<PAGE> 1
The SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Amendment No. 1
to
FORM 10-QSB
MARK ONE:
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter, November 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ________________ to _________________.
Commission file number 0-12850
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 13-3152648
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
200 N. Westlake Blvd., Suite 202, Westlake Village, CA 91362
(Address of principal executive offices)
Issuer's telephone number, including area code (805) 381-2700
Edudata Corporation
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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 issuer was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
--- ---
State the number of shares of registrant's common stock outstanding as of
January 20,1997: 3,980,717, after adjustment for a one for 2.197317574 reverse
stock split effective January 13, 1997.
Transitional Small Business Disclosure Format Yes [ ] No [ X ]
1
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DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
FORM 10-QSB REPORT
November 30, 1996
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE
----
<S> <C>
Item 1 Interim Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheet-November 30, 1996 4
Condensed Consolidated Statements of Operations 5
Thirteen Week and Thirty Nine Week Periods Ended November 30, 1996
Condensed Consolidated Statement of Shareholders' Equity 6
Thirty Nine Week Period Ended November 30, 1996
Condensed Consolidated Statement of Cash Flows 7
Thirty Nine Week Period Ended November 30, 1996
Notes to Interim Condensed Consolidated Financial Statements 8
Item 2 Management's Discussion and Analysis or Plan of Operation 12
PART II - OTHER INFORMATION
Item 1 Legal proceedings
Item 2 Changes in Senior Securities
Item 3 Defaults in Senior Securities
Item 4 Submission of Matters to a Vote of Security-Holders 18
Item 5 Other Information
Item 6 Exhibits and Reports on Form 8-K 18
(a) Exhibits 18
(b) Reports on Form 8-K 19
Signatures 20
Exhibit 3.1 Amended and Restated Certificate of Incorporation of the
Registrant
Exhibit 10.1 Form of Secured Convertible Promissory Note, dated as of
November 27, 1996, Issued by the Registrant and a Schedule of Note
holders
Exhibit 10.2 Form of Warrant for the Purchase of Shares of Common
Stock, dated as of November 25, 1996, Issued by the Registrant and a
Schedule of Warrant holders
Exhibit 10.3 Security Agreement, dated as of November 25, 1996, Entered
into by the Registrant
Exhibit 10.4 Agency Agreement, dated as of October 23, 1996, by and
between the Registrant and M. H. Meyerson & Co., Inc.
</TABLE>
2
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<TABLE>
<S> <C>
Exhibit 10.5 Employment Agreement, dated as of October 1, 1996, by and
between the Registrant and Robert H. Gurevitch
Exhibit 10.6 Employment Agreement, dated as of October 1, 1996, by and
between the Registrant and Dewey Perrigo
Exhibit 10.7 Note Extension Agreement, dated as of November 25, 1996,
by and between the Registrant and Robert H. Gurevitch
Exhibit 10.8 Note Extension Agreement, dated as of November 25, 1996,
by and between the Registrant and Boston Marketing Company, Ltd.
Exhibit 10.9 Distribution Agreement, dated as of October 1, 1996, by
and between the Registrant and Boston Marketing Company, Ltd.
Exhibit 10.10 Form of Subscription Agreement
Exhibit 11.1 Statement Regarding Computation of Net Income (Loss) Per
Share
Exhibit 27.1 Financial Data Schedule
</TABLE>
3
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PART I - FINANCIAL INFORMATION
ITEM 1 - INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
November 30, 1996
(Unaudited)
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 790,280
Accounts receivable, less allowances for bad
debts and sales returns of $20,975 1,070,868
Inventories 1,579,448
Prepaid expenses and other 211,763
-----------
Total current assets 3,652,359
Property and equipment, net 398,727
Debt issuance costs, net 266,935
Other assets 97,541
-----------
Total assets $ 4,415,562
===========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current liabilities:
Accounts payable $ 1,294,494
Accrued salaries and wages 94,965
Other accrued expenses 314,709
Customer deposits 30,310
Current portion of capital lease obligations 18,468
Notes payable to related parties 272,966
-----------
Total current liabilities 2,025,912
Notes payable 1,355,291
Capital lease obligations 67,555
Other long term liabilities 14,098
-----------
Total liabilities 3,462,856
-----------
Commitments and contingencies
SHAREHOLDERS' EQUITY:
Common stock, par value $.01 per share; 20,000,000 shares
authorized; 3,980,717 shares issued and outstanding 87,469
Preferred stock, par value $.01 per shares; 1,000,000 shares authorized; -
none outstanding
Paid in capital 2,591,018
Accumulated deficit (1,725,781)
-----------
Total shareholders' equity 952,706
-----------
Total liabilities and shareholders' equity $ 4,415,562
===========
</TABLE>
The accompanying notes are an integral part of these interim consolidated
financial statements.
