<PAGE>
[LOGO]
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC.
1,800,000 SHARES OF COMMON STOCK AND
1,800,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS
All of the 1,800,000 shares of common stock ("Common Stock") and 1,800,000
Redeemable Common Stock Purchase Warrants ("Warrants") offered hereby (together,
"Securities") are being sold by Dental/Medical Diagnostic Systems, Inc.
("Company"). Each Warrant entitles the holder to purchase one share of Common
Stock at a price of $5.00 per share during the four year period commencing one
year from the date of this Prospectus. The Company may redeem the Warrants, once
they become exercisable, at a price of $.01 per Warrant, upon not less than 30
days' prior written notice if the last sale price of the Common Stock has been
at least 190% of the then current exercise price of the Warrants ($9.50 based
upon $5.00 exercise price) on each of the ten consecutive trading days ending on
the third day prior to the date on which notice is given. The Common Stock and
Warrants are being issued as separate securities, and not as a unit, and,
accordingly, are immediately separately transferable. See "Description of
Securities."
Prior to this Offering, there has been only a limited public market for the
Common Stock and no public market for the Warrants. Through the date of this
Prospectus, the Common Stock was quoted on the NASD OTC Bulletin Board ("OTC
Bulletin Board") under the symbol "DMDI." On May 8, 1997, the high bid and low
ask price of the Common Stock were $5.50 and $6.25, respectively. See "Price
Range of the Common Stock." The Common Stock and the Warrants have been approved
for quotation on the Nasdaq SmallCap Market under the symbols "DMDS" and
"DMDSW," respectively. There can be no assurance that an active trading market
will develop for either the Common Stock or the Warrants, or that, if developed,
any such market will be sustained. See "Underwriting" for information relating
to the factors considered in determining the public offering price of the
Securities and the exercise price of the Warrants.
--------------------------
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY INVOLVES A HIGH DEGREE OF
RISK AND IMMEDIATE SUBSTANTIAL DILUTION. PROSPECTIVE INVESTORS SHOULD CONSIDER
CAREFULLY THE DISCUSSION UNDER "RISK FACTORS" COMMENCING ON PAGE 7 AND
"DILUTION" ON PAGE 19 OF THIS PROSPECTUS.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS
TO DISCOUNTS AND TO
PUBLIC COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
Per Share........................................ $4.50 $.36 $4.14
Per Warrant...................................... $.50 $.04 $.46
Total(3)......................................... $9,000,000 $720,000 $8,280,000
</TABLE>
(1) Does not include a 3% nonaccountable expense allowance which the Company has
agreed to pay the Underwriter. The Company has also agreed to sell the
Underwriter an option ("Underwriter's Purchase Option") to purchase 180,000
shares of the Common Stock and/or 180,000 Warrants and to indemnify the
Underwriter against certain liabilities, including liabilities under the
Securities Act of 1933, as amended ("Securities Act"). See "Underwriting."
(2) Before deducting expenses payable by the Company, including the
nonaccountable expense allowance in the amount of $270,000 ($310,500 if the
Underwriter's over-allotment option is exercised in full), estimated at
approximately $1,608,750.
(3) The Company has granted the Underwriter an option, exercisable within 45
days from the date of this Prospectus, to purchase up to 270,000 additional
shares of the Common Stock and/or 270,000 additional Warrants on the same
terms set forth above, solely for the purpose of covering over-allotments,
if any. If such over-allotment option is exercised in full, the total Price
to Public, Underwriting Discounts and Commissions, and Proceeds to Company
will be $10,350,000, $828,000 and $9,522,000, respectively. See
"Underwriting."
This Prospectus also relates to the offer and sale (i) by certain persons
("Selling Securityholders") of 1,600,000 Warrants issued to the Selling
Securityholders in exchange for warrants ("Bridge Warrants") that were issued to
them in connection with the Company's November 1996 bridge financing ("Bridge
Financing") and (ii) by two optionholders ("Selling Optionholders") of 10,240
shares of Common Stock ("Option Shares") issuable to them upon exercise of
outstanding stock options. The Warrants offered by the Selling Securityholders
and the Option Shares are not part of this underwritten Offering and the Company
will not receive any of the proceeds from the sale of such Warrants and Option
Shares. The Selling Securityholders may not sell such Warrants prior to November
27, 1998 without the prior consent of the Underwriter.
The Securities are being offered by the Underwriter subject to prior sale,
when, as and if delivered to and accepted by the Underwriter and subject to the
approval of certain legal matters by counsel and certain other conditions. The
Underwriter reserves the right to withdraw, cancel, or modify this Offering and
to reject any order in whole or in part. It is expected that delivery of
certificates representing the Securities will be made against payment thereof at
the offices of the Underwriter in Jersey City, New Jersey, on or about May 14,
1997.
