<PAGE>
US Securities and Exchange Commission
Washington, DC 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [Fee Required]
For the fiscal year ended December 31, 1998.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [No Fee Required]
Commission File Number 0-12365
MEDICAL DEVICE TECHNOLOGIES, INC.
(Name of small business issuer in its charter)
Utah 58-1475517
---------------- ---------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
9191 Towne Centre Drive, Suite 420, San Diego, California 92122
(Address of principal executive offices)
Issuer's telephone number: (619) 455-7127
Securities registered under Section 12(b) of the Exchange Act: None
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, $0.15 Par Value Over-the-counter
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 ___
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B not contained in this form, 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
amendment to this Form 10-KSB. [ X ]
State issuer's revenues for its most recent fiscal year $1,869,374.
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 March 31, 1999, was $3,642,341.
As of March 31, 1999, Registrant had outstanding 5,136,624 shares of common
stock, 0 shares of 6% cumulative convertible Series A preferred stock and 56,386
redeemable common stock purchase warrants.
Transitional Small Business Disclosure Format (check one): Yes ___ No. X
Portions of the Registrants definitive Proxy Statement relating to the 1999
Annual Meeting of the Stockholders are incorporated by reference into Part III
hereof.
<PAGE>
TABLE OF CONTENTS
PART I
Item 1. Description of the Business..................................1
Item 2. Description of Property......................................5
Item 3. Legal Proceedings............................................6
Item 4. Submission of Matters to a Vote of Security Holders..........7
PART II
Item 5. Market for Common Equity and Related Stockholder Matters ....7
Item 6. Management's Discussion and Analysis and Plan of Operation...8
Item 7. Financial Statements.........................................15
Item 8. Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure.....................................16
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons,
Compliance with Section 16(a) of the Exchange Act............16
Item 10. Executive Compensation.......................................18
Item 11. Security Ownership of Certain Beneficial Owners and
Management...................................................18
Item 12. Certain Relationships and Related Transactions...............18
PART IV
Item 13. Exhibits and Reports on Form 8-K.............................19
<PAGE>
PART I
ITEM 1. DESCRIPTION OF THE BUSINESS
Corporate History
- -----------------
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.
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.
The Company's 6% Cumulative Convertible Series A Preferred Stock, par value $.01
per share (the "Preferred Stock"), which previously traded on the NASDAQ
SmallCap Market under the symbol "MEDDP", converted to Common Stock at a ratio
of 4/35 (four thirty-fifths) shares of Common Stock to 1 (one) share of
Preferred Stock on July 24, 1997. There were no shares of Preferred Stock
outstanding at December 31, 1998.
The Company
- -----------
Prior to 1992, the Company's business was the exploration and production of
hydrocarbons. As of June 1, 1992, the Company re-entered the development stage.
Effective January 1, 1994, the Company completed the divestiture of all oil and
gas properties and was no longer in the hydrocarbon business. Since that time,
the Company has been exclusively a medical device company. The Company changed
its name in April 1995, from Cytoprobe Corporation, to reflect the change of
focus.
1
<PAGE>
Prior to 1998, the Company had developed three innovative medical device
products. The first product, the Fluid Alarm System (FAS), formerly called the
Personal Alarm System (PAS), is a device which monitors the integrity of
infection control barriers, such as surgical gloves and gowns worn during
medical procedures. The second product, the Cell Recovery System (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 received FDA clearance for the FAS during the
year ended December 31, 1995 and received FDA clearance for the CRS in March
1996. The Company initiated further clinical trials on the CRS in 1997. The
third product, the Intracranial Pressure Monitoring System (ICP), is a
diagnostic device that measures pressures within the coincident skull
noninvasively. 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 1997 and deemed the ICP
license to have no future value. In 1998, coincident with the purchase of Vision
Diagnostics, Inc. and Affiliates, described in the next paragraph, the Company
wrote off the costs associated with the FAS and the CRS licenses, including
certain fixed assets and inventory costs, and recognized impairment losses in
the amount of $725,458, and $616,093, respectively. However, the company
continues to retain the rights to the use of the licenses through 2005 and 2008,
respectively. Therefore, the Company may elect to reintroduce either product at
a later date.
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).
Vision Diagnostics, Inc. and Affiliates is in the business of providing
radiologic diagnostic services. The affiliated group of companies includes
Vision Diagnostic, Inc., Regional MRI of Orlando, Inc., Regional MRI of
Jacksonville, Ltd. and Regional MRI of Toledo, Inc. In addition, Vision is the
general partner in West Regional MRI Limited Partnership located in Oak Brook,
Illinois.
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
consolidated financial statements from July 14,1998. Goodwill associated with
this transaction amounted to $2,170,550.
Additionally, at this date, the Company acquired of 100% of the stock of Vision
Diagnostics, Inc. with the issuance of 1,568,000 shares of Restricted Rule 144
common stock. The Company has accounted for the acquisition using the purchase
method of accounting with the results of operations of the acquired entity
included in the Company's consolidated financial statement from the date of
acquisition. Goodwill associated with this transaction amounted to $1,577,477.
Vision Diagnostics, Inc. is the 50% general partner in West Regional MRI Limited
Partnership. The 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 consolidated balance sheet at December 31, 1998. The limited
partners' share of the partnership's net income has been presented as minority
partners share of income consolidated partnership interest in the accompanying
consolidated statement of operations for the year-ended December 31, 1998. With
the acquistion of Vision Diagnostics, Inc. and Affiliates, the Company has
emerged from the development stage.
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.
2
<PAGE>
Acquisitions
- ------------
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 is in the business of providing radiologic
diagnostic services. The affiliated group of companies includes Vision
Diagnostic, Inc., Regional MRI of Orlando, Inc., Regional MRI of Jacksonville,
Ltd. and Regional MRI of Toledo, Inc. In addition, Vision is the general partner
in West Regional MRI Limited Partnership located in Oak Brook, Illinois.
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 also plans to seek, investigate and, if such investigation warrants,
to acquire controlling interest in business opportunities presented to it by
persons or firms who or which desire to seek the perceived advantages of an
Exchange Act registered corporation. The Company will not restrict its search to
any specific business, industry, or geographical location, although does plan to
concentrate its search in the medical business in general. 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
establishing 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;
3
<PAGE>
(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.
In applying the foregoing criteria, no one of which is now known to be
controlling, management will attempt 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)
evidence of existing patents, trademarks or service marks or rights thereto;
(vii) present and proposed forms of compensation to management; (viii) a
description of transactions between the target and its affiliates during
relevant periods; (ix) a description of present and required facilities; (x) an
analysis of risks and competitive conditions; (xi) a financial plan of operation
and estimated capital requirements; and (xii) 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.
4
<PAGE>
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
- ------
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.
The Company has not been profitable for the last 10 years and expects to incur
additional operating losses in the coming year. 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 long-term viability of the Company
is dependent on its ability to obtain additional funding to acquire additional
MRI centers and to obtain the financing necessary to fund its operations.
Number of Employees
- -------------------
As of March 31, 1999, the Company had two full-time employees in executive and
management capacity, four full-time employees in MRI site management capacity,
three full-time employees in MRI site marketing management capacity, six
full-time and two part-time employees as MRI technicians and eleven full-time
employees in general and administrative capacity.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases its MRI machines and offices in San Diego, CA, Jacksonville
FL, Orlando, FL, Toledo OH, and Oak Brook IL. The Company's total lease
obligation is currently approximately $96,000 per month with certain leases
extending through 2003.
5
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
The Company is currently involved in several lawsuits. A description of these
lawsuits follows.
In January 1998, the Company was sued in the Superior Court of the State of
California, County of Ventura 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. The Company has accrued the
$93,000 in accounts payable as of December 31, 1998. Management believes that
the outcome will not have a material adverse effect on the consolidated
financial statements.
In July 1998, Vision Diagnostics, Inc., which was acquired July 14, 1998, was
sued in the United States District Court for the Northern District of Illinois
for alleged non-payment of a $90,000 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 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 consolidated
financial statements.
In May 1998, Vision Diagnostics, Inc. and affiliates, which was acquired July
14, 1998, was sued in the Court of Common Pleas, Cuyahoga County, Ohio 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 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 in the
Circuit Court of the Eighteenth Judicial Circuit, DuPage County, Illinois
against Vision Diagnostics, Inc. and DVI Business Credit Corporation 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 and compensation for poor management by the general partner. Subsequently,
the lawsuit was amendeded to include the Company and to void the July 14, 1998
acquisition of the limited partnership. On April 9, 1999, the Company completed
the acquisition of the limited partnership and accordingly the lawsuit was
dismissed.
In January 1998, certain financial consultants filed a lawsuit in the United
States District Court for the District of New Jersey 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 consolidated financial
statements.
6
<PAGE>
The Company has been named as a defendant in several legal actions primarily
involving the default by the Company with respect to the provisions of certain
agreements and/or financial obligations. Many of these matters have been settled
with payment terms agreed to by both parties, and while any litigation has an
element of uncertainty, the Company believes that the ultimate outcome of any
legal matter or claim that is pending or threatened will not have a material
adverse effect on its consolidated financial position or results of operations.
However, the ultimate outcome of all of them combined could have a material
adverse effect on its consolidated financial position or results of operations.
