<PAGE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC.
1996 ANNUAL REPORT
<PAGE>
THE COMPANY
Dental/Medical Diagnostic Systems, Inc. ("Company"), designs, develops,
manufactures and sells high technology dental equipment. Currently, the
Company's primary emphasis is on the manufacture and sale of an intraoral camera
system known as the TeliCam System and a dental office networking system, known
as IntTELInet, for use in connection with the TeliCam System. The TeliCam System
displays close-up video images of dental patients' teeth and gums. These TeliCam
images assist dentists in displaying dental health and hygiene problems to
patients and, as a result of such display, promote patient acceptance of
treatment plans. The TeliCam System offers dentists the ability to capture and
display multiple video images without an expensive external capture device such
as a video cassette recorder or color printer, thereby providing a low-cost
alternative to the more expensive traditional intraoral dental camera systems.
In November 1996, the Company introduced the InTELInet networking system for
the TeliCam System. The InTELInet networking system allows networking of
multiple TeliCam Systems in a dental practice so that each TeliCam System
connects to a central printer. Because the TeliCam System has the capability to
capture and store images in its CCD chip, the TeliCam system, unlike competing
intraoral dental camera systems, does not require the memory of a printer or
other image storage device for use during patient examinations. However, because
U.S. insurance companies generally require hard copies of treatment data, and
for patient record keeping purposes, it may be desirable to print hard copies of
the captured images. The InTELInet system allows multiple TeliCam Systems to be
linked to a single printer, generating substantial savings to dentists by
eliminating the need for multiple printers or video cassette recorders, each
dedicated to a single intraoral dental camera, which are required by competing
systems. Generally, the cost of a color printer is the second most significant
cost element in each intraoral camera system. The InTELInet networking system
offers additional benefits by allowing for office expansion and can accommodate
multiple additional TeliCam Systems.
The Company's principal executive offices are located at 200 N. Westlake
Boulevard, Suite 202, Westlake Village, California 91362, and its telephone
number is (805) 381-2700.
<PAGE>
UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS REPORT HAS BEEN ADJUSTED
TO REFLECT A ONE-FOR-2.197317574 REVERSE STOCK SPLIT OF THE COMMON STOCK
EFFECTED ON JANUARY 13, 1997, AND A PROPOSED ONE-FOR-1.333333333 REVERSE STOCK
SPLIT WHICH THE BOARD OF DIRECTORS OF DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC.
(THE "COMPANY") HAS APPROVED AND WHICH WILL BE SUBMITTED TO VOTE OF THE
STOCKHOLDERS ON MARCH 24, 1997 ("REVERSE STOCK SPLITS").
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE DISCUSSION BELOW SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED
FINANCIAL STATEMENTS OF THE COMPANY AND NOTES THERETO INCLUDED ELSEWHERE IN THIS
REPORT.
INTRODUCTION
This discussion summarizes the significant factors affecting the
consolidated operating results, financial condition and liquidity/cash flows of
the Company for the ten-month period ended December 31, 1996, and for the period
from inception (October 23, 1995) to March 2, 1996. Except for the historical
information contained herein, the matters discussed in this Management's
Discussion and Analysis are forward looking statements that involve risks and
uncertainties and are based upon judgments concerning various factors that are
beyond the Company's control.
On March 1, 1996, the Company purchased all of the outstanding membership
interests of Dental/ Medical Diagnostic Systems, L.L.C. ("DMD") and all of the
outstanding capital stock of Bavarian Dental Instruments, Inc. ("BDI").
Immediately subsequent to the transaction, the former members of DMD and
stockholders of BDI owned approximately 66.6% of the Company's outstanding
common stock and management control of the Company was transferred to the former
management of DMD and BDI. Accordingly, for accounting purposes the acquisition
was treated as a recapitalization of DMD and BDI with DMD and BDI combined as
the acquiror (reverse acquisition). As a result, the combined historical
financial statements of DMD and BDI became the financial statements of the
Company. From inception, in October 1995, through March 2, 1996, the Company
generated net sales of only $220,623 and incurred a net loss of $1,625,213.
Because both DMD and BDI were only formed in October and November of 1995,
incurred substantial losses in connection with the commencement of their
respective operations, and commenced sales in February 1996, a comparison of the
financial information of the Company for the ten-month period ended December 31,
1996 to the period from inception (October 23, 1995) through March 2, 1996 is
not meaningful.
DMD was formed in October 1995 and has been primarily involved in designing,
developing, manufacturing, and marketing intraoral dental cameras ("TeliCam
Systems"). The first shipments to customers of the TeliCam System commenced in
early February 1996. BDI was formed in November 1995 and has been primarily
involved in the marketing and distribution of dental burs imported from Russia.
The first sales of burs commenced in March 1996. On July 9, 1996, the Company
determined to focus future strategic development primarily upon high value added
dental/medical products and technology and, accordingly, decided to discontinue
the dental bur product line, comprised of low-margin, low-technology products.
The Company thereafter commenced an orderly liquidation of its inventory of
dental burs, and expects the liquidation to be completed in 1997 without
significant adverse effect on operations.
On January 13, 1997 the Company changed its name from Edudata Corporation to
Dental/Medical Diagnostic Systems, Inc. On February 5, 1997, the Company changed
its fiscal year end from a fiscal year ending on the nearest Saturday to
February 28th to a December 31 fiscal year end. On February 28, 1997, the
Company filed with the Securities and Exchange Commission a registration
statement on Form SB-2 relating to a proposed public offering by the Company
(the "Proposed Offering") of an aggregate of 1,500,000 shares of Common Stock
and 1,500,000 Redeemable Stock Purchase Warrants at a proposed offering price of
$4.50 and $0.50, respectively. There can be no assurance that the Proposed
Offering will
1
<PAGE>
be successful or that additional financing will be available to the Company when
needed or on commercially reasonable terms. Any inability to obtain additional
financing when needed will have a material adverse effect on the Company,
including requiring the Company to curtail expansion of its operations.
The Company has a limited history of operations which include results of
operations of the BDI product line, now discontinued. Although no assurance can
be given, the Company anticipates increased sales of the TeliCam Systems and the
introduction of new products and therefore results of operations for the period
presented may not be indicative of future results. The Company's prospects for
increasing sales and profits is subject to a number of risks, including
competitive and economic conditions, as well as the market acceptance of new
technologies the Company may seek to introduce.