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DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THIRTEEN WEEK AND THIRTY NINE WEEK PERIODS ENDED NOVEMBER 30, 1996
(unaudited)
<TABLE>
<CAPTION>
Thirteen Weeks Thirty Nine Weeks
-------------- -----------------
<S> <C> <C>
Net sales $ 2,773,180 $ 9,558,090
Cost of sales 1,748,459 5,614,431
----------- -----------
Gross profit 1,024,721 3,943,659
Operating expenses
Selling, general and administrative expenses 1,033,874 3,717,217
Research and development expenses 108,773 270,074
Amortization of debt issue costs 15,702 15,702
Interest expense 28,673 41,234
----------- -----------
Loss before tax (162,301) (100,568)
Provision for taxes on income 26,000 --
----------- -----------
Net loss $ (136,301) $ (100,568)
----------- -----------
Net loss per common share ($.03) ($.03)
===== =====
Weighted average common shares 3,980,717 3,841,632
----------- -----------
</TABLE>
The accompanying notes are an integral part of these interim
consolidated financial statements.
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DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE THIRTY NINE WEEK PERIOD ENDED NOVEMBER 30, 1996
(unaudited)
<TABLE>
<CAPTION>
Common Stock
-------------------------
Number of Shares Paid In Accumulated
Outstanding Amount Capital Deficit Total
----------- ------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Balance at March 2,
1996 3,417,758 $75,099 $1,289,782 ($1,625,213) $(260,332)
Issuance of common stock
for cash, net of
issuance costs 562,959 12,370 1,042,133 1,054,503
Issuance of warrants __ __ 259,103 __ 259,103
for cash
Net loss __ __ __ (100,568) (100,568)
--------- ------- ---------- ----------- ---------
Balance at November
30, 1996 3,980,717 $87,469 $2,591,018 $(1,725,781) $ 952,706
========= ======= ========== =========== =========
</TABLE>
The accompanying notes are an integral part of these interim consolidated
financial statements.
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DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THIRTY NINE WEEK PERIOD ENDED NOVEMBER 30, 1996
(unaudited)
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss $ (100,568)
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation and amortization 69,981
Allowances for bad debts and sales returns (7,305)
Inventory write down 15,822
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable (1,014,540)
Inventories (523,185)
Prepaid expenses and other (58,778)
Other assets (61,501)
Increase (decrease) in:
Accounts payable (322,372)
Accrued expenses 219,700
Customer deposits (219,035)
----------
Net cash used by operating activities (2,001,781)
----------
Cash flows from investing activities:
Purchase of property and equipment (208,324)
----------
Cash flows from financing activities:
Decrease in book overdraft (49,906)
Net proceeds from issuance of common stock 1,054,503
Net proceeds from issuance of notes payable 1,331,757
Proceeds from borrowings from related parties 25,000
Payments on borrowings from related parties (29,049)
Increase in other long term liabilities 1,469
----------
Net cash provided by financing activities 2,333,774
----------
Net increase in cash and cash equivalents 123,669
Cash and cash equivalents, beginning of period 666,611
----------
Cash and cash equivalents, end of period $ 790,280
==========
Supplemental cash flow information:
Capital lease obligation incurred $ 5,997
</TABLE>
The accompanying notes are an integral part of these interim consolidated
financial statements.
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DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC AND SUBSIDIARIES.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1996
(unaudited)
1. General
The accompanying unaudited interim condensed consolidated financial
statements include the accounts of Dental/Medical Diagnostic Systems, Inc.
and Subsidiaries (the "Company"). They have been prepared in accordance with
generally accepted accounting principles for interim financial information
and with instructions to Form 10-QSB and Item 10 of Regulation S-B.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair representation
have been included. Operating results for the thirteen week, and thirty nine
week periods ended November 30, 1996 are not necessarily indicative of the
results that may be expected for the year ending March 1, 1997. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's annual report on Form 10-KSB for the period
ended March 2, 1996.
On October 23, 1996, the Company authorized an increase in the authorized
number 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 This increase was effective on
January 13, 1997.
As of January 13, 1997 the Company effected a reverse stock split of 1 for
2.197317574 shares of its common stock. All shares and per share amounts have
been retroactively restated to reflect this reverse split.
2. Summary of Significant Accounting Policies
Basis of Presentation
Except for the second quarter of fiscal 1997, the Company since inception has
incurred start-up losses and has an accumulated consolidated deficit of
$1,725,781 at November 30, 1996.
The Company has funded these losses, and intends to fund possible future
losses, through the offering of notes and equity and/or debt securities and
ultimately, through the attainment of positive operating cash flows. Through
the acquisition of the Company by Edudata (see Note 2 to the Company's Annual
Report on Form 10-KSB), the Company raised approximately $606,000, net of
issuance costs and in the first quarter of fiscal year 1997 completed the
sale of 563,010 shares of the Company's common stock for approximately
$1,055,000, net of issuance costs, through an offshore offering pursuant to
Regulation-S. In the third quarter of fiscal year 1997 the Company sold debt
securities for $1,331,751, net of issuance costs (Note 5). The Company
anticipates raising additional capital through the offering of its debt
and/or equity securities.
