<PAGE> 1
The SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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 ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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.
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
November 12, 1997: 5,110,658
Transitional Small Business Disclosure Format Yes [ ] No [X]
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DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
FORM 10-QSB REPORT
September 30, 1997
<TABLE>
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PAGE
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PART I - FINANCIAL INFORMATION
Item 1. Interim Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheet-September 30, 1997 3
Condensed Consolidated Statements of Operations 4
Three and Nine Month Periods Ended September 30, 1997 and
Thirteen Week and Thirty-Nine Week Periods Ended November
30, 1996
Condensed Consolidated Statements of Cash Flows 5
Nine Month Period Ended September 30, 1997 and Thirty-Nine
Week Period Ended November 30, 1996
Notes to Interim Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis or Plan of Operation 8
PART II - OTHER INFORMATION
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
(a) Exhibits 16
(b) Reports on Form 8-K 16
Signatures 17
</TABLE>
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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
(Unaudited)
<TABLE>
<CAPTION>
September 30,1997
-----------------
ASSETS
<S> <C>
Current assets:
Cash and cash equivalents $ 6,082,291
Accounts receivable, less allowance for
bad debts and sales returns of $20,975 1,869,654
Inventories 2,489,552
Income taxes receivable 37,522
Deferred income taxes 90,000
Prepaid expenses and other 296,533
-----------
Total current assets 10,865,552
Property and equipment, net 427,252
Loans receivable from related parties 126,000
Other assets 18,652
-----------
Total assets $11,437,456
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current Portion of capital lease obligations $ 20,885
Accounts payable 1,274,287
Accrued liabilities 614,399
Customer deposits 15,675
-----------
Total current liabilities 1,925,246
Notes payable to related parties 94,114
Capital lease obligations 49,118
Other long term liabilities 10,778
-----------
Total liabilities 2,079,256
-----------
Commitments and contingencies
STOCKHOLDERS' EQUITY
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:
5,110,658 shares issued and outstanding 51,106
Paid in capital 11,329,479
Accumulated deficit (2,022,385)
-----------
Total stockholders' equity 9,358,200
-----------
Total liabilities and stockholders' equity $11,437,456
===========
</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 THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND THE
THIRTEEN AND THIRTY-NINE WEEKS ENDED NOVEMBER 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
Three Months Thirteen Weeks Nine Months Thirty-Nine Weeks
Ended Ended Ended Ended
Sept. 30,1997 Nov. 30,1996 Sept. 30, 1997 Nov.30, 1996
------------- ------------- -------------- -----------------
<S> <C> <C> <C> <C>
Net sales $ 3,505,575 $ 2,773,180 $11,688,838 $ 9,558,090
Cost of sales 2,356,863 1,748,459 7,384,583 5,614,431
------------ ------------ ----------- ------------
Gross profit 1,148,712 1,024,721 4,304,255 3,943,659
Selling, general & administrative
expenses 1,359,117 1,033,874 4,056,544 3,717,217
Research & development expenses 155,387 108,773 228,721 270,074
Non-recurring charge 256,250 -- 256,250 --
------------ ------------ ----------- ------------
Operating loss (622,042) (117,926) (237,260) (43,632)
Interest income 90,285 -- 139,250 --
Interest expense (4,655) (28,673) (136,774) (41,234)
Amortization of debt issuance costs -- (15,702) (76,431) (15,702)
------------ ------------ ----------- ------------
Loss before income taxes
and extraordinary item (536,412) (162,301) (311,215) (100,568)
Provision for income taxes (96,837) (26,000) (11,042) --
------------ ------------ ----------- ------------
Loss before extraordinary item (439,575) (136,301) (300,173) (100,568)
Extraordinary loss on early
extinguishment of debt (net of tax
benefit of $143,511) -- -- (234,149) --
------------ ------------ ----------- ------------
Net loss $ (439,575) $ (136,301) $ (534,322) $ (100,568)
============ ============ ============ ============
Loss per share of common stock:
Loss before extraordinary item $ (0.09) $ (0.05) $ (0.07) $ (0.04)
Extraordinary loss on early
extinguishment of debt $ -- $ -- $ (0.06) $ --
------------ ------------ ----------- ------------
Net loss $ (0.09) $ (0.05) $ (0.13) $ (0.04)
============ ============ ============ ============
Weighted average common shares
outstanding 5,066,653 2,985,539 4,081,152 2,881,224
============ ============ ============ ============
</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 CASH FLOWS
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1997 AND THE
THIRTY-NINE WEEK PERIOD ENDED NOVEMBER 30, 1996
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended Thirty-Nine Weeks Ended
September 30, 1997 November 30, 1996
------------------- -----------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (534,322) $ (100,568)
Adjustments to reconcile net loss
to net cash used by operating
activities:
Depreciation and amortization 201,279 69,981
Allowances for returns and
doubtful accounts (86,428) (7,305)
Inventory write-downs 20,000 15,822
Extraordinary item 234,149 --
Other (795) --
Changes in operating assets and
liabilities:
Accounts receivable (624,782) (1,014,540)
Inventories (995,682) (523,185)
Income taxes receivable (37,522)
Prepaid expenses and other (87,980) (58,778)
Other assets 23,618 (61,501)
Accounts payable 184,954 (322,372)
Accrued liabilities 151,943 193,700
Income taxes payable (25,059) 26,000
Customer deposits (17,932) (219,035)
---------- ----------
Net cash used by operating activities (1,594,559) (2,001,781)
---------- ----------
Cash flows from investing activities:
Purchase of property and equipment (118,795) (208,324)
Loan to related party (126,000) --
---------- ----------
Net cash used in investing activities (244,795) (208,324)
---------- ----------
Cash flows from financing activities:
Decrease in book overdraft -- (49,906)
Decrease in other long term liabilities (13,237) --
Net proceeds from issuance of
common stock 8,654,898 1,054,503
Net Proceeds from issuance of
notes payable -- 1,331,757
Repayment of notes payable (1,600,000)
Repayments on borrowings to
related parties (178,852) (29,049)
Proceeds from borrowings from
related parties -- 25,000
Increase in other long term liabilities -- 1,469
---------- ----------
Net cash provided by financing activities 6,862,809 2,333,774
---------- ----------
Net increase in cash and
cash equivalents 5,023,455 123,669
Cash and cash equivalents,
beginning of period 1,058,836 666,611
---------- ----------
Cash and cash equivalents,
end of period $ 6,082,291 $ 790,280
========== ==========
Supplemental cash flow information:
Interest paid $ 92,962
Income taxes paid $ 48,904
Capital lease obligation incurred $ -- 5,997
</TABLE>
The accompanying notes are an integral part of these interim consolidated
financial statements.