RESULTS OF OPERATIONS
For the ten-month period ended December 31, 1996, net sales totaled
$11,673,102, generating an operating profit of $304,435. Included in these
results were sales of approximately $235,000 and an operating loss of
approximately $196,000 related to the Company's discontinued dental bur product
line. As described above, the Company expects to complete the sale of inventory
related to this product line in fiscal 1997 without any significant adverse
impact on operating results.
Net sales totaled $11,673,102 for the ten-month period ended December 31,
1996, and are comprised primarily of sales of TeliCam Systems and related
products. Total sales for this period included approximately $2,200,000 in sales
to international distributors. Sales for the period from inception (October 23,
1995) through March 2, 1996 were not significant as the Company spent the
majority of the period developing its initial product offering with sales
commencing in February 1996. As further described below under the caption
"Fluctuations in Quarterly Results," the Company's sales are generally expected
to be higher in the fourth quarter due to the purchasing patterns of dentists in
the United States. During the ten month period ended December 31, 1996, the
month of December alone accounted for approximately $2,100,000 in net sales due
to a combination of increasing domestic and foreign sales. Domestic sales in
December were higher than normal primarily due to year end purchases by dentists
taking advantage of a $17,000 Federal tax credit for capital equipment
purchases, and to the introduction of the InTELInet system. The Company believes
that the tax credit accelerated certain TeliCam System sales that would
ordinarily have occurred in January and February 1997 and may result in reduced
first quarter 1997 sales.
Cost of sales for the ten-month period ended December 31, 1996 were
$6,685,464 or 57% of sales. As a percentage of sales, the Company expects costs
of international sales to be higher than domestic sales due to higher discounts
being required on international sales, however, this effect should be offset by
reduced warranty and service costs as well as reduced selling costs on
international sales.
Selling, general, and administrative expenses totaled $4,360,736 or 37% of
sales for the ten-month period ended December 31, 1996. These expenses relate to
administering the continuing design, development, manufacturing, and marketing
of the Company's TeliCam Systems. These expenses include advertising and
promotion expenses of $1,008,879 comprised primarily of trade show fees, trade
magazine advertising and direct mail promotions. Salaries and wages totaled
$966,745 comprised primarily of expenses for sales and production
administration, marketing, sales and customer support staff and finance and
accounting personnel. Commissions resulting from sales of TeliCam Systems and
the InTELInet product introduced in November 1996 totaled $1,223,547. These
expenses are expected to increase in absolute dollars relative to net sales in
future periods, due to the need for additional support functions as the
Company's sales increase.
Research and development expenses totaled $322,467 or 3% of sales for the
ten-month period ended December 31, 1996, and related primarily to direct
expenses of ongoing design and development of enhancements to the Company's
TeliCam System and, to a lesser extent, the Company's DMD System One. These
expenses are comprised of wages and benefits for engineering personnel, design
and development fees and raw material used in the development of prototypes.
These expenses are expected to
2
<PAGE>
continue at relatively the same rates in future periods for the TeliCam System.
However research and development expenses will increase for the development of
new products. Increased expenditures on research and development resulting from
application of the proceeds of the Proposed Offering to further research and
development projects and joint ventures and possible acquisitions, are expected
to result in increased expenses and may result in correspondingly reduced
earnings in future periods.
Amortization of debt issuance cost totaled $31,548 for the ten-month period
ended December 31, 1996, and is the result of the cost of the sale of the Bridge
Notes, issued in November 1996, being amortized over the term of the Notes.
These costs will continue into future periods until the debt is paid. The
Company intends to pay such debt out of the proceeds of the Proposed Offering
and, accordingly, expects to take a charge of approximately $190,000 for the
write off of unamortized debt issuance costs in the second quarter of fiscal
1997.
Interest expense totaled $57,166 for the ten-month period ended December 31,
1996, and consisted of interest paid on capital lease obligations and interest
accrued on the Bridge Notes and notes payable to related parties.
Net income for the ten-month period ended December 31, 1996 totaled $137,151
or $.05 per share.
LIQUIDITY AND CAPITAL RESOURCES
For the ten-month period ended December 31, 1996, the Company used net cash
of $1,631,343 in operations. The Company financed its operating cash
requirements through the sale of 422,219 shares of Common Stock in April 1996
which generated cash proceeds of approximately $1,055,000, net of issuance
costs, and through the Bridge Financing in November 1996, which generated cash
proceeds of approximately $1,315,000, net of issuance costs.
Accounts receivable increased by $1,188,544 to $1,305,143 at December 31,
1996 primarily due to the increasing sales volumes during the ten-month period
ended December 31, 1996 and due to the level of international sales during
December. Sales for the period from inception (October 23, 1995) through March
2, 1996 were only $220,000. Accounts payable and accrued liabilities totalling
$1,720,358 at December 31, 1996 decreased slightly from $1,806,640 at the prior
year end period. Inventory levels increased $461,812 to $1,513,075 due to
increased sales and production levels for TeliCam Systems.
Capital expenditures totaled $200,686 for the ten-month period ended
December 31, 1996, and resulted primarily from purchases of additional computer
equipment and test equipment to support the administrative and production
functions of the Company. Book overdrafts decreased in the current period by
$49,906. Cash on hand at the end of the period was $1,058,836.
The Company requires additional cash to continue to pay down its liabilities
(including, without limitation, the Bridge Notes issued in the November 1996
Bridge Financing) for working capital purposes to support anticipated increased
sales levels and to fund its research and development activities.
Based on its current operating plan, the Company believes that the proceeds
of the Proposed Offering, together with existing resources and cash generated
from operations, if any, will be sufficient to satisfy the Company's
contemplated working capital requirements for at least the next twelve months.
There can be no assurance that the Proposed Offering will be successful, that
the Company's working capital requirements during this period will not exceed
its available resources or that these funds will be sufficient to meet the
Company's longer term cash requirements for operations.
On February 13, 1997, the Company received a Commitment Letter from Comerica
Bank ("Comerica") confirming Comerica's intent to extend a $2,000,000 line of
credit to the Company, to be secured by a first priority security interest in
the Company's assets and by an assignment of the Company's rights under a
distribution agreement with the Boston Marketing Company, Ltd. The credit
facility will bear interest monthly at the rate of the Comerica Bank Prime plus
one-quarter of one percent (0.25%), as it may change
3
<PAGE>
from time to time, through June 1, 1998. All borrowings under the facility will
be subject to a formula based, generally, on accounts receivable and inventory.