The ability of the Company to raise additional funds and ultimately achieve
positive operating cash flow is uncertain and, therefore, this raises
substantial doubt about the Company's ability to continue as a going concern.
The accompanying interim condensed consolidated financial statements have
been prepared assuming that the Company will continue as a going concern and
do not include any adjustments that might result from the outcome of this
uncertainty.
Concentration of Credit Risk and Major Customers
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of trade accounts
receivable.
8
<PAGE> 9
For the third quarter and year to date period ended November 30, 1996, six of
the Company's customers accounted for 30% and 20% of sales, respectively. At
November 30, 1996, six of the Company's customers accounted for approximately
75% of trade accounts receivables.
The Company performs ongoing credit evaluations of its customers' financial
condition and generally does not require collateral. Estimated credit losses
and returns, have been provided for in the financial statements.
9
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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 at the date of the
financial statements and 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 warranty provision.
Actual results could differ from those estimates.
Earnings (Loss) Per Share
Earnings (loss) per share is computed based on the weighted average number of
common shares outstanding during the periods presented and common stock
equivalent unless antidilutive.
3. Related Party Transactions
From December 1995 through February 1996, Robert H. Gurevitch (Chairman of the
Board and Chief Executive Officer of the Company) and Boston Marketing Company,
Ltd. (an entity which is controlled by Hiroki Umezaki who is a Director and
greater than 10% stockholder of the Company) collectively loaned the Company an
aggregate of $377,015 in exchange for certain promissory notes. The promissory
notes bear interest at 6% per annum and were originally payable within six
months of issuance. On February 26, 1996, the company repaid $50,000 to each of
Mr. Gurevitch and Boston Marketing. As of November 25, 1996, Mr. Gurevitch and
Boston Marketing each agreed to extend the term of the promissory notes until
the earlier to occur of (a) November 25, 1998, (b) the completion of a public
offering of the Company's equity securities and (c) the repayment in full of the
promissory notes issued in connection with the Company's November 1996 financing
transaction (Note 5). Through the current periods no interest has been paid on
the promissory notes issued to Mr. Gurevitch and Boston Marketing, however,
interest was accrued in the Company's financial statements.
On April 11, 1996 Boston Marketing loaned the Company $25,000 in exchange for a
promissory note that bears interest at 6% per annum and is due within six
months. This note was paid in full by the Company on August 22, 1996.
From March 3, 1996 to November 30, 1996, 1,979 cameras and frame grabber units
at an aggregate cost of $1,484,250 have been purchased by the Company from
Boston Marketing. Amounts payable at November 30, 1996 to Boston Marketing
totaled $92,145 and are included in accounts payable. Through January 8, 1996,
an additional 530 cameras and frame grabber circuitry units have been purchased
by the Company at an aggregate cost of $397,500. Subsequent to November 30,
1996 payments totaling approximately $397,500 have been made to Boston
Marketing.
Effective October 1, 1996, the Company entered into a distribution agreement
with Boston Marketing. Pursuant to this agreement the Company acquired the
exclusive right to market certain component parts used in the Company's
intraoral camera to the dental market. This agreement has an initial five year
term and further provides that during each of such years the Company will
purchase a minimum of 2,500 units of the component parts at an initial price of
$750 per unit (subject to adjustment after October 1, 1998) (the "Minimum
Purchase Requirement"). This agreement is terminable by (a) the Company if it
objects to any price increase and (b) Boston Marketing if the Company fails to
satisfy the Minimum Purchase Requirement.
4. Inventories
Inventories at November 30, 1996 consisted of the following:
<TABLE>
<CAPTION>
<S> <C>
Raw materials $698,728
Work in process 134,733
Finished goods 745,987
-------
Total $1,579,448
==========
Finished goods inventory included $117,959 of dental burs.
</TABLE>
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5. Capital Transactions
On May 30, 1996, the Company completed the sale of a total of 562,959 shares of
its common stock to six foreign investors pursuant to Regulation S of the
Securities Act of 1933, as amended. Each share was sold at a price of $1.93 per
share and, consequently, the Company raised approximately $1,055,000 from the
sales, net of related expenses of approximately $34,000.
On November 27, 1996, the Company raised $1,600,000 through a private placement
of 32 Units to certain accredited investors. Each Unit consists of a $50,000
promissory note (each a "Note") and a warrant to purchase 25,000 shares of
Common Stock (each a "Warrant"). 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 securities; or (d) the
sale by the Company's Chief Executive Officer of all or substantially all of his
holding of the 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 the Common Stock at a rate of $2.00 per share. Each Warrant
entitles the holder thereof to purchase shares of the Common Stock at an initial
exercise price of $2.00 per share (subject to adjustment for stock splits and
capital reorganizations). The Warrants are first exercisable on November 27,
1997 and expire on November 27, 2002. As a result of the warrants, these notes
have been discounted by $259,104, which amount is being amortized over eighteen
months.