There are no other legal proceedings to which the Company is a party which could
have a material adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded over-the-counter under the symbol MEDD. The
following table sets forth, for the periods indicated, the high and low bid
prices for the Common Stock, as reported by the NASDAQ SmallCap Market during
1997 and 1998. Common Stock prices have been adjusted to reflect the one-for-two
reverse split in June 1996 and the one (1) for thirty-five (35) reverse split
effective March 6, 1998.
Bid Price
High Low
--------------------------
1997
- ----
First Quarter $27.30 $13.30
Second Quarter $28.35 $13.30
Third Quarter $15.40 $3.15
Fourth Quarter $5.60 $1.09
1998
- ----
First Quarter $ 2.50 $ .55
Second Quarter $ 2.31 $ 1.14
Third Quarter $ 2.13 $ .94
Fourth Quarter $ 1.06 $ .56
On March 31, 1999, the closing bid and asked prices of the Company's Common
Stock, as reported by the OTC Bulletin Board, were $1.31 and $1.31 per share,
respectively.
The Company received notice from NASDAQ, at the close of business on March 24,
1998, that the Company's stock, which had previously traded on the Small Cap
Market, was being delisted as of the date of notification for failure to meet
the minimum requirement for tangible net assets value.
On March 31, 1999, there were approximately 1,148 holders of record of Common
Stock.
The Company has not paid any cash dividends with respect to its Common Stock,
and it is unlikely that Company will pay any dividends on its Common Stock in
the foreseeable future. The Company was required to pay a 6% cumulative,
semi-annual dividend with respect to its Preferred Stock in shares of Common
Stock, and, through July 24, 1997, the date the Preferred Stock converted, by
its terms, to four/thirty-fifths (4/35 rounded to the nearest whole number of
shares) shares of Common Stock for each share of Preferred Stock, the Company
made each of such dividend payments. Earnings, if any, that the Company may
realize will be retained in the business for further development and expansion.
7
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS AND 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 Item 7 in this Form 10-KSB.
Forward-Looking Statements
- --------------------------
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.
General
- -------
>From its incorporation in 1980 until June 1992, the Company was engaged
exclusively in oil and gas activities. In June 1992, the Company commenced
certain initial activities with respect to the medical device business.
Thereafter, the Company continued to increase its activities in the medical
device field while simultaneously decreasing its oil and gas activities.
Effective as of January 1, 1994, the Company having disposed of all its oil and
gas interests and ceased all activities related thereto, commenced on a
full-time basis its current medical device operations. The Company changed its
name in May 1995, from Cytoprobe Corporation, to reflect the change of focus. On
June 1, 1992, the Company was considered, for accounting purposes, to have
re-emerged as a development stage company. In third quarter 1998, the Company
narrowed its focus to medical diagnostic imaging centers. 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 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 operation should be read in conjunction with
the consolidated financial statements and notes thereto referred to in Item 7.
8
<PAGE>
Results of Operations
- ---------------------
Year ended December 31, 1998 compared to year ended December 31, 1997.
Revenues
- --------
Operating revenues for the year ended December 31, 1998 were $1,869,374 compared
to $62,750 for the year ended December 31, 1997. The increase of 29.8 fold is a
result of the acquisition of Vision Diagnostics, Inc. 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 $1,867,474 of the
sales revenue in 1998. The FAS represented $1,900 of the sales revenue in 1998
and all of the sales revenue in 1997. This was generated from providing scanning
and reading services for the medical industry.
Operating Expenses
- ------------------
Research and Development
Research and development costs in 1998 were $102,293 as compared to $708,051 in
1997, representing a decrease of 85.6%. Current year costs associated with
research and development represent carrying costs for maintaining ownership of
the FAS and CRS for part of 1998 prior to their associated licenses being
written off.
Sales, General and Administrative
Sales, general and administrative costs were $2,967,114 in 1998 as compared to
$3,145,461 in 1997, representing a decrease of 5.7%. This decrease was primarily
the result of corporate downsizing of the sales, marketing, general and
administrative staff and management as compared to the same period in 1997
offset by the activity from the acquisition of Vision Diagnostics, Inc. and
Affiliates during the third quarter of 1998.
Loss on Impairment of License Agreements
Loss on impairment of License agreement was $487,784 in 1997, resulting from the
Company's license for the ICP being revoked by the licenser in January 1998
after the Company failed to cure a 1997 default in the license agreement for
non-payment of royalties. In 1998, coincident with the purchase of Vision
Diagnostics, Inc. and Affiliates, the Company wrote-off the FAS and the CRS
licenses as well as other related assets and recorded an impairment loss of
$1,341,551, an increase of 175% from 1997.
Losses
The Company's net loss for the year ended December 31, 1998 was $2,833,850 as
compared to $4,382,785 for the year ended December 31, 1997, representing a
35.4% decline in the net loss. This reduced loss was primarily attributable to
sales resulting from the acquisition of the MRI centers and the curtailment
certain research and development expenditures related to the CRS, 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 1998 was $0.93
as compared to a $15.15 loss per common share 1997. This reduction in loss per
common share was attributable to the reduced net loss in 1998 compared to 1997
and to the increase in the weighted average number of common shares outstanding
in 1998 as compared to 1997.
9
<PAGE>
Liquidity and Capital Resources
- -------------------------------
To date, the Company has funded its capital requirements for its current medical
diagnostic imaging 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 December 31, 1998 was $77,906 as compared to $45,505
at December 31, 1997, representing a 71.2% increase.
In 1998, $59,202 of net cash was used for operating activities. The Company
received $240,020 from the proceeds of private placement convertible notes and
$55,000 from the proceeds of Restricted Rule 144 Common Stock issued during
1998. Net cash used in operating activities in 1998 consisted principally of a
net loss of $2,833,850. This net loss was partially offset by an decrease in
other net assets (excluding cash) of $489,486, $396,680 in common stock paid for
services and interest in lieu of cash, plus depreciation, minority interest,
accrued compensation expense and loss on impairment and disposal of assets of
$1,888,482. Changes in current assets and current liabilities resulted in a
deficit in the Company's working capital position of $1,258,564 at December 31,
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 provide services in its' current MRI centers and to acquire
additional 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.
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
long-term viability of the Company is dependent on its ability to obtain
additional funding 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. 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 December 31, 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 December 31, 1998. Accrued interest amounted
to $4,400 for the year ended December 31, 1997 to $0 as of December 31, 1998.
All of the noteholders did not elect to exercise the related warrants, thus, all
such warrants expired on May 18, 1998.
10
<PAGE>
During the year ended December 31, 1998, the Company issued $240,020 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.
During the second and third quarters of 1998, 391,858 shares (including the
additional consideration shares) of Restricted Rule 144 Common Stock were issued
in order to convert all of these 1998 short-term convertible notes, including
principal and accrued interest payable, except for one note for $15,000, which
was still outstanding at December 31, 1998. Cash paid to these individuals for
interest was $0 as of December 31, 1998. Restricted Rule 144 Common Stock paid
to these individuals for interest was $13,708 as of December 31, 1998. Accrued
interest amounted to $1,248 as of December 31, 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. As of December 31,
1998, all such shares had been issued.
Net Operating Loss Carryforward
- -------------------------------
At December 31, 1998, the Company had approximately $23,000,000 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 $9,214,523.
New Accounting Pronouncements
- -----------------------------
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" (SFAS 130) issued by the FASB is effective for financial statements with
fiscal years beginning after December 15, 1997. Earlier application is
permitted. SFAS 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 130 on January 1, 1998 and it had
no effect on its financial position or results of operations.
11
<PAGE>
Statement of Financial Accounting Standards No. 131, "Disclosure about Segments
of an Enterprise and Related Information" (SFAS 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 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 131 on January 1, 1998 and it had no effect
on its financial position or results of operations.
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, Inc. and affiliates.
The Company's Capital Requirements
- ----------------------------------
The Company's greatest cash requirements during 1999 will be for funding, in the
immediate future, its deficit in working capital, and in the longer term,
obtaining the working capital necessary for future acquisitions of additional
medical diagnostic imaging centers.
The Company is seeking to fund these and other operating needs in the next 12
months from funds to be obtained through a corporate acquisition or merger with
another entity with greater financial resources or from the proceeds of
additional private placements or public offerings of debt or equity securities.
If a corporate acquisition or merger with another entity or private placement is
not completed, the Company will be required to 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 revenues of its MRI centers as well as through new private
financings and public offerings of debt and equity securities.
These financial statements have been prepared assuming that the Company will
continue as a going concern. The Company has recurring losses from operations,
negative working capital and is in default with respect to the terms of certain
obligations. Further, the continued viability of the Company is dependent on the
success of its MRI centers which were acquired in July 1998. These conditions
raise substantial doubt about the Company's ability to continue as a going
concern. The Company's independent certified public accountants have included
an explanatory paragraph in their audit report with respect to the Company's
1998 and 1997 consolidated financial statements related to a substantial doubt
with respect to the Company's ability to continue as a going concern.
The Company is seeking to fund its immediate and longer-term working capital
needs from funds to be obtained through a corporate acquisition or merger with
another entity with greater financial resources or from the proceeds of
additional private placements or public offerings of debt or equity securities.