M.H. MEYERSON & CO., INC.
FOUNDED 1960
525 WASHINGTON BOULEVARD
JERSEY CITY, NEW JERSEY 07310
(201) 459-9500 (800) 888-8118
The date of this Prospectus is May 9, 1997
<PAGE>
[Inside Cover:Photograph depicting TeliCam intraoral camera, monitor with
dentist and patient in the foreground]
<TABLE>
<C> <S>
- Network-ready
- Built-in Video Capture Mechanism
- TeliCam's exclusive Microprocessor Chip
- Uni-lens Handpiece Design
- Ergonomically-Balanced Handpiece
Simultaneous use of multiple cameras without printer or external
- capture device
- Capture images from 2mm to full face
</TABLE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICES OF THE SECURITIES, INCLUDING
OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE SHORT COVERING TRANSACTIONS
AND PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO, AND
SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL
STATEMENTS (INCLUDING THE NOTES THERETO) APPEARING ELSEWHERE IN THIS PROSPECTUS.
EACH PROSPECTIVE INVESTOR IS URGED TO READ THIS PROSPECTUS IN ITS ENTIRETY.
UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS HAS BEEN ADJUSTED
TO REFLECT A ONE-FOR-2.197317574 REVERSE STOCK SPLIT OF THE COMMON STOCK
EFFECTED ON JANUARY 13, 1997, AND A ONE-FOR-1.333333333 REVERSE STOCK SPLIT
APPROVED BY THE COMPANY'S STOCKHOLDERS ON MARCH 24, 1997 ("REVERSE STOCK
SPLITS"). THIS PROSPECTUS AND OTHER INFORMATION INCORPORATED HEREIN, CONTAINS
CERTAIN FORWARD-LOOKING STATEMENTS. 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 "RISK FACTORS" COMMENCING ON
PAGE 7 OF THIS PROSPECTUS. PROSPECTIVE PURCHASERS OF THE SECURITIES OFFERED
HEREBY SHOULD CAREFULLY CONSIDER THE SPECIFIC MATTERS SET FORTH UNDER "RISK
FACTORS," AS WELL AS THE OTHER INFORMATION AND DATA INCLUDED IN THIS PROSPECTUS,
PRIOR TO MAKING AN INVESTMENT IN THE SECURITIES OFFERED HEREBY.
THE COMPANY
Dental/Medical Diagnostic Systems, Inc. ("Company") designs, develops,
manufactures and sells high technology dental equipment. Currently, the
Company's primary emphasis is on the manufacture and sale of three versions of
an intraoral camera system known as the TeliCam System, and a dental office
networking system, known as InTELInet, for use in connection with the TeliCam
System. The TeliCam System displays close-up color video images of dental
patients' teeth and gums. These TeliCam images assist dentists in displaying
dental health and hygiene problems to patients and, as a result of such display,
promote patient acceptance of treatment plans. The TeliCam System offers
dentists the ability to capture and display multiple video images without an
expensive external capture device such as a video cassette recorder or color
printer, thereby providing a low-cost alternative to the more expensive
traditional intraoral dental camera systems. For this reason, the Company
believes that the TeliCam System should be particularly attractive to the
overseas market because printed copies of dental images are not generally
required by foreign insurance companies. The Company commenced shipments of the
initial model of the TeliCam System, referred to as TeliCam I, and an
international version compatible with the PAL television system, to customers in
February 1996, and April 1996, respectively. Through December 31, 1996, the
Company had sold 2,070 TeliCam Systems to dentists throughout the United States,
as well as to several dental schools, and 940 TeliCam Systems internationally.
The Company has completed the development of an enhanced version of the TeliCam
System, referred to as the "TeliCam II," which was introduced in April 1997.
In November 1996, the Company introduced its InTELInet Networking System
("InTELInet") for use with the TeliCam System. InTELInet creates a
video-electronic information link between the different operatories of the
dental office. InTELInet is different from other intra-office networking systems
known to the Company in that it enables simultaneous use of two or more
intraoral cameras, which allows dentists and their staff to conduct more than
one patient examination at a time. In addition, the TeliCam, unlike other
intraoral cameras on the market today has its own microprocessor video capture
device (or "frame grabber") built in, facilitating the need for only one central
video printer regardless of the number of intraoral cameras being used at the
same time. Competing systems require a separate color video printer or other
image storage device to capture the video images from each intraoral camera that
is in use. The color printer or other image storage device is typically the
second most expensive element of an intraoral camera system. The TeliCam System
and InTELInet presently enable the Company to offer its customers more efficient
and cost-effective networking of multiple operatories. From the time of its
first introduction in late November 1996, through March 25, 1997, 145 InTELInet
multiple operatory networking systems have been sold by the Company.