5
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DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
September 30,1997
1. General
The accompanying unaudited interim condensed consolidated financial
statements include the accounts of Dental/Medical Diagnostic Systems, Inc.
and Subsidiaries (the "Company"). The interim consolidated financial
statements 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 three and nine month periods ended September 30,
1997 are not necessarily indicative of the results that may be expected for
the year ending December 31, 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 December 31,
1996.
2. Summary of Significant Accounting Policies
Basis of Presentation
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 year
end. The accompanying condensed consolidated financial statements reflect
the operating results of the Company for the nine month period from January
1, 1997 to September 30, 1997 and the thirty-nine week period ended November
30, 1996.
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. Also, at various times throughout the year, cash balances are
maintained in excess of Federally insured limits.
For the nine month period ended September 30, 1997 and the thirty-nine week
period ended November 30, 1996, nine and five respectively of the Company's
customers accounted for 26% and 21% of sales, respectively. At September 30,
1997 nine of the Company's customers accounted for approximately 70% of
trade accounts receivable.
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.
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 provisions. 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
equivalents unless antidilutive.
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Recently Issued Accounting Standards
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("SFAS No. 128"). SFAS No. 128 requires dual presentation of newly defined
basic and diluted earnings per share on the face of the income statement for
all entities with complex capital structures. This method is considered more
compatible with International Accounting Standards. SFAS No. 128 is
effective for all fiscal years ending after December 15, 1997. The Company
has not yet determined the impact of SFAS No. 128.
In June 1997, the FASB issued SFAS No. 130, Comprehensive Income. SFAS No.
130 becomes effective in 1998 and requires reclassification of earlier
financial statements for comparative purposes. SFAS No. 130 requires that
changes in the amounts of certain items, including foreign currency
translation adjustments and gains and losses on certain securities be shown
in the financial statements. SFAS No. 130 does not require a specific format
for the financial statement in which comprehensive income is reported, but
does require that an amount representing total comprehensive income be
reported in that statement. Management has not yet determined the effect, if
any, of SFAS No. 130 on the consolidated financial statements.
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an
Enterprise and related Information. This statement will change the way
public companies report information about segments of their business in
their annual financial statements and requires them to report selected
segment information in their quarterly reports issued to shareholders. It
also requires entity-wide disclosures about the products and services an
entity provides, the material countries in which it holds assets and reports
revenues, and its major customers. The Statement is effective for fiscal
years beginning after December 15, 1997. Management has not yet determined
the effect, if any, of SFAS No. 131 on the consolidated financial
statements.
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. ("Boston Marketing"), an affiliate of Hiroki Umezaki, a former
Director of the Company, 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. In November
1996, Mr. Gurevitch and Boston Marketing each agreed to extend the term of
their respective notes. On May 23, 1997, Boston Marketing was paid the
remaining principal balance of $150,000 of its loan plus the accrued
interest of $3,526. Mr. Gurevitch was paid $25,000 on July 10, 1997 and
$26,850 on October 22, 1997 leaving approximately $47,300 outstanding.
On May 27, 1997, the Company loaned Dewey Perrigo, Vice President of Sales
of the Company, and Andrea Niemiec-Perrigo, an employee of the Company,
$126,000 for the purpose of buying a home. The Promissory Notes evidencing
such loans bear interest at prime plus .25% (presently 8.75%), and are due
and payable on May 27, 1999.
4. Inventories
Inventories consisted of the following:
SEPT. 30, 1997
--------------
Raw materials $1,118,822
Work in progress 668,987
Finished goods 701,743
----------
Total $2,489,552
==========
5. Capital Transactions
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 ("Bridge Note") and a warrant to purchase 18,750 shares of
Common Stock ("Bridge Warrant") at a purchase price of $2.67 per share. The
Notes bore interest at a rate of 10% per annum and the principal and all
accrued interest were 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
holdings of the
7
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Common Stock. Upon the happening of certain events the holders of the Notes
had the right to convert the outstanding balances of their Notes into shares
of the Common Stock at a rate of $2.67 per share. The Warrants were first
exercisable on November 27, 1997 and expired on November 27, 2002. As a
result of the warrants, these notes were discounted by $259,104, which
amount was amortized over the term of the notes.
On May 14, 1997, the Company closed a secondary offering of 2,070,000 shares
of common stock and 2,070,000 redeemable common stock purchase warrants.
This resulted in gross proceeds of $10,350,000 prior to expenses associated
with the offering. Approximately $1,700,000 of the net proceeds were used to
repay the Bridge Notes plus accrued interest. The Bridge Notes consisted of
secured convertible promissory notes in the aggregate principal amount of
$1,600,000 bearing interest at 10% per annum and were payable the earlier of
May 27, 1998 or consummation of the offering. Approximately $201,000 was
used to repay loans from related parties. The remaining proceeds net of
associated expenses will be used for product development, acquisition, joint
venture financing, to repay the remaining loans from related parties, and
working capital and general corporate purposes.
6. Extraordinary Item
On May 14, 1997, the Company repaid the $1,600,000 principal amount Bridge
Notes in connection with the Company's Offering. An extraordinary charge of
$234,149 (net of tax benefit of $143,511) was incurred for the early
extinguishment of those notes.
7. Non-Recurring Charge
On September 17, 1997, the Company repurchased the exclusive distribution
rights of its products into the European market from DMD N.V., an
independent distributor, for 50,000 shares of common stock. This resulted in
a non-recurring charge of $256,250.
