
------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Name and Position Restricted
----------------- Stock Options LTIP Other
Year Salary Bonus Other Awards & SARs Payouts Compensation
---- ------ ----- ----- ------ ------ ------- ------------
($$) ($$) ($$) ($$) ($$) ($$) ($$)
Van A. Horsley, President 2000 105,000 0 15,000 0 0 0 0
& Chief Executive 1999 122,500 0 15,000 0 500,000* 0 1,610
1998 123,333 0 5,465 0 0* 0 306
Chae. Kim, Director and 2000 115,103 0 12,000 0 0* 0 1,440
President of 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 2000 113,833 0 12,000 0 0* 0 1,992
and CEO of CADI 1999 129,380 0 12,000 0 0* 0 1,688
1998 105,000 0 6,000 0 600,000** 0 1,400
23
</TABLE>
<PAGE>
* MEDY granted 500,000 options 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. The options will automatically
vest if the merger with InfoCure or PracticeWorks is completed.
** MEDY granted 600,000 options to purchase common stock in 1998 to each of Mr.
Richmond and Mr. Kim. These options 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. The options will automatically vest if the merger with
InfoCure or PracticeWorks is completed.
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, 2000, MEDY's
matching contributions to the plan for the accounts of Van Horsley totaled $-0-
and the matching contribution under the plan for the accounts of all executive
officers as a group totaled $-0-. These amounts are included in column (i) of
the Summary Compensation Table. The MEDY Plan was terminated in October of 1999.
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, 2000, CADI's matching contributions to the Plan for the accounts
Chae Kim and Dan Richmond totaled $-0-. Effective December 1, 1998 CADI canceled
the SARSEP plan and January 1, 1999 adopted a defined contribution pension plan
entitled the Computer Age Dentist 401-K Retirement 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. At
September 30, 2000, CADI's matching contributions to the Plan for the accounts
of Chae Kim and Dan Richmond totaled $3,432. These amounts are included in
column (i) of the Summary Compensation Table.
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 by its
terms.
24
<PAGE>
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 12, 2000, 49,000
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 12, 2000, 134,000 options are outstanding
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. The 1988 and (or) 1998 Plan
contains the same provisions for administration as were contained in the Old
Plans.
Under the 1988 Plan, MEDY reserved an aggregate of 1,000,000 shares of
its common stock for issuance to employees (including officers), consultants and
directors of MEDY or any subsidiary. The plan contains restrictions on the
number of options granted to officers and directors, exercise price, maximum
term and transferability. On May 14, 1991, MEDY filed a registration statement
under the Securities Act of 1933 on Form S-8 which registered the shares of
common stock underlying options granted under the 1988 Plan. As such, shares
issued upon exercise of outstanding options can be traded on the open market
with limited restriction.
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 2000. No stock appreciation rights were granted.
25
<PAGE>
Option Grants in Fiscal 2000: None
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 2000 fiscal year as well as the year-end value of options held by
such persons on September 30, 2000: No Stock Appreciation Rights have been
granted, or are held by, any such person:
(a) (b) (c) (d) (e)
Number of Value of In-the-
Unexercised Money Options
Options at FY End at FY End
Shares Acquired on Value (Exercisable/ (Exercisable/
Name Exercise Realized Unexercisable) Unexercisable)
---- -------- -------- -------------- -------------
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
(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 director's 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 2000 to board members.
26
<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.
27
<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 12, 2000 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 1,054,290 (2) 7.9%
Horsley Adair
317 Paragon Way
Castle Pines Village
Colorado, 80104
Daniel L. Richmond 1,097,760 (4) 8.0%
17052 Oak View Drive
Encino, CA. 91436
Chae U. Kim 1,097,760 (4) 8.0%
3231 Cheviot Vista Place
Los Angeles, CA. 90034
I. Dean Bayne, M.D. 40,000 .3%
Van A. Horsley 519,686 (3) 3.8%
Leroy Bilanich, Ed.D. 40,000 .3%
All officers and directors as a group 3,849,496 (5) 26.0%
(7 persons)
* Percent of class based upon shares outstanding on December 12, 2000 of
13,229,206.
(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.
28
<PAGE>
(3) Includes 429,780 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 options 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.
-----------------------
MEDY knows of no arrangement, the operation of which may, at a
subsequent date, result in change in control of MEDY.
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. Also as a result of the
transaction, MEDY paid Mr. Richmond and Mr. Kim: 1,295,520 shares of its
restricted common stock, promissory notes aggregating $300,000, and $254,697 in
cash.
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 its current maturity, September 30, 2001. These notes continue to bear
interest at 12% per annum, with repayment subsequently subordinated to the
InfoCure loan.
29
<PAGE>
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.
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(*), and expired
on July 1,2000.
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 Brush(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.
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.
30
<PAGE>
(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(e) International Distributor Agreement
10.6(f) Indemnification Agreement - Edwin L. Adair, M.D.
10.7(f) Indemnification Agreement - Pat Horsley Adair
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
31
<PAGE>
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(c) Loan agreement between InfoCure Corporation and Medical Dynamics,
Inc., dated October 28, 1999.
