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US Securities and Exchange Commission
Washington, DC 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [Fee Required]
For the quarterly period ended September 30, 1998.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from __________________ to ____________________
Commission File Number 0-12365
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MEDICAL DEVICE TECHNOLOGIES, INC.
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(Name of small business issuer in its charter)
Utah 58-1475517
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
9191 Towne Centre Drive, Suite 420, San Diego, California 92122
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(Address of principal executive offices)
Issuer's telephone number: (619) 455-7127
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Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports); and (2) has been
subject to such filing requirements for the past 90 days. Yes X No ___
State issuer's revenues for its most recent fiscal year $62,750.
The aggregate market value of the voting stock held by non-affiliates computed
by reference to the price at which the stock was sold, or the average bid and
asked prices of such stock, as of November 1, 1998, was $2,106,600.
As of November 1, 1998, Registrant had outstanding 5,171,137 shares of common
stock and 56,386 redeemable common stock purchase warrants.
Transitional Small Business Disclosure Format (check one): Yes ___ No. X
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TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
Condensed Consolidated Balance Sheets as of September 30,
1998 and December 31, 1997.................................... F-1
Condensed Consolidated Statements of Operations for the
Three Months and Nine Months Ended September 30, 1998
and September 30, 1997........................................ F-3
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1998 and September 30, 1997... F-4
Notes to Condensed Consolidated Financial Statements.......... F-8
Item 2. Management's Discussion And Analysis or Plan Of Operation .... 3
PART II OTHER INFORMATION
Item 1. Legal Proceedings............................................. 12
Item 2. Changes in Securities......................................... 13
Item 3. Defaults Upon Senior Securities............................... 13
Item 4. Submission of Matters to a Vote of Security Holders........... 13
Item 5. Other Information............................................. 13
Item 6. Exhibits and Reports on Form 8-K.............................. 13
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
See attached condensed consolidated financial statements and notes thereto for
the period ended September 30, 1998.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion of the Company's financial condition and results of
operations should be read in conjunction with the consolidated financial
statements and the notes thereto appearing in Part I, Item 1 in this Form
10-QSB.
Forward-Looking Statements
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The following discussion contains forward-looking statements regarding the
Company, its business, prospects and results of operations that are subject to
certain risks and uncertainties posed by many factors and events that could
cause the Company's actual business, prospects and results of operations to
differ materially from those that may be anticipated by such forward-looking
statements. Factors that may affect such forward-looking statements include,
without limitation: the Company's ability to successfully develop new products
for new markets; the impact of competition on the Company's revenues, changes in
law or regulatory requirements that adversely affect or preclude customers from
using the Company's products for certain applications; delays in the Company's
introduction of new products; and failure by the Company to keep pace with
emerging technologies.
When used in this discussion, words such as "believes", "anticipates",
"expects", "intends" and similar expressions are intended to identify
forward-looking statements, but are not the exclusive means of identifying
forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date of this
report. The Company undertakes no obligation to revise any forward-looking
statements in order to reflect events or circumstances that may subsequently
arise. Readers are urged to carefully review and consider the various
disclosures made by the Company in this report and other reports filed with the
Securities and Exchange Commission that attempt to advise interested parties of
the risks and factors that may affect the Company's business.
Description of Business
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Medical Device Technologies, Inc. (the "Company") was incorporated on February
6, 1980, under the laws of the State of Utah, initially under the name of Gold
Probe, Inc. In September 1981, the Company and the Hailey Oil Company, Inc., a
Mississippi corporation, entered into an Agreement and Plan of Reorganization
whereby the Company acquired Hailey Oil Company, Inc. and exchanged 4,500,000
shares of its Common Stock for all the issued and outstanding shares of Hailey
Oil Company, Inc. Also, pursuant to the reorganization in January 1982, the
Company changed its name to Hailey Energy Corporation, effected a one (1) for
five (5) reverse split of its Common Stock, and decreased its authorized number
of shares to 25,000,000. In October 1986, the number of authorized shares of the
Company was increased to 100,000,000. In November 1990, the Company effected a
one (1) for thirty (30) reverse split of its Common Stock and increased the par
value of its Common Stock to $0.15 per share. In November 1992, the Company
changed its name from "Hailey Energy Corporation" to "Cytoprobe Corporation". In
January 1994, the Company effected a one (1) for six (6) reverse split of its
Common Stock. In April 1995, the Company changed its name to Medical Device
Technologies, Inc. to reflect the Company's broadening base of medical products.
In June 1996, the Company effected a one (1) for two (2) reverse split of its
Common Stock. On March 6, 1998, the Company effected a one (1) for thirty-five
(35) reverse split of its Common Stock. The par value of the Company's Common
Stock remained at $0.15 per share and the number of authorized shares of Common
Stock (100,000,000) remained unchanged.
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The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Reports, proxy statements
and other information filed with the Commission can be inspected and copied at
the public reference facilities of the Commission at 450 Fifth Street NW,
Washington, DC 20549. Such material may also be accessed electronically by means
of the Commission's home page on the Internet at http://www.sec.gov. As of March
31, 1998, the Company's Common Stock, par value $.15 per share (the "Common
Stock") is traded over-the-counter under the symbol "MEDD". The Company's
Redeemable Common Stock Purchase Warrants (the "Redeemable Warrants") and Common
Stock, which previously traded on the National Association of Securities Dealers
Automated Quotation (NASDAQ) SmallCap Market under the symbols MEDDW and MEDD
were delisted by NASDAQ on September 30, 1997 and March 26, 1998, respectively.
There were no shares of Preferred Stock outstanding at September 30, 1998.
Effective as of January 1, 1994, the Company has been engaged in identifying,
developing and bringing to market medical devices which the Company believes are
innovative, represent improvements over existing products, or are responsive to
a presently unfulfilled need in the marketplace. The Company's strategy consists
of: (i) identifying patented technologies in the medical device field that it
believes have potential commercial viability but still require refinement and
regulatory clearance, (ii) license or acquire the technologies, (iii) complete
product development and obtain the requisite regulatory clearance of such
products, and (iv) attempt to commercialize or sublicense such technologies by
entering into agreements with one or more entities for clinical development,
manufacturing and marketing of such products. Through this strategy, the Company
believes that it can play a role in bridging the gap between viable patented
technologies and their commercialization. The Company identified and acquired
three licenses to develop the following products, the Fluid Alarm System (FAS),
formerly the Personal Alarm System (PAS), the Cell Recovery System (CRS) and the
Intracranial Pressure Monitoring System (ICP). The Company believes the FAS and
CRS have potential commercial viability. The FAS is a device which monitors the
integrity of infection control barriers, such as surgical gloves and gowns worn
during medical procedures. The CRS is a cell "brushing" and retrieval system
using an automated biopsy brush for the collection of specimen cells for
diagnostic purposes, primarily (but not limited to) cancer detection. The
Company's license for the ICP was revoked by the licensor in January 1998 after
the Company failed to cure a default in the license agreement with the licensor
for non-payment of royalties. As a result, the Company recorded an impairment
loss on the ICP license in the amount of $487,784 in 1997. The Company deemed
the ICP license to have no future value.