8. Income Taxes
At September 30, 1997, the Company recorded a valuation allowance against
its deferred tax assets of approximately $239,000.00 based on its current
assessment of operating results and other factors. Although realization is
not assured, management believes it is more likely than not that the
remaining net deferred tax assets will be realized. Federal and state income
taxes were accrued at the statutory rate of 42% for the thirteen and
thirty-nine week periods ended November 30, 1996.
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 three and nine month periods ended September 30, 1997 and for the
thirteen and thirty-nine week periods ended November 30, 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. Actual results could differ materially
from those projected in the forward looking statements as a result of, among
other factors, the factors set forth under the caption "Cautionary Statements
and Risk Factors" below.
On March 1, 1996, the Company purchased all of the outstanding membership
interests of Dental/Medical Diagnostic Systems, LLC ("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 acquirer (reverse acquisition). As a result, the combined historical
financial statements of DMD and BDI became the financial statements of the
Company.
DMD was formed in October 1995 and has been primarily involved in designing,
developing, manufacturing, and marketing intra-oral camera systems referred to
as "TeliCam Systems". The first shipments to customers of the TeliCam System
commenced in early
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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 Diagnostics 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 January 13, 1997 the Company
effected a one-for-2.197317574 reverse stock split and on March 24, the
Company's stockholders approved an additional one-for-1.33333333 reverse stock
split. All information in this Report has been adjusted to reflect both stock
splits.
On May 14, 1997, the Company closed an underwritten offering (the "Offering") of
2,070,000 shares of Common Stock, and 2,070,000 Redeemable Common Stock Purchase
Warrants, raising gross proceeds of $10,350,000 prior to expenses associated
with the Offering. Of these proceeds, $1,700,000 was applied to repay the Bridge
Notes issued by the Company in November 1996 and $201,000 was applied to repay
loans from related parties.
Results of Operations
For the three and nine month periods ended September 30, 1997 and the thirteen
and thirty-nine week periods ended November 30, 1996, net sales totaled
$3,505,575 and $2,773,180, respectively, for the quarters and $11,688,838 and
$9,558,090, respectively year to date. The Company incurred an operating loss
after a non-recurring charge of $256,220 for the quarter ended September 30,
1997, of $622,042 and $117,926, respectively for the quarters and $237,260 and
$43,632, respectively year to date. Included in the results of the thirty-nine
week period ended November 30, 1996 are sales of approximately $230,800 and an
operating loss of approximately $197,000 related to the Company's discontinued
dental bur line.
Net sales for the three and nine month periods ended September 30, 1997 were
$3,505,575 and $11,688,838, respectively compared to $2,773,180 and $9,558,090,
respectively for the thirteen and thirty-nine week periods ended November 30,
1996, or an increase of approximately 26% and 22%, respectively, for the
periods. These increases were primarily due to increased international sales
volume and increased sales volume of the InTELIinet video systems. The sales in
the thirty-nine week period ended November, 1996 were significantly enhanced by
an approximate $1,255,000 back order position from inception to the commencement
of sales in the period. Back orders on hand as of January 1, 1997 amounted to
$65,448 in the aggregate. Sales are comprised primarily of sales of TeliCam
Systems and related products.
Cost of sales for the three and nine month periods, ended September 30, 1997
were $2,356,863 or 67% of sales and $7,384,583 or 63% of sales, respectively.
For the thirteen and thirty-nine week periods ended November 30, 1996 cost of
sales were $1,748,459 or 63% of sales and $5,614,431 or 59% of sales,
respectively. Cost of sales increased as a percentage of sales primarily due to
the increased international sales that require price discounts on sales,
however, this should be partially offset by anticipated reduced warranty and
service costs. International sales and anticipated reduced warranty costs on
same are subject to a number of risks, including the Company's dependence on
third party suppliers for non-defective components and the Company's dependence
on foreign distribution. See " Cautionary Statements and Risk Factors -
Dependence on Third Party Suppliers and - Reliance on International Sales and
Distributors and General Risks on International Operations." Also contributing
to the increase in cost of sales was the increase in lower margin InTELInet
sales.
Selling, general and administrative expenses totaled $1,359,117 and $4,056,544,
respectively for the three and nine month periods ended September 30, 1997, and
$1,033,874 and $3,717,217, respectively for the thirteen and thirty-nine week
periods ended November 30, 1996. The increase in expense is primarily due to
increased sales commissions as a result of the increase in sales volume,
increased salary and wages and legal expenses. These expenses are expected to
continue to increase as sales volume increases and increased marketing costs are
incurred. Partially offsetting these increases for the nine month period ended
September 30, 1997 were decreased advertising, show expenses and salaries as a
result of discontinuing the dental bur line.
Research and development expenses totaled $155,387 and $228,721, respectively
for the three and nine month periods ended September 30, 1997 and $108,773 and
$270,074, respectively, for the thirteen and thirty-nine week periods ended
November 30, 1996. The decrease year-to-date is the result of phasing out
expenditures on TeliCam with the introduction of TeliCam II. However, the
Company currently anticipates that research and development expenses will
increase significantly for the development of new products as the Company has
entered into development agreements for new products. These agreements are
expected to cause the Company to expend over $1.3 million in research and
development and expense this in the fourth quarter of 1997. See "Cautionary
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Statements and Risk Factors - Importance of New Product Development to Growth,"
and "Cautionary Statements and Risk Factors - Expansion through Undetermined
Acquisitions and Joint-Ventures." Increased expenditures on research and
development are expected to continue into future periods.
Amortization of debt issuance cost totaled $76,431 for the nine month period
ended September 30, 1997 and $15,702 for the thirteen and thirty-nine week
periods ended November 30, 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. The Company has repaid such debt out of the proceeds of the Offering, and
as a result this cost will not continue into future periods.
Interest income totaled $90,285 and $139,250, respectively, for the three and
nine month periods ended September 30, 1997, and is the result of investing the
net proceeds of the Offering in a short term management account through Comerica
Securities. These funds were not available in the prior periods.