However, neither the consummation nor the success of an acquisition or merger,
nor the receipt of additional funds can be assured. Therefore, the long-term
viability of the Company is dependent on its ability to profitably operate its
MRI centers and to obtain the financing necessary to fund its anticipated
growth.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amount of
liabilities that might be necessary should the Company be unable to continue in
existence.
12
<PAGE>
Year 2000 Compliance
Background
In the past, many computers, software programs, and other information technology
("IT systems"), as well as other equipment relying on microprocessors or similar
circuitry ("non-IT systems"), were written or designed using two digits, rather
than four, to define the applicable year. As a result, date-sensitive systems
(both IT systems and non-IT systems) may recognize a date identified with "00"
as the Year 1900, rather than the year 2000. This is generally described as the
Year 2000 issue. If this situation occurs, the potential exists for system
failures or miscalculations, which could impact business operations.
The Securities and Exchange Commission ("SEC") has asked public companies to
disclose four general types of information related to Year 2000 preparedness:
the Company's state of readiness, costs, risks, and contingency plans. See SEC
Release No. 33-7558 (July 29, 1998). Accordingly, the Company has included the
following discussion in this report, in addition to the Year 2000 disclosures
previously filed with the SEC.
State of Readiness
The Company believes that it has identified all significant IT systems and
non-IT systems that require modification in connection with Year 2000 issues.
Internal and external resources have been used and are continuing to be used, to
make the required modifications and test Year 2000 readiness. The required
modifications are under way. The Company plans on completing the modifications
to and testing of all significant systems by July 1999.
In addition, the Company has been communicating with customers, suppliers,
banks, vendors and others with whom it does significant business (collectively)
its "business partners") to determine their Year 2000 readiness and the extent
to which the Company is vulnerable to any other organization's Year 2000 issues.
Based on these communications and related responses, the Company is monitoring
the Year 2000 preparations and state of readiness of its business partners.
Although the Company is not aware of any significant Year 2000 problems with its
business partners, there can be no guarantee that the systems of other
organizations on which the Company's system rely will be converted in a timely
manner, or that a failure to convert by another organization, or a conversion
that is incompatible with the Company's systems, would not have a material
adverse effect on the Company.
13
<PAGE>
Costs
The total cost to the Company of Year 2000 activities has not been and is not
anticipated to be material to its financial position or results of operations in
any given year. The total costs to the company of addressing Year 2000 issues
are estimated to be less than $10,000. These total costs, as well as the date on
which the Company plans to complete the Year 2000 modification and testing
processes, are based on management's best estimates. However, there can be no
guarantee that these estimates will be achieved, and actual results could differ
from those estimates.
Risks
The company utilizes IT systems and non-IT systems in various aspects of its
business. Year 2000 problems in some of the Company's systems could possibly
disrupt operations, but the Company does not expect that any such disruption
would have a material adverse impact on the Company's operating results.
The Company is also exposed to the risk that one or more of its customers,
suppliers or vendors could experience Year 2000 problems that could impact the
ability of such customers to transact business or such suppliers or vendors to
provide goods and services. Although this risk is lessened by the availability
of alternative suppliers, the disruption of certain services, such as utilities,
could, depending upon the extent of the disruption, potentially have a material
adverse impact on the Company's operations.
Contingency Plans
The Company is in the process of developing contingency plans for the Company's
IT systems and non-IT systems requiring Year 2000 modification. In addition, the
Company is developing contingency plans to deal with the possibility that some
suppliers or vendors might fail to provide goods and services on a timely basis
as a result of Year 2000 problems. These contingency plans will include the
identification, acquisition and/or preparation of backup systems, suppliers and
vendors.
14
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
INDEX
-----
Page No.
--------
Reports of Independent Certified Public Accountants F-1
Consolidated Balance Sheets as of December 31, 1998 and 1997 F-3
Consolidated Statements of Operations for the
Years Ended December 31, 1998 and 1997 F-5
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1998 and 1997 F-6
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1998 and 1997 F-8
Notes to Consolidated Financial Statements F-11
15
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On January 27, 1999, the Registrant received notification that its accounting
firm, BDO Seidman, LLP, had resigned. The Company's decision to accept the
resignation of BDO Seidman was approved by the Company's Board of Directors. The
Registrant had no disagreements nor other events reportable under Item 304 of
Regulation S-B with the former accounting firm. The former auditors' report on
the financial statements for the past two fiscal years did not contain an
adverse opinion or a disclaimer of opinion, nor was it qualified or modified as
to uncertainty, audit scope, or accounting principles, except that their report
contained an explanatory paragraph regarding the substantial doubt about the
Company's ability to continue as a going concern.
The Board of Directors has approved the engagement of Parks, Tschopp, Whitcomb &
Orr, PA as independent accountants for the Company and to advise the Company on
accounting matters. Prior to the appointment of Parks, Tschopp, Whitcomb & Orr,
PA, the Company had not consulted with Parks, Tschopp, Whitcomb & Orr, PA ,
regarding the application of accounting principles.
The registrant has no disagreements with its current auditor Parks, Tschopp,
Whitcomb & Orr, PA.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS,
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The Directors and Executive Officers, on December 31, 1998, and their ages,
positions held with the Company, length of time in such positions, and term of
office are set forth below:
Name and Age Current Position Director Since Officer Since
------------ ---------------- -------------- -------------
M. Lee Hulsebus Chairman of the Board, 11/11/94 8/31/94
Age 60 Chief Executive Officer,
President
Albert J. Perry, Jr. Chief Financial Officer 7/14/98
Age 35
(The Company's Chief Financial Officer resigned effective February 18, 1999)
Richard E. Sloan Vice President of Operations 3/15/96
Age 50 and New Business Development
Don L. Arnwine Director 3/6/95
Age 66
Arthur E. Bradley Director 9/26/86
Age 65
Thomas E. Glasgow Director 11/11/94
Age 45
Larry M. Lammers Director 7/14/98
Age 45
Robert S. Muehlberg Director 3/11/99
Age 45
The principal occupations and positions for the past several years of each of
the executive officers and directors of the Company are as follows:
M. Lee Hulsebus has been in the health care field for 33 years. From January
1992 until he joined the Company in August 1994, he was the President and owner
of his own health care consulting firm. From August 1993 to November 1993, Mr.
Hulsebus also served as Chief Executive Officer of InCoMed Corporation, then a
small California-based medical products company. From 1990 to 1992, Mr. Hulsebus
served as President and Chief Operating Officer of Sports Support, Inc., a
sports medicine company. From 1988 until 1990, he served as Medical Group
President for Teleflex, Inc. For 22 years prior to that, Mr. Hulsebus was
employed by Becton-Dickinson & Co. and C.R. Bard, Inc., both of which are
leading companies in the health care industry. Mr. Hulsebus has served in the
capacity of President/Chief Executive Officer for the past 19 years for various
companies.
16
<PAGE>
Albert J. Perry, Jr. had been the Company's Chief Financial Officer since July
14, 1998. Mr. Perry was the Controller of Vision Diagnostics Inc. prior to the
acquisition. Mr. Perry has worked within the healthcare industry for over eight
years and held various positions in both operations and financial management.
While with Clinical Diagnostic Systems, Mr. Perry was directly involved in the
sale of the company to National Medical Care, the largest provider of dialysis
services in the U.S. Mr. Perry a US Army veteran, is a business administration
graduate of the University of Central Florida and is a licensed CPA in the state
of Florida. Mr. Perry resigned from his position of Chief Financial Officer of
the Company effective February 18, 1999.
Richard E. Sloan has been Vice President of New Business Development since March
1996 and Vice President of Operations since July 14, 1998. Mr. Sloan was also a
consultant to the Company from August 1995 to March 1996. From March 1995 to
July 1995, Mr. Sloan served as Chief Executive Officer of WorldWide Products,
Inc., a private Los Angeles based development and marketing firm that
distributes pharmaceutical products to plastic surgeons and dermatologists.
Prior thereto, from March 1992 to March 1995 he served as corporate marketing
director and general manager for Industrial Products of UniFET Incorporated, a
private company based in San Diego, California involved in the development of
solid-state sensor-based medical products. From December 1989 through March
1992, Mr. Sloan managed his own mergers and acquisition business with First
Pacific Group, located in Carlsbad, California, which provided investment and
financial services to privately-held companies in southern California. Prior to
that Mr. Sloan had held various management positions with Baxter International,
Deerfield, IL and IVAC Corporation, San Diego, CA.
Don L. Arnwine has been President of Arnwine Associates of Irving, Texas, a
company he founded to provide specialized advisory services to the health care
industry, since 1988. Mr. Arnwine served as Chairman and Chief Executive Officer
from 1985 until 1988 of Voluntary Hospitals of America (VHA), a company he
joined in 1982. Prior to joining VHA, Mr. Arnwine served as President and Chief
Executive Officer of Charleston Area Medical Center, a 1000-bed regional
facility care center in the State of West Virginia. Mr. Arnwine holds a BS
degree in Business Administration from Oklahoma Central State University and a
Masters degree in Hospital Management from Northwestern University.