In the immediate future, the Company needs to obtain additional financing for
its working capital requirements associated with the costs of providing services
in its MRI centers as well as the development, marketing and sales of its
medical devices. The Company currently intends to continue marketing the FAS,
and completing the regulatory and development process relative to the CRS so
that the Company can also bring this product to market. On an ongoing basis, the
Company also receives opportunities from time to time to license other patented
technologies in the medical device field. Depending on the specific device and
other circumstances, such as the Company's then-current financial and operating
situation, the Company may pro-actively attempt, on a limited basis, to identify
and license additional patented technologies in the medical device field.
Acquisitions
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During the third quarter of 1998, three MRI centers and the general partnership
of a fourth MRI center were purchased for 3,461,356 shares of Restricted Rule
144 Common Stock. (see Note 6)
On July 14, 1998, the Company acquired either the stock or substantially all of
the assets and liabilities of Vision Diagnostics, Inc. and Affiliates. Vision
Diagnostics, Inc. and Affiliates are in the business of providing radiologic
diagnostic services.
On July 14, 1998, the Company consummated the acquisition of certain assets
(primarily related to accounts receivable and property and equipment) and the
assumption of certain liabilities (primarily accounts payable and debt) from
Regional MRI of Orlando, Inc., Regional MRI of Jacksonville, Ltd. and Regional
MRI of Toledo, Inc. for a purchase price of 1,893,356 shares of Restricted Rule
144 common stock. The Company has accounted for the acquisition using the
purchase method of accounting with the assets acquired and the liabilities
assumed recorded at fair value, and the results of the acquired entities
included in the Company's condensed consolidated financial statements from July
1, 1998. Goodwill associated with this transaction amounted to $2,025,240.
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On July 14, 1998, the Company consummated the acquisition of 100% of the stock
of Vision Diagnostics, Inc. with the issuance of 1,568,000 shares of Restricted
Rule 144 common stock. Vision Diagnostics, Inc. is the general partner and fifty
percent owner of West Regional MRI located in Oak Brook, Illinois. The Company
has accounted for the acquisition using the purchase method of accounting and
with the results of the acquired entity included in the Company's consolidated
financial statements from the July 1, 1998. Goodwill associated with this
transaction amounted to $1,546,712.
Vision Diagnostics, Inc. is the 50% general partner in West Regional MRI Limited
Partnership. The condensed consolidated financial statements reflect all of the
assets, liabilities, revenues and expenses of the partnership. The limited
partners' share of the partner's capital has been reflected as a minority
interest on the accompanying condensed consolidated balance sheet at September
30, 1998 and December 31, 1997. The limited partners' share of the partnership's
net income has been shown as minority interest in the accompanying condensed
consolidated statements of operations.
The Company also plans to seek, investigate and, if such investigation warrants,
to acquire controlling interest in business opportunities that are similar in
nature to our existing medical diagnostic imaging centers. The Company will not
restrict its search to any geographical location, although does plan to
concentrate its search to opportunities that are located near existing centers.
However, the Company may participate in a business venture of virtually any kind
or nature.
The Company may seek a business opportunity in the form of firms which have
recently commenced operations, are developing companies in need of expansion
into new products or markets, are seeking to develop a new product or service or
established mature businesses.
In seeking business opportunities, the management decision of the Company will
be based upon the objectives of seeking long-term appreciation in the value of
the Company. Current income will only be a minor factor in such decisions.
Although it is unlikely that the Company will be able to participate in more
than one business opportunity concurrently, management may, in its sole
discretion, elect to enter into more than one acquisition if it believes these
transactions can be effected on terms favorable to the Company. This potential
lack of diversification may not permit the Company to offset potential losses
from one business opportunity against profits from another and should be
considered a substantial risk to shareholders of the Company.
The analysis of new business opportunities will be pursued under guidelines and
objectives established by the Company's officers and directors. The Company will
have unrestricted flexibility in seeking, analyzing and participating in
business opportunities. In these efforts, the Company will consider the
following, among other, factors:
(a) potential for growth in revenues and profits, as indicated by new
technology, anticipated market expansion or new products;
(b) competitive position compared to other firms of similar size and
experience within the industry segment, as well as within the industry
as a whole;
(c) strength and diversity of management, either in place or scheduled for
recruitment;
(d) capital requirements and anticipated availability of required funds to
be provided by the target company for operations, through the sale of
additional securities, the formation of joint ventures or similar
arrangements, or from other sources;
(e) the cost of participation by the Company as compared to the perceived
tangible and intangible values and potential;
(f) the value of existing and accessibility of required resources other
than capital including management expertise, personnel, raw materials,
services, professional assistance and other required items; and
(g) such other relevant factors as may arise from time to time, including
investor and market makers, if any, interest.
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In applying the foregoing criteria, no one of which is now known to be
controlling, management will attempt to analyze all relevant factors and make a
determination based upon reasonable investigative measures and available data.
Potentially available business opportunities may occur in many different
industries and at various stages of development, all of which will make the task
of comparative investigation and analysis of such business opportunities
extremely difficult and complex. Because of the Company's lack of capital, the
Company may not discover or adequately evaluate adverse facts about an
opportunity to be acquired.
The Company is unable to predict when it may participate in a business
opportunity. It expects, however, that the analysis of specific proposals and
the selection of a business opportunity may take a substantial amount of time
during the coming fiscal year.
Prior to making a decision to participate in a business opportunity, the Company
will generally request that it be provided with written materials regarding the
business opportunity and containing such items as: (I) a description of product,
service and company history; (ii) management resumes; (iii) financial
information (including projections and audited financial statements, if
available); (iv) evidence of existing patents, trademarks or service marks or
rights thereto; (v) an explanation of proprietary products and services; vi)
present and proposed forms of compensation to management; (vii) a description of
transactions between the target and its affiliates during relevant periods;
(viii) a description of present and required facilities; (ix) an analysis of
risks and competitive conditions; (x) a financial plan of operation and
estimated capital requirements; and (xi) other information deemed relevant under
the circumstances, including investor and market makers, but only after the
release of public information on the target.
As part of the Company's investigation, officers and directors will meet
personally with management and key personnel, visit and inspect material
facilities, obtain independent analysis or verification of certain information
provided, check references of management and key personnel and take other
reasonable investigative measures to the extent reasonably allowed by the
Company's limited financial resources. Management of the Company will utilize
the services of its present attorney and accountants in the investigation of
prospective acquisitions. The Company may also utilize the services of hired
consultants.