Interest expense totaled $4,655 and $136,774, respectively, for the three and
nine month periods ended September 30, 1997 and $28,673 and $41,234,
respectively, for the thirteen and thirty-nine week periods ended November 30,
1996, and consisted of interest paid on capital lease obligations and interest
accrued on the Bridge Notes and notes payable to related parties. The increase
year-to-date is primarily due to the Bridge Notes, which were repaid in May 1997
with proceeds of the Offering. As a result, that expense decreased for the
quarter and will not continue into future periods.
A non-recurring charge of $256,250 was incurred on September 17, 1997 and was
the result of the purchase by the Company of the distribution rights into the
European market from DMD N.V., an independent distributor, for 50,000 shares of
common stock.
Loss before extraordinary item for the three and nine month periods ended
September 30, 1997 totaled $439,575 or $.09 per share and $300,173 or $.07 per
share as compared to net loss of $136,301 or $.05 per share and $100,568 or $.04
per share, respectively, for the thirteen and thirty-nine week periods ended
November 30, 1996.
Extraordinary loss on early extinguishment of debt totaled $234,149 (net of tax
benefit of $143,511) for the nine month period ended September 30, 1997, and is
the result of the payment of the $1,600,000 Bridge Notes with the proceeds of
the Offering. The amount is comprised of the write-off of unamortized debt
issuance cost and the discount to the Bridge Notes that was being amortized over
the term of the Notes.
Capital Resources and Liquidity
For the nine month period ended September 30, 1997, the Company used net cash of
$1,594,559 in operations. Accounts receivable increased by $624,782 to
$1,869,654 at September 30, 1997 primarily due to the level of international
sales during the period. Accounts payable and accrued liabilities totaling
$1,888,686 at September 30, 1997, increased slightly from $1,720,358 at the
prior year-end period. Inventory levels increased $995,682 primarily due to the
increased sales volume.
Capital expenditures totaled $118,795 for the nine month period ended September
30, 1997. Approximately $49,000 was for the purchase of an exhibit booth used at
dental shows. Cash and cash equivalents on hand at the end of the period was
$6,082,291.
On July 1, 1997, the Company finalized a credit agreement with Comerica Bank
("Comerica") extending up to a $2,000,000 line of credit to the Company, secured
by a first priority security interest in the Company's assets and by an
assignment of the Company's rights under the Boston Marketing Distribution
Agreement. The credit facility bears interest monthly at the rate of the
Comerica Bank Prime plus one-quarter of one percent (0.25%), as it may change
from time to time, through June 1, 1998. All borrowings under the facility are
subject to a formula based, generally, on accounts receivable and inventory. The
Company intends to use the credit facility, when needed, for working capital and
general corporate purposes.
Based on its current operating plan, the Company anticipates that in addition to
the remaining proceeds of the Offering, together with the credit facility,
further capital may be required during the next twelve months to satisfy the
Company's expected increased working capital and research and development
requirements for the new products. The Company is currently exploring
alternatives to fulfill these requirements. No assurance can be given that
additional financing will be available when needed or that, if available, it
will be on terms favorable to the Company or its stockholders. If needed funds
are not available, the Company may be required to curtail its operations, which
could have a material adverse effect on the Company's business, operating
results and financial condition. There can be no assurance 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.
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<PAGE> 11
Fluctuations in Quarterly Results
The Company's business is subject to certain quarterly influences. Net sales and
operating profit 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.
Quarterly results may be adversely affected in the future by a variety of other
factors, including the timing of acquisitions and their related costs, as well
as 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 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.
Recently Issued Accounting Standards
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128").
SFAS No. 128 requires dual presentation of newly defined basic and diluted
earnings per share on the face of the income statement for all entities with
complex capital structures. This method is considered more compatible with
International Accounting Standards. SFAS 128 is effective for all fiscal years
ending after December 15, 1997. The Company has not yet determined the impact of
SFAS No. 128.
In June 1997, the FASB issued SFAS No. 130, Comprehensive Income. SFAS No. 130
becomes effective in 1998 and requires reclassification of earlier financial
statements for comparative purposes. SFAS No. 130 requires that changes in the
amounts of certain items, including foreign currency translation adjustments and
gains and losses on certain securities be shown in the financial statements.
SFAS No. 130 does not require a specific format for the financial statement in
which comprehensive income is reported, but does require that an amount
representing total comprehensive income be reported in that statement.
Management has not yet determined the effect, if any, of SFAS No. 130 on the
consolidated financial statements.
In June 1997, the FASB issued SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information. This statement will change the way public
companies report information about segments of their business in their annual
financial statements and requires them to report selected segment information in
their quarterly reports issued to shareholders. It also requires entity-wide
disclosures about the products and services an entity provides, the material
countries in which it holds assets and reports revenues, and its major
customers. The Statement is effective for fiscal years beginning after December
15, 1997. Management has not yet determined the effect, if any, of SFAS No. 131
on the consolidated financial statements.
CAUTIONARY STATEMENTS AND RISK FACTORS
Several of the matters discussed in this document contain forward looking
statements that involve risks and uncertainties. Factors associated with the
forward looking statements which could cause actual results to differ materially
from those projected or forecast in the statements that appear below. In
addition to other information contained in this document, readers should
carefully consider the following cautionary statements and risks factors:
Limited Operating History; History of Losses and Accumulated Deficit. While the
Company has been in existence since 1981, its operations between 1988 and its
acquisition of DMD and BDI in March 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 TeliCam System, and BDI, a
subsidiary of the Company, have only been in operation since October 1995. For
the period from inception (October 23, 1995) to March 2, 1996, the Company
incurred a net loss of $1,625,213, and for the ten month period ended December
31, 1996, the Company had net income of $137,151. For the nine months ended
September 30, 1997 the Company had a net loss after extraordinary item of
$534,322. At September 30, 1997, the Company's accumulated deficit was
$2,022,385. The ability of the Company to obtain and sustain profitability will
depend, in part, upon the successful marketing of existing products and the
successful and timely introduction of new products. There can be no assurance
that the Company will be able to generate and sustain net sales or profitability
in the future.