10.24(c) Merger Agreement between InfoCure Corporation, Medical Dynamics,
Inc., and CADI Acquisition Corporation, dated December 21, 1999.
10.25(g) Amended and Restated Merger Agreement between InfoCure
Corporation, Medical Dynamics, and CADI Acquisition Corporation,
dated October 11, 2000
10.26(h) First amendment to the Amended and Restated Merger Agreement,
dated October 30, 2000
10.27* Second amendment to the Amended and Restated Merger Agreement,
dated December 19, 2000
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.
(b) Incorporated by reference from MEDY's Form 10-K for the period
ended September 30, 1991.
(c) Incorporated by reference from MEDY's Form 10-KSB for the year
ended September 30, 1999
32
<PAGE>
(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.
(g) Incorporated by reference from MEDY's Form 8-K reporting an event
of October 11, 2000.
(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.
(b) Reports on Form 8-K
During the period covered by this Report up to December 20, 2000, the
Company filed the following reports on Form 8-K:
November 2, 1999, reporting an event under Item 5 - Other Events
December 23, 1999, reporting an event under Item 5 - Other Events
April 10, 2000, reporting an event under Item 5 - Other Events
May 22, 2000, reporting an event under Item 5 - Other Events
June 22, 2000, reporting an event under Item 5 - Other Events
September 13, 2000, reporting an event under Item 5 - Other Events
October 11, 2000, reporting an event under Item 5 - Other Events
October 30, 2000, reporting an event under Item 5 - Other Events
November 30, 2000, reporting an event under Item 5 - Other Events
33
<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.
December 20, 2000 By: /s/ Van A. Horsley
--------------------------------
Van A. Horsley, Principal
Executive Officer,
Principal Financial
Officer, and Director
December 20, 2000 By: /s/ Edwin L. Adair
--------------------------------
Edwin L. Adair, M.D.,
Chairman of the Board and
Director
December 20, 2000 By: /s/ Daniel L. Richmond
--------------------------------
Daniel L. Richmond,
Director
December 20, 2000 By: /s/ Chae U. Kim
--------------------------------
Chae U. Kim, Director
December 20, 2000 By: /s/ I. Dean Bayne
--------------------------------
I. Dean Bayne, M.D.,
Director
December 20, 2000 By: /s/ Pat Horsley Adair
--------------------------------
Pat Horsley Adair,
Director
December 20, 2000 By: /s/ Leroy Bilanich
--------------------------------
Leroy Bilanich, Director
34
<PAGE>
Medical Dynamics, Inc. and Subsidiaries
Consolidated Financial Statements
For the Years Ended
September 30, 2000 and 1999
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Independent Auditor's Report.................................................F-2
Consolidated Balance Sheet - September 30, 2000..............................F-3
Consolidated Statements of Operations - For the Years
Ended September 30, 2000 and 1999...................................F-4
Consolidated Statements of Stockholders' Equity - For the Years
Ended September 30, 2000 and 1999...................................F-5
Consolidated Statements of Cash Flows - For the Years
Ended September 30, 2000 and 1999...................................F-6
Notes to Consolidated Financial Statements...................................F-8
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Medical Dynamics, Inc.
Englewood, Colorado
We have audited the accompanying consolidated balance sheet of Medical Dynamics,
Inc. and subsidiaries (the "Company") as of September 30, 2000, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years ended September 30, 2000 and 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Medical Dynamics,
Inc. and subsidiaries as of September 30, 2000, and the results of their
operations and their cash flows for the years ended September 30, 2000 and 1999,
in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses and negative
cash flows from operations. This raises substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 2. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/ HEIN + ASSOCIATES LLP
-------------------------
HEIN + ASSOCIATES LLP
Denver, Colorado
November 30, 2000
F-2
<PAGE>
<TABLE>
<CAPTION>
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2000
ASSETS
------
<S> <C>
CURRENT ASSETS:
Cash and equivalents $ 330,800
Trade receivables, less allowance for doubtful accounts of $19,600 43,300
Inventories 2,500
Prepaid expenses and other 700
------------
Total current assets 377,300
------------
SOFTWARE DEVELOPMENT AND SUPPORT:
Software development costs, net of accumulated amortization of $1,321,800 1,948,200
Technical support contracts, net of accumulated amortization of $890,700 593,800
------------
Total software development and support 2,542,000
------------
PROPERTY AND EQUIPMENT:
Demonstration equipment 143,000
Machinery and equipment 606,100
Furniture and fixtures 235,600
Leasehold improvements 54,500
------------
1,039,200
Less accumulated depreciation and amortization (753,900)
------------
Property and equipment, net 285,300
------------
OTHER ASSETS:
Goodwill, net of accumulated amortization of $225,500 1,050,600
Deposits and other 42,500
------------
Total other assets 1,093,100
------------
TOTAL ASSETS $ 4,297,700
============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Current maturities of notes payable $ 2,002,200
Accounts payable and accrued expenses 665,900
Unearned revenue 269,800
------------
Total current liabilities 2,937,900
------------
NOTES PAYABLE, net of current portion 135,900
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value; authorized 5,000,000 shares; none issued --
Common stock, $.001 par value; authorized 30,000,000 shares, issued and
outstanding 13,229,206 shares 13,200
Additional paid-in capital 28,353,200
Accumulated deficit (27,142,500)
------------
Total stockholders' equity 1,223,900
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,297,700
============
See accompanying notes to these consolidated financial statements.