The Company intends to use the proceeds of this credit facility for working
capital and general corporate purposes. Although negotiations of the credit
facility are proceeding, the commitment of Comerica is contingent upon the
parties' ability to execute and deliver a definitive credit agreement, reach
arrangements with current secured creditors to provide Comerica with a first
priority lien and upon the absence of any material adverse change in the
Company's business or financial condition. There can be no assurance that the
Company will be successful in obtaining the credit facility, and the failure of
the Company to do so could have a material adverse effect on the Company's
business, operating results and financial condition.
FLUCTUATIONS IN QUARTERLY RESULTS
The Company's business is subject to certain quarterly influences. Net sales
and operating profits are generally higher in the fourth quarter due to the
purchasing patterns of dentists in the United States and are generally lower in
the first quarter due primarily to the effect upon demand of increased purchases
in the prior quarter. It is also expected that the Company's business will
experience lower sales in the summer months as a consequence of holiday
vacations and a lesser number of trade shows. Additionally, use by the Company
of a portion of the proceeds of the Proposed Offering to repay the Bridge Notes
will cause the Company to incur a charge in the second quarter of 1997 of
approximately $378,000. Quarterly results may also be adversely affected by a
variety of other factors, including the timing of acquisitions and related
costs, the release of new products and promotions taking place within the
quarter. The Company plans to increase expenses to fund greater levels of
research and development and to fund investments in joint ventures and
acquisitions. To the extent that such expenses precede or are not subsequently
followed by increased revenues, the Company's business, operating results and
financial condition will be adversely affected.
4
<PAGE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of Independent Accountants.......................................................................... F-2
Consolidated Balance Sheets as of December 31, 1996 and March 2, 1996...................................... F-3
Consolidated Statements of Operations for the Ten-month period ended December 31, 1996 and for the Period
from Inception (October 23, 1995) to March 2, 1996....................................................... F-4
Consolidated Statements of Stockholders' Equity for the Ten-month period ended December 31, 1996 and for
the Period from Inception (October 23, 1995) to March 2, 1996............................................ F-5
Consolidated Statements of Cash Flows for the Ten-month period ended December 31, 1996 and for the Period
from Inception (October 23, 1995) to March 2, 1996....................................................... F-6
Notes to Consolidated Financial Statements................................................................. F-7
</TABLE>
F-1
<PAGE>
The accompanying consolidated financial statements reflect the reverse stock
split of one share for 1.33333333 shares of Common Stock, which is to be
effected on or before March 24, 1997. The following Report of Independent
Accountants is in the form that will be signed by Coopers & Lybrand L.L.P. upon
consummation of the one-for-1.33333333 reverse stock split as described in Note
2 of Notes to Consolidated Financial Statements assuming, that from the date
thereon to the date of such split, no other events shall have occurred that
would affect the accompanying consolidated financial statements and notes
thereto.
Coopers & Lybrand L.L.P.
Los Angeles, California
February 25, 1997
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders of
Dental/Medical Diagnostic Systems, Inc.
We have audited the accompanying consolidated financial statements of
Dental/Medical Diagnostic Systems, Inc. and Subsidiaries ("the Company") listed
in the index on page F-1 of this Report. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our 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 financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Dental/Medical
Diagnostic Systems, Inc. and Subsidiaries as of December 31, 1996 and March 2,
1996 and the consolidated results of their operations and their cash flows for
the ten-month period ended December 31, 1996 and for the period from inception
(October 23, 1995) to March 2, 1996 in conformity with generally accepted
accounting principles.
Los Angeles, California
January 31, 1997, except for the effects of the stock split
described in Note 2, as to which the date is .
F-2
<PAGE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND MARCH 2, 1996
<TABLE>
<CAPTION>
DECEMBER 31,
1996 MARCH 2, 1996
------------- -------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents......................................................... $ 1,058,836 $ 666,611
Accounts receivable, less allowance for returns and doubtful accounts of $146,699
and $28,280 at December 31, 1996 and March 2, 1996.............................. 1,158,444 49,023
Inventories....................................................................... 1,513,075 1,072,085
Deferred tax asset................................................................ 90,000 --
Prepaid expenses and other current assets......................................... 208,552 152,985
------------- -------------
Total current assets............................................................ 4,028,907 1,940,704
Property and equipment, net of accumulated depreciation........................... 393,578 249,000
Debt issuance costs, net of accumulated amortization.............................. 253,686 --
Other assets...................................................................... 42,270 36,040
------------- -------------
Total assets.................................................................... $ 4,718,441 $ 2,225,744
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Book overdraft.................................................................... $ -- $ 49,906
Current portion of capital lease obligations...................................... 18,468 15,505
Notes payable to related parties.................................................. -- 277,015
Accounts payable.................................................................. 1,089,332 1,616,866
Accrued liabilities............................................................... 462,456 189,974
Income taxes payable.............................................................. 168,570 --
Customer deposits................................................................. 33,607 249,345
------------- -------------
Total current liabilities....................................................... 1,772,433 2,398,611
Notes payable..................................................................... 1,355,291 --
Notes payable to related parties.................................................. 272,966 --
Capital lease obligations......................................................... 66,028 74,836
Other long term liabilities....................................................... 14,098 12,629
------------- -------------
Total liabilities............................................................... 3,480,816 2,486,076
------------- -------------
Commitments and contingencies
Stockholders' equity (deficit)
Preferred stock, par value $.01 per share; 1,000,000 shares authorized; none
issued and outstanding........................................................ -- --
Common stock, par value $.01 per share; 20,000,000 shares authorized; 2,985,537
and 2,563,318 shares issued and outstanding at December 31, 1996 and March 2,
1996.......................................................................... 29,855 25,633
Additional paid in capital...................................................... 2,695,832 1,339,248
Accumulated deficit............................................................. (1,488,062) (1,625,213)
------------- -------------
Total stockholders' equity (deficit)............................................ 1,237,625 (260,332)
------------- -------------
Total liabilities and stockholders' equity (deficit)............................ $ 4,718,441 $ 2,225,744
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE TEN-MONTH PERIOD ENDED DECEMBER 31, 1996
AND FOR THE PERIOD FROM INCEPTION (OCTOBER 23, 1995) TO MARCH 2, 1996
<TABLE>