Arthur E. Bradley, DDS has been a practicing dentist since 1961. Dr. Bradley has
been involved for his own account in real estate investments for twenty years
and has been active in oil and gas investments for fifteen years. Dr. Bradley
graduated from the University of Mississippi at Hattiesburg and obtained his
degree in Dentistry from Loyola University Dental School.
Thomas E. Glasgow has been President and co-owner of Integrated Trade Systems
("ITS"), a Chicago, Illinois company from April 1992 to the present. Mr. Glasgow
and another individual purchased ITS from its parent company in 1992. ITS is a
logistics management company specializing in the development and marketing of
import and export document generation systems. From 1989 through 1991, Mr.
Glasgow was a partner with Wharton Resource Group and a consultant with ITS.
Wharton Resource Group is a strategic management company specializing in the
development of early stage companies. Prior to these activities, he was a
director with Federal Express Corporation for 11 years in various senior
management capacities.
17
<PAGE>
Larry M. Lammers, D.C. was the President and founder of Vision Diagnostics, Inc.
and built from start-up the four centers which were acquired by MDT. Since 1993,
Dr. Lammers had been the CEO or Regional MRI of Orlando, dba "Vision MRI". He
has been the President Owner/Operator of the Tuscawilla Chiropractic Center
since 1989 and Leesburg Chiropractic Center since 1977. Dr. Lammers received his
medical education from National College of Chiropractic, Acquinas College of
Monroe Catholic Central.
Robert S. Muehlberg has been President and Chief Executive Officer of Envision
Management, Inc. of Las Vegas, NV, a company that provides management and
consulting services to the health care industry since 1997. Mr. Muehlberg served
as Chairman and Chief Executive Officer from 1994 until 1997 of Medical Imaging
Centers of America, Inc. (MICA), a company he joined in 1985. Prior to joining
MICA, Mr. Muehlberg held various management positions at International Imaging,
Inc., Chicago, IL and American Medical International (AMI) Clearwater, FL. Mr.
Muehlberg holds a Bachelor's degree in Health Science from the University of
Missouri and a Masters degree in Business Administration from Nova Southeastern
University.
The information required by this Item, which will be set forth under the
captions "Proposal No. 1- Election of Directors," "Executive Officers" and
"Compliance with Section 16(a) of the Exchange Act" in the Company's Proxy
Statement for its 1999 Annual Meeting of Shareholders, is incorporated herein by
reference.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this Item, which will be set forth under the caption
"Executive Compensation" in the Company's Proxy Statement for its 1999 Annual
Meeting of Shareholders, is incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item, which will be set forth under the caption
"Voting Securities and Principal Holders Thereof" in the Company's Proxy
Statement for its 1999 Annual Meeting of Shareholders, is incorporated herein by
reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In 1998, one director received compensation of $8,600 for general corporate
consulting services. Pursuant to the Vision acquisition agreement, another
director received $65,000 for corporate consulting fees in 1998. Per the terms
of such agreement, this director will continue to receive $13,000 per month
until July 15, 2000.
During the fourth quarter of 1997, the Company issued $100,000 in principal
amount of 36% short-term convertible notes payable, due April 18, 1998, to five
individuals, $50,000 of which was provided by three of the Company's directors,
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 before the due date, be converted
at the conversion price of $2.35 per share of Common Stock. Interest paid to
these individuals and to the directors was $0 in 1997 and accrued interest
amounted to $4,400 at December 31, 1997. 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 7 to the
consolidated financial statements). In connection with the issuance of the
warrants, 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. All of these notes were converted in
1998.
18
<PAGE>
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
Reports on Form 8-K The company filed current reports on Forms
8-K which were issued on April 17, 1998, July 15, 1998,
September 11, 1998 and February 3, 1999.
19
<PAGE>
SIGNATURES
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/ M. Lee Hulsebus Chief Executive Officer, President, April 14, 1999
- ------------------------ Chief Financial Officer,
M. Lee Hulsebus, Chairman, Principal Accounting Officer
and Secretary
/s/ Don L. Arnwine Director April 14, 1999
- ------------------------
Don L. Arnwine
/s/ Arthur E. Bradley Director April 14, 1999
- ------------------------
Arthur E. Bradley
/s/ Thomas E. Glasgow Director April 14, 1999
- ------------------------
Thomas E. Glasgow
/s/ Larry M. Lammers Director April 14, 1999
- ------------------------
Larry M. Lammers
/s/ Robert S. Muehlberg Director April 14, 1999
- ------------------------
Robert S. Muehlberg
20
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
The Board of Directors
Medical Device Technologies, Inc.
San Diego, California
We have audited the accompanying consolidated balance sheet of Medical Device
Technologies, Inc. and subsidiaries (the "Company") as of December 31, 1998, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for the year then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audit.
We conducted our audit 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 consolidated 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 audit provides 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 Device
Technologies, Inc. and subsidiaries at December 31, 1998, and the results of
their operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
The accompanying 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's recurring losses from operations, negative
working capital and lack of long-term financing raise 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.
Maitland, Florida
April 7, 1999
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Medical Device Technologies, Inc.
San Diego, California
We have audited the accompanying consolidated balance sheets of Medical Device
Technologies, Inc. and subsidiaries as of December 31, 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows for
of the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit 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 consolidated 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 audit provides 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 Device
Technologies, Inc. and subsidiaries at December 31, 1997, and the results of
their operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
The accompanying 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's recurring losses from operations, negative
working capital raise 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.
By /s/ BDO Seidman, LLP
----------------------
BDO SEIDMAN, LLP
Costa Mesa, California
March 25, 1998
F-2
<PAGE>
<TABLE>
MEDICAL DEVICE TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
<CAPTION>
ASSETS
- ------
1998 1997
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 77,906 $ 45,505
Accounts receivable (net of allowance of $1,487,172
and $46,473) 2,536,042 15,162
Inventory (net of reserve of $5,711 in 1997) - 189,638
Prepaid expenses and other assets 72,180 44,391
--------------- ---------------
Total current assets 2,686,128 294,696
--------------- ---------------
Property and equipment (note 4):
Furniture and fixtures 33,799 105,188
Machinery and equipment 188,546 199,373
Equipment under capital leases 2,380,038 -
Leasehold improvements 406,082 5,349
--------------- ---------------
3,008,465 309,910
Less accumulated depreciation (1,197,268) (136,979)
--------------- ---------------
Net property and equipment 1,811,197 172,931
Intangible assets (note 3):
License agreements - 1,824,812
Goodwill 3,938,378 -
Organization costs 160,930 -
Less accumulated amortization (175,867) (745,570)
--------------- ---------------
3,923,441 1,079,242
Other assets 134,822 16,834
--------------- ---------------
Total assets $ 8,555,588 $ 1,563,703
=============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
<TABLE>
MEDICAL DEVICE TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
1998 1997
---- ----
<S> <C> <C>
Current liabilities:
Accounts payable $ 917,368 $ 454,977
Accrued expenses 1,256,549 214,915
Current obligation under capital lease obligations (note 5) 897,629 -
Short-term notes payable and line of credit (note 4) 873,146 100,000
--------------- ---------------
Total current liabilities 3,944,692 769,892
--------------- ---------------
Other liabilities:
Convertible debt 15,000 -
Capital lease obligations, less current portion (note 5) 1,552,378 -
--------------- ---------------
Total liabilities 5,512,070 769,892
--------------- ---------------
Minority interest 643,252 -
--------------- ---------------
Commitments and contingencies (notes 5 and 6)
Stockholders' equity (notes 7 and 8)
Series I convertible preferred stock (247,500 shares
authorized; 0 issued and outstanding) - -
6% cumulative convertible Series A preferred stock,
and $.01 par value (1,972,500 shares authorized;
0 shares issued and outstanding) - -
Preferred stock, $.01 par value (10,000,000 shares
authorized; 0 shares issued and outstanding) - -
Common stock, $.15 par value (100,000,000 shares
authorized; 4,370,905 and 436,262 outstanding) 655,636 65,439
Common stock to be issued (862,394 and 715 shares) 866,162 23,440
Additional paid-in capital 25,607,914 22,603,053
Deferred stock compensation 25,443 22,792
Accumulated deficit (24,754,889) (21,920,913)
--------------- ---------------
Total stockholders' equity 2,400,266 793,811
--------------- ---------------
Total liabilities and stockholders' equity $ 8,555,588 $ 1,563,703
=============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
MEDICAL DEVICE TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 1998 and 1997
<CAPTION>
1998 1997
--------------- ---------------
<S> <C> <C>
Patient service revenue $ 1,867,474 $ -
Net sales of products 1,900 62,750
Cost of sales (619) (174,990)
--------------- ---------------
Gross profit (loss) 1,868,755 (112,240)
--------------- ---------------
Operating expenses:
Research and development 102,293 708,051
Sales, general and administrative 2,967,114 3,145,461
Loss on impairment of license agreements (note 3) 1,341,551 487,784
--------------- ---------------
Total operating expenses 4,410,958 4,341,296
--------------- ---------------
Loss from operations (2,542,203) (4,453,536)