F-3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED
SEPTEMBER 30,
----------------------------
2000 1999
------------ ------------
<S> <C> <C>
NET SALES:
Dental products:
Software, training, and installation $ 796,300 $ 3,809,700
Equipment 222,200 4,495,900
Support services 2,669,500 2,522,400
Medical products 11,300 130,700
------------ ------------
3,699,300 10,958,700
------------ ------------
COST OF SALES:
Dental products:
Software, training, and installation 616,200 1,133,000
Equipment 365,400 4,015,300
Support services 679,100 924,700
Medical products 54,500 34,600
------------ ------------
1,715,200 6,107,600
------------ ------------
GROSS PROFIT 1,984,100 4,851,100
------------ ------------
OPERATING EXPENSES:
Selling and marketing 608,000 3,679,800
General and administrative 2,945,500 4,983,300
Stock-based compensation 24,400 49,600
Research and development -- 2,900
Impairment of goodwill -- 655,200
------------ ------------
Total operating expenses 3,577,900 9,370,800
------------ ------------
OPERATING LOSS (1,593,800) (4,519,700)
OTHER INCOME (EXPENSE):
Other income 3,800 44,900
Interest income 14,300 13,500
Interest expense (375,700) (650,000)
Loss on Command settlement -- (286,800)
------------ ------------
(357,600) (878,400)
------------ ------------
NET LOSS $ (1,951,400) $ (5,398,100)
============ ============
BASIC AND DILUTED LOSS PER COMMON SHARE $ (.15) $ (.52)
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 13,087,200 10,312,700
============ ============
See accompanying notes to these consolidated financial statements.
F-4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 2000 AND 1999
COMMON STOCK Additional
------------------------ Paid-in
Shares Amount Capital
--------- ------------ -----------
<S> <C> <C> <C>
BALANCE, October 1, 1998 10,034,500 $ 10,000 $ 25,246,900
Conversion of debentures to common stock:
Principal, net of discount 1,144,900 1,200 1,142,200
Accrued interest 101,300 100 125,900
Fair value of warrants issued for debt discount and issuance costs -- -- 299,400
Proceeds from exercise of options 98,000 100 141,400
Proceeds from sale of common stock, net of offering costs of $32,900 523,800 500 766,600
Additional shares issued pursuant to terms of agreement 311,800 300 (300)
Attribution of compensation under stock options and warrants:
Employee -- -- 32,100
Non-employee -- -- 17,500
Net loss -- -- --
------------ ------------ ------------
BALANCE, September 30, 1999 12,214,300 12,200 27,771,700
Conversion of debentures to common stock:
Principal, net of discount 729,340 720 372,980
Proceeds from exercise of options 207,700 200 184,200
Additional shares issued pursuant to terms of agreement 77,866 80 (80)
Attribution of compensation under stock options and warrants:
Non-employee -- -- 24,400
Net loss -- -- --
------------ ------------ ------------
BALANCE, September 30, 2000 13,229,206 $ 13,200 $ 28,353,200
============ ============ ============
Table continues on following page.
See accompanying notes to these consolidated financial statements.
F-5
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 2000 AND 1999
(Continued)
Accumulated
Deficit Total
------------ ------------
<S> <C> <C>
BALANCE, October 1, 1998 $(19,793,000) $ 5,463,900
Conversion of debentures to common stock:
Principal, net of discount -- 1,143,400
Accrued interest -- 126,000
Fair value of warrants issued for debt discount and issuance costs -- 299,400
Proceeds from exercise of options -- 141,500
Proceeds from sale of common stock, net of offering costs of $32,900 -- 767,100
Additional shares issued pursuant to terms of agreement -- --
Attribution of compensation under stock options and warrants:
Employee -- 32,100
Non-employee -- 17,500
Net loss (5,398,100) (5,398,100)
------------ ------------
BALANCE, September 30, 1999 (25,191,100) 2,592,800
Conversion of debentures to common stock:
Principal, net of discount -- 373,700
Proceeds from exercise of options -- 184,400
Additional shares issued pursuant to terms of agreement -- --
Attribution of compensation under stock options and warrants:
Non-employee -- 24,400
Net loss (1,951,400) (1,951,400)
------------ ------------
BALANCE, September 30, 2000 $(27,142,500) $ 1,223,900
============ ============
See accompanying notes to these consolidated financial statements.