Dependence Upon a Single Product. The TeliCam I, and its enhanced version, the
TeliCam II, are currently the Company's primary product and, together with
related products such as the InTELInet system, will account for a substantial
portion of the Company's revenue for the foreseeable future. There can be no
assurance that the TeliCam System will be more effective than competing products
or technologies, or will be successfully marketed. The Company is still in the
early stages of marketing the TeliCam System
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<PAGE> 12
and related products, and, consequently, the degree to which the market will
accept this product is still uncertain. If the TeliCam System and related
products cannot be marketed successfully on a sustained basis, it is likely that
the Company's business operations would be substantially and adversely impacted.
Importance of New Product Development to Growth. The Company's ability to
develop and introduce new products successfully 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 extensive
governmental regulatory requirements and a substantial capital commitment. 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. Any failure by the Company to
anticipate or respond in a cost-effective and timely manner to government
requirements, 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.
Possible Need for Additional Capital. Although the Company believes that the net
proceeds of the Offering, together with the Comerica credit line, existing
resources and cash generated from operations, if any, will be sufficient to
satisfy the Company's working capital requirements for the next twelve months,
there can be no assurance that this will be the case or that these funds will be
sufficient to meet the Company's longer-term cash requirements for expansion. To
the extent that the funds generated by the Offering together with existing
resources, are insufficient to fund the Company's planned activities the Company
will need to raise additional funds through bank borrowings, public or private
financings, or otherwise. If additional funds are raised through the issuance of
equity securities, additional dilution to stockholders may occur. No assurance
can be given that additional financing will be available when needed or that, if
available, it will be on terms favorable to the Company or its stockholders. If
needed funds are not available, the Company may be required to curtail its
operations, which could have a material adverse effect on the Company's
business, operating results and financial condition.
Expansion through Undetermined Acquisitions and Joint Ventures. The Company
intends to expand its product lines and domestic and international markets, in
part, through acquisitions. The Company's ability to expand successfully through
acquisitions will depend upon the availability of suitable acquisition
candidates at prices acceptable to the Company, the Company's ability to
consummate such transactions and the availability of financing on terms
acceptable to the Company. There can be no assurance that the Company will be
successful in completing acquisitions. Such transactions involve numerous risks,
including possible adverse short-term effects on the Company's operating results
or the market price of the Common Stock. These acquisitions and joint ventures
may not be subject to approval or review by the Company's stockholders. The
Company does not expect that it will obtain an appraisal by any independent
appraisers with respect to any such acquisition. Certain of the Company's future
acquisitions may also give rise to an obligation by the Company to make
contingent payments or to satisfy certain repurchase obligations, which payments
could have an adverse financial effect on the Company. In addition, integrating
acquired businesses may result in a loss of customers or product lines of the
acquired businesses and also requires significant management attention and may
place significant demands on the Company's operations, information systems and
financial resources. The failure effectively to integrate acquired businesses
with the Company's operations could adversely affect the Company. In addition,
the Company competes for acquisition opportunities with companies which have
significantly greater financial and management resources than those of the
Company. There can be no assurance that suitable acquisition opportunities will
be identified, that any such transactions can be consummated, or that, if
acquired, such new businesses can be integrated successfully and profitably into
the Company's operations. Moreover, there can be no assurance that the Company's
historic rate of growth will continue, that the Company will continue to
successfully expand, or that growth or expansion will result in profitability.
The Company also intends to expand its product lines and domestic and
international markets through joint ventures. The Company's ability to expand
successfully through joint ventures will depend upon the availability of
suitable joint venture candidates whose terms are acceptable to the Company, the
Company's ability to consummate such transactions and the availability of
financing on terms acceptable to the Company. There can be no assurance that the
Company will be successful in completing joint ventures. Such transactions
involve numerous risks, including possible adverse short-term effects on the
Company's operating results or the market price of the Common Stock. The failure
effectively to integrate joint ventures with the Company's operations could
adversely affect the Company. In addition, the Company competes for expansion
opportunities with companies which have significantly greater financial and
management resources than those of the Company. There can be no assurance that
suitable investment opportunities will be identified, that any such transactions
can be consummated, or that such new businesses can be integrated successfully
and profitably into the Company's operations. Moreover, there can be no
assurance that the Company's historic rate of growth will continue, that the
Company will continue to successfully expand, or that growth or expansion will
result in profitability.
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<PAGE> 13
Dependence on Third-Party Suppliers. With the exception of the TeliCam System's
CCD processor unit, the Company believes that there are multiple sources from
which it may purchase the components of the TeliCam System. The Company
anticipates that it will obtain certain of the components of the TeliCam System
from a single source or a limited number of sources of supply. Although the
Company believes it will be able to negotiate satisfactory supply arrangements
and relationships, the failure to do so may have a material adverse effect on
the Company. Furthermore, there can be no assurance that suppliers will dedicate
sufficient production capacity to satisfy the Company's requirements within
scheduled delivery times or at all. Failure or delay by the Company's suppliers
in fulfilling its anticipated needs may adversely affect the Company's ability
to market the TeliCam System. Pursuant to the Boston Marketing Distribution
Agreement, the Company has the exclusive right to market 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 will be terminated as a licensed distributor. In
the event of such termination, the Company, as a sublicensee subdistributor 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 the Boston Marketing Distribution Agreement, 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
may take more than six months. The potential delay associated with locating an
alternative source of supply would have a significant adverse effect on the
Company's operating results and financial condition. In addition, there is no
guarantee that an intraoral dental camera system utilizing the replacement
components will be accepted by the dental marketplace.
Fluctuations in Quarterly Results. The Company's business is subject to certain
quarterly influences. Management's prior experience in the industry would
indicate that net sales and operating profits are generally higher in the fourth
quarter due to the purchasing patterns of dentists and are generally lower in
the first quarter due primarily to increased purchases in the prior quarter and
during the summer months due to a reduced volume of trade shows and increased
unavailability of dentists due to summer vacations. 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, quarterly operating results and financial condition will be adversely
affected. Quarterly results may also be adversely affected by a variety of other
factors, including the timing of acquisitions and their related costs, as well
as the release of new products and promotions taking place within the quarter.