The Company anticipates that the selection of a business opportunity in which to
participate will be complex and extremely risky. Because of general economic
conditions, rapid technological advances being made in some industries and
shortages of available capital, management believes that there are numerous
firms seeking the perceived benefits of a publicly registered corporation. Such
perceived benefits may include facilitating or improving the terms on which
additional equity financing may be sought, providing liquidity for incentive
stock options or similar benefits to key employees, providing liquidity (subject
to restrictions of applicable statutes), for all shareholders and other factors.
Potentially available business opportunities may occur in many different
industries and at various stages of development, all of which will make the task
of comparative investigation and analysis of such business opportunities
extremely difficult and complex.
Risks
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As the Company acquires additional MRI centers with existing revenue streams,
the working capital requirements of the Company can be expected to increase. The
Company's ability to collect the accounts receivable associated with providing
MRI services will be a significant factor in meeting its working capital needs.
As development of each of its medical devices concludes, increased marketing and
sales costs will be incurred and the Company's working capital requirements can
be expected to grow accordingly. The Company's sales, general and administrative
costs include costs related to marketing, promotional and sales activities, in
addition to office, administration and overhead expenses.
The Company has not been profitable for the last 10 years and expects to incur
additional operating losses in the coming year. The following management
discussion and analysis and plan of operations should be read in conjunction
with the condensed consolidated financial statements and notes thereto appearing
in Part 1, Item 1 in this Form 10-QSB.
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In the immediate future, in order to fund its current negative working capital
position and to continue to operate, the Company currently intends to seek to
complete additional private placements of debt and/or equity. The Company's
ability to obtain additional sources of financing cannot be assured. The Company
also seeks to achieve certain minimum sales of the FAS device during the next
twelve months, but these would require the Company obtaining sufficient working
capital to support marketing operations and this cannot be assured. The
long-term viability of the Company is dependent on its ability to obtain
additional funding to profitably develop and market its current products and to
obtain the financing necessary to fund its operations.
General
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The following management's discussion and analysis and plan of operation should
be read in conjunction with the condensed consolidated financial statements and
notes thereto referred to in Item 1.
Results of Operations for the Three Months Ended September 30, 1998
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Revenues
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Operating revenues for the three months ended September 30, 1998 were $940,474
compared to ($1,950) for the same period in 1997. The increase of 100% is a
result of the acquisition of Vision Diagnostics and affiliates which consists of
three wholly owned MRI centers and the general partnership of a fourth center.
Revenue from the MRI centers accounted for all of the sales revenue in the third
quarter of 1998.
Operating Expenses
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Research and Development
Research and development costs in the third quarter of 1998 were $38,272, as
compared to $130,635 in the third quarter of 1997, representing a decrease of
70.7%. Current year costs associated with research and development represent
carrying costs for maintaining ownership of the products. This decrease was due
to the temporary postponement of certain research and development expenditures
on all products in 1998 as compared to 1997.
Sales, General and Administrative
Sales, general and administrative costs were $1,226,811 in the three month
period ended September 30, 1998 as compared to $897,827 in 1997, representing a
increase of 36.6%. This increase was primarily the result of the acquisition of
Vision Diagnostics and Affiliates. Although costs associated with the medical
products decreased during the third quarter of 1998, the addition of MRI centers
caused overall sales, general and administrative costs to increase.
Losses
The Company's net loss for the third quarter of 1998 was $466,157 as compared to
$1,047,892 in the third quarter of 1997, representing a 55.5% decline in the net
loss. This reduced loss was primarily attributable to sales resulting from the
acquisition of the MRI centers and the temporary postponement of certain
research and development expenditures, the reduction of FAS promotion and the
sales, marketing, general and administrative personnel downsizing in 1998 as
compared to 1997. Loss per common share for the third quarter of 1998 was $0.11
as compared to a $3.08 loss per common share for the same period in 1997. This
reduction in loss per common share was primarily attributable to the reduced net
loss in the third quarter of 1998 compared to 1997 and secondarily attributable
to the increase in the weighted average number of common shares outstanding in
1998 as compared to 1997.
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Results of Operations for the Nine Months Ended September 30, 1998
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Revenues
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Operating revenues for the first nine months of 1998 were $942,374 compared to
$56,750 for the same period in 1997. The increase of 94% is a result of the
acquisition of Vision Diagnostics and affiliates which consist of three wholly
owned MRI centers and the general partnership of a fourth MRI center.
Operating Expenses
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Research and Development
Research and development costs in the nine month period ended September 30, 1998
were $73,861, as compared to $626,348 in 1997, representing a decrease of 88.2%.
This decrease was due to the temporary postponement of certain research and
development expenditures on all products in 1998 as compared to 1997.
Sales, General and Administrative
Sales, general and administrative costs were $1,972,733 in the first nine months
of 1998 as compared to $2,612,120 in 1997, representing a decrease of 24.4%.
This decrease was primarily the result of reduced FAS promotion and distributor
recruiting efforts and corporate downsizing of the sales, marketing, general and
administrative staff and management as compared to the same nine month period in
1997.
Losses
The Company's net loss for the first nine months of 1998 was $1,276,548 as
compared to $3,197,254 in 1997, representing a 60% decline in the net loss. This
reduced loss was primarily attributable to the temporary postponement of certain
research and development expenditures, the reduction of FAS promotion and the
sales, marketing, general and administrative personnel downsizing in 1998 as
compared to 1997. Loss per common share for the first nine months of 1998 was
$0.78 as compared to $12.83 representing a reduction in loss per share of 93.9%.
This reduction in loss per common share was primarily attributable to the
reduced net loss in the first nine months of 1998 compared to 1997 and
secondarily attributable to the increase in the weighted average number of
common shares outstanding in 1998 as compared to 1997.
Liquidity and Capital Resources
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To date, the Company has funded its capital requirements for its current medical
device operations from the public and private sale of debt and equity securities
and the issuance of Common Stock in exchange for services. The Company's cash
position at September 30, 1998 was $52,451 as compared to $45,505 at December
31, 1997, representing a 15.3% increase. In the first nine months of 1998,
$85,278 of net cash was used for operating activities and $1,525 was received
from the disposal of property and equipment. The Company received $225,020 from
the proceeds of private placement convertible notes and $55,000 from the
proceeds of Restricted Rule 144 Common Stock issued during the first nine months
of 1998. Net cash used in operating activities in 1998 consisted principally of
a net loss of $1,276,548. This net loss was partially offset by a decrease in
other net assets (excluding cash) of $269,873, $357,023 in common stock paid for
services and interest in lieu of cash, plus depreciation and accrued
compensation expense of $536,755. Changes in current assets and current
liabilities resulted in a deficit in the Company's working capital position of
$928,228 at September 30, 1998 as compared to a negative working capital of
$475,196 at December 31, 1997. The Company's current deficit in working capital
requires the Company to obtain funds in the short-term to be able to continue in
business, and in the longer term to continue to market its products and to fund
research and development on products not yet ready for market and to provide
services in its' MRI centers. The Company is seeking to fund these and other
operating needs in the next 12 months from funds to be obtained through the
proceeds of additional private placements or public offerings of debt or equity
securities, or both.