F-5(Con't)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
SEPTEMBER 30,
--------------------------
2000 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,951,400) $(5,398,100)
Adjustments to reconcile net loss to net cash used in
operating activities:
Common stock options granted for compensation
and other services 24,400 49,600
Depreciation expense 135,900 191,800
Amortization of intangible assets 887,900 937,000
Amortization of debt discount and issuance costs 123,000 446,500
Conversion of accrued interest on debentures to common stock -- 126,000
Bad debt expense -- 82,300
Impairment of goodwill -- 655,200
Loss on disposal of Command, less cash received -- 279,500
Provision for obsolete and slow-moving inventories -- 23,700
Other -- (23,200)
Changes in operating assets and liabilities, net of
effects of acquisitions:
Decrease (increase) in:
Trade receivables 211,100 454,000
Inventories 186,700 621,700
Prepaid expenses and other 22,700 13,100
Increase (decrease) in:
Accounts payable and accrued expenses (453,700) 263,500
Unearned revenue (98,700) (1,600)
----------- -----------
Net cash used in operating activities (912,100) (1,279,000)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in restricted cash -- 50,000
Software development costs (68,200) (229,100)
Purchase of property and equipment -- (85,800)
----------- -----------
Net cash used in investing activities (68,200) (264,900)
----------- -----------
See accompanying notes to these consolidated financial statements.
F-6
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
FOR THE YEARS ENDED
SEPTEMBER 30,
--------------------------
2000 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on notes payable (353,300) (453,900)
Payment of debt issue costs -- (90,900)
Proceeds from issuance of common stock -- 767,100
Proceeds from exercise of common stock options 184,400 141,500
Proceeds from issuance of convertible debentures -- 400,000
Proceeds from shareholder loan -- 400,000
Proceeds from short-term borrowings 1,300,000 5,991,500
Repayment of short-term borrowings -- (5,984,500)
------------ ----------
Net cash provided by financing activities 1,131,100 1,170,800
------------ ----------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 150,800 (373,100)
CASH AND EQUIVALENTS, beginning of year 180,000 553,100
------------ ----------
CASH AND EQUIVALENTS, end of year $ 330,800 $ 180,000
============ ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION -
Cash paid for interest $ 161,900 $ 100,500
============ ==========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Conversion of accounts payable to debt $ -- $ 118,600
============ ==========
Conversion of debentures to common stock, net of discount $ 373,700 $1,143,400
============ ==========
Conversion of accrued interest to notes payable $ -- $ 9,200
============ ==========
Fair value of warrants issued for debt discount $ -- $ 40,000
============ ==========
Debt issuance costs incurred for convertible debentures $ -- $ 259,400
============ ==========
See accompanying notes to these consolidated financial statements.
F-7
</TABLE>
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES:
-------------------------------
Nature of Business Operations - Medical Dynamics, Inc. (the "Company") is
engaged in the development and marketing of practice management software
and related products for the dental profession. The Company's principal
products are practice management software, patient education systems,
digital x-ray systems and a wide variety of ancillary products utilized
by the dental profession.
Principles of Consolidation - The consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries,
Computer Age Dentist, Inc. (CADI), Information Presentation Systems, Inc.
(IPS) and DOM, Inc., d/b/a Command Dental Systems (Command). All
significant intercompany accounts and transactions have been eliminated
in the accompanying consolidated financial statements.
Use of Estimates - The preparation of the Company's consolidated
financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying
notes. The actual results could differ from those estimates.
The Company's consolidated financial statements are based on a number of
estimates, including the allowance for doubtful accounts, the provision
for obsolete and slow-moving inventories, the selection of estimated
useful lives of intangible assets and property and equipment, realization
of long-lived assets, assumptions affecting the valuation of common stock
issued in business combinations, and stock options and warrants granted
to non-employees. It is reasonably possible that estimates affecting the
provision for obsolete and slow-moving inventories and realization of
long-lived assets will change in the forthcoming year and such revisions
could be material.
Cash Equivalents - The Company considers all highly liquid debt
instruments purchased with an original maturity of three months or less
to be cash equivalents. At September 30, 2000, cash equivalents include a
mutual fund that invests in money market instruments.
Inventories - Inventories are stated at the lower of cost (first-in,
first-out method) or market and consist primarily of miscellaneous
computer hardware.
Property and Equipment - Property and equipment is stated at cost.
Depreciation is computed principally by the straight-line method over the
following estimated useful lives:
Years
-------
Demonstration equipment 3
Machinery and equipment 3 - 10
Furniture and fixtures 3 - 10
Leasehold improvements are amortized over the lesser of the life of the
lease or the estimated useful life of the improvement.
F-8
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Software Development Costs - The Company capitalizes costs of producing
software to be sold, leased, or otherwise marketed, incurred subsequent
to establishing technological feasibility in accordance with Statement of
Financial Accounting Standards No. 86.
Amortization of capitalized software development costs is computed on a
product-by-product basis. The annual amortization is the greater of the
amount computed using the ratio of current gross revenue for a product to
the total of current and anticipated future gross revenue for that
product or the straight-line method, not to exceed 7 years. In addition,
management periodically compares the unamortized capitalized costs for
each product to the net realizable value of that product. If the
unamortized capitalized costs exceed the net realizable value, the excess
will be charged to operations.