Expenses associated with the private placement totaled $285,234. These expenses
have been capitalized and are being amortized over eighteen months. These
expenses included legal fees and fees paid to the placement agent who assisted
in the offering.
On July 2, 1996, the Company modified the vesting period and expiration date on
125,153 options granted in April 1996, whereby these options are fully vested
and expire in 2001.
6. Advertising and Promotion Expense
Total advertising and promotion expense incurred for the thirteen and
thirty-nine week periods ending November 30, 1996 amounted to $281,361 and
$900,340, respectively.
7. Income Taxes
The Company has accrued federal and state income taxes at the applicable
statuary rates which result in an effective tax rate of approximately 43 percent
or $26,000 for the second quarter. This accrual was reversed in the third
quarter due to the loss incurred. Upon further examination of the Company's tax
position following its acquisition of DMD and BDI, management has determined
that the Company's net operating losses (NOL) incurred prior to the acquisition
are not available for carryforward because management determined that the losses
were limited under the provisions of Internal Revenue Code Section 382. The
reassessment of losses available for carryforward had no impact on previously
issued financial statements because any deferred tax assets recognized were
fully offset by valuation allowances.
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Item 2. - Management's Discussion and Analysis or Plan of Operation
Introduction
This discussion summarizes the significant factors affecting the consolidated
operating results, financial condition and liquidity/cash flows of the Company
for the thirteen week and thirty nine week periods ended November 30, 1996.
This discussion should be read in conjunction with the financial statements and
notes thereto, included in this Report on Form 10-QSB and the Company's
financial statements and notes thereto, included in the Company's Annual Report
on From 10-KSB for the fiscal year ended March 2, 1996. Except for the
historical information contained herein , the matters discussed in this item
2-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. See "Risk Issues and
Uncertainties" below. On January 13, 1997 the Company changed its name from
Edudata Corporation to Dental/Medical Diagnostics, Inc.
As more fully described in the Company's Annual Report on From 10-KSB for the
period ended March 2, 1996, on March 1, 1996 the Company purchased 100% of the
outstanding membership interests of Dental/Medical Diagnostic Systems, LLC
("DMD") and 100% of the outstanding capital stock of Bavarian Dental
Instruments, Inc. ("BDI"). Immediately subsequent to the transaction, the former
members of DMD and shareholders of BDI owned approximately 66.7% 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. Since both DMD and BDI were only formed in October
and November of 1995, and since the historical combined financial statements of
DMD and BDI became the financial statements of the Company there is no
comparable financial information for the comparable periods of the 1996 fiscal
year.
DMD was formed in October 1995 and has been primarily involved in designing,
developing, manufacturing and marketing TeliCam Intraoral Camera Systems
("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 early March 1996. On July 9,
1996, the Company decided to discontinue the dental bur product line. The
Company intends to liquidate the remaining inventory of dental burs.
Because of the limited history of the Company's operations and because the
Company anticipates increased sales of the TeliCam Systems, the results of
operations for the period presented is not indicative of future results.
Results of Operations
For the thirteen week ("third quarter") and thirty nine week periods ended
November 30, 1996 (collectively, the "current periods"), total net sales for the
Company's product lines (intraoral dental cameras and dental burs) amounted to
$2,773,180 and $9,558,090 , respectively. During, the thirteen and thirty-nine
week period ended November 30, 1996 (a) cost of sales for both product lines
totaled $1,748,459 or 63% of net sales and $5,614,431 or 59%, respectively. (b)
gross margin for both product lines totaled 1,024,721, or 37% of net sales and
$3,943,659 or 41%, respectively, (c) selling, general and administrative
expenses totaled $1,033,874, and $3,717,217, respectively, and (d) research and
development expenses totaled $108,773 and $270,074, respectively. Amortization
of debt issue costs, which relate solely to the November 1996 financing, totaled
$15,702 for the third quarter and year to date. Interest expense totaled $28,673
for the quarter and $41,234 for the year to date. For the current periods,
operating profits/(losses) before interest expense relating to the intraoral
camera product line totaled $(132,965) and $ 158,650, respectively. Operating
profits/(losses) before interest relating to the dental bur product line totaled
$20,765 and ($196,341), respectively in the current periods. On a consolidated
basis the net loss before tax for the current periods totaled $(162,301) and
$(100,568),
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respectively. The tax provision of $26,000 was reversed in the third quarter
due to the loss incurred. This resulted in a net loss of ($136,301) or ($.03)
per share for the quarter and ($100,568) or ($.03) per share for the year to
date.
Intraoral Dental Camera Systems Product Line:
Sales: Net sales relating the intraoral dental camera systems and related
products for the third quarter totaled $2,727,341 and $9,327,277 for the fiscal
year to date.