<CAPTION>
TEN MONTHS ENDED INCEPTION TO
DECEMBER 31, 1996 MARCH 2, 1996
----------------- -------------
<S> <C> <C>
Net sales....................................................................... $ 11,673,102 $ 220,623
Cost of sales................................................................... 6,685,464 202,115
----------------- -------------
Gross profit.................................................................. 4,987,638 18,508
Selling, general and administrative expense..................................... 4,360,736 1,111,391
Research and development expense................................................ 322,467 528,426
----------------- -------------
Operating income (loss)....................................................... 304,435 (1,621,309)
Interest expense................................................................ 57,166 3,904
Amortization of debt issuance costs............................................. 31,548 --
----------------- -------------
Income (loss) before income taxes............................................. 215,721 (1,625,213)
Provision for income taxes...................................................... 78,570 --
----------------- -------------
Net income (loss)............................................................. $ 137,151 $ (1,625,213)
----------------- -------------
----------------- -------------
Net income (loss) per share..................................................... $ .05 $ (1.57)
----------------- -------------
----------------- -------------
Number of shares used in computing per share amounts............................ 3,019,213 1,035,778
----------------- -------------
----------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE TEN-MONTH PERIOD ENDED DECEMBER 31, 1996
AND FOR THE PERIOD FROM INCEPTION (OCTOBER 23, 1995) TO DECEMBER 31, 1996
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
--------------------- PAID IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
---------- --------- ----------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance, October 23, 1995 (date of
inception)............................. -- $ -- $ -- $ -- $ --
Issuance of common stock for cash........ 1,416,500 14,165 617,070 -- 631,235
Issuance of common stock for services.... 290,126 2,901 125,216 -- 128,117
Issuance of common stock for cash, net of
issuance costs......................... 856,692 8,567 596,962 -- 605,529
Net loss................................. -- -- -- (1,625,213) (1,625,213)
---------- --------- ----------------- ------------- -------------
Balance, March 2, 1996................... 2,563,318 25,633 1,339,248 (1,625,213) (260,332)
Issuance of common stock for cash, net of
issuance costs......................... 422,219 4,222 1,050,281 -- 1,054,503
Issuance of warrants for cash............ -- -- 259,103 -- 259,103
Issuance of stock options to
nonemployees........................... -- -- 47,200 -- 47,200
Net income............................... -- -- -- 137,151 137,151
---------- --------- ----------------- ------------- -------------
Balance, December 31, 1996............... 2,985,537 $ 29,855 $ 2,695,832 $ (1,488,062) $ 1,237,625
---------- --------- ----------------- ------------- -------------
---------- --------- ----------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE TEN-MONTH PERIOD ENDED DECEMBER 31, 1996
AND FOR THE PERIOD FROM INCEPTION (OCTOBER 23, 1995) TO MARCH 2, 1996
<TABLE>
<CAPTION>
TEN MONTHS ENDED INCEPTION TO
DECEMBER 31, 1996 MARCH 2, 1996
----------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)............................................................. $ 137,151 $ (1,625,213)
Adjustments to reconcile net income (loss) to net cash used by operating
activities:
Depreciation and amortization............................................... 108,047 9,219
Allowance for returns and doubtful accounts................................. 79,123 28,280
Inventory write down........................................................ 20,822 91,556
Deferred taxes.............................................................. (90,000) --
Deferred rent............................................................... 1,469 12,629
Common stock and stock options issued for services.......................... 47,200 128,117
Changes in operating assets and liabilities:
Accounts receivable....................................................... (1,188,544) (77,303)
Inventories............................................................... (461,812) (1,163,641)
Prepaid expenses and other current assets................................. (55,567) (152,985)
Other assets.............................................................. (6,230) (36,040)
Accounts payable.......................................................... (448,316) 1,524,470
Accrued liabilities....................................................... 272,482 131,991
Income taxes payable...................................................... 168,570 --
Customer deposits......................................................... (215,738) 249,345
----------------- --------------
Net cash used by operating activities................................... (1,631,343) (879,575)
----------------- --------------
Cash flows from investing activities:
Purchase of property and equipment.......................................... (200,686) (144,537)
----------------- --------------
Net cash used in investing activities................................... (200,686) (144,537)
----------------- --------------
Cash flows from financing activities:
(Decrease) increase in book overdraft....................................... (49,906) 49,906
Accounts payable to related party in excess of terms........................ (79,218) 79,218
Net proceeds from issuance of common stock.................................. 1,054,503 1,291,113
Net proceeds from issuance of notes payable................................. 1,314,766 --
Proceeds from borrowings from related parties............................... 25,000 377,015
Payments on borrowings from related parties................................. (29,049) (100,000)
Principal payments on capital lease obligations............................. (11,842) (6,529)
----------------- --------------
Net cash provided by financing activities............................... 2,224,254 1,690,723
----------------- --------------
Net increase in cash and cash equivalents............................... 392,225 666,611
Cash and cash equivalents, beginning of period................................ 666,611 --
----------------- --------------
Cash and cash equivalents, end of period...................................... $ 1,058,836 $ 666,611
----------------- --------------
----------------- --------------
Supplemental cash flow information:
Capital lease obligations incurred............................................ $ 5,997 $ 96,870
Property and equipment not paid for at period end............................. -- 16,812
Common stock issuance costs not paid for at period end........................ -- 54,349
Interest paid................................................................. 8,219 --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The Company was organized in New York in 1981 under the name Edudata
Corporation and reincorporated in Delaware in 1983 by Sun Equities Corporation
("Sun") which owned approximately 81 percent of the Company's outstanding common
stock until August 11, 1995. At that time, Sun distributed the shares of the
Company that it owned to its stockholders in the form of a dividend.
The Company was initially organized to provide education in the use of
personal computers, to market software programs developed by others, and to
provide a broad range of advisory services to businesses in conjunction with
both computer and non-computer related management issues. The Company's original
concept was modified, however, and until 1987, the Company was engaged in the
ownership and operation of technical schools through its subsidiaries, Betty
Owen Secretarial Systems, Inc. and Taylor Business Institute, Inc., and in the
development, construction and sale of single-family homes and commercial
buildings through its majority-owned subsidiary, Lytton & Tolly, Inc. In 1988
the Company disposed of its subsidiaries and their operations and determined to
use the proceeds to acquire another business. From 1988 to early 1996, the
Company's operations were limited to exploring opportunities to acquire or to
become an operating business.