Other factors that may influence the Company's quarterly operating results
include the timing of introduction or enhancement of products by the Company or
its competitors, market acceptance of the TeliCam II, the InTELInet System and
other new products, development and promotional expenses relating to the
introduction of new products or enhancements of existing products, reviews in
the industry press concerning the products of the Company or its competitors,
changes or anticipated changes in pricing by the Company or its competitors, mix
of distribution channels through which products are sold, mix of products sold,
product returns, the timing of orders from major distributors, order
cancellations, delays in shipment and general economic conditions. Due to all of
the foregoing factors, it is also likely that in some future periods the
Company's operating results may be below the expectations of analysts and
investors. In such event, the price of the Company's Common Stock would likely
be materially adversely affected.
Extensive Government Regulation. The Company's products and its manufacturing
practices are subject to regulation by the United States Food and Drug
Administration ("FDA") pursuant to the Federal Food, Drug and Cosmetic Act ("FDC
Act"), and by other state and foreign regulatory agencies. Under the FDC Act,
medical and dental devices, including those under development by the Company
must receive FDA clearance or approval before they may be sold, or be exempted
from the need to obtain such clearance or approval. 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 is
subject to 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 or the adoption of new
regulations could make regulatory compliance by the Company more difficult in
the future. 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 manufacture and distribution of medical and dental devices is
intensely competitive. The Company competes with numerous other companies,
including several major manufacturers and distributors. With respect to the
intraoral camera market, the Company has at least five major competitors. Most
of the Company's competitors have greater financial and other resources than the
13
<PAGE> 14
Company. Consequently, such entities may begin to develop, manufacture, market
and distribute systems which are substantially similar or superior to the
Company's products.
Rapid Expansion of the Company's Business. From inception (October 23, 1995)
through September 30, 1997, the Company has experienced rapid and substantial
growth in revenues and geographic scope of operations. Any future growth may
place a significant strain on management and on the Company's financial
resources and information processing systems. The failure to recruit additional
staff and key personnel, to have sufficient financial resources, to maintain or
upgrade these financial reporting systems, or to respond effectively to
difficulties encountered during expansion could have a material adverse effect
on the Company's business, operating results and financial condition.
Reliance on International Sales and Distributors and General Risks of
International Operations. For the nine-month period ended September 30, 1997,
international sales have accounted for approximately 26% of the Company's net
sales, and the Company expects that international sales may increase as a
percentage of sales in the future. Consequently, 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;
tariffs and other barriers and restrictions; potentially adverse taxes; and the
burdens of complying with a variety of international laws and communications
standards. The Company's international sales involve potentially longer payment
cycles and the Company may experience greater difficulty collecting accounts
receivable. The Company currently depends on third party distributors for
substantially all of its international sales. At September 30, 1997, nine of the
Company's international distributors accounted for 70% of the Company's accounts
receivable, and nine of these distributors accounted for approximately
$3,100,000 or 26%, of the Company's total sales for the nine-month period ended
September 30, 1997. Certain of the Company's third party distributors may also
act as resellers for competitors of the Company and could devote greater effort
and resources to marketing competitive products. The loss of, or other
significant reduction in sales to, certain of these third party distributors
could have a material adverse effect on the Company's business and results of
operations. 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 has 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 obtained "key person" life
insurance on Mr. Gurevitch in the amount of $2,000,000, of which the Company is
the sole beneficiary, but there can be no assurance that the proceeds of such
insurance 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.
Limited Proprietary Protection. The Company's success and ability to compete is
dependent in part upon its proprietary technology. The Company's proprietary
technology is not protected by any patents. Consequently, the Company relies
primarily on trademark, trade secret and copyright laws to protect its
technology. Also, the Company has implemented a policy that most senior and
technical employees and third-party developers sign nondisclosure agreements.
However, there can be no assurance that such precautions will provide meaningful
protection from competition or that competitors will not be able to develop
similar or superior technology independently. Also, the Company has no license
agreements with the end users of its products, so it may be possible for
unauthorized third parties to copy the Company's products or to reverse engineer
or otherwise obtain and use information that the Company regards as proprietary.
If litigation is necessary in the future, to enforce the Company's intellectual
property rights, to protect the Company's trade secrets or to determine the
validity and scope of the proprietary rights of others, such litigation could
result in substantial costs and diversion of resources and could have a material
adverse effect on the Company's business, operating results and financial
condition. Ultimately, the Company may be unable, for financial or other
reasons, to enforce its rights under intellectual property laws. In addition,
the laws of certain countries in which the Company's products are or may be
distributed may not protect the Company's products and intellectual property
rights to the same extent as the laws of the United States.
The Company believes that its products do not infringe upon any valid existing
proprietary rights of third parties. Although the Company has received no
communication from third parties alleging the infringement of proprietary rights
of such parties, there can be no assurance that third parties will not assert
infringement claims in the future. Any such third party claims, whether or not
meritorious, could result in costly litigation or require the Company to enter
into royalty or licensing agreements. There can be no
14
<PAGE> 15
assurance that the Company would prevail in any such litigation or that any such
licenses would be available on acceptable terms, if at all. If the Company were
found to have infringed upon the proprietary rights of third parties, it could
be required to pay damages, cease sales of the infringing products and redesign
or discontinue such products, any of which alternatives, individually or
collectively could have a material adverse effect on the Company's business,
operating results and financial condition.
Conflict of Interests. Robert Gurevitch, Chairman of the Company, has loaned
money to the Company ("Loan Obligations") and has guaranteed the performance by
the Company under its leases for its Irvine and Westlake, California premises.
The Company believes that all of these transactions were on terms no less
favorable than were available from unaffiliated third parties. The Company
intends to attempt to relieve Mr. Gurevitch from his obligations under each of
these guarantees and it is possible that, in order to achieve the release of Mr.
Gurevitch from these guarantees, the Company will be required to post collateral
or provide other concessions to the recipients of the guarantees. The Company
has, in the past, entered into transactions with affiliates and there can be no
assurance that the Company will not enter into transactions with affiliated
parties in the future.