The Company is currently working with third parties in the development of a
teeth whitening system. This system would utilize a high energy, high pressure
ionized gas in the presence of an electrical current to create a laser-type
light to effect teeth whitening. The Company believes that the teeth whitening
system
3
<PAGE>
can produce faster results at lower cost than currently available teeth
whitening systems. Currently, the leading system for teeth whitening in the
dental office requires more than two hours of the dentist's time. The Company is
currently testing technologies for whitening teeth that have the potential to
whiten teeth in a dentist's office in substantially less time and can be
operated by a dental hygienist instead of the dentist. The testing involves the
compatibility of the light source and catalytic chemicals to produce effective
and rapid teeth whitening. The technology also functions as a curing system for
curing composites, adhesives and sealants used in dental bonding and repair.
Currently available light curing systems can achieve similar results to those
anticipated to be produced by the system currently being tested by the Company.
However, the Company believes the curing system it is testing can be sold at a
price point significantly below that of functionally competitive systems. If the
teeth whitening system is successfully developed, the Company may be required to
enter into contractual arrangements with the third party developers retained by
the Company prior to marketing the system. The Company is also negotiating to
obtain marketing rights to digital dental x-ray technology through a possible
joint venture or through an exclusive worldwide distribution agreement. This
technology, if successfully developed or obtained through a marketing
arrangement, would enable the Company to provide a more user-friendly digital
x-ray system comparable to functionally competitive systems at a significantly
lower price point. Digital x-ray systems, including those currently on the
market, reduce radiation exposure compared to conventional x-ray systems, allow
dentists to view x-ray images in real-time without the time-consuming process of
film development and eliminate the need to use and dispose of chemicals required
to develop conventional x-ray film. This technology also will allow database
storage and recall of images for comparison purposes.
The Company intends to use a significant portion of the net proceeds of this
Offering to develop and introduce new products and to expand domestic and
international sales. Its primary strategy in pursuing these objectives is to
expand its product lines both through internal development and through
acquisitions and joint ventures and expand sales of its products by establishing
additional distributor relationships internationally.
The Company's principal executive offices are located at 200 N. Westlake
Boulevard, Suite 202, Westlake Village, California 91362, and its telephone
number is (805) 381-2700.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Securities Offered........................... 1,800,000 shares of the Common Stock and
1,800,000 Warrants. Each Warrant entitles the
holder thereof to purchase one share of the
Common Stock at a price of $5.00 per share
during the four year period commencing one
year from the date of this Prospectus. The
Company may redeem the Warrants, once they
become exercisable, at a price of $.01 per
Warrant upon not less than 30 days' prior
written notice if the last sale price of the
Common Stock has been at least 190% of the
then current exercise price of the Warrants
($9.50 based upon a $5.00 exercise price) on
each of the ten consecutive trading days
ending on the third day prior to the date on
which notice is given. See "Description of
Securities."
Common Stock Outstanding Prior to
this Offering.............................. 2,985,537 shares
Common Stock to be Outstanding After this
Offering................................... 4,785,537 shares
Nasdaq SmallCap Market Symbols............... Common Stock: DMDS
Warrants: DMDSW
Boston Stock Exchange Symbols................ Common Stock: DMD
Warrants: DMDW
</TABLE>
USE OF PROCEEDS
The Company intends to apply the net proceeds of this Offering approximately
as follows: (i) $1,700,000 to repay in full the secured promissory notes
("Bridge Notes") of the Company issued in the Bridge Financing; (ii) $1,300,000
for product development; (iii) $1,300,000 for acquisitions and joint venture
financing; (iv) $300,000 for the repayment of certain loans made by an affiliate
and a former affiliate of the Company; and (v) $2,800,000 for working capital
and general corporate purposes. See "Use of Proceeds" and "Certain
Transactions."
RISK FACTORS
The Securities offered hereby involve a high degree of risk, including,
without limitation, the risk of the Company's limited operating history and
history of losses; the risks associated with dependence upon a single product;
the risk that new products will not be developed successfully; and the Company's
dependence upon acquisitions and joint ventures for business growth. See "Risk
Factors."
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
The summary financial information set forth below is derived from the
consolidated financial statements of the Company appearing elsewhere in this
Prospectus. This information must be read in conjunction with such consolidated
financial statements, including the notes thereto.