Other income (expense):
Other income 7,332 25,000
Interest income 64 51,687
Interest expense (269,851) (5,936)
--------------- ---------------
Loss before minority interest (2,804,658) (4,382,785)
Minority interest (29,192) -
--------------- ---------------
Net loss (2,833,850) (4,382,785)
Loss per share:
Add cumulative preferred stock dividends (note 7) - 206,462
--------------- ---------------
Net loss attributable to common stockholders $ (2,833,850) $ (4,589,247)
=============== ===============
Basic and diluted loss per common share (0.93) (15.15)
=============== ===============
Weighted average common shares outstanding 3,038,968 302,946
=============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
<TABLE>
MEDICAL DEVICE TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1998 and 1997
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL COMMON
------------------------- ------------------------- PAID-IN STOCK
SHARES AMOUNT SHARES AMOUNT CAPITAL TO BE ISSUED
------------ ------------ ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997 1,343,500 $ 13,435 197,085 $ 1,034,694 $ 20,650,306 $ 40,170
Stock issued for:
Research and development, compensation
and services - - 69,140 362,984 110,937 -
Common stock dividend distributable to 6%
cumulative convertible Series A preferred
stockholders - - 8,102 42,538 180,654 (16,730)
Common stock issued for conversion of 6%
cumulative convertbile Series A preferred stock (1,343,500) (13,435) 153,543 806,100 (792,665) -
Accrued stock issuance - - 8,392 44,062 228,882 -
Effect of one-for thirty-five reverse stock split (2,224,939) 2,224,939
Net loss for 1997 - - - - - -
------------ ------------ ------------ ------------ ------------- ------------
Balance, December 31, 1997 - $ - 436,262 $ 65,439 $ 22,603,053 $ 23,440
============ ============ ============ ============ ============= ============
</TABLE>
(continued below)
<TABLE>
<CAPTION>
DEFERRED ACCUMULATED
COMPENSATION DEFICIT TOTAL
--------------- --------------- ---------------
<S> <C> <C> <C>
Balance, January 1, 1997 $ 247,500 $ (17,331,666) $ 4,654,439
Stock issued for:
Research and development, compensation
and services - - 473,921
Common stock dividend distributable to 6%
cumulative convertible Series A preferred
stockholders - (206,462) -
Common stock dividend distributable to 6%
cumulative convertbile Series A preferred stock - - -
Accrued stock issuance (224,708) - 48,236
Effect of one-for thirty-five reverse stock split -
Net loss for 1997 - (4,382,785) (4,382,785)
--------------- --------------- ---------------
Balance, December 31, 1997 $ 22,792 $ (21,920,913) $ 793,811
=============== =============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
<TABLE>
MEDICAL DEVICE TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1998 and 1997
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL COMMON
------------------------- ------------------------- PAID-IN STOCK
SHARES AMOUNT SHARES AMOUNT CAPITAL TO BE ISSUED
------------ ------------ ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1998 - $ - 436,262 $ 65,439 $ 22,603,053 $23,440
Common stock issued as a result of the rounding
of shares for the thirty-five to one reverse
stock split - - 839 126 - -
Common stock issued for research and
development, compensation, and services - - 345,311 51,797 344,883 -
Restricted Section 144 common stock issued for
the conversion of principal and accrued interest
on convertible notes payable - - 933,816 140,072 460,695 -
Common stock purchased - - 55,000 8,250 46,750 -
Restricted Section 144 common stock issued for
Acquisition of Vision Diagnostic, Inc. &
Affiliates - - 2,599,677 389,952 2,152,533 842,722
Accrued stock issuance - - - - - -
Net loss - - - - - -
------------ ------------ ------------ ------------ ------------- ------------
Balance, December 31, 1998 - $ - 4,370,905 $ 655,636 $ 25,607,914 $ 866,162
============ ============ ============ ============ ============= ============
</TABLE>
(continued below)
<TABLE>
<CAPTION>
DEFERRED ACCUMULATED
COMPENSATION DEFICIT TOTAL
--------------- --------------- ---------------
<S> <C> <C> <C>
Balance, January 1, 1998 $ 22,792 $ (21,920,913) $ 793,811
Common stock issued as a result of the rounding
of shares for the thirty-five to one reverse
stock split - (126) -
Common stock issued for research and
development, compensation, and services - - 396,680
Restricted Section 144 common stock issued for
the conversion of principal and accrued interest
on convertible notes payable - - 600,767
Common stock purchased - - 55,000
Restricted Section 144 common stock issued for
Acquisition of Vision Diagnostic, Inc. &
Affiliates - - 3,385,207
Accrued stock issuance 2,651 2,651
Net loss - (2,833,850) (2,833,850)
--------------- --------------- ---------------
Balance, December 31, 1998 $ 25,443 $ (24,754,889) $ 2,400,266
=============== =============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
<TABLE>
MEDICAL DEVICE TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1998 and 1997
<CAPTION>
1998 1997
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (2,833,850) $ (4,382,785)
Adjustments to reconcile net loss to net cash
used in operating activities:
Stock paid for services 396,680 472,957
Compensation recognized relating to
accrued employee stock grants and warrants 2,651 48,236
Minority interest 29,192 -
Bad debt expense - 46,473
Depreciation and amortization 623,853 358,106
Loss on disposal of inventory 189,638 -
Loss (gain) on disposal of fixed assets 116,074 (2,678)
Loss on impairment of license agreement 927,074 487,784
Increase (decrease) from changes in assets and liabilities
excluding net assets acquired:
Accounts receivable (14,348) (53,072)
Inventory - (89,259)
Prepaid expenses and other assets (27,789) 89,918
Other assets 61,531 (1,831)
Accounts payable and accrued expenses 470,092 92,442
--------------- ---------------
Net cash used in operating activities (59,202) (2,933,709)
--------------- ---------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
<TABLE>
MEDICAL DEVICE TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1998 and 1997
<CAPTION>
1998 1997
--------------- ---------------
<S> <C> <C>
Cash flows from investing activities:
Purchase of property and equipment $ - $ (86,142)
Proceeds from sale of property and equipment - 77,226
--------------- ---------------
Net cash used in investing activities - (8,916)
--------------- ---------------
Cash flows from financing activities:
Proceeds from notes payable 240,020 100,000
Principal payments on notes payable and line of credit (49,226) -
Proceeds from issuing common stock 55,000 -
Principal payments on capital lease obligations (154,191) (1,103)
--------------- ---------------
Net cash provided by financing activities 91,603 98,897
--------------- ---------------
Net increase (decrease) in cash and cash equivalents 32,401 (2,843,728)
Cash and cash equivalents, beginning of period 45,505 2,889,233
--------------- ---------------
Cash and cash equivalents, end of period $ 77,906 $ 45,505
=============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE>
<TABLE>
MEDICAL DEVICE TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1998 and 1997
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997
- ---------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES:
<S> <C> <C>
PAYMENTS FOR:
Interest $ 283,560 $ -
Income taxes $ 800 $ 800
STOCK ISSUED FOR:
Research and development $ 170,675 $ 182,361
Public relations and marketing services - 50,046
Legal, professional, and employee services 178,610 186,853
Directors' fees 47,395 32,521
Manufacturing costs - 9,876
Termination agreement - 10,300
------------------------------
$ 396,680 $ 471,957
------------------------------
Common stock dividends distributable and issued to
6% cumulative convertible Series A preferred
stockholders $ - $ 206,462
</TABLE>
NON-CASH FINANCING ACTIVITY:
During the years ended 1998 and 1997, deferred compensation expense of $2,651
and $48,236, respectively, 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, 7,856 and
536 shares, respectively, 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.
During the year ended December 31 1998, the Company acquired the net assets of
other companies in exchange for 3,461,356 shares of common stock.
The net assets acquired were as follows:
Accounts receivable $2,506,532
Property and equipment 2,211,088
Other Assets 179,519
Accounts payable and other liabilities (2,846,114)
Capital lease obligations (2,604,196)
----------------
($553,171)
----------------
See accompanying notes to consolidated financial statements.
F-10
<PAGE>
MEDICAL DEVICE TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
(a) DESCRIPTION OF BUSINESS
Medical Device Technologies, Inc., (the "Company") is a public company
incorporated in Utah on February 6, 1980 and headquartered in San Diego,
California. The Company's Common Stock currently trades over-the-counter under
the symbol "MEDD". Prior to 1992, the Company's business was the exploration and
production of hydrocarbons. As of June 1, 1992, the Company re-entered the
development stage. Effective January 1, 1994, the Company completed the
divestiture of all oil and gas properties and was no longer in the hydrocarbon
business. Since that time, the Company has been exclusively a medical device
company. The Company changed its name in April 1995, from Cytoprobe Corporation,
to reflect the change of focus.
Prior to 1998, the Company had developed three innovative medical device
products. The first product, the Fluid Alarm System (FAS), formerly called the
Personal Alarm System (PAS), is a device which monitors the integrity of
infection control barriers, such as surgical gloves and gowns worn during
medical procedures. The second product, the Cell Recovery System (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 received FDA clearance for the FAS during the
year ended December 31, 1995 and received FDA clearance for the CRS in March
1996. The Company initiated further clinical trials on the CRS in 1997. The
third product, the Intracranial Pressure Monitoring System (ICP), is a
diagnostic device that measures pressures within the coincident skull
noninvasively. 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 1997 and deemed the ICP
license to have no future value. In 1998, coincident with the purchase of Vision
Diagnostics, Inc. and Affiliates, described in the next paragraph, the Company
wrote off the costs associated with the FAS and the CRS licenses, including
certain fixed assets and inventory costs, and recognized impairment losses in
the amount of $725,458, and $616,093, respectively. However, the company
continues to retain the rights to the use of the licenses through 2005 and 2008,
respectively.