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In the immediate future, in order to fund its current negative working capital
position and to continue to operate, the Company intends to seek to complete
additional private placements of debt and/or equity. The Company's ability to
complete to obtain additional sources of financing cannot be assured. The
Company also seeks to achieve certain minimum sales of the FAS device during the
next twelve months, but these would require the Company obtaining sufficient
working capital to support marketing operations and this cannot be assured. The
long-term viability of the Company is dependent on its ability to obtain
additional funding to profitably develop and market its current products and to
obtain the financing necessary to fund its operations surrounding the MRI
centers.
During the fourth quarter of 1997, the Company issued $100,000 ($50,000 to three
of the Company's directors) in principal amount of 36% short-term convertible
notes payable, due May 18, 1998, to five individuals to finance operations until
a corporate acquisition could be completed. Until payment in full, the unpaid
principal amount of these notes, or any portion may, at the election of
the noteholder at any time, be converted at the conversion price per share of
fifty (50%) percent of the previous thirty day average trading bid price as of
the date of conversion (as amended). As additional consideration for these
loans, the individual lenders, including the directors, were awarded an
aggregate of warrants to purchase 1,429 shares of Common Stock for every $12,500
loaned to the Company at an exercise price of $4.20 per share (see Note 5). In
connection with the issuance of the warrants to the individuals, the Company did
not recognize additional interest expense, as the value of the warrants was
deemed to be immaterial. The interest rate and terms of these notes were made at
arms length.
On June 19, 1998, 164,096 shares of Restricted Rule 144 Common Stock were issued
in order to convert all of these 1997 notes including principal and accrued
interest payable. Cash paid to these individuals and to the directors for
interest was $0 at December 31, 1997 and September 30, 1998. Restricted Rule 144
Common Stock paid to these individuals and to the directors for interest was $0
at December 31, 1997 and $21,300 at September 30, 1998. Accrued interest
amounted to $4,400 for the year ended December 31, 1997 to $0 as of September
30, 1998. All of the noteholders did not elect to exercise the related warrants,
thus, all such warrants expired on May 18, 1998.
During the first nine months of 1998, the Company issued $225,020 in principal
amount of short-term convertible notes payable, due one year from the date of
the related note or the date the Company receives funding from any offering or
merger with another corporation, to four individual to finance operations until
a corporate acquisition could be completed. Until payment in full, the unpaid
principal and accrued interest amounts of these notes, may be converted, at the
option of the noteholder, into common shares of the Company at any time prior to
repayment thereof at a conversion price per share of fifty (50%) percent of the
previous thirty day average trading bid price as of the date of conversion.
These notes accrues interest at a rate per annum equal to one (1%) percent over
the referenced prime lending rate announced from time to time by Bank of America
in San Francisco, California. As additional consideration for these loans, the
individual lenders were awarded 6,250 Restricted Rule 144 Common Stock for every
$12,500 loaned to the Company (see Note 5).
On June 19, 1998, 309,373 shares (including the additional consideration shares)
of Restricted Rule 144 Common Stock were issued in order to convert certain 1998
short-term convertible notes, including principal and accrued interest payable
(see Notes 5 and 6). Cash paid to these individuals for interest was $0 at
September 30, 1998. Restricted Rule 144 Common Stock paid to these individuals
for interest was $13,044 at September 30, 1998. Accrued interest amounted to $0
as of September 30, 1998.
Pursuant to an investment letter dated June 26, 1998 with an individual, the
Company received $55,000 for the purchase of 55,000 shares of Restricted Rule
144 Common Stock at a purchase price of $1.00 per share. At September 30, 1998,
such shares had been issued (see Note 6).
The Company is seeking to fund its immediate and longer-term working capital
needs from funds to be obtained through the proceeds of additional private
placements or public offerings of debt or equity securities. These funds could
be partially supplemented by certain minimum anticipated sales of the FAS in
1998.
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During the next twelve months, the Company will be required to seek additional
sources of financing through private placement of debt and/or equity securities,
which cannot be assured. In the event the Company cannot complete additional
financing, the Company would have to further curtail its operations due to lack
of funds. The long-term viability of the Company is dependent upon obtaining the
financing necessary to fund its current working capital deficit, funding the
operating requirements associated with both the MRI centers and the marketing
and developing of its current products and to profitably develop and market new
products.
Net Operating Loss Carryforward
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At September 30, 1998, the Company had approximately $22,748,000 in net
operating loss carryovers to offset future taxable income. These carryovers will
expire in various years through 2013. As a result of a change in ownership,
federal tax rules impose limitations on the use of net operating losses. The
limitations will reduce the amount of these benefits that will be available to
offset future taxable income each year, starting with the year of an ownership
change, for which the issuance of the Preferred Stock in the Company's June 1996
public offering was deemed to be. The dollar amount of these limitations is
indeterminable at this time. In addition, the Company provides a valuation
allowance for deferred tax assets when it is more likely than not, based on
available evidence, that some portion or all of the deferred tax assets will not
be realized. In management's opinion, it cannot determine if it is more likely
than not that the Company will generate sufficient future taxable income before
2013, the year after which all current available net operating loss
carryforwards expire, to utilize all of the Company's deferred assets. A
valuation allowance has been recognized for the full amount of the deferred tax
assets of $7,810,298.
New Accounting Pronouncements
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Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130") issued by the FASB is effective for financial
statements with fiscal years beginning after December 15, 1997. Earlier
application is permitted. SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components in a full set of general
purpose financial statements. The Company adopted SFAS No. 130 on January 1,
1998 and it had no effect on its financial position or results of operations.
Statement of Financial Accounting Standards No. 131, "Disclosure about Segments
of an Enterprise and Related Information" ("SFAS No. 131") issued by the FASB is
effective for financial statements with fiscal years beginning after December
15, 1997. The new standard requires that public business enterprises report
certain information about operating segments in complete sets of financial
statements of the enterprise and in condensed financial statements of interim
periods issued to shareholders. It also requires that public business
enterprises report certain information about their products and services, the
geographic areas in which they operate and their major customers. The Company
adopted SFAS No. 131 on January 1, 1998 and it had no effect on its financial
position or results of operations.
10
<PAGE> 11
PLAN OF OPERATION
Emergence from a Development Stage Company
- ------------------------------------------
The Company has emerged in 1998 from a development stage to an operating company
through a corporate acquisition of Vision Diagnostics and affiliates.
The Company's Capital Requirements
- ----------------------------------
The Company's greatest cash requirements during 1998 will be for funding, in the
immediate future, its deficit in working capital, and in the longer term,
obtaining the working capital necessary for marketing the FAS, and additional
clinical testing, continued development, FDA filings of the CRS, and selling,
general and administrative expenses. The funding for costs and build-up of
working capital necessary for the marketing of the FAS could be partially
supplemented by certain minimum anticipated sales of the FAS in 1998.