<TABLE>
<CAPTION>
TEN MONTHS
ENDED INCEPTION TO
DECEMBER 31, MARCH 2,
1996(1) 1996(2)
------------ --------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales........................................................................... $ 11,673,102 $ 220,623
Gross profit........................................................................ 4,987,638 18,508
Operating expenses:
Selling, general and administrative............................................... 4,360,736 1,111,391
Research and development.......................................................... 322,467 528,426
Operating income (loss)............................................................. 304,435 (1,621,309)
Income (loss) before income taxes................................................... 215,721 (1,625,213)
Net income (loss)................................................................... $ 137,151 $ (1,625,213)
------------ --------------
------------ --------------
Net income (loss) per share......................................................... $ .05 $ (1.57)
------------ --------------
------------ --------------
Number of shares used in computing per share amounts................................ 3,019,213 1,035,778
<CAPTION>
DECEMBER 31, 1996
----------------------------
ACTUAL AS ADJUSTED(3)
------------ --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................................................... $ 1,058,836 $ 6,477,120
Working capital..................................................................... $ 2,256,474 $ 7,674,758
Total assets........................................................................ $ 4,718,441 $ 9,946,424
Current liabilities................................................................. $ 1,772,433 $ 1,772,433
Non-current liabilities............................................................. $ 1,708,383 $ 80,126
Total stockholders' equity.......................................................... $ 1,237,625 $ 8,251,444
</TABLE>
- ------------------------
(1) On February 5, 1997, the Company changed its year end from a fiscal year
ending on the Saturday nearest to February 28 to a December 31 fiscal year
end. Information provided is for the ten-month period from March 3, 1996
through December 31, 1996.
(2) Information provided is for the period from inception (October 23, 1995) to
March 2, 1996.
(3) Reflects the receipt of the net proceeds of approximately $7,400,000 from
the sale of the Securities offered hereby and the application thereof to (i)
the repayment of the Bridge Notes in the principal amount of $1,600,000 and
accrued interest of $100,000 and the related effect of writing off
approximately $190,000 in financing costs related to the Bridge Financing
and the discount on the Bridge Notes of $188,000 relating to the valuation
of the Bridge Warrants; and (ii) the repayment of loans in the principal
amount of $273,000 made by an affiliate and former affiliate of the Company.
UNLESS OTHERWISE INDICATED, ALL SHARE, PER-SHARE AND FINANCIAL INFORMATION
SET FORTH HEREIN ASSUMES NO EXERCISE OF (I) THE UNDERWRITER'S OVER-ALLOTMENT
OPTION TO PURCHASE 270,000 SHARES OF COMMON STOCK AND/OR 270,000 WARRANTS AND
THE WARRANTS ISSUABLE UPON EXERCISE OF THE UNDERWRITER'S OVER-ALLOTMENT OPTION;
(II) THE UNDERWRITER'S PURCHASE OPTION TO PURCHASE 180,000 SHARES OF COMMON
STOCK AND/OR 180,000 WARRANTS AND THE EXERCISE OF THE WARRANTS ISSUABLE UPON
EXERCISE OF THE UNDERWRITER'S PURCHASE OPTION; (III) THE WARRANTS TO PURCHASE
1,800,000 SHARES OF COMMON STOCK OFFERED HEREBY; (IV) THE WARRANTS ("RESALE
WARRANTS") TO PURCHASE 1,600,000 SHARES OF COMMON STOCK INTO WHICH THE BRIDGE
WARRANTS HAVE BEEN AUTOMATICALLY CONVERTED ON THE DATE OF THIS PROSPECTUS; (V)
STOCK OPTIONS TO PURCHASE 253,154 SHARES OF COMMON STOCK GRANTED OR COMMITTED TO
BE GRANTED TO EMPLOYEES, DIRECTORS AND CONSULTANTS OUTSIDE OF THE COMPANY'S 1997
STOCK INCENTIVE PLAN PRIOR TO THE DATE OF THIS PROSPECTUS; AND (VI) 25,000
OPTIONS GRANTED UNDER, AND OPTIONS TO PURCHASE 325,000 ADDITIONAL SHARES OF
COMMON STOCK RESERVED FOR ISSUANCE PURSUANT TO, THE COMPANY'S 1997 STOCK
INCENTIVE PLAN.
6
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY INVOLVES A HIGH DEGREE OF
RISK. PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS
INHERENT IN AND AFFECTING THE BUSINESS OF THE COMPANY AND THIS OFFERING,
TOGETHER WITH THE OTHER INFORMATION IN THIS PROSPECTUS, BEFORE MAKING AN
INVESTMENT DECISION.
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. At December 31, 1996, the
Company's accumulated deficit was $1,488,062. The ability of the Company to
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. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
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 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. See "Business--The
TeliCam System."