The total amount charged to expense in the statements of operations for
amortization of capitalized software costs was $465,700 and $446,100 for
the years ended September 30, 2000 and 1999, respectively, and is
included in cost of sales.
Costs incurred in researching, designing and planning for the development
of new software are classified as research and development expenses and
are charged to operations as incurred.
Other Intangible Assets - Other intangible assets are stated at cost and
are amortized utilizing the straight-line method over the following
estimated useful lives:
Years
-------
Technical support contracts 5
Goodwill 15
Non-compete agreements 5
Patents and trademarks 3 - 10
Debt Issuance Costs - Debt issuance costs are amortized using the
interest method over the term of the related debt.
Impairment of Long-Lived Assets - Management of the Company assesses
impairment whenever events or changes in circumstances indicate that the
carrying amount of a long-lived asset may not be recoverable. If the net
carrying value exceeds the net cash flows, then impairment will be
recognized to reduce the carrying value to the estimated fair value.
During the year ended September 30, 1999, management determined that
certain goodwill was impaired due to the closing of certain regional
operations, and recorded a loss on impairment of $655,200. No loss on
impairment was recorded during the year ended September 30, 2000.
Research and Development - Research and development costs are charged to
operations in the period incurred.
Advertising - Advertising costs are expensed the first time the
advertisement is run. Total advertising costs charged to operations
amounted to $74,200 and $503,400 for the years ended September 30, 2000
and 1999, respectively.
F-9
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Earnings Per Share - Net loss per common share is presented in accordance
with the provisions of Statement of Financial Accounting Standards (SFAS)
No. 128, Earnings Per Share. SFAS No. 128 replaces the presentation of
primary and fully diluted earnings per share (EPS), with a presentation
of basic EPS and diluted EPS. Under SFAS No. 128, basic EPS excludes
dilution for potential common shares and is computed by dividing the net
loss by the weighted average number of common shares outstanding for the
year. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or
converted into common stock and resulted in the issuance of common stock.
Basic and diluted EPS are the same in 1999 and 2000 as all potential
common shares were antidilutive.
Income Taxes - The Company accounts for income taxes under the liability
method, which requires recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this method,
deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates.
Revenue Recognition - The Company recognizes sales when finished goods
are shipped to a customer. Revenue from the sale of the Company's
proprietary software is recognized when the software is delivered and the
Company has substantially performed all material obligations relating to
the sale agreement and collectibility is deemed probable by management.
Revenue from software services is recognized ratably over the contractual
period or as the services are performed.
Unearned revenue primarily represents payments received on deferred
maintenance contracts that has not been earned. The amounts are amortized
into revenue on a monthly basis using the straight-line method over the
life of the contracts.
Costs for maintenance and customer support are charged to expense when
the related revenue is recognized or when those costs are incurred,
whichever occurs first.
Stock-Based Compensation - The Company accounts for stock-based
compensation for employees using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued
to Employees, and related interpretations. Accordingly, compensation cost
for stock options granted to employees is measured as the excess, if any,
of the quoted market price of the Company's common stock at the
measurement date (generally, the date of grant) over the amount an
employee must pay to acquire the stock.
In October 1995, the Financial Accounting Standards Board issued a new
statement titled Accounting for Stock-Based Compensation (SFAS No. 123).
SFAS No. 123 requires that options, warrants, and similar instruments
which are granted to non-employees for goods and services be recorded at
fair value on the grant date. Fair value is generally determined under an
option pricing model using the criteria set forth in SFAS No. 123. The
Company did not adopt SFAS No. 123 to account for stock-based
compensation for employees but is subject to the pro forma disclosure
requirements.
Segment Disclosures - Operating segments are components of a company
about which separate financial information is available that is evaluated
regularly by the chief operating decisionmaker in deciding how to
F-10
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
allocate resources and in assessing performance. The only material
segment that the Company is currently engaged in is the dental products
segment. Accordingly, the accompanying financial statements do not
include disclosures for the immaterial medical products segment.
2. LIQUIDITY:
---------
Through September 30, 2000, the Company has incurred substantial
operating losses and negative cash flows from operations. The Company's
future viability depends on its ability to increase sales, curtail
expenditures and become profitable.
As discussed further in Note 8, the Company entered into an agreement to
be acquired, was successful in obtaining additional debt financing of
$250,000 in October 2000 and extended payments terms on certain notes
payable. However, management believes additional capital is necessary to
fund existing working capital requirements. The Company's ability to
continue as a going concern is dependent on completing the acquisition,
or raising additional capital.
3. LONG-TERM LIABILITIES:
---------------------
Convertible Debentures - In October 1997, the Company issued convertible
debentures totaling $1,100,000. The conversion price is equal to the
average of the two lowest closing bid prices of the Company's common
stock as reported by NASDAQ during the 60 trading days preceding the
conversion date. The Company received net proceeds of $986,000 from the
debentures, after paying all costs related to the issuance. Through
September 30, 1998, the holder had converted $660,000 of debentures to
315,700 shares of common stock. In October 1998, the holder converted the
remaining $440,000 of debentures to 234,667 shares of common stock.