The Company is seeking to fund these and other operating needs in the next 12
months from funds to be obtained through the proceeds of additional private
placements or public offerings of debt or equity securities.
If a private placement is not completed, the Company will be required to further
reduce costs and seek alternative financing sources which cannot be assured.
Consequently, the Company's operating outlook is not assured.
Subsequent to the next 12 months, the Company currently plans to finance its
long-term operations and capital requirements with the profits and funds
generated from the sales of its products and services as well as through new
private financings and public offerings of debt and equity securities.
Year 2000
- ---------
The Company's management has prepared a plan for assuring that all of the
software applications of the Company will be year 2000 compliant. Billing and
accounting software are currently year 2000 compliant and operating systems are
being evaluated with an outside consultant to determine the year 2000 readiness.
An outside consultant has also been engaged to determine the readiness of our
medical diagnostic equipment. The costs for network and PC readiness is
estimated to be minimal. The costs associated with making the MRI machines year
2000 compliant has been estimated to be $30,000. The risks associated with the
MRI machines consists of time and the availability of the outside consultant to
complete the work by the year 2000. A reasonably likely scenario if the MRI
machines are not year 2000 compliant would be a temporary discontinuance of
operations. It is believed that an alternate supplier to make the MRI machines
year 2000 compliant does not presently exist.
11
<PAGE> 12
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Refer to the Company's Form 10-KSB for the year ended December 31, 1997.
The Combined Company is currently involved in several lawsuits. A description of
these lawsuits follows.
In January 1998, the Company was sued for payment of work allegedly performed
for the Company by a third party in the amount of approximately $93,000. The
Company is currently negotiating with the third party, but it is uncertain
whether a mutually agreeable settlement can be reached and litigation avoided.
The Company has accrued the $93,000 in accounts payable as of September 30,
1998. If the Company can not reach such a settlement with the third party,
accelerated payments of amounts due, if any, and/or litigation expense could
have a material adverse effect on the Company if it is not able to raise
additional capital through the placement of debt or equity securities, or both.
In July 1998, Vision Diagnostics, Inc., which was acquired July 14, 1998, was
sued for alleged non-payment of a Promissory Note. The Company is currently
negotiating a settlement, but is uncertain as to whether one can be reached.
Management believes that the outcome will not have a material adverse effect on
the condensed consolidated financial statements.
In April 1998, Vision Diagnostics, Inc., which was acquired July 14, 1998, was
sued for collection of amounts owed under a certain capital equipment lease. The
Company has agreed to refinancing terms with the third party and is awaiting
final approval by the credit committee of the third party. Management believes
that the outcome will not have a material adverse effect on the condensed
consolidated financial statements.
In May 1998, Vision Diagnostics, Inc. and affiliates, which was acquired July
14, 1998, was sued for breach of contract, unjust enrichment, fraud and
conversion related to lack of payment on reading fees. In addition, the former
shareholder claims breach of contract, fiduciary duty, self-dealing, conversion
and fraud related to certain stock ownership transactions. Management plans to
vigorously defend against this lawsuit and believes the outcome will be in favor
of the above named defendants and will not have a material adverse effect on the
condensed consolidated financial statements. Settlement of this lawsuit will
come from shares not yet issued from the purchase of Regional MRI of Orlando.
Thirty-five percent of the shares associated with the asset purchase of Regional
MRI of Orlando, Inc. have not been issued for this purpose.
In May 1998, the limited partners in West Regional MRI filed a lawsuit against
Vision Diagnostics, Inc., DVI Business Credit Corporation and Medical Devices
Technologies, Inc. to remove Vision Diagnostics, Inc. as the general partner of
the partnership, to declare the DVI line of credit financing arrangement
unenforceable against West Regional MRI, to void the purchase of Vision
Diagnostics, Inc. by MDT and compensation for poor management by the general
partner. Management plans to vigorously defend against this lawsuit and believes
the outcome will be in favor of the defendants and will not have a
material adverse effect on the condensed consolidated financial statements. The
Company has averted any action by the court through its compliance with the
partnership agreement and has presently tendered an offer to purchase the
limited partnership interests. This offer has been accepted by the limited
partners; however, it is contingent upon financing.
In January 1998, certain financial consultants have filed a lawsuit against
Vision Diagnostics, Inc., West Regional MRI, and other individuals, for
negligent misrepresentation, a derivative claim for breach of fiduciary duty and
breach of contract. The financial consultants believe they are owed finders fees
and/or commissions related to financing arranged, equity that could have been
obtained and an aborted merger. In addition, one of the financial consultants
believes he was wrongfully terminated. Management plans to vigorously defend
against this lawsuit and believes the outcome will be in favor of the above
named defendants and will not have a material adverse effect on the condensed
consolidated financial statements. Any settlement of this lawsuit will be paid
out of the portion of the shares not yet issued from the purchase of Vision
Diagnostics, Inc. Thirty percent of the shares associated with the purchase of
Vision Diagnostics, Inc. have not been issued for this purpose.
There are no other legal proceedings to which the Company is a party which could
have a material adverse effect on the Company.
12
<PAGE> 13
ITEM 2. CHANGES IN SECURITIES
Effective March 6, 1998, the directors of the Company approved a one (1) for
thirty-five (35) reverse split of the common stock. There were no changes in the
common stock voting rights, par value or authorized shares.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit 27 Financial Data Schedule.
The Company filed Current Reports on Forms 8-K which were issued on April 17,
July 15, and September 11, 1998.
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MEDICAL DEVICE TECHNOLOGIES, INC.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Albert J. Perry, Jr. Chief Financial Officer November 19, 1998
- ------------------------
Albert J. Perry, Jr.