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. Although the Company intends to
devote a significant portion of the proceeds of this Offering to developing new
products, there can be no assurance that the commitment and use of such funds
will result in improved or new products or that if successfully completed, such
improved or new products will be cleared or approved by the appropriate
governmental authorities and gain market acceptance. 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. See
"Business-- InTELInet System" and "Business--Product Development Activities."
SIGNIFICANT PORTION OF PROCEEDS USED TO SATISFY INDEBTEDNESS; BENEFIT TO
INSIDERS. Approximately $2,000,000 or 27%, of the net proceeds received by the
Company from this Offering will be used to repay outstanding indebtedness, and,
therefore, will not be available for future operations. Approximately $300,000
of such amount, or 4% of the net proceeds, will be paid to an affiliate and
former affiliate of the Company including Robert Gurevitch, the Company's
Chairman of the Board and Chief Executive Officer.
7
<PAGE>
BROAD DISCRETION OF MANAGEMENT IN APPLICATIONS OF PROCEEDS. Approximately
$5,400,000 or 73% (77% if the Underwriter's over-allotment option is exercised
in full) of the net proceeds of this Offering will be allocated and used for
working capital, general corporate purposes, research and development, and
possible joint ventures and acquisition of businesses complementary to the
Company. Although the Company intends to apply the net proceeds of this Offering
in the manner described under "Use of Proceeds," the Company's management and
its Board of Directors have broad discretion within such proposed uses as to the
precise allocation of the net proceeds, the timing of expenditures and all other
aspects of the use thereof. The Company will have broad discretion regarding how
and when the proceeds of this Offering allocated to working capital and general
corporate purposes, and the possible acquisition of complementary businesses,
will be applied, and will use a portion of such proceeds to pay salaries,
including salaries of its executive officers. The Company reserves the right to
reallocate the net proceeds of this Offering among the various categories set
forth under "Use of Proceeds" as it, in its sole discretion, deems necessary or
advisable based upon prevailing business conditions and circumstances. See "Use
of Proceeds" and "Certain Transactions."
POSSIBLE NEED FOR ADDITIONAL CAPITAL. Although the Company believes that
the net proceeds of the Offering, together with 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. See "Use of
Proceeds." To the extent that the funds generated by this Offering, together
with existing resources, are insufficient to fund the Company's planned
activities and, to the extent the Company is unsuccessful in concluding
negotiations of an acceptable line of credit, 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. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
EXPANSION THROUGH UNDETERMINED ACQUISITIONS AND JOINT VENTURES. The Company
has allocated $1,300,000, or 18%, of the net proceeds of this Offering to
acquisition and joint venture financing. 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. As of the date of this Prospectus, the Company is not engaged in
negotiations to acquire any business, and has not yet identified any such
business. 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
8
<PAGE>
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 Company
is currently engaged in discussions relating to product development joint
ventures. 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. See "Business-- Growth Strategy."
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. See "Business--Manufacturing and
Component Parts." Pursuant to an agreement with Boston Marketing Company, Ltd.
("Boston Marketing") the Company has the exclusive right to market TeliCam's CCD
processor unit ("Teli Units") to the dental market ("Boston Marketing
Distribution Agreement"). See "Certain Transactions." 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. See "Business--Manufacturing and Component Parts."
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
9
<PAGE>
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. Additionally, use by the Company of a portion of the proceeds of the
offering to repay the Bridge Notes will cause the Company to incur a charge in
the second quarter of 1997 of approximately $378,000. Quarterly results may also
be adversely affected by a variety of other factors, including the timing of
acquisitions and 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's 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. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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. See "Business--Government
Regulation."
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
Company. Consequently, such entities may begin to develop, manufacture, market
and distribute systems which are substantially similar or superior to the
Company's products. See "Business--Competition."
10
<PAGE>
RAPID EXPANSION OF THE COMPANY'S BUSINESS. From inception (October 23,
1995) through December 31, 1996, 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 ten-month period ended December 31, 1996,
international sales have accounted for approximately 20% 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 December 31, 1996, six of the
Company's international distributors accounted for 75% of the Company's accounts
receivable, and five of these distributors accounted for approximately
$2,200,000, or 20%, of the Company's total sales for the ten-month period ended
December 31, 1996. 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. See "Business--Marketing and Sales--International Sales and
Distribution."
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. See "Management -- Employment Agreements."
The Company is presently the sole beneficiary of a life insurance policy on Mr.
Gurevitch in the amount of $1,000,000 and intends to increase such insurance
coverage to $2,000,000, but there can be no assurance that such increased
coverage can be obtained or that, if obtained, 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. See
"Management."
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 is currently implementing a policy
that most senior and technical employees and third-party developers sign
nondisclosure agreements. However, there can be no assurance
11
<PAGE>
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 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 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. See "Business--Proprietary Rights."