Cost of Sales: Cost of sales relating to intraoral dental camera systems and
related products totaled $1,729,282 for the third quarter, or 63% of net sales
and $5,523,771 or 59% year to date. The cost of sales include direct costs of
production, including raw materials, labor and overhead. Cost of sales have
increased due to the increase in camera shipments. The percentage increase in
cost of sales during the third quarter is a result of increased international
sales which have a lower gross margin. The Company anticipates that
international sales will continue to increase in future periods.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses relating to the intraoral dental camera systems product
line totaled $1,025,146 for the third quarter, and $3,377,676 year to date.
These expenses relate to administering the continuing design, development,
manufacture and marketing of the Company's camera systems. The expenses include
the following: advertising and promotion expenses totaling $281,361 and
$766,123, respectively for the current periods. These advertising and
promotions costs relate to trade show fees, trade magazine advertising and
direct mail promotions. Salaries and wages for the current periods totaled
$246,925 and $752,108, respectively relating to sales and production
administration, marketing, sales and customer support staff and finance and
accounting personnel; and commissions resulting from the sales of the intraoral
dental camera systems totaled $245,252 and amortization $950,896, respectively.
Commissions are decreasing relative to sales primarily due to the increase in
international sales on which commissions are not paid. These expenses are
expected to increase in 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: Research and development expenses relating to
the intraoral dental camera totaled $108,773 and $270,074, respectively in the
current periods and relate to direct expenses of ongoing design and development
of enhancements to the Company's camera system. 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 continue at relatively the same rates in future periods.
Dental Bur Product Line:
On July 9, 1996, the Company decided to discontinue its dental bur product line.
The Company is in the process of selling its remaining inventory. At November
30, 1995, assets and liabilities relating to this product line primarily
consist of approximately $117,959 of finished goods inventory and $28,079 of
accounts payable and accrued expenses. No significant loss is expected on the
liquidation of the remaining dental burs.
Sales: Dental bur net sales in the current periods amounted to $45,839 for the
third quarter and $230,813 for the fiscal year to date. As previously discussed,
since the Company decided to discontinue the dental burs product line, sales
from dental burs decreased in the third quarter as compared to previous quarters
and will continue to decrease in future periods.
Cost of Sales: Cost of sales relating to the sales of dental burs totaled
$19,177 in the third quarter, or 42% of net sales, and $90,660 year to date or
39% of net sales, and included dental bur product costs. Due to the
discontinuance of the product these costs have increased as a percent of net
sales.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses relating to the dental bur business totaled $5,898 and
$336,495, respectively in the current periods. These expenses relate to
importing, distribution, marketing and selling the dental bur product. These
expenses have been significantly decreased in the third quarter and will
continue to decrease in future periods due to the discontinuance of the product
line.
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<PAGE> 14
Dental/Medical Diagnostic Systems, Inc.
Amortization of Debt Issuance cost: Amortization of debt issuance cost totaled
$15,702 for the periods, and is the result of the amortization over eighteen
months of the cost of the sale of the debt securities in the third quarter.
These costs will continue into future periods
Interest Expense: Interest expense totaled $28,673 for the quarter and $41,234
for the year to date. The increase in the current quarter is due to the
increased debt. These costs will continue into future periods.
Capital Resources and Liquidity
For the thirty-nine week period ended November 30, 1996 (" current period ") the
Company used net cash in operating activities of $2,001,781. Accounts receivable
increased $1,014,540 to $1,070,868 primarily due to the increase in intraoral
dental camera sales internationally shipped in the current period. Inventory
levels increased $523,185 to $1,579,448 in anticipation of increased sales and
production levels for the cameras. Accounts payable decreased by $ 322,372 to
$1,294,494 and customer deposits decreased $219,035 to $30,310 due to shipments
of product. These increases in working capital were partially financed by
accrued liabilities which increased $219,700 to $409,674.
Capital expenditures totaled $208,324 in the period and related primarily to
purchases of additional computer equipment and test equipment to support the
administrative and production functions of the Company.
Bank overdrafts decreased in the current period by $49,906. Cash on hand at the
end of the period was $790,280.
These cash outflows were primarily financed through the sale of 562,959 shares
of common stock to foreign investors which raised approximately $1,055,000, net
of issuance costs, and the private placement of debt financing of $1,331,757,
net of issuance costs.
The Company needs additional cash to continue to pay down its current
liabilities (including, without limitation, the debt incurred in connection with
the November 1996 private placement -- See Note 5 to Financial Statements), for
working capital purposes to support the anticipated increased sales levels and
to fund its research and development activities. The Company is currently
reviewing various capital raising alternations, including the possible issuance
of debt and/or equity securities. There can be no assurance, however, that such
efforts to raise funds will provide adequate cash or that such capital will be
available at terms acceptable to the Company, or at all. The inability to raise
additional capital may have a substantial negative impact on the Company's
business, operating results and financial condition.