13
<PAGE> 14
MEDICAL DEVICE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
(unaudited)
------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 52,451 $ 45,505
Accounts receivable (net of allowance of $1,382,482 and $46,473) 2,577,814 15,162
Inventory (net of reserve of $6,275 and $5,711) (Note 2) 189,074 189,638
Prepaid expenses and other assets 172,709 44,391
- ---------------------------------------------------------------------------------------------------------
Total current assets 2,992,048 294,696
- ---------------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT:
Furniture and fixtures 111,903 105,188
Machinery and equipment 357,251 199,373
Leasehold Improvements 553,104 0
Equipment under capital lease 3,825,016 5,349
- ---------------------------------------------------------------------------------------------------------
4,847,274 309,910
Less accumulated depreciation (2,736,148) (136,979)
- ---------------------------------------------------------------------------------------------------------
NET PROPERTY AND EQUIPMENT 2,111,126 172,931
- ---------------------------------------------------------------------------------------------------------
LICENSE AGREEMENTS
(net of accumulated amortization of $897,015 and $745,570) 927,073 1,079,242
OTHER ASSETS
Goodwill (Net of accumulated amortization of $89,299) 3,571,953 0
Other Assets 253,592 16,834
- ---------------------------------------------------------------------------------------------------------
$ 9,855,792 $ 1,563,703
=========================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
F-1
<PAGE> 15
MEDICAL DEVICE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
(unaudited)
------------- -------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,463,591 $ 454,977
Accrued expenses 248,501 100,332
Current obligation under termination agreement 114,583 114,583
Current obligation under notes payable 568,177 0
Line of Credit 449,622 0
Current obligation under capital lease 1,075,802 100,000
- ---------------------------------------------------------------------------------------------------------
Total current liabilities 3,920,276 769,892
OTHER LIABILITIES
Long-term obligation under capital lease 1,448,820 0
- ---------------------------------------------------------------------------------------------------------
Total other liabilities 1,448,820 0
Minority Interest in West Regional MRI 675,324 0
STOCKHOLDERS' EQUITY (NOTE 5)
Series I convertible preferred stock (247,500 shares
authorized; 0 issued and outstanding) 0 0
6% cumulative convertible Series A preferred stock,
$.01 par value (1,972,500 shares authorized; 0
and 0 shares issued and outstanding) 0 0
Preferred stock, $.01 par value (10,000,000 shares authorized;
0 shares issued and outstanding) 0 0
Common stock, $.15 par value (100,000,000 shares
authorized; 4,102,532 and 436,262 outstanding) 615,380 65,439
Common stock to be issued (912,997 and 715 shares) 915,652 23,440
Additional paid-in capital 25,452,484 22,603,053
Deferred stock compensation 25,443 22,792
Accumulated deficit (23,197,587) (21,920,913)
- ---------------------------------------------------------------------------------------------------------
Total stockholders' equity 3,811,372 793,811
- ---------------------------------------------------------------------------------------------------------
$ 9,855,792 $ 1,563,703
=========================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
F-2
<PAGE> 16
MEDICAL DEVICE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Sept.30, Nine Months Ended Sept.30,
--------------------------- --------------------------
1998 1997 1998 1997
======================================================================================================
<S> <C> <C> <C> <C>
NET REVENUES $ 940,474 $ (1,950) $ 942,374 $ 56,750
OPERATING EXPENSES:
Research and development 38,272 130,635 73,861 626,348
Direct costs 140,598 22,636 619 91,236
Sales, general and administrative 1,086,213 897,827 1,972,733 2,612,120
- ------------------------------------------------------------------------------------------------------
LOSS FROM OPERATIONS (324,609) (1,053,048) (1,104,839) (3,272,954)
OTHER INCOME (EXPENSE):
Other income 11,527 0 11,527 25,000
Other expense (9,154) 0 (9,154)
Interest income 0 5,156 0 50,700
Interest expense (116,302) 0 (146,463) 0
Loss on disposal of assets (1,685) 0 (1,685) 0
-----------------------------------------------------------------------------------------------------
LOSS BEFORE MINORITY INTEREST (440,223) (1,047,892) (1,250,614) (3,197,254)
MINORITY INTEREST IN WEST REGIONAL MRI (25,934) 0 (25,934) 0
- ------------------------------------------------------------------------------------------------------
NET LOSS $ (466,157) $ (1,047,892) $ (1,276,548) $ (3,197,254)
======================================================================================================
LOSS PER SHARE:
LESS: CUMULATIVE PREFERRED STOCK DIVIDENDS 0 23,956 0 206,462
======================================================================================================
NET LOSS ATTRIBUTABLE TO COMMON STOCK $ (466,157) $ (1,071,848) $ (1,276,548) (3,403,716)
======================================================================================================
BASIC AND DILUTED LOSS PER COMMON SHARE $ (0.11) $ (3.08) $ (0.79) $ (12.83)
======================================================================================================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 4,212,173 348,398 1,625,324 265,223
======================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
F-3
<PAGE> 17
MEDICAL DEVICE TECHNOLOGIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS NINE MONTHS ENDED SEPTEMBER 30,
1998 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ($1,276,548) ($3,197,254)
Adjustments to reconcile net loss
to net cash used in operating activities:
Stock paid for services 319,588 370,960
Compensation recognized relating to
accrued employee stock grants and warrants 2,650 45,056
Minority Interest in West Regional MRI 25,934 0
Depreciation and amortization 534,105 268,250
Loss (gain) on disposal of fixed assets 1,685 (2,678)
Stock paid for accrued interest on Convertible Notes 37,435 0
Increase (decrease) from changes in:
Accounts receivable (62,318) (48,168)
Inventory 564 (163,609)
Prepaid royalties (25,000) (25,000)
Prepaid expenses and other assets 38,652 55,981
Other assets 12,157 (2,866)
Accounts payable 218,549 124,872
Termination obligation 0 (98,667)
Accrued expenses and taxes 87,269 (28,852)
- ---------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities ($85,278) ($2,701,975)
- ---------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (86,142)
Proceeds from sale of property and equipment 1,525 77,225
Cash acquired in acquisition of Vision Diagnostics
and affiliates 54,582 0
- ---------------------------------------------------------------------------------------------------------
Net cash provided (used in) by investing activities $ 56,107 ($8,917)
- ---------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
F-4
<PAGE> 18
MEDICAL DEVICE TECHNOLOGIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS NINE MONTHS ENDED SEPTEMBER 30,
1998 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on line of credit (150,145) 0
Proceeds from notes payable 225,020 0
Principal payments on notes payable (3,274) 0
Proceeds from common stock 55,000 0
Capital lease financing (90,484) (1,103)
--------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities $ 36,117 ($1,103)
- ---------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents 6,946 (2,711,995)
Cash and cash equivalents, beginning of period 45,505 2,889,233
- ---------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 52,451 $ 177,238
- ---------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
F-5
<PAGE> 19
MEDICAL DEVICE TECHNOLOGIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1998 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES:
PAYMENTS FOR:
Interest $ 71,638 $ -
Income taxes $ 800 $ 800
STOCK ISSUED FOR:
Research and development $ 5,309 $ 160,461
Public relations and marketing services 50,046
Legal, professional and employee services 274,622 119,400
Directors' fees 37,782 31,177
Termination agreement 1,875 -
Manufacturing costs - 9,876
Interest expense on convertible notes payable 37,435 -
-------------------------------
$ 357,023 $ 370,960
-------------------------------
Common stock dividends distributable and issued to 6% cumulative
convertible Series A preferred stockholders $ - $206,462
</TABLE>
NON-CASH FINANCING ACTIVITY:
During the second quarter of 1998, short-term convertible notes payable in the
amount of $262,520 were converted along with accrued interest payable of $34,344
into 473,469 shares of Restricted Rule 144 Common Stock (see Note 4).
During the third quarter of 1998, short-term convertible notes payable in the
amount of $231,709 were converted along with accrued interest payable of $3,091
into 361,627 shares of Restricted Rule 144 Common Stock (see Note 4).
During the first nine months of 1998 and 1997, deferred compensation expense of
$2,651 and $45,056 were recorded relating to accrued employee stock grants in
order to value such shares at the estimated fair market value at the date of
grant.