POSSIBLE INFLUENCE BY EXISTING MANAGEMENT. Following this Offering, the
present officers and directors of the Company and their affiliates will
beneficially own approximately 21% of the outstanding Common Stock of the
Company. Accordingly, they will have the ability to influence significantly 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. See "Principal Stockholders."
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 as well as the performance by the Company of its obligations
under its credit card processing agreement with Checkfree Corporation. See
"Certain Transactions." 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. See "Certain Transactions."
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 may 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
12
<PAGE>
indemnified, and to obtain directors' and officers' insurance, if available on
reasonable terms. The Company intends to purchase directors' and officers'
liability insurance after the completion of this Offering. Section 145 of the
Delaware Law provides that a corporation may indemnify a director, officer,
employee or agent made, or threatened to be made, 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. See
"Management--Limitation of Liability."
LIMITED PRIOR MARKET; POTENTIAL EFFECTS OF "PENNY STOCK" RULES; ARBITRARY
OFFERING PRICE; POSSIBLE VOLATILITY OF STOCK PRICE. As of the date hereof,
there has been no public market for the Warrants and only a limited public
market for the Common Stock. Although the Common Stock has been sporadically
traded on the OTC Bulletin Board, and it is the intention of the Company that
the Common Stock and Warrants will trade on the Nasdaq SmallCap Market and the
Boston Stock Exchange, there can be no assurance that an active public trading
market for the Common Stock or Warrants will develop and continue after the
closing of this Offering. In the absence of such a market, purchasers of the
Common Stock and the Warrants may experience substantial difficulty in selling
the Securities. Moreover, there can be no assurance that the Company will be
able to continue to meet the maintenance criteria necessary for the Common Stock
and the Warrants to continue to be listed on the Nasdaq SmallCap Market and the
Boston Stock Exchange. The failure to meet these maintenance criteria in the
future may result in the Common Stock or the Warrants being ineligible for
quotations on the Nasdaq SmallCap Market and the Boston Stock Exchange and
trading, if any, of the Common Stock and the Warrants would thereafter be
conducted on the OTC Bulletin Board. As a result of such ineligibility for
quotations, an investor may find it more difficult to dispose of, or to obtain
accurate quotations as to the market value of the Common Stock or the Warrants.
In addition, if the Common Stock was to become delisted from trading on the
Nasdaq SmallCap Market and the Boston Stock Exchange, and the trading price of
the Common Stock was less than $5.00 per share, trading in the Common Stock
might also be subject to the requirements of certain rules promulgated under the
Securities Exchange Act of 1934, as amended ("Exchange Act"), which require
additional disclosure by broker-dealers in connection with any trades involving
a stock defined as a penny stock (generally, any equity security not quoted on
the Nasdaq SmallCap Market or listed on the Boston Stock Exchange with a price
of less than $5.00). Such rules require the delivery, prior to any penny stock
transaction, of a disclosure schedule explaining the penny stock market and the
risks associated therewith, and impose various sales practice requirements on
broker-dealers who sell penny stocks to persons other than established customers
and accredited investors (generally institutions). For these types of
transactions, the broker-dealer must make a special suitability determination
for the purchaser and must have received the purchaser's written consent to the
transaction prior to sale. The additional burdens imposed upon broker-dealers by
such requirements may discourage them from effecting transactions in the Common
Stock and Warrants, which could severely limit the liquidity of the Common Stock
and Warrants and the ability of purchasers in this offering to sell the Common
Stock and Warrants in the secondary market.
The public offering price of the Common Stock in this Offering and the
Warrant Exercise Price have been determined by negotiations between the Company
and the Underwriter. Factors considered in such negotiations, in addition to
prevailing market conditions, included the history and prospects for the
industry in which the Company competes, an assessment of the Company's
management, the prospects of the Company, its capital structure, the market for
public offerings and certain other factors as were deemed relevant.
Consequently, the public offering price of the Common Stock and the exercise
price of the Warrants do not necessarily bear any relationship to the Company's
asset value, net worth or other established valuation criteria and may not be
indicative of prices that may prevail at any time or from time
13
<PAGE>
to time in the public market for the Common Stock and the Warrants. See
"Underwriting." The trading price of the Company's Common Stock and Warrants
could be subject to significant fluctuations in response to variations in
quarterly operating results, changes in analysts' earnings estimates,
announcements of innovations by the Company or its competitors, general
conditions in the dental equipment industry and other factors. In addition, the
stock market is subject to price and volume fluctuations that affect the market
prices for companies, and are often unrelated to operating performance.