On March 1, 1996, the Company acquired all the outstanding securities of
Dental/Medical Diagnostic Systems LLC, a California limited liability company
("DMD"), and Bavarian Dental Instruments, Inc., a California close corporation
("BDI"), in exchange for the issuance by the Company of a total of 1,706,626
restricted shares of its Common Stock. As a result of these transactions, the
former members of DMD and former stockholders of BDI gained a majority of the
Company's voting securities and management control of the Company was
transferred to the former management of DMD and BDI. For accounting purposes
these transactions were treated as a recapitalization of DMD and BDI, with DMD
and BDI combined as the acquiror (reverse acquisition). As a result, the
combined historical financial statements of DMD and BDI became the financial
statements of the Company.
On January 28, 1997 the Company changed its name to Dental/Medical
Diagnostic Systems, Inc. ("DMDS") from Edudata Corporation. Collectively, DMDS
and its wholly owned subsidiaries are referred to as the Company.
The Company designs, develops, manufactures and sells high technology dental
equipment. Currently, the Company's primary emphasis is on the manufacture and
sale of an intraoral camera system known as the TeliCam System and a dental
office networking system, known as InTELInet, for use in connection with the
TeliCam System. The Company commenced shipments of TeliCam Systems to customers
in February 1996 and, in November 1996, introduced the InTELInet networking
system for the TeliCam System.
BDI was initially formed in November 1995 to import from Russia, distribute
and market dental burs in the United States and elsewhere. The first sales of
the burs commenced in early March 1996. On July 9, 1996, the Company decided to
discontinue the dental bur product line.
2. BASIS OF PRESENTATION
On October 23, 1996, the Company authorized an increase in the authorized
number of shares of Common Stock from 10,000,000 shares to 20,000,000 shares.
The Board of Directors also authorized a new class of 1,000,000 shares of
Preferred Stock with a par value of $.01 per share.
F-7
<PAGE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. BASIS OF PRESENTATION (CONTINUED)
On January 13, 1997, the Company effected a reverse stock split of 1 share
for 2.197317574 shares of its issued and outstanding Common Stock. In addition,
on February 11, 1997 the Company's Board of directors approved, subject to
stockholder approval, a reverse stock split of 1 share for 1.33333333 shares of
its issued and outstanding Common Stock. All share and per share amounts have
been retroactively restated to reflect these reverse splits.
On February 5, 1997 the Company changed its fiscal year-end from a fiscal
year ending on the nearest Saturday to February 28th to a December 31 fiscal
year-end. The accompanying consolidated financial statements reflect the
operating results of the Company for the ten-month period from March 3, 1996
through December 31, 1996 and for the period from inception (October 23, 1995)
through March 2, 1996.
3. ACQUISITION OF DMD AND BDI
On March 1, 1996, DMDS (formerly Edudata) completed the acquisition of BDI
and DMD. The acquisition was affected pursuant to the terms of the two
Contribution Agreements dated February 29, 1996 ("Contribution Agreements")
between DMDS and BDI and between DMDS and DMD. Pursuant to the Contribution
Agreements the former shareholders of BDI and members of DMD received a total of
1,706,626 shares of newly issued DMDS restricted common stock, then constituting
approximately 66.6% of DMDS' outstanding common stock, taking into consideration
the newly issued shares. As part of the transaction, DMDS' prior Board of
Directors resigned and were replaced by Robert H. Gurevitch, Chief Executive
Officer, director and member/shareholder of DMD and BDI, Hiroki Umezaki,
President of DMD's International Operations, director and member of DMD and two
outside directors. In addition, existing management and security holders of both
DMD and BDI assumed management control of DMDS.
Accordingly, for accounting purposes the acquisition was treated as a
recapitalization of DMD and BDI with DMD and BDI combined as the acquiror
(reverse acquisition). As a result, the combined historical financial statements
of DMD and BDI became the financial statements of DMDS.
Further, since DMDS' assets consisted solely of approximately $660,000 in
cash and cash equivalents and had no operations in the seven years prior to the
acquisition, for accounting purposes this transaction was recorded by the
Company as the issuance of common stock for cash held by DMDS. Therefore no
proforma information has been presented.
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of DMDS and its
wholly owned subsidiaries as of December 31, 1996 and March 2, 1996 and for the
ten-month period ended December 31, 1996 and for the period from inception
(October 23, 1995) to March 2, 1996. All intercompany balances and transactions
have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and
F-8
<PAGE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the reported amounts of revenues and expenses during the reporting period. The
significant estimates made in the preparation of the consolidated financial
statements relate to the assessment of the carrying value of accounts
receivable, inventories, and estimated provision for warranty costs. Actual
results could differ from those estimates.
RISKS AND UNCERTAINTIES
The Company buys certain key components from one supplier or from a limited
number of suppliers. Although there are a limited number of suppliers of the key
components, management believes that other suppliers could provide similar
components on comparable terms. Changes in key suppliers could cause delays in
manufacturing and distribution of products and a possible loss in sales, which
could adversely affect operating results.
The Company has derived substantially all of its revenues from the sale of
one product family. The Company believes that the inability to attract new
customers, the loss of one or more of its major customers, a significant
reduction in business from such customers, or the uncollectibility of amounts
due from any of its larger customers, could have a material adverse affect on
the Company.
REVENUE RECOGNITION
The Company recognizes revenue from the sales of systems and supplies at the
time of shipment and satisfaction of significant vendor obligations, if any, net
of an allowance for estimated sales returns. The Company generally warrants its
systems for one year. A provision for estimated future costs relating to
warranty is recorded when systems are shipped.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all
highly liquid investments purchased with an original maturity of three months or
less to be cash equivalents.
INVENTORIES
Inventories are carried at standard costs which approximate the lower of
actual cost (first-in; first-out) or market. Such amounts include the cost of
materials and, when applicable, labor and overhead.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation.
Capitalized leases are recorded at the lower of fair market value or the present
value of future minimum lease payments, less accumulated amortization.
Maintenance and repairs are expensed as incurred. The cost and related
accumulated depreciation and amortization of property and equipment sold or
retired are removed from the accounts and the resulting gains or losses are
included in current operations. Depreciation and amortization are provided on a
straight line basis over the estimated useful lives of the related asset, or
F-9
<PAGE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
with respect to leasehold improvements and capital leases by the primary term of
the lease, whichever is less, as follows:
<TABLE>
<S> <C>
Equipment and software, including capitalized leases............... 5 years
Furniture and fixtures............................................. 7 years
Leasehold improvements............................................. 3 years
</TABLE>
ADVERTISING AND PROMOTION COSTS
Production costs of future media advertising and costs of dental industry
trade shows are deferred until the advertising or trade show occurs. All other
advertising and promotion costs are expensed as incurred. Total advertising and
promotion expenses incurred for the ten-month period ended December 31, 1996
were $1,008,879 and for the period from inception (October 23, 1995) through
March 2, 1996 were $437,590.