Pursuant to certain employee agreements in January and September 1997, 7,857 and
536 shares of accrued employee common stock grants were issued. Accordingly,
deferred stock compensation of $247,500 and $25,444 was reclassified to common
stock and additional paid-in capital in the first and third quarters of 1997,
respectively.
During the third quarter of 1998, three MRI centers and the general partnership
of a fourth MRI center were purchased for 3,461,356 shares of Restricted Rule
144 Common Stock. (see Note 5)
F-6
<PAGE> 20
On July 14, 1998, the Company acquired either the stock or substantially all of
the assets and liabilities of Vision Diagnostics, Inc. and Affiliates. Vision
Diagnostics, Inc. and Affiliates are in the business of providing radiologic
diagnostic services.
On July 14, 1998, the Company consummated the acquisition of certain assets
(primarily related to accounts receivable and property and equipment) and the
assumption of certain liabilities (primarily accounts payable and debt) from
Regional MRI of Orlando, Inc., Regional MRI of Jacksonville, Ltd. and Regional
MRI of Toledo, Inc. for a purchase price of $1,893,356 shares of Restricted Rule
144 common stock. The Company will account for the acquisition using the
purchase method of accounting with the assets acquired and the liabilities
assumed recorded at fair value, and the results of the acquired entities
included in the Company's condensed consolidated financial statements from July
1, 1998. Goodwill associated with this transaction amounted to $2,025,240.
On July 14, 1998, the Company consummated the acquisition of 100% of the stock
of Vision Diagnostics, Inc. with the issuance of 1,568,000 shares of Restricted
Rule 144 common stock. Vision Diagnostics, Inc. is the general partner and fifty
percent owner of West Regional MRI located in Oak Brook, Illinois. The Company
will account for the acquisition using the purchase method of accounting and
with the results of the acquired entity included in the Company's consolidated
financial statements from the July 1, 1998. Goodwill associated with this
transaction amounted to $1,546,712.
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
F-7
<PAGE> 21
MEDICAL DEVICE TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Statement of Information Furnished
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments (consisting only of normal and
recurring accruals) necessary to present fairly the Company's financial position
for the interim reporting period as of September 30, 1998, and the results of
operations for the three month and nine month periods ended September 30, 1998
and 1997 and cash flows for the nine month periods ended September 30, 1998 and
1997. These results have been determined on the basis of generally accepted
accounting principles and practices applied consistently with those used in the
preparation of the Company's 1997 Annual Report on Form 10-KSB.
The results of operations for the three month and nine month period ended
September 30, 1998 are not necessarily indicative of the results to be expected
for any other period or for the full year.
Certain information and footnote disclosures normally included in financial
statements presented in accordance with generally accepted accounting principles
have been condensed or omitted. The accompanying condensed consolidated
financial statements should be read in conjunction with the Company's audited
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1997.
2. Accounts receivable
Accounts receivable are recorded at net realizable value and have been reduced
for known billing adjustments.
3. Inventory
The inventory balance shown at September 30, 1998 consisted of $109,262 of
finished goods, net of reserve of $6,275 and $79,812 of parts and materials. The
inventory balance shown at December 31, 1997 consisted of $109,826 of finished
goods, net of reserve of $5,711 and $79,812 of parts and materials. Inventory is
valued at the lower of cost or market, on a first-in, first-out basis.
4. Loss Per Common Share
Loss per share is based on the weighted average number of common shares
outstanding during each period presented. For the three months and nine months
ended September 30, 1998 and 1997, outstanding stock options and warrants of
87,847 and 89,421, respectively, are not included in the diluted earnings per
share calculation since their effect would be anti-dilutive. Weighted average
number of common shares outstanding during the three months and nine months
ended September 30, 1998 and 1997 includes stock to be issued; however,
convertible notes payable were not included as common stock equivalents as the
effect would be anti-dilutive.
F-8
<PAGE> 22
5. Short-term Notes Payable
During the fourth quarter of 1997, the Company issued $100,000 ($50,000 to three
of the Company's directors) in principal amount of 36% short-term convertible
notes payable, due May 18, 1998, to five individuals to finance operations until
a corporate acquisition could be completed. Until payment in full, the unpaid
principal amount of these notes, or any portion may, at the election of
the noteholder at any time, be converted at the conversion price per share of
fifty (50%) percent of the previous thirty day average trading bid price as of
the date of conversion (as amended). As additional consideration for these
loans, the individual lenders, including the directors, were awarded an
aggregate of warrants to purchase 1,429 shares of Common Stock for every $12,500
loaned to the Company at an exercise price of $4.20 per share. In connection
with the issuance of the warrants to the individuals, the Company did not
recognize additional interest expense, as the value of the warrants was deemed
to be immaterial. The interest rate and terms of these notes were made at arms
length.
On June 19, 1998, 164,096 shares of Restricted Rule 144 Common Stock were issued
in order to convert all of these 1997 notes including principal and accrued
interest payable. Cash paid to these individuals and to the directors for
interest was $0 at December 31, 1997 and September 30, 1998. Restricted Rule 144
Common Stock paid to these individuals and to the directors for interest was $0
at December 31, 1997 and $21,300 at September 30, 1998. Accrued interest
amounted to $4,400 for the year ended December 31, 1997 to $0 as of September
30, 1998. None of the noteholders elected to exercise the related warrants,
thus, all such warrants expired on May 18, 1998.
During the first nine months of 1998, the Company issued $225,020 in principal
amount of short-term convertible notes payable, due one year from the date of
the related note or the date the Company receives funding from any offering or
merger with another corporation, to four individuals to finance operations until
a corporate acquisition could be completed. Until payment in full, the unpaid
principal and accrued interest amounts of these notes, may be converted, at the
option of the noteholder, into common shares of the Company at any time prior to
repayment thereof at a conversion price per share of fifty (50%) percent of the
previous thirty day average trading bid price as of the date of conversion.
These notes accrue interest at a rate per annum equal to one (1%) percent over
the referenced prime lending rate announced from time to time by Bank of America
in San Francisco, California. As additional consideration for these loans, the
individual lenders were awarded 6,250 Restricted Rule 144 Common Stock for every
$12,500 loaned to the Company.
On June 19, 1998, 309,373 shares (including the additional consideration shares)
of Restricted Rule 144 Common Stock were issued in order to convert certain 1998
short-term convertible notes, including principal and accrued interest payable
(see Note 6). Cash paid to these individuals and to the for interest was $0 at
September 30, 1998. Restricted Rule 144 Common Stock paid to these individuals
for interest was $13,044 at September 30, 1998. Accrued interest amounted to $0
as of September 30, 1998.
In the third quarter of 1998, 361,627 shares (including the additional
consideration shares) of Restricted Rule 144 Common Stock were issued in order
to convert certain short-term convertible notes, including principal and accrued
interest payable (see Note 6). Cash paid to these individuals for interest was
$0 at September 30, 1998. Restricted Rule 144 Common Stock paid to these
individuals for interest was $3,091 at September 30, 1998.