EFFECT OF OUTSTANDING OPTIONS AND WARRANTS. Immediately after the Offering,
assuming full exercise of the Underwriter's over-allotment option, the Company
will have outstanding Warrants to purchase an aggregate of up to 3,670,000
shares of Common Stock. This amount includes 2,070,000 shares underlying the
Warrants and 1,600,000 shares underlying the Resale Warrants into which the
Bridge Warrants have been automatically converted as of the date of this
Prospectus. In addition, there are outstanding stock options that have been
granted or committed to be granted to employees, directors and consultants of
the Company to purchase an aggregate of approximately 278,154 shares of Common
Stock at a weighted average exercise price of $2.80 per share and the
Underwriter's Purchase Option pursuant to which the Underwriter has the right to
acquire up to 180,000 shares of Common Stock for $4.95 per share and 180,000
Warrants for $.55 per Warrant. The exercise of any of such outstanding stock
options, Warrants and the Underwriter's Purchase Option (and the Warrants
included therein) will dilute the percentage ownership of the Company's
stockholders, and any sales in the public market of the Common Stock underlying
such stock options, Warrants and the Underwriter's Purchase Option (and the
Warrants included therein) may adversely affect prevailing market prices for the
Common Stock. Moreover, the terms upon which the Company will be able to obtain
additional equity capital may be adversely affected, since the holders of such
outstanding securities can be expected to exercise them at a time when the
Company would, in all likelihood, be able to obtain any needed capital on terms
more favorable to the Company than those provided in such stock options,
Warrants and the Underwriter's Purchase Option. In addition, the Company has
granted certain demand and piggy-back registration rights to the Underwriter
with respect to the securities issuable upon exercise of the Underwriter's
Purchase Option. See "Management--Stock Option Grants," "Description of
Securities--Warrants" and "Underwriting."
FUTURE SALES OF COMMON STOCK. Sales of the Common Stock in the public
market after this Offering by existing stockholders could adversely affect the
market price of the Common Stock or the Warrants. See "Shares Eligible for
Future Sale."
IMMEDIATE AND SUBSTANTIAL DILUTION. Purchasers of the Securities offered
hereby will experience an immediate and substantial dilution of approximately
65% of their investment in the Common Stock because the net tangible book value
of the Company's Common Stock after this Offering will be approximately $1.73
per share as compared with the initial public offering price of $4.50 per share
and $.50 per Warrant. See "Dilution."
ABSENCE OF DIVIDENDS. The Company has never paid any cash dividends on the
Common Stock and does not expect to pay any dividends on the Common Stock in the
foreseeable future. See "Dividend Policy."
POTENTIAL ADVERSE EFFECT OF REDEMPTION OF WARRANTS. The Warrants may be
redeemed by the Company at any time while they are exercisable at a redemption
price of $.01 per Warrant upon not less than 30 days' prior written notice if
the last sale price of the Common Stock has been at least 190% of the then
exercise price of the Warrants (initially $9.50, but subject to adjustment in
certain circumstances) for each of the ten consecutive trading days during a
period ending on the third trading day prior to the date of the notice of
redemption. Due to the low redemption price, notice of redemption of the
Warrants could force the holders to exercise the Warrants and pay the exercise
price at a time when it may be disadvantageous for them to do so, to sell the
Warrants at the current market price when they might otherwise wish to hold the
Warrants, or to accept the redemption price which would be substantially less
than the market value of the Warrants at the time of redemption. See
"Description of Securities--Warrants."
14
<PAGE>
CURRENT PROSPECTUS AND STATE BLUE SKY REGISTRATION REQUIRED TO EXERCISE
WARRANTS. The Company will be able to issue shares of its Common Stock upon
exercise of the Warrants only if there is then a current prospectus relating to
such Common Stock, and only if such Common Stock is qualified for sale or exempt
from qualification under applicable state securities laws of the jurisdictions
in which the various holders of the Warrants reside. The Company has undertaken
and intends to file and keep current a prospectus which will permit the purchase
and sale of the Common Stock underlying the Warrants, but there can be no
assurance that the Company will be able to do so. Although the Company intends
to seek to qualify for sale the shares of Common Stock underlying the Warrants
in those states in which the Securities are to be offered, no assurance can be
given that such qualification will occur. The Warrants may be deprived of any
value and the market for the Warrants may be limited if a current prospectus
covering the Common Stock issuable upon the exercise of the Warrants is not kept
effective or if such Common Stock is not qualified or is exempt from
qualification in the jurisdictions in which the holders of the Warrants reside.
See "Description of Securities--Warrants."
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.
See "Description of Securities--Preferred Stock" and "Description of
Securities--Delaware Law."