Limitation of Liability and Indemnification. The Company's Amended and Restated
Certificate of Incorporation limits, to the maximum extent permitted by the
Delaware General Corporation Law ("Delaware Law"), the personal liability of
directors for monetary damages for breach of their fiduciary duties as a
director, and provides that the Company shall indemnify its officers and
directors and may indemnify its employees and other agents to the fullest extent
permitted by law. The Company has entered into indemnification agreements with
its directors and executive officers which may require the Company, among other
things, to indemnify such directors against liabilities that arise by reason of
their status or service as directors or officers (other than liabilities arising
from willful misconduct of a culpable nature), to advance their expenses
incurred as a result of any proceeding against them as to which they could be
indemnified, has obtained director's and officer's insurance. The Company has
purchased director's and officer's liability insurance in the amount of $3.0
million. Section 145 of the Delaware Law provides that a corporation may
indemnify a director, officer, employee or agent made, or threatened to be, a
party to an action by reason of the fact that he was a director, officer,
employee or agent of the corporation or was serving at the request of the
corporation against expenses actually and reasonably incurred in connection with
such action if he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the corporation, and, with respect
to any criminal action or proceeding, if he had no reasonable cause to believe
his conduct was unlawful. Delaware Law does not permit a corporation to
eliminate a director's duty of care, and the provisions of the Company's Amended
and Restated Certificate of Incorporation have no effect on the availability of
equitable remedies, such as injunction or rescission, for a director's breach of
the duty of care.
Anti-Takeover Provisions. The Company has an authorized class of 1,000,000
shares of preferred stock which may be issued by the Board of Directors on such
terms and with such rights, preferences and designations as the Board of
Directors may determine. Issuance of such preferred stock, depending upon the
rights, preferences and designations thereof, may have the effect of delaying,
deterring or preventing a change in control of the Company. In addition, certain
"anti-takeover" provisions of the Delaware Law, among other things, restrict the
ability of stockholders to effect a merger or business combination or obtain
control of the Company, and may be considered disadvantageous by a stockholder.
Product Liability. Although the Company has not experienced any product
liability claims to date, the sale and support of products by the Company may
entail the risk of such claims, and there can be no assurance that the Company
will not be subject to such claims in the future. A successful product liability
claim or claim arising as a result of use of the Company's products brought
against the Company, or negative publicity attendant to any such claim, could
have a material adverse effect upon the Company's business, operating results
and financial condition. The Company maintains product liability insurance with
coverage limits of $1,000,000 per occurrence and $1,000,000 per year. While the
Company believes that it maintains adequate insurance coverage, there can be no
assurance that the amount of insurance will be adequate to satisfy claims made
against the Company in the future, or that the Company will be able to obtain
insurance in the future at satisfactory rates or in adequate amounts.
15
<PAGE> 16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities and Use of Proceeds.
In September 1997, the Company issued 50,000 shares of Common Stock to DMD N.V.,
an independent distributor, to repurchase the exclusive distribution rights for
the Company's products into the European market. The issuance and sale of these
securities was made in reliance on section 4(2) of the Securities Act as a
transaction not involving any public offering.
Item 3. Defaults in Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security-Holders.
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10.37 DMD N.V. 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
None.
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<PAGE> 17
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 November 14, 1997 By: /s/ RONALD E. WITTMAN
-------------------------------------------
Ronald E. Wittman
Vice President and Chief Financial Officer
17
<PAGE> 1
EXHIBIT 10.37
AGREEMENT
Parties Dental/Medical Diagnostic Systems, Inc.
200 N. Westlake Blvd., Suite 202
Westlake Village, CA 91362
("DMD")
DMD N.V.
(formerly named Imaging Concepts N.V)
Xavier DeCocklaan 68/4
B-9831
Deurle, Belgium
("DMD N.V.")
Date: September 17, 1997
Place: Westlake Village, California
RECITALS
A. DMD's predecessor, Dental/Medical Diagnostic Systems, LLC and Edudata
Corporation, together with Michael Van Gerven and Imaging Concepts N.V., now
collectively named DMD N.V., entered into a Distributor Agreement dated June 1,
1996, appointing DMD N.V. as distributor for Dental/Medical Diagnostic Systems,
LLC and Edudata Corporation (collectively referred to as "D&M") for the
marketing and sales of the products known as the TeliCam IntraOral camera
system, consisting of camera, handpiece, illumination system and lens and the
full range of software within the territory described in Schedule A attached
to this Agreement and made a part hereto by this reference ("Territory").
B. All parties agree that the Distributor Agreement shall be terminated
and the relationship between the parties shall be controlled by the terms of
this Agreement.
IT IS MUTUALLY AGREED AS FOLLOWS:
1. By the signing of this Agreement by all parties, the Distributor
Agreement shall have no force or effect, and all parties shall look to the
terms, conditions and performance of obligations under this Agreement only.
2. The consideration for the forfeiture of distributor rights within the
Territory as described in the Distributor Agreement and any alleged rights to
distribute any DMD products (including but not limited to, DMD licensed
<PAGE> 2
products, technology and equipment and all software currently developed or to
be developed in the future) shall be as follows:
(a) DMD N.V. shall receive fifty thousand (50,000) shares of common
stock in DMD as of the close of business _________________.
3. Guy DeVreese represents and warrants that he has acquired all interests
of Michel Van Gerven in and to Imaging Concepts N.V. and any interest, personal
or otherwise, Michel Van Gerven may have in and to the Distributor Agreement.
Guy DeVreese shall produce documentation satisfactory to DMD, evidencing the
transfer of such interest from Michele Van Gerven to Guy DeVreese or DMD N.V.
4. General Provisions
(a) Modification or Amendment. This Agreement may be modified or
amended in whole or in part from time to time only by the mutual written
agreement signed by all parties.
(b) Governing Law. All provisions of this Agreement, shall be subject
to and shall be enforced and construed pursuant to the laws of the State of
California.
(c) Attorney's Fees and Costs. In the event of any dispute arising
under this Agreement, the prevailing party shall be entitled to recover
interest as may be provided by law, court costs and reasonable attorneys' fees.