In each case, the shares of Restricted Rule 144 Common Stock have not been
registered under the Securities Act of 1933 (the "Act") and are "restricted
securities" as that term is defined in Rule 144 under the Act. These shares may
not be offered for sale, sold or otherwise transferred for one year and one day
from the date of issue.
F-9
<PAGE> 23
6. Stockholders' Equity
Common Stock
Pursuant to certain employee agreements in January and September 1997, 7,857 and
536 shares of accrued employee common stock grants were issued. Accordingly,
deferred stock compensation of $247,500 and $25,444 was reclassified to common
stock and additional paid-in capital in the first and third quarters of 1997,
respectively.
Effective March 6, 1998, the Director's of the Company approved a one (1) for
thirty-five (35) reverse split of the common stock. There was no change in the
common stock voting rights, par value or authorized shares. All share balances
have been retroactively adjusted to reflect the reverse stock split.
On June 19, 1998, 473,469 shares of Restricted Rule 144 Common Stock were issued
in order to convert certain 1997 and 1998 convertible notes payable and the
related accrued interest (see Note 5). Cash paid to these individuals for
interest was $0 at September 30, 1998 and December 31, 1997. In each case, the
shares of Restricted Rule 144 Common Stock have not been registered under the
Securities Act of 1933 (the "Act") and are "restricted securities" as that term
is defined in Rule 144 under the Act. These shares may not be offered for sale,
sold or otherwise transferred for one year and one day from the date of issue.
In the third quarter of 1998, 361,627 shares (including the additional
consideration shares) of Restricted Rule 144 Common Stock were issued in order
to convert certain short-term convertible notes, including principal and accrued
interest payable (see Note 5). Cash paid to these individuals and to the for
interest was $0 at September 30, 1998. Restricted Rule 144 Common Stock paid to
these individuals for interest was $3,091 at September 30, 1998.
Pursuant to an investment letter dated June 26, 1998 with an individual, the
Company received $55,000 for the purchase of 55,000 shares of Restricted Rule
144 Common Stock at a purchase price of $1.00 per share. On July 1, 1998, these
shares were issued. The shares of Restricted Rule 144 Common Stock have not been
registered under the Securities Act of 1933 (the "Act") and are "restricted
securities" as that term is defined in Rule 144 under the Act. These shares may
not be offered for sale, sold or otherwise transferred for one year and one day
from the date of issue.
In each of the five most current years, the Company's board of directors have
annually approved a stock compensation plan, the most recent which registered
100,000 shares of common stock under Form S-8 on May 13, 1998, whereby services
are obtained in exchange for issuance of free trading stock of the Company.
Shares may be awarded under this plan until April 1, 2003. During the nine
months ended September 30, 1998 and 1997, 226,260 and 33,589 shares,
respectively, of common stock under Form S-8 registrations were issued for
directors fees, research and development, advertising and public relations,
compensation and legal and professional services provided to the Company.
On July 14, 1998, the Registrant acquired certain defined magnetic resonant
image (MRI) technology properties and Vision Diagnostics, Inc. for a total of
3,461,356 Restricted Rule 144 common shares (2,549,074 issued and 912,282 to be
issued upon completion of escrow requirements) of the Registrant. The shares of
Restricted Rule 144 Common Stock have not been registered under the Securities
Act of 1933 (the "Act") and are "restricted securities" as that term is defined
in Rule 144 under the Act. These shares may not be offered for sale, sold or
otherwise transferred for one year and one day from the date of issue. As a
result of the acquisitions, the Registrant has acquired certain assets and
liabilities of three MRI centers and the general partnership of a fourth MRI
center. The four centers are located in Orlando, Florida; Jacksonville, Florida;
Oak Brook, Illinois; and Toledo, Ohio. The acquisition will be accounted for
using the purchase method and all revenue and expense associated with the
acquisition have been included in the consolidated financial statements of the
Company as of July 1, 1998. The results of operations between July 1 and the
acquisition date, July 14, 1998, are immaterial. As a part of the acquisition of
these properties, the principal owner of the properties has been indemnified
against certain liabilities and received a two-year consulting agreement with
the Registrant, which includes a 5% finder's fee on all new properties acquired
by the Registrant through the principal owners' efforts. The principal owner has
become a member of the Registrant's Board of Directors and has become the major
shareholder of the Registrant, subject to a Voting Trust Agreement which permits
the current Board of Directors of the Registrant to vote these shares for a
period of up to three years from the date of closing. The trust agreement
further restricts the sale of the stock beyond those restrictions imposed by
Rule 144. The trust agreement provides that only 25% of the shares will be
released to the shareholder after year one of the trust agreement. Under the
trust agreement, the voting rights of any shares sold after year one remain with
the board of directors.
F-10
<PAGE> 24
7. New Accounting Pronouncements
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130") issued by the FASB is effective for financial
statements with fiscal years beginning after December 15, 1997. Earlier
application is permitted. SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components in a full set of general
purpose financial statements. The Company adopted SFAS No. 130 on January 1,
1998 and it had no effect on its financial position or results of operations.
Statement of Financial Accounting Standards No. 131, "Disclosure about Segments
of an Enterprise and Related Information" ("SFAS No. 131") issued by the FASB is
effective for financial statements with fiscal years beginning after December
15, 1997. The new standard requires that public business enterprises report
certain information about operating segments in complete sets of financial
statements of the enterprise and in condensed financial statements of interim
periods issued to shareholders. It also requires that public business
enterprises report certain information about their products and services, the
geographic areas in which they operate and their major customers. The Company
adopted SFAS No. 131 on January 1, 1998 and it had no effect on its financial
position or results of operations.
F-11
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 10QSB
09/30/98 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> APR-01-1998 JAN-01-1998
<PERIOD-END> JUN-30-1998 SEP-30-1998
<CASH> 52451 52451
<SECURITIES> 0 0
<RECEIVABLES> 3960297 3960297
<ALLOWANCES> 1382482 1382482
<INVENTORY> 189074 189074
<CURRENT-ASSETS> 2992048 2992048
<PP&E> 4847274 4847274
<DEPRECIATION> 2736148 2736148
<TOTAL-ASSETS> 9855792 9855792
<CURRENT-LIABILITIES> 3920276 3920276
<BONDS> 0 0
0 0
0 0
<COMMON> 615380 615380
<OTHER-SE> 3195992 3195992
<TOTAL-LIABILITY-AND-EQUITY> 9855792 9855792
<SALES> 942374 940474
<TOTAL-REVENUES> 942374 940474
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 1265083 2047213
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (116302) (146463)
<INCOME-PRETAX> (466157) (1276548)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (466157) (1276548)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (466157) (1276548)
<EPS-PRIMARY> (.11) (.79)
<EPS-DILUTED> (.11) (.79)
</TABLE>