The Company also granted the debenture holder a warrant to purchase
84,615 shares of the Company's common stock. The warrant is exercisable
until October 31, 2000 at an exercise price of $3.38. The estimated fair
value of this warrant of $120,000 was accounted for as a discount on the
convertible debentures. During 1999, these warrants were canceled.
In July 1998, the Company issued additional convertible debentures
totaling $1,100,000. The conversion price is equal to the average of the
two lowest closing bid prices of the Company's common stock as reported
by NASDAQ during the 60 trading days preceding the conversion date. The
Company received net proceeds of $1,003,000 from the debentures, after
paying all costs related to the issuance. Through September 30, 1999, the
holder had converted $800,000 of debentures to 910,200 shares of common
stock. In October 1999 and January 2000, the holder converted the
remaining $300,000 of debentures to 575,273 shares of common stock.
The Company also granted the Debenture holder a warrant to purchase
110,000 shares of the Company's common stock. The warrant is exercisable
until July 31, 2003 at an exercise price of $2.58. The estimated fair
value of this warrant of $100,000 was accounted for as a discount on the
convertible debentures.
F-11
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In November 1998, the Company issued an additional $400,000 of
convertible debentures with terms similar to the July 1998 issuance
described above. The Company also agreed to issue an additional warrant
for 40,000 shares exercisable until November 2003 at an exercise price of
$2.58 per share. The estimated fair value of the warrants of $40,000 was
accounted for as a discount on the convertible debenture.
During fiscal 1999, the Company entered into amendments to modify certain
terms and conditions of the debentures. The conversion price will be
equal to 85% of the average of the two lowest closing bid prices over a
60-day period immediately preceding the date of conversion. As a result
of the issuance of warrants in 1999 private placement, the exercise price
of the outstanding warrants to acquire 150,000 shares at $2.58 per share
was decreased to $1.832. As a result of the amendments, additional debt
issuance costs of approximately $260,000 were recorded.
In January 2000, the holder converted $102,600 of debentures to 154,067
shares of common stock. The debenture holder attempted to convert all
remaining 1998 debentures but was precluded from doing so due to a
provision under which a maximum of 1,880,000 total shares can be issued
to the debenture holder. As a result, the balance of $297,400 of
debentures were unable to be converted and this amount is now due on
demand. In addition, the Company was required to pay a premium of 15% of
the demand note to the debenture holder. This amount totaling
approximately $44,000 is included in accrued expenses as of September 30,
2000.
Notes Payable - At September 30, 2000, long-term debt consists of the
following:
Notes payable to InfoCure:
Interest at 12%, due September 2001 or upon sale of
the Company, collateralized by substantially all of
the Company's assets $1,300,000
Note payable to shareholder (former debenture holder):
Interest at 8%, due on demand, unsecured 297,400
Notes payable to former shareholders of CADI:
Interest at 12%, due September 2001 or upon sale of the
Company, subordinated to the note payable to InfoCure 126,700
Notes payable to former owners of Command:
Interest at 6%, due April 2003, unsecured 240,200
Discount for below-market interest, net of accumulated
amortization of $21,110 (26,500)
----------
Net 213,700
----------
Note payable to shareholder:
Interest at 12%, due September 2001 or upon sale of the
Company, collateralized by substantially all of the
Company's assets, subordinated to the note payable
to InfoCure 200,300
----------
Total notes payable 2,138,100
Less current maturities (2,002,200)
----------
Notes payable, less current maturities $ 135,900
==========
F-12
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The effective interest rate on the debt incurred under the notes payable
to the former owners of CADI and Command was 15% to 16%.
As of September 30, 2000, aggregate maturities of notes payable are as
follows:
Year Ending September 30, Principal Discount Net
------------------------- ---------- --------- ----------
2001 $2,018,000 $15,900 $2,002,100
2002 100,200 9,100 91,100
2003 46,400 1,500 44,900
---------- --------- ----------
Total $2,164,600 $26,500 $2,138,100
========== ======= ==========
4. STOCKHOLDERS' EQUITY:
---------------------
In March 1999, an unaffiliated entity purchased 523,800 shares of the
Company's common stock for $800,000. In addition, the Company agreed to
issue additional shares to this entity at various determination dates
which are intended to compensate the entity for one-third of any decrease
in the market price of the Company's stock. As of September 30, 2000, the
Company has issued an additional 389,666 shares under this agreement. The
Company has no further obligations under the agreement.
Stock Option Plan - The Company has two stock option plans under which
incentive and non-qualified stock options may be granted to officers,
directors, employees, and consultants. Incentive stock options are
required to have an exercise price which is not less than the fair market
value of the stock at the date of grant. Under the first plan which was
approved by shareholders in October 1988, an aggregate of 1,000,000
shares were reserved for issuance pursuant to the terms of the plan.