F-11
<PAGE>
MEDICAL DEVICE TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
(a) DESCRIPTION OF BUSINESS - CONTINUED
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).
Vision Diagnostics, Inc. and Affiliates is in the business of providing
radiologic diagnostic services. The affiliated group of companies includes
Vision Diagnostic, Inc., Regional MRI of Orlando, Inc., Regional MRI of
Jacksonville, Ltd. and Regional MRI of Toledo, Inc. In addition, Vision is the
general partner in West Regional MRI Limited Partnership located in Oak Brook,
Illinois.
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
consolidated financial statements from the date of acquisition. Goodwill
associated with this transaction amounted to $2,170,550.
Additionally, at this date, the Company acquired of 100% of the stock of Vision
Diagnostics, Inc. with the issuance of 1,568,000 shares of Restricted Rule 144
common stock. The Company has accounted for the acquisition using the purchase
method of accounting with the results of operations of the acquired entity
included in the Company's consolidated financial statements from the date of
acquisition. Goodwill associated with this transaction amounted to $1,577,447.
Vision Diagnostics, Inc. is the 50% general partner in West Regional MRI Limited
Partnership. The 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 partners'
interest on the accompanying consolidated balance sheet at December 31, 1998.
The limited partners' share of the partnership's net income has been presented
as minority partners' share of income of consolidated partnership in the
accompanying 1998 consolidated statement of operations. With the acquisition of
Vision Diagnostics, Inc. and Affiliates, the Company has emerged from the
development stage.
F-12
<PAGE>
MEDICAL DEVICE TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
(1) CONTINUED
---------
The following unaudited proforma information presents a summary of the
consolidated results of operations as if the acquisition had taken place on
January 1, 1997.
Year ended December 31
1998 1997
----------- -----------
Revenues 3,738,299 3,599,609
Net loss (2,907,664) (4,833,849)
Loss per share (0.07) (0.10)
These proforma results of operations have been prepared for comparative purposes
only and do not purport to be indicative of the results of operations which
actually would have resulted had the acquisition occurred on the date indicated,
or which may result in the future.
(b) INVENTORY
The inventory balance shown at December 31, 1997 consisted of $109,826 of
finished goods, (net of a reserve of $5,711), and $79,812 of parts and
materials. Inventory is valued at the lower of cost (first-in, first-out basis)
or market. At December 31, 1998, the inventory balance was zero as a result of
the write-off of costs associated with the impairment loss of the FAS license.
(c) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is being provided on a
straight line basis over the estimated useful lives of the related assets which
range from three to nine years.
(d) LICENSE AGREEMENTS
The Company has entered into various license agreements whereby the Company has
acquired the exclusive worldwide rights to develop, commercialize, manufacture,
and sell its products. In addition, the Company paid finder's fees relating to
two of its products. These costs, along with legal costs to register the related
patents, had been capitalized and were being amortized over the estimated useful
life of the license agreements, prior to writing off the licenses in 1998 and
1997.
In 1998, coincident with the purchase of Vision Diagnostics, Inc. and
Affiliates, the Company has concentrated its efforts in the MRI centers, and
accordingly has written off the costs associated with the FAS and the CRS
licenses, including certain fixed assets and inventory costs, and recognized
impairment losses in the amount of $725,458, and $616,093, respectively.
However, the company continues to retain the rights to the use of the licenses
through 2005 and 2008, respectively.
F-13
<PAGE>
MEDICAL DEVICE TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
(1) CONTINUED
---------
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.
(e) INCOME TAXES
Income taxes are accounted for in accordance with Statement of Financial
Accounting Standards No.109, "Accounting for Income Taxes", (SFAS No. 109). This
statement employs an asset and liability approach for financial accounting and
reporting of deferred income taxes. Generally, SFAS No. 109 allows for
recognition of deferred tax assets in the current period for the future benefit
of net operating loss carryforwards and items for which expenses have been
recognized for financial statement purposes but will be deductible in future
periods. A valuation allowance is recognized if, on the weight of available
evidence, it is more likely than not that some portion or all of the deferred
tax assets will not be realized.
(f) CASH FLOWS
For purposes of the statement of cash flows, the Company considers all highly
liquid debt instruments with an original maturity of three months or less to be
cash equivalents.
(g) REVENUE RECOGNITION
During 1998, the principal sources of revenues are from magnetic resonance
imaging which are recognized as performed. The Company is presently operating in
this one business segment and only in the United States.
F-14
<PAGE>
MEDICAL DEVICE TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
(1) CONTINUED
---------
(h) FINANCIAL INSTRUMENTS FAIR VALUE, CONCENTRATION OF BUSINESS AND CREDIT RISKS
The carrying amount reported in the balance sheet for cash, accounts receivable,
accounts payable and accrued expenses approximates fair value because of the
immediate or short-term maturity of these financial instruments. The carrying
amount reported in the accompanying balance sheet for notes payable approximates
fair value because the actual interest rate do not significantly differ from
current rates offered for instruments with similar characteristics. Financial
instruments, which potentially subject the Company to concentrations of credit
risk, consist principally of accounts receivable. The Company operates and
grants credit to customers in Central Florida, Oak Brook, Illinois, Toledo, Ohio
and Jacksonville, Florida. In addition, the Company files claims with numerous
insurance carriers, managed care groups and Medicare and Medicaid located
throughout the United States.
Consequently, the Company's ability to collect the amounts due from customers,
managed care groups, insurance companies and government agencies may be affected
by economic fluctuation and governmental regulations in the healthcare industry.
(i) USE OF ESTIMATES
Management of the Company has made certain estimates and assumptions relating to
the reporting of assets and liabilities and the disclosure of contingent assets
and liabilities to prepare these financial statements in conformity with
generally accepted accounting principles. Actual results could differ from those
estimates.
(j) LOSS PER COMMON SHARE
Loss per common share have been computed based upon the weighted average number
of common shares outstanding during the years presented. Common stock
equivalents resulting from the issuance of the stock options and warrants have
not been included in the per share calculations because such inclusion would be
antidilutive.
F-15
<PAGE>
MEDICAL DEVICE TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
(1) CONTINUED
---------
(k) NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" (SFAS 130) issued by the FASB is effective for financial statements with
fiscal years beginning after December 15, 1997. Earlier application is
permitted. SFAS 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 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 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 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 131 on January 1, 1998 and it had no effect
on its financial position or results of operations.
(l) Reclassification
Certain amounts in the 1997 Financial Statements have been reclassified to
conform with the 1998 presentation.
(2) GOING CONCERN
-------------
These financial statements have been prepared assuming that the Company will
continue as a going concern. The Company has recurring losses from operations,
negative working capital and is in default with respect to the terms of certain
obligations. Further, the continued viability of the Company is dependent on the
success of its MRI centers which were acquired in July 1998. These conditions
raise substantial doubt about the Company's ability to continue as a going
concern.
F-16
<PAGE>
MEDICAL DEVICE TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
The Company is seeking to fund its immediate and longer-term working capital
needs from funds to be obtained through a corporate acquisition or merger with
another entity with greater financial resources or from the proceeds of
additional private placements or public offerings of debt or equity securities.
However, neither the consummation nor the success of an acquisition or merger,
nor the receipt of additional funds can be assured. Therefore, the long-term
viability of the Company is dependent on its ability to profitably operate its
MRI centers and to obtain the financing necessary to fund its anticipated
growth.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amount of
liabilities that might be necessary should the Company be unable to continue in
existence.
(3) INTANGIBLE ASSETS
-----------------
LICENSE AGREEMENTS
License agreements costs are as follows:
December 31,
------------
Useful Life 1998 1997
----------- ---- ----
CRS 10 Years - 1,338,624
FAS 10 Years $ 486,188
---------- ----------
- 1,824,812
Less: accumulated amortization 745,570
---------- ----------
$ 1,079,242
========== ==========
Amortization expense was $152,168 and $297,142 for the years ended December 31,
1998 and 1997, respectively.
In 1998, coincident with the purchase of Vision Diagnostics, Inc. and
Affiliates, the Company has concentrated its efforts in the MRI centers, and
accordingly has written off the costs associated with the FAS and the CRS
licenses, including certain fixed assets and inventory costs, and recognized
impairment losses in the amount of $725,458, and $616,093, respectively.
However, the company continues to retain the rights to the use of the licenses
through 2005 and 2008, respectively.
F-17
<PAGE>
MEDICAL DEVICE TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
GOODWILL
In connection with the Vision acquisition, consideration paid exceeded the
estimated fair value of the assets acquired (including estimated liabilities
assumed as part of the transaction) by approximately $3,800,000. The excess of
the consideration paid over the fair value of the net assets acquired has been
recorded as goodwill and is being amortized on a straight line basis over 40
years.