Seasonality: It is expected that the Company's business will be moderately
seasonal, with lower sales in the summer months, as a consequence of holiday
vacations and a lesser number of trade shows.
New Accounting Pronouncements: The FASB recently issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
123), which is effective for financial statements for fiscal years beginning
after December 15, 1995. SFAS 123 establishes new financial accounting and
reporting standards for stock-based compensation plans. Entities will be allowed
to measure compensation cost for stock-based compensation under SFAS 123 or APB
Opinion No. 25, "Accounting for Stock Issued to Employees". Entities electing to
remain with the accounting provisions of APB Opinion No. 25 will be required to
make pro forma disclosure of net income and earnings per share as if the
provisions of SFAS 123 had been applied. The Company is in the process of
evaluating SFAS 123. The potential impact on the Company by adopting the new
standard has not been quantified at this time. The Company is required to
implement SFAS 123 in fiscal 1997.
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Risk Issues and Uncertainties
From time to time the Company may issue forward-looking statements relating to
such things as anticipated financial performance, business prospects,
acquisition activities and similar matters. The Private Securities Litigation
Reform Act of 1995 provides a safe harbor for forward-looking statements. In
order to comply with the terms of the safe harbor, the Company notes that a
variety of factors could cause the Company's actual results and experience to
differ materially from anticipated results or other expectations expressed in
the Company's forward looking statements. The risks and uncertainties that may
affect the Company's business, financial condition and results of operations
include, but are not limited to:
Limited Operating History and History of Losses. While the Company has
been in existence since 1981, its operations between 1988 and the acquisition of
its current operating business in March of 1996, were limited to the exploration
of acquisition opportunities. Dental Medical Diagnostic Systems, the division of
the Company which designs and markets the Company's intraoral camera system (the
"TeliCam System"), and Bavarian Dental Instruments, Inc. ("BDI"), the subsidiary
of the Company which distributes dental burs, have only been in operation since
October 1995. For the transition period ended March 2, 1996, the Company
incurred a net loss of $1,625,213, and for the 39 week period ended November 30,
1996, the Company had a net after tax loss of $100,568. The ability of the
Company to achieve profitability in the future, or if achieved, to sustain
profitability, will depend in part upon the successful and timely introduction
of new products, the successful marketing of existing products and the Company's
ability to collect receivables in a timely manner. There can be no assurance
that the Company will be able to generate and sustain net sales in the future,
effectively collect its receivables or achieve and sustain profitability.
Dependence Upon a Single Product. The TeliCam System, is currently the
Company's primary product and will account for substantially all of the
Company's revenue, if any, for the foreseeable future. There can be no assurance
that the TeliCam System will be more effective than competing products or
technologies, or will continue to be successfully marketed. If the TeliCam
System does not continue to be successfully commercialized, it is likely that
the Company's business, operating results and financial conditions would be
substantially impacted.
Importance of New Product Development to Growth. The Company's ability
to successfully develop and introduce new products on a timely basis will be a
significant factor in the Company's ability to grow and remain competitive. New
product development often requires long-term forecasting of market trends, the
development and implementation of new designs, compliance with excessive
governmental requirements and a substantial capital commitment. Although the
Company intends to devote a substantial portion of its resources to product
development activities, there can be no assurance that the Company will have
sufficient funds to develop new products or that the commitment and use of such
funds will result in improved and/or new products or that if successfully
completed, that such improved and/or new products will gain market acceptance.
Any failure by the Company to anticipate or respond in a cost-effective and
timely manner to market trends or customer requirements, or any significant
delays in product development or introduction, could have a material adverse
effect on the Company's business, operating results and financial condition.
Obsolescence and Technological Change. The medical and dental device
industry is characterized by rapid technological change. As technological
changes occur in the marketplace, the Company may have to modify its products in
order to keep pace with these changes and developments. The introduction of
products embodying new technologies or the emergence of new industry standards
may render existing products or products under development obsolete or
unmarketable. Although the Company intends to continue to improve and add to its
existing products, there can be no assurance that funds for such expenditures
will be available or that the Company's competitors will not develop products
with superior capabilities and/or market them at lower prices. Any failure by
the Company to anticipate or respond in a cost-effective and timely manner to
technological changes could have a material adverse effect on the Company's
business, operating results and financial condition.
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DEPENDENCE ON THIRD-PARTY SUPPLIERS. With the exception of the camera's CCD
processor unit, the Company believes that there multiple sources from which it
may purchase the components of the TeliCam System. Although the Company believes
it will continue to obtain such components on favorable terms and on a timely
basis, failure to do so may have a material adverse effect on the Company.