Under the second plan which was approved by shareholders in June 1998, an
F-13
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
aggregate of 1,500,000 shares were reserved for issuance pursuant to the
terms of the plan. The maximum term is 10 years for options granted under
both plans. Activity in the 1988 and 1998 stock option plans for the
years ended September 30, 2000 and 1999 is as follows:
<TABLE>
<CAPTION>
1998 Plan 1998 Plan
-------------------------- -------------------------
Weighted Weighted
Average Average
Number of Exercise Price Number of Exercise Price
Shares Per Share Shares Per Share
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Outstanding, October 1, 1998 57,200 $ 1.74 -- $ --
Granted -- -- 234,800 .93
Exercised -- -- -- --
Cancled (5,000) 3.00 -- --
--------- --------
Outstanding, September 30, 1999 52,200 1.61 234,800 .93
Granted -- -- 40,000 1.81
Exercised -- -- (207,700) .89
Canceled -- -- (44,100) 1.64
--------- ---------
Outstanding, September 30, 2000 52,200 $ 1.61 23,000 $ 1.47
========= =========
</TABLE>
Options available for future grant at September 30, 2000 totaled
1,225,200 shares under the 1998 plan. No shares were available for future
grants under the 1988 plan.
As of September 30, 2000, all options outstanding under the 1988 plan are
vested and 23,000 are vested under the 1998 plan. If not previously
exercised, options outstanding at September 30, 2000, will expire as
follows:
1988 Plan 1998 Plan
--------------------- ---------------------
Number of Exercise Number of Exercise
Year Ending September 30, Shares Price Shares Price
------------------------- --------- --------- --------- ---------
2001 37,200 $ 1.38 -- $ --
2002 10,000 2.00 -- --
2003 5,000 2.63 -- --
2004 -- -- 20,000 1.50
2005 -- -- 3,000 1.25
--------- ---------
52,200 $ 1.61 23,000 $ 1.47
========= =========
F-14
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Non-Qualified Stock Options and Warrants - The Company has also granted
non-qualified stock options and warrants to officers, directors,
employees, consultants, and lenders. The following is a summary of
activity during the years ended September 30, 2000 and 1999:
Weighted
Average
Number of Exercise Price
Shares Per Share
--------- ---------
Outstanding, September 30, 1998 4,236,500 $ 3.28
Granted to:
Employees 610,800 3.04
Consultants 100,000 1.50
Convertible debenture holders 40,000 2.58
Canceled (1,468,700) 3.70
Exercised (98,000) 1.44
---------
Outstanding, September 30, 1999 3,420,600 2.99
Granted -- --
Canceled (161,000) 3.25
Exercised -- --
Expired:
Employees (160,900) 1.13
Consultants (75,000) 4.50
---------
Outstanding, September 30, 2000 3,023,700 3.03
=========
F-15
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
If not previously exercised, non-qualified options and warrants expire as
follows:
Weighted
Average
Year Ending Number of Exercise
September 30, Shares Price
------------ ---------- --------
2001 182,000 $ 1.73
2001 250,000 2.87
2001 115,000 3.75
2002 10,200 3.00
2003 52,000 1.50
2003 258,900 2.68
2003 274,800 3.84
2004 140,800 1.60
2004 40,000 2.58
2005 1,200,000 3.25
2006 500,000 3.25
----------
3,023,700
==========
At September 30, 2000, a total of 2,323,700 non-qualified stock options
and warrants are vested. Unvested employee performance options were
outstanding for 700,000 shares. These options vest when the Company
achieves various revenue levels. The Company also has 20,000 options
outstanding that vest at future dates. Vesting under most of these
options can be accelerated if various performance targets are achieved.
During the years ended September 30, 2000 and 1999, the Company
recognized compensation expense of $0 and $32,100, respectively, related
to employee performance options. The ultimate amount of compensation
expense related to the employee performance options will be determined
based on the market value of the Company's common stock on the date that
the options vest.
The fair value of options granted to non-employees in 1999 (no options
were granted to non-employees in 2000) was estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted
average assumptions:
Expected volatility 78.0%
Risk-free interest rate 6.0%
Expected dividends 0.0%
Expected terms (in years) .7
F-16
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended September 30, 2000 and 1999, options granted to
non-employees resulted in the recognition of approximately $24,400 and
$17,500, respectively, of compensation expense.
Pro Forma Stock-Based Compensation Disclosures - The Company applies APB
Opinion 25 and related interpretations in accounting for stock options
which are granted to employees. Accordingly, no compensation cost is
recognized for grants of options to employees if the exercise prices were
not less than the market value of the Company's common stock on the
measurement dates. Had compensation cost been determined based on the
fair value at the measurement dates consistent with the method of SFAS
No. 123, the Company's net loss and loss per share would have been
changed to the pro forma amounts indicated below.