(d) Severability. If any provision or term of this Agreement is held
to be invalid, or unenforceable, the remainder of the provisions shall remain in
full force and effect, and shall in no way be affected, impaired, or
invalidated.
(e) Entire Agreement. The parties hereto agree that this Agreement,
including Exhibit A attached hereto, constitutes and expresses the entire
agreement between the parties concerning the subject matter hereto.
(f) Notices. Any notice, demand or request required or permitted to
be given under this Agreement shall be in writing and shall be deemed effective
twenty-four (24) hours after having been deposited in the United States mail,
postage prepaid, registered or certified and addressed to the addressee at its
main office, as set forth below. Any party may change its address for purposes
of the Agreement by written notice given in accordance with this provision.
(g) Arbitration. Any controversy or claim arising out of or relating
to this agreement or the breach of the agreement will be settled by arbitration
in
<PAGE> 3
accordance with the rules of the American Arbitration Association. Judgment on
the award rendered by the arbitrators may be entered in any court having
jurisdiction over the award.
(h) Binding Agreement. This Agreement shall be binding upon and inure
to the benefit of each of the parties and their respective successors,
representatives and assignees; however, DMD N.V. acknowledges that the Agreement
is personal and may be assigned only upon approval by DMD.
IN WITNESS THEREOF, this Agreement shall be effective as of the date
written above.
"DMD"
DENTAL/MEDICAL DIAGNOSTIC
SYSTEMS, INC.
Dated: 9/17/97 By: [SIG]
------------------ ---------------------
President
"DMD N.V."
Dated: September 17, 1997
------------------ -------------------------
Maureen Siefert
Dated: 9/17/97 /s/ GUY DEVREESE
------------------ -------------------------
Guy DeVreese
<PAGE> 4
SCHEDULE A
----------
"TERRITORY"
The countries of Iceland; Norway; Sweden; Finland; The Netherlands; U.K., which
includes Ireland, Scotland and Great Britain; Belgium/Luxembourg; France; Spain,
Portugal; Germany; Austria; Switzerland; Italy; Greece; Cyprus.
DATE: September 17, 1997 DENTAL/MEDICAL DIAGNOSTIC
------------------------- SYSTEMS, Inc., a Delaware Corporation
200 N. Westlake Blvd., BY: [SIG]
Suite 202 ----------------------------------
Westlake Village, CA 91362
Date: 9/12/97 DMD N.V.
-------------------------
By: [SIG]
- -------------------------------- ----------------------------------
- --------------------------------
<PAGE> 1
EXHIBIT 11.1
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND
THIRTEEN AND THIRTY-NINE WEEKS ENDED NOVEMBER 30, 1996
STATEMENT REGARDING COMPUTATION OF NET INCOME (LOSS) PER SHARE
<TABLE>
<CAPTION>
Three Months Thirteen Weeks Nine Months Thirty-Nine Weeks
Ended Ended Ended Ended
NET INCOME PER SHARE WAS September 30, November 30, September 30, November 30,
CALCULATED AS FOLLOWS: 1997 1996 1997 1996
---------------------- ------------- -------------- ------------- -----------------
<S> <C> <C> <C> <C>
Primary:
Weighted average common shares outstanding 5,066,653 2,985,539 4,081,152 2,881,224
Incremental shares under stock options
computed under the treasury stock method
using the average market price of the
issuer's commons stock during the period -- -- -- --
Weighted average common and common
equivalent shares outstanding 5,066,653 2,985,539 4,081,152 2,881,224
========= ========= ========= =========
Fully diluted:
Weighted average common shares outstanding 5,066,653 2,985,539 4,081,152 2,881,224
Incremental shares under stock options computed
under the treasury stock method using the
market price of the issuer's common stock at
the end of the period if higher than the
average market price -- -- -- --
Weighted average common and common
equivalent shares outstanding 5,066,653 2,985,539 4.081,152 2,881,224
========= ========= ========= =========
Loss amounts
Loss before extraordinary item $ (439,575) $ (136,301) $ (300,173) $ (100,568)
Extraordinary loss on early
extinguishment of debt $ $ $ (234,149) $
----------- ----------- ----------- -----------
Net loss $ (439,575) $ (136,301) $ (534,322) $ (100,568)
Loss per share of common stock:
Loss before extraordinary item $ (0.09) $ (0.05) $ (0.07) $ (0.04)
Extraordinary loss on early
extinguishment of debt $ $ $ (0.06) $
----------- ----------- ----------- -----------
Net loss $ (0.09) $ (0.05) $ (0.13) $ (0.04)
Shares used in the per share calculation:
Weighted average common shares outstanding 5,066,653 2,985,539 4,081,152 2,881,224
========= ========= ========= =========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE INTERIM
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF DENTAL/MEDICAL DIAGNOSTIC
SYSTEMS, INC. AS OF AND FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30,
1997 INCLUDED IN THIS REPORT ON FORM 10-QSB AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 6,082,291
<SECURITIES> 0
<RECEIVABLES> 1,869,654
<ALLOWANCES> 20,975
<INVENTORY> 2,489,552
<CURRENT-ASSETS> 10,865,552
<PP&E> 579,121
<DEPRECIATION> 151,869
<TOTAL-ASSETS> 11,437,456
<CURRENT-LIABILITIES> 1,925,246
<BONDS> 0
0
0
<COMMON> 51,106
<OTHER-SE> 9,307,094
<TOTAL-LIABILITY-AND-EQUITY> 11,437,456
<SALES> 11,688,838
<TOTAL-REVENUES> 11,688,838
<CGS> 7,384,583
<TOTAL-COSTS> 4,541,515
<OTHER-EXPENSES> 76,431
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 136,774
<INCOME-PRETAX> (311,215)
<INCOME-TAX> (11,042)
<INCOME-CONTINUING> (300,173)
<DISCONTINUED> 0
<EXTRAORDINARY> (234,149)
<CHANGES> 0
<NET-INCOME> (534,322)
<EPS-PRIMARY> (.13)
<EPS-DILUTED> (.13)
</TABLE>