(4) SHORT-TERM NOTES PAYABLE AND LINE OF CREDIT
-------------------------------------------
<TABLE>
Notes payable and line of credit consist of the following at December 31:
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Line of credit with finance company at prime plus 3% under which the Company
may borrow up to $1,500,000 or the "borrowing base" as defined.
Balance due August 1999, renewable for consecutive one-year periods. $ 562,538 $ -
Note payable originally due June 1997. Outstanding balance currently due
with interest at 12.5%. 59,619 -
Note payable to bank, with interest at 9.95%, due August, 1998. 79,689 -
Note payable to bank, with interest at prime plus 2%. Balance was due
August 1998, collateralized by MRI machine and second lien on accounts
receivable. 94,129 -
Note payable to bank, with interest due quarterly at 4% above discount
rate, principal due June, 1999 77,171 -
Notes payable to individuals ($50,000 to three directors) interest at 36%,
due April, 1998 convertible at $2.35 per share of common stock. Note holders
were also awarded warrants to purchase 1,429 shares for every
$12,500 loaned to the Company at an exercise price of $4.20 per share. 100,000
---------- ----------
$ 873,146 $ 100,000
========== ==========
</TABLE>
F-18
<PAGE>
MEDICAL DEVICE TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
(5) LEASES
------
The Company is currently leasing its MRI machines under capital lease agreements
and its offices under operating leases which expire at various dates.
At December 31, 1998, future minimum annual rental commitments under
noncancellable lease obligations are as follows:
<TABLE>
<CAPTION>
Capital Operating
Year-ending December 31, Leases Leases
------------------------ ------ ------
<S> <C> <C>
1999 $ 974,839 172,497
2000 919,399 106,359
2001 476,925 85,200
2002 194,305 87,200
2003 181,560 87,200
Thereafter 315,406 135,700
----------- -----------
Total minimum lease payments 3,062,434 674,156
Less amounts representing interest (at rates of 5.7% to
18.2%) 612,427
-----------
Present value of net minimum lease payments 2,450,007
Less current portion 897,629
-----------
Capital lease obligations $1,552,378
===========
</TABLE>
Rent expense for operating leases, including month to month leases, was $154,449
and $106,306 for the years ended December 31, 1998 and 1997, respectively.
F-19
<PAGE>
MEDICAL DEVICE TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
(6) COMMITMENTS AND CONTINGENCIES
-----------------------------
LICENSE AGREEMENTS
In prior years the Company entered into license agreements in connection with
the acquisition of the FAS and CRS devices. Through December 31, 1997, the
Company had paid $620,000 and issued 6,514 shares of common stock pursuant to
the original CRS license agreement.
In connection with the write-off of the FAS and CRS licenses, the associated
license agreements were terminated. License expense associated with the CRS
license amounted to $90,212 in 1998.
EMPLOYEE AND MEDICAL ADVISOR AGREEMENTS
On January 1, 1998, the Company had agreements with medical advisors for a one-
to two-year term. The agreements provide for shares of common stock to be issued
to each advisor per year, issued semi-annually, as determined by the Chairman of
the Board.
In August 1994, the Company entered into an exclusive four-year employment
agreement with the Chief Executive Officer. The employment agreement provides
for a base salary of $162,000 per year in addition to three thousand five
hundred and seventy-two (3,572) shares of the common stock at the end of two
years of continuous satisfactory employment by the Company. On August 2, 1996,
the Board of Directors changed the date which the Chief Executive Officer is
entitled to received these shares to January 2, 1997. In addition, the Chief
Executive Officer received 2,858 common stock purchase warrants which are
exercisable over a five (5) year period ending August 31, 1999 at $70.00 per
share.
In addition, in 1994, the Company entered into a severance agreement with the
Chief Executive Officer. The severance agreement provides, among other things,
that in the event a change in control of the Company occurs or the Chief
Executive Officer is involuntarily terminated, suffers a disability while
employed by the Company or dies while employed by the Company, then the Chief
Executive Officer is entitled to receive certain benefits from the Company. Such
benefits may include some or all of the following: an amount based on the base
salary as provided for in the employment agreement; an amount based on the bonus
F-20
<PAGE>
MEDICAL DEVICE TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
(6) CONTINUED
---------
paid or payable to the Chief Executive Officer as provided for in the employment
agreement; the right to receive common stock that shall vest immediately; and
the right to exercise any warrants or stock options held by or granted to the
Chief Executive Officer under the employment agreement or any stock option plan
of the Company or both, health insurance and disability insurance. The Chief
Executive Officer will not receive any benefits upon voluntarily termination of
employment with the Company or if the Company terminates the Chief Executive
Officer "for cause", which is defined as the conviction of the Chief Executive
Officer after appeal of a felony.
On August 2, 1998, the Board of Directors extended the Employment and Severance
Agreements with the Chief Executive Officer for an additional one (1) year
period or until August 31, 2001.
In March 1996, the Company entered into an exclusive employment agreement with
the Vice President of New Business Development for a three-year term providing
for a base salary of $108,000 per annum. The agreement also provides for seven
hundred and fifteen (715) shares of the Company's common stock; one half of the
shares of common stock vested on March 15, 1997 and the remaining shares vested
on March 15, 1998. In addition, the agreement provides for warrants to purchase
one thousand and seventy-two (1,072) shares of the Company's common stock at
$28.00 per share. One-quarter (1/4) of the warrants were issued on each of March
15, 1997 and 1998 and one-quarter (1/4) of the warrants are to be issued on each
of March 15, 1999 and 2000. The warrants are exercisable for a period of six (6)
years from the date of issuance.
LEGAL MATTERS
The Company has been named as a defendant in several legal actions primarily
involving the default by the Company with respect to the provisions of certain
agreements and/or financial obligations. Many of these matters have been settled
with payment terms agreed to by both parties, and while any litigation has an
element of uncertainty, the Company believes that the ultimate outcome of any
legal matter or claim that is pending or threatened will not have a material
adverse effect on its consolidated financial position or results of operations.
However, the ultimate outcome of all of them combined could have a material
adverse effect on its consolidated financial position or results of operations.
F-21
<PAGE>
MEDICAL DEVICE TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
(7) STOCKHOLDERS' EQUITY
--------------------
PREFERRED STOCK
In April 1995, the Company amended its Articles of Incorporation to authorize
10,000,000 shares of $.01 par value preferred stock. In December 1995, the
Company further amended its Articles of Incorporation to authorize 187,500 of
Series I convertible preferred stock in conjunction with its private placement
offering, the Company issued 153,750 shares of Series I convertible preferred
stock with an assigned value of $384,375 (see note 3). On January 19, 1996, the
Company again amended its Articles of Incorporation to increase the authorized
shares of Series I convertible preferred stock from 187,500 to 247,500. On
January 24, 1996, the Company issued an additional 93,750 shares of Series I
convertible preferred stock. These preferred shares were considered an original
issue discount associated with the notes payable and were amortized over
approximately the first five months of 1996.
On June 24, 1996, the Company completed a public offering of 1,500,000 shares of
6% cumulative convertible Series A preferred stock (the "Preferred Stock") and
1,500,000 redeemable common stock purchase warrants (the "Redeemable Warrants")
resulting in gross proceeds of $7.65 million. The Company received approximately
$4 million after repayment of short-term debt and costs associated with the
offering. The Preferred Stock is convertible into four thirty-fifths (4/35)
share of common stock $43.75 per share and for a total of $131.25. As part of
the terms of this offering, the holders of the Series I convertible preferred
stock exchanged their preferred stock for the Preferred Stock on a one for one
basis at no cost. Each share of Preferred Stock, by its terms, automatically
converted into four thirty-fifths (4/35) share of common stock on July 24, 1997.
During the first quarter of 1997, 94,920 shares of Preferred Stock were
converted into 10,848 shares of common stock; and during the second quarter of
1997, 31,927 shares of Preferred Stock were converted into 3,649 shares of
common stock. On July 24, 1997, each of the then-outstanding shares of Preferred
Stock, by their terms, automatically converted into four thirty-fifths (4/35)
share of common stock.
COMMON STOCK
On June 20, 1996, the directors of the Company approved a one-for-two reverse
split of the common stock. On March 6, 1998, the directors of the Company
approved an additional one-for-thirty-five reverse split of the Common Stock of
the Company. All share balances have been retroactively restated in the
accompanying consolidated financial statements to reflect the reverse stock
splits.
On September 9, 1996, the Company issued 2,047 shares of common stock as a
dividend for the period through August 31, 1996 for the Preferred Stockholders
of record as of August 12, 1996.
F-22
<PAGE>
MEDICAL DEVICE TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
(7) CONTINUED
---------
COMMON STOCK
On November 11, 1996, the Company declared a common stock dividend of 3,186
shares to Preferred Stockholders of record as of December 10, 1996. On June 12,
1997 the Company declared a common stock dividend of 4,345 shares to Preferred
Stockholders of record as of June 27, 1997 and on July 24, 1997 declared a
common stock dividend of 571 shares to Preferred Stockholders of record as of
July 24, 1997. The shares for November 1996 dividend and for the June 1997
dividend were issued in January 1997 and July 1997, respectively and,
accordingly, were recorded as common stock dividend distributable and additional
paid-in capital at December 31, 1996 and at June 20, 1997, respectively. The
number of shares paid on the Preferred Stock as a dividend was calculated based
on the 10 day moving average price of the common stock during the 30 days prior
to the declaration date, subject to a maximum price of $105.00 and minimum price
of $42.00 per share. Fractional shares were rounded up.