RESEARCH AND DEVELOPMENT COSTS
Costs related to research and development are expensed as incurred.
INCOME TAXES
The Company accounts for income taxes under the liability method. Under this
method, deferred tax assets and liabilities are determined based on the
differences between the financial statement and tax bases of assets and
liabilities, using enacted tax rates in effect for the year in which the
differences are expected to reverse. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized.
Income tax expense is the tax payable for the period and the change during the
period in deferred tax assets and liabilities.
STOCK-BASED EMPLOYEE COMPENSATION AWARDS
Statement of Financial Accounting Standards No. 123, "Accounting for the
Awards of Stock-Based Compensation to Employees" ("SFAS No. 123") encourages,
but does not require companies to record compensation cost for stock-based
compensation plans at fair value. The Company has adopted the disclosure
requirements of SFAS No. 123, which involves proforma disclosure of net income
under SFAS No. 123, detailed descriptions of plan terms and assumptions used in
valuing stock option grants. The Company has chosen to continue to account for
stock-based employee compensation awards in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees".
CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash deposits and trade
accounts receivable. The Company's cash deposits are placed with various
financial institutions and, from time to time, may exceed the Federal Deposit
Insurance Corporation limit.
For the ten month period ended December 31, 1996, five of the Company's
customers accounted for approximately 21% of sales and as of December 31, 1996,
six of the Company's customers, primarily international distributors, accounted
for approximately 75% of trade accounts receivable. Export sales
F-10
<PAGE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
represented approximately 20% of total sales for the ten-month period ended
December 31, 1996. No customer accounted for more than 10% of revenues and there
were no export sales in the period ended March 2, 1996.
The Company extends credit based on an ongoing credit evaluation of its
customers' financial condition and generally does not require collateral.
Estimated credit losses and returns have been provided for in the financial
statements and, to date, have been within management's expectations.
The majority of the Company's current customers consist of dental
professionals. Certain of the dental professionals lease the Company's products
through third party leasing companies. Under the terms of the sales, the leasing
companies have no recourse against the Company.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosure About Fair
Value of Financial Instruments", requires disclosure of fair value information
about all financial instruments held by a company except for certain excluded
instruments and instruments for which it is not practical to estimate fair
value. The carrying value of the Company's financial instruments approximates
their fair value.
EARNINGS (LOSS) PER SHARE
Earnings (loss) per share is computed based on the weighted average number
of common and common equivalent shares outstanding during the periods presented,
using the treasury stock method. Common stock equivalents related to warrants
and stock options are excluded from the computation when their effect is
antidilutive.
5. RELATED PARTY TRANSACTIONS
In October 1996, the Company entered into an agreement with Boston Marketing
Company, Ltd. ("Boston Marketing") pursuant to which the Company obtained
worldwide marketing rights in the dental market for the Teli Units as well as
the right to use the "TeliCam" trademark. At the time the Company entered into
this agreement, Hiroki Umezaki was an officer, director and principal
stockholder of the Company and is a substantial stockholder and the President of
Boston Marketing. At December 31, 1996 and March 2, 1996 the Company owed Boston
Marketing approximately $247,500 and $674,218, respectively, in connection with
Teli Units purchased by the Company. For the ten-month period ended December 31,
1996, the Company purchased 2,509 Teli Units at an aggregate cost of $1,881,750
and from inception (October 23, 1995) through March 2, 1996, the Company
purhased 905 Teli Units at an aggregate cost of $674,218 from Boston Marketing.
In addition, the Company had an agreement with Mr. Umezaki pursuant to which he
was to receive a 15% commission on all sales made by the Company in Asia, except
Japan for which his commission was to be 12%. This agreement resulted in Mr.
Umezaki earning $15,000 in commissions for the ten-month period ended December
31, 1996.
From December 1995 through February 1996, Robert H. Gurevitch, Chairman of
the Board and Chief Executive Officer of the Company, and Boston Marketing, an
affiliate of Mr. Umezaki, loaned the Company an aggregate of $377,015. The
promissory notes evidencing such loans bear interest at 6% per annum and were
originally payable within six months. On February 26, 1996, the Company repaid
$50,000 to each of Mr. Gurevitch and Boston Marketing. No interest has been paid
on the remaining principal balance of these notes although interest has been
accrued in the Company's financial statements. In
F-11
<PAGE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. RELATED PARTY TRANSACTIONS (CONTINUED)
November 1996, Mr. Gurevitch and Boston Marketing each agreed to extend the term
of their respective notes until the earlier to occur of: (i) twenty-four months
following the closing of the Bridge Financing (see Note 11); (ii) at such time
as the Company receives proceeds from the sale of the Common Stock in connection
with a public offering; and (iii) the repayment of the Bridge Notes in full. In
addition, on April 11, 1996, Boston Marketing loaned the Company an additional
$25,000 under similar terms ("April Loan"). The April Loan was repaid in full on
August 26, 1996.
Mr. Gurevitch and Mr. Umezaki have guaranteed the performance by the Company
under the Company's leases for its Irvine and Westlake premises, and Mr.
Gurevitch has also personally guaranteed the Company's credit card processing
agreement with the Checkfree Corporation.
6. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 2,
1996 1996
------------ ------------
<S> <C> <C>
Raw materials.................................................... $ 789,464 $ 754,946
Work in process.................................................. 136,786 49,164
Finished goods................................................... 586,825 267,975
------------ ------------
$1,513,075 $ 1,072,085
------------ ------------
------------ ------------
</TABLE>
7. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 2,
1996 1996
------------ ------------
<S> <C> <C>
Prepaid advertising and industry trade show fees................. $ 178,281 $ 117,495
Other............................................................ 30,271 35,490
------------ ------------
$ 208,552 $ 152,985
------------ ------------
------------ ------------
</TABLE>
F-12
<PAGE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 2,
1996 1996
------------ ----------
<S> <C> <C>
Equipment and software, including $102,867 and $96,870 of
capitalized leases at December 31, 1996 and March 2, 1996........ $ 342,989 $ 191,705
Furniture and fixtures............................................. 116,152 61,352
Leasehold improvements............................................. 5,761 5,162
------------ ----------
464,902 258,219
Less accumulated depreciation and amortization, including $20,341
and $3,368 relating to capitalized leases at December 31, 1996
and at March 2, 1996............................................. (71,324) (9,219)
------------ ----------
$ 393,578 $ 249,000
------------ ----------
------------ ----------
</TABLE>
9. ACCRUED LIABILITIES
Accrued liabilities consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 2,
1996 1996
------------ ----------
<S> <C> <C>
Accrued commissions................................................ $ 257,341 $ 32,516
Accrued warranty................................................... 56,515 38,444
Accrued salaries and wages......................................... 42,159 45,432
Accrued interest................................................... 34,552 1,822
Other.............................................................. 71,889 71,760
------------ ----------
$ 462,456 $ 189,974
------------ ----------
------------ ----------
</TABLE>
10. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases two facilities under various operating leases which
expire in 1998 and 2000. The leases require the Company to pay taxes,
maintenance fees, and insurance and provide for periodic fixed rent increases
based on a published price index. The Company also leases certain equipment
under capital leases which expire in 2000 and has the right to purchase the
underlying equipment at the termination of the leases for its fair market value.