Pursuant to an agreement with Boston Marketing, the Company has obtained the
exclusive right to market the camera's CCD processor unit (the "Teli Units") to
the dental market. Boston Marketing is a licensed distributor of the Teli Units
under a separate agreement with their manufacturer. The agreement between Boston
Marketing and the Teli Units' manufacturer obligates Boston Marketing to meet
minimum purchase obligations. If Boston Marketing fails to meet these
obligations, Boston Marketing may be terminated as a licensed distributor. In
the event of such termination, the Company, as a sub-licensee sub-distributor of
Boston Marketing may lose its right to purchase the Teli Units. Moreover, in the
event the Company is unable to meet its minimum annual purchase obligations
under its agreement with Boston Marketing and as a consequence such agreement
terminates, the Company may be required to find an alternative source for the
primary component of its TeliCam System. The Company believes that, in the event
the Company loses its right to sell the Teli Units, replacement components could
be developed by and obtained from third parties, but that this process could
take a period of four to six months. If the Company is obliged to develop a new
CCD processor unit there is a substantial likelihood that it Company will need
to halt the production and marketing of its intraoral camera system during the
development period; that such halt would have a material adverse effect on the
Company's business, operating results and financial condition. In addition,
there is no guarantee that an intraoral camera system utilizing a replacement
CCD processor unit will be accepted by the dental market place.
EXTENSIVE GOVERNMENT REGULATION. The Company's products and its
manufacturing practices are subject to regulation by the United States Food and
Drug Administration (the "FDA") pursuant to the Federal Food, Drug and Cosmetic
Act (the "FDC Act"), and by other state and foreign regulatory agencies. Under
the FDC Act, medical and dental devices must receive FDA clearance or approval
before they may be sold. FDA regulations also require the Company to adhere to
certain "Good Manufacturing Practices" ("GMP") regulations, which include
validation testing, quality control and documentation procedures. The Company's
compliance with applicable regulatory requirements will be monitored through
periodic inspections by the FDA.
The process of obtaining required regulatory clearances or approvals can be
time consuming and expensive, and compliance with the FDA's GMP regulations and
other regulatory requirements can be burdensome. Moreover, there can be no
assurance that the required regulatory clearances will be obtained, and those
obtained may include significant limitations on the uses of the product in
question. In addition, changes in existing regulations and the adoption of new
regulations makes regulatory compliance by the Company extremely difficult and
there can be no assurance that the Company has in the past or will in the future
be in full compliance with applicable governmental regulations. Although the
Company believes that its products and procedures are currently in material
compliance with all relevant FDA requirements, the failure to obtain the
required regulatory clearances or to comply with applicable regulations could
result in fines, delays or suspensions of clearances, seizures or recalls of
products, operating restrictions and criminal prosecutions, and would have a
material adverse effect on the Company.
COMPETITION. The Company is part of an intensely competitive industry.
There are at least five major competitors manufacturing intraoral cameras. Many
of the Company's competitors have greater financial and other resources than the
Company. Consequently, such entities may develop, manufacture, market and/or
distribute systems which are substantially similar or superior to the Company's
products and may be able to devote substantially grater resources to the
marketing of their systems.
WIND DOWN OF BAVARIAN DENTAL INSTRUMENTS, INC. BDI distributes and markets
reusable diamond dental burs. The company is currently in the process of winding
down BDI's operations. Any failure by the Company to liquidate BDI's current
inventory could have an adverse effect on the Company's business, operating
results and financial condition.
INTERNATIONAL OPERATIONS. Since October 1995 and through November 30, 1996,
international sales have accounted for more than 10% of the Company's net sales,
and the Company expects that the
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international sales may increase as a percentage of sales in the future. Due to
its international sales, the Company is subject to the risks of conducting
business internationally, including unexpected changes in, or impositions of,
legislative or regulatory requirements, fluctuations in the U.S. dollar which
could materially adversely affect U.S. dollar revenues or operating expenses,
tariffs and other barriers and restrictions, potentially longer payment cycles,
greater difficulty in accounts receivable collection, potentially adverse taxes
and the burdens of complying with a variety of international laws and
communications standards. The Company is also subject to general geopolitical
risks, such as political and economic instability and changes in diplomatic and
trade relationships, in connection with its international operations. There can
be no assurance that these risks of conducting business internationally will not
have a material adverse effect on the Company's business. Further, any failure
by the Company to predict or plan for changes in the international arena could
have a material adverse effect on the Company's business, operating results and
financial condition.
DEPENDENCE ON KEY PERSONNEL. The Company's future performance will depend
significantly upon its Chairman of the Board and Chief Executive Officer Robert
H. Gurevitch and upon certain other key employees of the Company. The loss of
service of one or more of these persons could have a material adverse effect on
the Company's business and operations. The Company had entered into Employment
Agreements with Robert H. Gurevitch and Dewey Perrigo, the Company's Vice
President of Sales, pursuant to which they each have agreed to render services
to the Company until October 1, 1999. The Company has applied for "key person"
life insurance on Mr. Gurevitch in the amount of $2.0 million, of which the
Company will be the sole beneficiary but there can be no assurance that such
policy will be obtained or that if obtained that the proceeds will be sufficient
to offset the loss to the Company in the event of his death. The Company does
not maintain any insurance on the lives of its other senior management. In
addition, the Company's success will be dependent upon its ability to recruit
and retain qualified personnel. Any failure by the Company to retain and attract
key personnel could have a material adverse effect on the Company's business,
operating results and financial condition.