During the year ended December 31, 1996, as a result of individuals exercising
4,643 private warrants, the Company issued 4,643 shares of common stock for
$275,000. No warrants were exercised in 1998 or 1997.
Pursuant to certain employment agreements in January and September 1997, 7,856
and 536 shares of accrued employee common stock grants were issued,
respectively. 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 Directors 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.
F-23
<PAGE>
MEDICAL DEVICE TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
(7) CONTINUED
---------
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. As of December 31,
1998, all such shares had been issued (see Note 9).
On July 14, 1998, the Company acquired either the stock or substantially all of
the assets and liabilities of Vision Diagnostics, Inc. and Affiliates for a
total of 3,461,356 Restricted Rule 144 common shares. At December 31, 1998,
2,599,677 shares have been issued and 861,679 are to be issued upon the
completion of escrow requirements.
(8) OPTIONS AND WARRANTS
--------------------
The Company has issued options and warrants in connection with various private
placements, the public offering in 1996, and certain other agreements with and
compensation to employees and consultants. The Company's options and private
warrants allow the holder to purchase one share of the Company's common stock at
a specified price and the public warrants each allow the holder to purchase two
shares at $65.625 per share.
F-24
<PAGE>
MEDICAL DEVICE TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
(8) CONTINUED
---------
Options and private and public warrants granted and issued by the Company
consisted of:
Weighted
Average
Number Price
------ -------
Balance outstanding, December 31, 1996 89,421 $ 103.60
Options granted 10,572 20.65
Warrants granted 11,429 4.20
Warrants expired (13,572) 75.95
Balance outstanding, December 31, 1997 97,850 49.08
Options granted - -
Options expired (2,285) 20.65
Warrants granted - -
Warrants expired (12,286) 5.86
Balance outstanding, December 31, 1998 83,279 56.12
Common shares 139,638 59.96
Options and warrants exercisable 78,861 58.08
Common shares resulting 135,224 $ 61.23
Compensation expense was not recorded for any issuance of options and warrants
to officers of employees in 1998 and 1997 as the fair market value of the
options and warrants was below the exercise price on their respective dates of
issuance.
F-25
<PAGE>
MEDICAL DEVICE TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
(8) CONTINUED
---------
Information relating to options and warrants at December 31, 1998 summarized by
exercise price is as follows:
<TABLE>
<CAPTION>
Outstanding Exercisable
Weighted Average Weighted Average
Exercise Price Equiv. Life Exercise Equiv. Exercise
Per Share Shares (Year) Price Shares Price
<S> <C> <C> <C> <C> <C>
$ 20.65 8,287 9.0 20.65 4,144 20.65
28.00 9,572 5.0 28.00 9,301 28.00
44.10 2,849 2.0 44.10 2,849 44.10
45.15 554 2.0 45.15 554 45.15
48.30 518 2.0 48.30 518 48.30
65.63 112,715 2.0 65.63 112,715 65.63
70.00 5,143 3.6 70.00 5,143 70.00
139,638 3.6 55.96 135,224 61.23
</TABLE>
Had compensation cost for stock-based compensation been determined based on the
fair value at the grant dates consistent with the method of SFAS No. 123, the
Company's net loss and loss per share for the years ended December 31, 1998 and
1997 would have been increased to the pro forma amounts presented below:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net loss:
As reported $(2,833,850) $(4,382,785)
Pro forma (2,924,708) (4,535,746)
Loss attributable to common stockholders
As reported (2,833,850) (4,589,247)
Pro forma (2,924,708) (4,742,208)
Basic and diluted loss per share
As reported (.93) (15.15)
Pro forma (.96) (15.65)
</TABLE>
F-26
<PAGE>
MEDICAL DEVICE TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
(8) CONTINUED
---------
The fair value of options and warrants is estimated on the date of grants
utilizing the Black-Scholes option pricing model with the following weighted
average assumptions for years ended December 31, 1998 and 1997: expected life of
10 years; expected volatility of 33.5%; risk-free interest rate of 6%; and a 0%
dividend yield. The weighted average fair value at the date of grant of the
options and warrants granted during 1997 approximated $11.90 per option and
warrant.
Due to the fact that the Company's warrants vest over several years and
additional awards are made each year, the above pro forma numbers are not
indicative of the financial impact had the disclosure provisions of SFAS No. 123
been applicable to all years of previous warrant grants. The above numbers do
not include the effect of warrants granted prior to 1996 that vested in 1997 and
1998.
Additionally, the Company's fully owned subsidiary, Vision Diagnostics, Inc. has
247,000 warrants outstanding which entitle the holder to purchase shares of
Vision Diagnostics, Inc. at $1.50 per share. These warrants expire in 2001.
(9) EMPLOYEE BENEFIT PLANS - COMPENSATORY STOCK BENEFIT PLANS
---------------------------------------------------------
In each of the four most current years, the Company's board of directors have
annually approved a stock compensation plan, the most recent which registered
500,000 shares of common stock under Form S-8 on March 17, 1999, whereby
services are obtained in exchange for issuance of free trading stock of the
Company. Shares may be awarded under this plan until February 1, 2004. During
1998 and 1997 345,311 and 69,140 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.
Beginning in 1997, compensation recognized relating to accrued employee stock
grants and warrants is based on the pro-rata common stock and warrants earned
and the market value of the Company's stock at the time of issuance (fair value
method) and amortized over the applicable period.
F-27
<PAGE>
MEDICAL DEVICE TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
(10) DEFINED CONTRIBUTION PLAN
-------------------------
In August 1996, the Company adopted the Medical Device Technologies, Inc.
Employee Retirement Savings and Profit Sharing Plan (the "Plan"). The Plan is a
defined contribution profit sharing plan which allows the employee to
participate once hired. Total expense for its full time employees amounted to
$10,341 and $3,077 for the years ended December 31, 1997 and 1998, respectively.
In 1998, the Plan was terminated and no contributions were made to the Plan by
the Company during 1998.
(11) RELATED PARTY TRANSACTIONS
--------------------------
During the fourth quarter of 1997, the Company issued $100,000 in principal
amount of 36% short-term convertible notes payable, due April 18, 1998, to five
individuals, including three directors, 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 before the due date, be converted at the conversion price of $2.35 per
share of common stock. 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, 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. The notes were converted
to common stock in 1998.
In 1998, one director received compensation of $8,600 for general corporate
consulting services. Pursuant to the Vision acquisition agreement, another
director received $65,000 for corporate consulting fees in 1998. Per the terms
of such agreement, this director will continue to receive $13,000 per month
until July 15, 2000.
F-28
<PAGE>
MEDICAL DEVICE TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
(12) INCOME TAXES
------------
The types of temporary differences between the tax bases of assets and
liabilities and their financial reporting amounts that give rise to the net
deferred tax asset and liability, and their approximate tax effects, are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
---- ----
<S> <C> <C>
Inventory reserve $ - (949)
Bad debt reserve 559,623 19,148
Other - 9,872
Net operating loss carryforwards 8,654,900 7,782,227
------------- -------------
9,214,523 7,810,298
Valuation allowance (9,214,523) (7,810,298)
------------- -------------
Total $ - -
============= =============
</TABLE>
At December 31, 1998, the Company had approximately $23,000,000 in net operating
loss carryovers to offset future taxable income. These carryovers will expire in
various years through 2018. 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
2018, 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
asset at December 31, 1998 and 1997.
F-29
<PAGE>
MEDICAL DEVICE TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
(13) SUBSEQUENT EVENTS
-----------------
On April 7, 1999, the Company acquired the West Regional MRI Limited
Partnership, of which the Company was the General Partner, at a purchase price
of $1,300,000.
In March 1998, a lawsuit was filed against the Company for "false designation"
in connection with the use of the name Medical Device Technologies, Inc.
Subsequent to year-end, the lawsuit was settled whereby the Company agreed to
cease using the name of Medical Device Technologies, Inc. effective on June 18,
1999.
In February 1999, the Company entered into a lease for a new MRI machine to be
used at Regional MRI of Orlando. The terms of this lease call for sixty monthly
payments in the amount of $16,747.
F-30
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 77906
<SECURITIES> 0
<RECEIVABLES> 2536042
<ALLOWANCES> 1487172
<INVENTORY> 0
<CURRENT-ASSETS> 2686128
<PP&E> 3008465
<DEPRECIATION> (1197268)
<TOTAL-ASSETS> 8555588
<CURRENT-LIABILITIES> 5512070
<BONDS> 0
0
0
<COMMON> 655636
<OTHER-SE> 1744630
<TOTAL-LIABILITY-AND-EQUITY> 8555588
<SALES> 1869374
<TOTAL-REVENUES> 1869374
<CGS> 619
<TOTAL-COSTS> 619
<OTHER-EXPENSES> 3069407
<LOSS-PROVISION> 1341551
<INTEREST-EXPENSE> 269851
<INCOME-PRETAX> (2833850)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2833850)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2833850)
<EPS-PRIMARY> (0.93)
<EPS-DILUTED> (0.93)
</TABLE>