Rent expense for all operating leases was approximately $102,000 and $38,000 for
the ten-month period ended December 31, 1996 and for the period from inception
(October 23, 1995) to March 2, 1996, respectively. All non-cancelable leases are
guaranteed by Robert H. Gurevitch, Chief Executive Officer and Chairman of the
Board of the Company. The other facility lease is co-guaranteed by Hiroki
Umezaki, former Executive Vice President, director, Secretary, and stockholder
of the Company.
F-13
<PAGE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The aggregate liability for future rentals under these lease agreements as
of December 31, 1996, is summarized as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDED DECEMBER 31 LEASES LEASES
- ---------------------------------------------------------------------- ---------- ----------
<S> <C> <C>
1997.................................................................. $ 29,795 $ 116,359
1998.................................................................. 28,077 109,026
1999.................................................................. 25,672 70,008
2000.................................................................. 22,539 61,257
---------- ----------
106,083 $ 356,650
----------
----------
Less amounts representing:
Interest............................................................ 21,587
Current portion..................................................... 18,468
----------
Long term portion..................................................... $ 66,028
----------
----------
</TABLE>
11. CAPITAL TRANSACTIONS
As previously described in Note 3, for accounting purposes, the acquisition
of DMD and BDI was treated as a recapitalization of DMD and BDI, whereby the
previously outstanding shares and interests of DMD and BDI were exchanged for
1,706,626 shares of DMDS (formerly Edudata) restricted common stock and 856,692
shares of common stock were issued for the approximately $660,000 in cash and
cash equivalents held by DMDS ($606,000 net of issuance costs of approximately
$54,000). Accordingly, DMD's and BDI's historical shareholder's equity and
members' interest activity prior to the acquisition has been retroactively
restated for the equivalent number of DMDS' common shares received in the
transaction.
The capital transactions of DMD and BDI prior to the acquisition of DMD and
BDI by the Company have been restated as if (i) the Company issued 870,379
shares of its common stock to Robert Gurevitch, Chief Executive Officer and
Chairman of the Board for cash payments totaling approximately $388,235 or $.44
per share; (ii) the Company issued 546,121 shares of its common stock to Hiroki
Umezaki, Executive Vice-president, director, and Secretary of the Company for
cash payments totaling approximately $243,000, or $.44 per share; and (iii) in
exchange for services, 290,126 shares of the Company's common stock were issued
to three employees and valued at approximately $128,000, or $.44 per share for
which compensation expense was included in the consolidated statements of
operations.
On May 30, 1996, the Company completed the sale of a total of 422,219 shares
of its common stock to six foreign investors. Each share was sold at a price of
$2.58 per share and, consequently, the Company raised approximately $1,055,000
from the sale, net of related expenses of approximately $34,000.
On November 27, 1996, the Company raised $1,314,766, net of issuance costs
of $285,234, through a private placement of 32 Units to certain accredited
investors. Each Unit consisted of a secured promissory note in the principal
amount of $50,000 ("Note") and a warrant ("Bridge Warrant") to purchase 18,750
shares of Common Stock at a purchase price of $2.67 per share. The Notes bear
interest at a rate of 10% per annum and the principal and all accrued interest
are payable upon the earliest to occur of: (a) May 27, 1998; (b) certain change
in control events effecting the Company; (c) a public offering of the Company's
F-14
<PAGE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. CAPITAL TRANSACTIONS (CONTINUED)
securities; or (d) the sale by the Company's Chief Executive Officer of all or
substantially all of his holdings of Common Stock. Upon the happening of certain
events the holders of the Notes will have the right to convert the outstanding
balances of their Notes into shares of Common Stock at a rate of $2.67 per
share. The Warrants are first exercisable on November 27, 1997 and expire on
November 27, 2002. As a result of the warrant issuance, these Notes have been
discounted by $259,103, which amount is being amortized over the term of the
Notes.
12. STOCK OPTIONS
During the ten-month period ended December 31, 1996, the Company granted
stock options to certain executives, key employees and directors. The options
were granted with an exercise price equal to the fair value of the common stock
at the date of grant, are fully vested and are exercisable over a period of five
years.
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option pricing model with the following assumptions (i)
risk-free interest rate of 6.85%, (ii) expected option life of 5 years, (iii)
forfeiture rate of 0, (iv) expected volatility of 143% and (v) no expected
dividends.
A summary of stock option activity with executives, key employees and
directors is as follows:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED AVERAGE
NUMBER OF AVERAGE OPTION GRANT DATE FAIR
SHARES EXERCISE PRICE VALUE
----------- --------------- -----------------
<S> <C> <C> <C>
Options outstanding at March 2, 1996............................... -- $ -- $ --
Granted............................................................ 139,943 2.63 2.11
Exercised.......................................................... -- -- --
----------- ----- -----
Options outstanding at December 31, 1996........................... 139,943 $ 2.63 $ 2.11
----------- ----- -----
----------- ----- -----
Options exercisable at December 31, 1996........................... 139,943 $ 2.63
----------- -----
----------- -----
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1996:
<TABLE>
<S> <C>
Range of exercise prices........................................ $.88-2.93
Weighted average remaining contractual life..................... 51 months
</TABLE>
The Company has adopted the disclosure only provisions of SFAS No. 123 and
accordingly, no compensation expense has been recognized for stock options
granted to executives, key employees, and directors. Had compensation expense
for such grants been determined based on the fair value of the award at the
grant date, consistent with the provisions of SFAS No. 123, the Company's net
income and income per share would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<S> <C>
Net income--as reported.......................................... $ 137,151
---------
---------
Net loss--pro forma.............................................. $(158,129)
---------
---------
Income per share--as reported.................................... $ 0.05
---------
---------
Loss per share--pro forma........................................ $ (0.06)
---------
---------
</TABLE>
F-15
<PAGE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. STOCK OPTIONS (CONTINUED)
In addition to the stock options granted to executives, key employees and
directors, the Company also issued stock options to various non-employees for
past or future services. As of December 31, 1996 options to purchase 80,211
shares of common stock were held by non-employees with an exercise price of
$.88-$2.93 per share, exercisable over five to ten years. Certain of these
options vest 20% per year over five years. Compensation expense of $47,200 was
recognized during the ten-month period ended December 31, 1996 in connection
with the issuance of these options.