Years Ended September 30,
--------------------------------
2000 1999
-------------- --------------
Net loss:
As reported $ (1,951,400) $ (5,398,100)
Pro forma (1,992,600) (6,739,100
Net loss per common share:
As reported $ (.15) $ (.52)
Pro forma (.15) (.65)
For purposes of the above pro forma amounts, the weighted average fair
value of options granted to employees for the years ended September 30,
2000 and 1999 was $1.25 and $1.00, respectively. The fair value of each
employee option granted in 2000 and 1999 was estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted average assumptions:
Years Ended September 30,
--------------------------
2000 1999
-------- --------
Expected volatility 100.8% 81.0%
Risk-free interest rate 6.0% 6.0%
Expected dividends 0.0% 0.0%
Expected terms (in years) 5.0 4.5
F-17
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. INCOME TAXES:
------------
The amounts which give rise to the net deferred tax asset at September
30, 2000, are as follows:
Net operating loss carryforwards $ 8,497,000
Compensation expense related to stock options 109,000
Research and development tax credit carryforwards 20,000
Other 137,000
------------
Total Deferred Tax Assets 8,763,000
Valuation Allowance (8,763,000)
------------
$ --
============
Management has determined that a valuation allowance equal to the
deferred tax assets is required since it is more likely than not that the
benefits of these assets will not be realized. The valuation allowance
decreased by approximately $175,000 and increased by approximately
$900,000 during the years ended September 30, 2000 and 1999,
respectively.
At September 30, 2000, the Company has approximately $22,879,000 of net
operating loss carryforwards, and approximately $20,000 of research and
development tax credit carryforwards, both of which expire in varying
amounts from 2001 through 2020. Usage of the net operating loss
carryforwards may be limited by Section 382 of the Internal Revenue Code.
6. EMPLOYEE BENEFIT PLAN:
----------------------
The Company maintains a defined contribution 401(k) plan which covers
eligible employees as defined in the plan document. Matching
contributions are at the discretion of the Company. For the years ended
September 30, 2000 and 1999, matching contributions totaled approximately
$8,800 and $11,000, respectively.
7. COMMITMENTS AND CONTINGENCIES:
-----------------------------
License Agreement - The Company has various agreements to pay royalties
to both a former officer and current directors of the Company. These
royalties are based on the sales of specified products, some of which are
no longer manufactured by the Company. In June 1987, the Company entered
into a license agreement with its then CEO and Chairman relating to the
use of certain technology invented and developed by the Chairman. In
connection with the agreement, the Company agreed to pay royalties based
on the greater of 2% of sales of products which relate to this technology
or minimum annual royalties of $120,000.
F-18
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During 1997, the license agreement was amended to eliminate the minimum
annual royalty and to provide for future royalties generally equal to 2%
of sales of the products that relate to the technology. For the years
ended September 30, 2000 and 1999, the Company did not incur any royalty
expense related to this agreement. The license agreement may be
terminated by the Chairman in certain circumstances and the rights to the
patents may revert to him if commercial development of the related
products does not occur within prescribed deadlines.
Operating Leases - The Company conducts its operations from leased
facilities and leases certain equipment. The terms of the facilities
leases require the Company to pay all maintenance, utilities, property
taxes and insurance. Rent expense has been recorded on a straight-line
basis over the life of the lease. Following is a schedule of future
minimum commitments under operating leases having an initial or remaining
term of more than one year.
Years Ending September 30,
--------------------------
2001 $ 155,600
2002 108,000
2003 9,000
-----------
$ 272,600
===========
Total rent expense was $321,500 and $430,400, net of sublease rentals
received, for the years ended September 30, 2000 and 1999, respectively.
Employment Agreements - The Company has employment agreements with two
individuals who are officers or directors of the Company or CADI. As of
September 30, 2000, the agreements were effective for a remaining period
of two years with an annual aggregate compensation of $210,000.
Contingencies - The Company may from time to time be involved in various
claims, lawsuits, disputes with third parties, actions involving
allegations of discrimination, or breach of contract incidental to the
operations of its business. The Company is currently involved in some
incidental litigation which it believes will not have a material adverse
effect on its financial condition or results of operations. Management
has created a legal reserve for this litigation which it believes is
sufficient to cover these claims.
During the year ended September 30, 1999, the Company settled litigation
against the former principals of Command Dental Systems, a business
acquired by the Company in April 1998, resulting in a loss of
approximately $287,000.
F-19
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. SUBSEQUENT EVENTS:
------------------
In December 1999, the Company entered into an Agreement and Plan of
Merger and Reorganization with InfoCure Corporation (InfoCure) wherein
InfoCure will acquire 100% of the outstanding common stock of the Company
in exchange for common and preferred shares of InfoCure. This agreement
was amended in October 2000 and the Company anticipates closing the
transaction during fiscal year 2001. If the agreement is breached by the
Company, the Company may, pursuant to specific details outlined in the
agreement, be responsible for reimbursement of InfoCure's costs and
expenses incurred in connection with the agreement and payment of a
$250,000 termination fee.
In October 2000, InfoCure advanced the Company an additional $250,000 at
an interest rate of 12% and extended the maturity of the entire
indebtedness until September 30, 2001.
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