CONTROL BY EXISTING MANAGEMENT. The present officers and directors of the
Company and their affiliates beneficially own approximately 43% of the
outstanding Common Stock. Accordingly, they will have the ability to
significantly influence the election of the Company's directors and most
corporate actions. This concentration of ownership could have the effect of
delaying or preventing a change in control of the Company.
CONFLICT OF INTERESTS. The Company's Executive Vice President, Secretary
and Director, Hiroki Umezaki, is also an owner of Boston Marketing. The Company
has entered into an agreement with Boston Marketing relating to the purchase of
certain key components for the Company's TeliCam System. As of November 30,
1996, the Company owed Boston Marketing $92,145 for purchased product. The
Company has also entered into a commission agreement with Mr. Umezaki with
respect to sales of the TeliCam System in Asia. Additionally, Boston Marketing
and Robert Gurevitch have each loaned money to the Company (the "Loan
Obligations"). The Company believes that all of these transactions were on terms
no less favorable than were available from unaffiliated third parties. There can
be no assurance that the Company will not enter into transactions with
affiliated parties in the future.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
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Item 2. Changes in Securities.
None.
Item 3. Defaults in Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security-Holders.
As of October 23, 1996, pursuant to a written consent (the "Written Consent"),
stockholders holding in excess of 58% of the Common Stock approved an amendment
and restatement (the "Amendment and Restatement") of the Company's Certificate
of Incorporation (the "Certificate of Incorporation"). Pursuant to the Amendment
and Restatement the following material changes were made to the Certificate of
Incorporation:
(a) the Company's name was changed from Edudata Corporation to
Dental/Medical Diagnostic Systems, Inc.;
(b) the authorized number of shares of Common Stock was increased from
10,000,000 shares to 20,000,000 shares and a new class of 1,000,000
shares of Preferred Stock, par value $.01 per share, was authorized;
(c) a one-for-2.197317574 reverse stock split of (i) the shares of the
Common Stock which were outstanding on the date that the Amendment and
Restatement was filed with the Delaware Secretary of State (the
"Effective Date"), and (ii) the shares of the Common Stock underlying
outstanding options and other rights granted by the Company on or
prior to the Effective Date, was effected; and
(d) certain other provisions of the Certificate of Incorporation
(including, without limitation, the provision concerning director and
officer indemnification) were restated.
The stockholders of the Corporation were provided with an Information Statement
relating to the Written Consent on or about November 29, 1996. The Amendment and
Restatement was filed with the Delaware Secretary of State on January 13, 1997.
Item 5. Other Information.
None.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 3.1 Amended and Restated Certificate of Incorporation of the
Registrant
Exhibit 10.1 Form of Secured Convertible Promissory Note, dated as of
November 27, 1996, Issued by the Registrant and a Schedule of Note
holders
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Exhibit 10.2 Form of Warrant for the Purchase of Shares of
Common Stock, dated as of November 25, 1996, Issued by the Registrant
and a Schedule of Warrant holders
Exhibit 10.3 Security Agreement, dated as of November 25, 1996,
Entered into by the Registrant
Exhibit 10.4 Agency Agreement, dated as of October 23, 1996, by
and between the Registrant and M. H. Meyerson & Co., Inc.
Exhibit 10.5 Employment Agreement, dated as of October 1, 1996, by
and between the Registrant and Robert H. Gurevitch
Exhibit 10.6 Employment Agreement, dated as of October 1, 1996, by
and between the Registrant and Dewey Perrigo
Exhibit 10.7 Note Extension Agreement, dated as of November 25,
1996, by and between the Registrant and Robert H. Gurevitch
Exhibit 10.8 Note Extension Agreement, dated as of November 25,
1996, by and between the Registrant and Boston Marketing Company, Ltd.
Exhibit 10.9 Distribution Agreement, dated as of October 1, 1996,
by and between the Registrant and Boston Marketing Company, Ltd.
Exhibit 10.10 Form of Subscription Agreement
Exhibit 11.1 Statement Regarding Computation of Net Income (Loss)
Per Share
Exhibit 27.1 Financial Data Schedule
(b) Reports on Form 8-K
During the fiscal quarter ended November 30, 1996, the Company did not file any
reports on Form 8-K.
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Signatures
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on behalf by the undersigned, thereto duly authorized.
Dental/Medical Diagnostic Systems, Inc.
Dated January 21, 1997 By: /s/ Ronald E. Wittman
-------------------------
Ronald E. Wittman
Chief Financial Officer
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