13. INCOME TAXES
The income tax expense (benefit) for the ten-month period ended December 31,
1996 is as follows:
<TABLE>
<S> <C>
Current:
Federal......................................................... $ 132,570
State........................................................... 36,000
---------
168,570
---------
Deferred:
Federal......................................................... (67,000)
State........................................................... (23,000)
---------
(90,000)
---------
Total............................................................. $ 78,570
---------
---------
</TABLE>
The Company's effective tax rate for the ten-month period ended December 31,
1996 differs from the statutory federal income tax rate as follows:
<TABLE>
<S> <C>
Tax provision at the statutory rate................................. 34%
Nondeductible expenses.............................................. 10
State taxes, net of federal benefit................................. 14
Reduction in deferred asset valuation allowance..................... (27)
Other............................................................... 5
--
36%
--
--
</TABLE>
There was no tax expense for the period from inception (October 23, 1995)
through March 2, 1996 due principally to DMD being formed as a limited liability
company and, prior to the acquisition by DMDS, having elected to be taxed as a
partnership. Due to the net operating loss incurred, however, treatment as a C
corporation would not have resulted in tax expense for the period from inception
through March 2, 1996.
F-16
<PAGE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. INCOME TAXES (CONTINUED)
The components of the net deferred taxes are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 2,
1996 1996
------------ ----------
<S> <C> <C>
Deferred Tax Assets:
Inventory reserves................................................ $ 28,300 $ 26,900
Warranty accrual.................................................. 22,600 15,400
Allowance for returns and doubtful accounts....................... 37,900 11,000
Other............................................................. 1,200 4,300
Valuation allowance............................................... -- (57,600)
------------ ----------
$ 90,000 $ --
------------ ----------
------------ ----------
</TABLE>
Based on the level of taxable income generated by the Company in the current
period, management believes it is more likely than not that the Company will
realize the benefit of its recorded net deferred tax asset.
14. SUBSEQUENT EVENTS (UNAUDITED)
Effective February 11, 1997 the Company's Board of Directors approved the
adoption of the 1997 Stock Incentive Plan ("Plan"). The Plan provides for the
grant of stock awards to directors, employees, officers and consultants of the
Company. A maximum of 350,000 shares of Common Stock are authorized and reserved
for issuance under the Plan.
On February 13, 1997, the Company received a commitment letter from a bank
to provide a $2,000,000 line of credit, to be secured by a first priority
security interest in the Company's assets and by an assignment of the Company's
rights under a distribution agreement with Boston Marketing. The credit facility
will bear interest monthly at the bank's prime rate, plus one-quarter of one
percent, through June 1, 1998. All borrowings under the facility will be subject
to a formula based, generally, on the levels of accounts receivable and
inventory.
F-17
<PAGE>
<TABLE>
<S> <C> <C> <C>
BOARD OF DIRECTORS EXECUTIVE OFFICERS CORPORATE OFFICES ANNUAL MEETING
OF STOCKHOLDERS
ROBERT H. GUREVITCH ROBERT H. GUREVITCH Dental\Medical Monday, March 24, 1997
Chairman of the Board, Chief Executive Officer Diagnostic Systems, Inc. 10:00AM
Chief Executive Officer and and President 200 N. Westlake Boulevard Troop Meisinger Steuber
President Suite 202 & Pasich, LLP
Dental/Medical Diagnostic MARVIN H. KLEINBERG Westlake Village, CA 91362 10940 Wilshire Blvd.,
Systems, Inc. Assistant Secretary Suite 800
Los Angeles, CA 90024
MARVIN H. KLEINBERG RONALD E. WITTMAN LEGAL COUNSEL FORM 10-KSB AND
Assistant Secretary Chief Financial Officer Troop Meisinger INVESTOR CONTACT
Dental/Medical Diagnostic Steuber & Pasich, LLP A copy of the Company's
Systems, Inc. MERLE ROBERTS Los Angeles, CA Form 10-KSB, when
Vice President of with the Securities and
RONALD E. WITTMAN Manufacturing INDEPENDENT AUDITORS Exchange Commission
Chief Financial Officer Coopers & Lybrand LLP (excluding exhibits), will
Dental/Medical Diagnostic DEWEY PERRIGO Los Angeles, CA be furnished without
Systems, Inc. Vice President of charge to Stockholders of
Sales STOCK REGISTRAR & record upon written
TRANSFER AGENT request to:
American Stock Transfer
and Trust & Company
6201 15th Avenue, 3rd Floor RONALD E. WITTMAN
Brooklyn, NY 11219 Chief Financial Officer
Dental\Medical Diagnostic
Systems, Inc.
200 N. Westlake
Boulevard, Suite 202
Westlake Village, CA
91362
</TABLE>
SECURITIES INFORMATION
Dental/Medical Diagnostic Systems, Inc.'s Common Stock has traded on the
NASDAQ OTC Bulletin Board under the symbol DMDS. The high and low transaction
prices for the Company's stock, as provided by NASDAQ, are set forth below.
<TABLE>
<CAPTION>
PERIOD ENDED HIGH LOW
- -------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
June 30, 1996......................................................................... $ 5.86 $ .94
August 31, 1996....................................................................... 5.48 3.66
November 30, 1996..................................................................... 5.86 3.66
December 31, 1996..................................................................... 5.68 4.39
</TABLE>
On December 31, 1996, there were 244 shareholders of record and
approximately 400 beneficial owners of the Company's Common Stock.
The Company does not currently issue cash dividends and plans to retain
earnings for use in operation and expansion of its business.
<PAGE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC.
NOTICE OF PROXY
AND
1996 ANNUAL REPORT