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.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS. This Prospectus includes
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933 ("Securities Act") and Section 21E of the Exchange Act. All
statements other than statements of historical fact included in this Prospectus,
including, without limitation, the statements under "Prospectus Summary," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business," regarding the Company's strategies,
plans, objectives and expectations; the Company's ability to design, develop,
manufacture and market products; the ability of the Company's products to
maintain commercial acceptance; the Company's ability to achieve new product
commercialization; the anticipated growth of its target markets; its future
operating results; and other matters are all forward-looking statements.
Although the Company believes that the expectations reflected in such
forward-looking statements are reasonable at this time, it can give no assurance
that such expectations will prove to have been correct. Important factors that
could cause actual results to differ materially from the Company's expectations
are set forth in these "Risk Factors," as well as elsewhere in this Prospectus.
All subsequent written and oral forward-looking statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by the Risk Factors.
15
<PAGE>
THE COMPANY
The Company was organized in New York in 1981 under the name Edudata
Corporation and reincorporated in Delaware in 1983 by Sun Equities Corporation
("Sun") which owned approximately 81 percent of the Company's outstanding common
stock until August 11, 1995. At that time, Sun distributed the shares of the
Company that it owned to its stockholders in the form of a dividend.
The Company was initially organized to provide education in the use of
personal computers, to market software programs developed by others, and to
provide a broad range of advisory services to businesses in conjunction with
both computer and non-computer related management issues. The Company's original
concept was modified, however, and until 1987, the Company was engaged in the
ownership and operation of technical schools through its subsidiaries, Betty
Owen Secretarial Systems, Inc. and Taylor Business Institute, Inc., and in the
development, construction and sale of single-family homes and commercial
buildings through its majority-owned subsidiary, Lytton & Tolley, Inc. In 1988
the Company disposed of its subsidiaries and their operations and determined to
use the proceeds to acquire another business. From 1988 to early 1996, the
Company's operations were limited to exploring opportunities to acquire or to
become an operating business.
On March 1, 1996, the Company acquired all the outstanding securities of
Dental\Medical Diagnostic Systems LLC, a California limited liability company
("DMD"), and Bavarian Dental Instruments, Inc., a California close corporation
("BDI"), in exchange for the issuance by the Company of a total of 1,706,626
restricted shares of its Common Stock. As a result of these transactions, the
former members of DMD and former stockholders of BDI gained a majority of the
Company's voting securities and the management control of the Company was
transferred to the former management of DMD and BDI. See "Management--Executive
Officers and Directors." For accounting purposes these transactions were treated
as a recapitalization of DMD and BDI, with DMD and BDI combined as the acquiror
(reverse acquisition). As a result, the combined historical financial statements
of DMD and BDI became the financial statements of the Company. Further, since
the Company's assets at February 29, 1996 consisted solely of approximately
$660,000 in cash and cash equivalents and the Company had no operations in the
seven years prior to the transactions, for accounting purposes these
transactions were recorded by the Company as the issuance of Common Stock for
cash held by the Company.
16
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Securities offered
hereby, after deducting underwriting discounts and commissions and estimated
offering expenses payable by the Company, are estimated to be approximately
$7,400,000 (approximately $8,601,500 if the Underwriter's over-allotment option
is exercised in full). The Company intends to apply the net proceeds
approximately as follows:
<TABLE>
<CAPTION>
APPLICATION OF PROCEEDS AMOUNT PERCENT
- ----------------------------------------------------------------------- ------------ -----------
<S> <C> <C>
Repayment of Bridge Notes.............................................. $ 1,700,000 22%
Product Development.................................................... 1,300,000 18
Acquisitions and Joint Venture Financing............................... 1,300,000 18
Repayment of Loans Made by Affiliates.................................. 300,000 4
Working Capital and General Corporate Purposes......................... 2,800,000 38
------------ -----
Total.............................................................. $ 7,400,000 100%
------------ -----
------------ -----
</TABLE>
Approximately $1,700,000 of the net proceeds of this Offering will be used
to repay the Bridge Notes issued in connection with the Bridge Financing
consummated in November 1996. The Bridge Notes consist of secured convertible
promissory notes in the aggregate principal amount of $1,600,000, bear interest
at the rate of 10% per annum and are payable upon the consummation of this
Offering. If this Offering is consummated in May 1997, the interest to be paid
on the Bridge Notes will be approximately $74,000. The net proceeds from the
sale of the Bridge Notes have been used primarily for the payment of certain
purchase obligations under a distribution agreement with a former affiliated
party and general corporate purposes. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources" and "Certain Transactions."
Approximately $1,300,000 of the net proceeds of this Offering will be
allocated to product development, including the development of an enhanced
version of the Company's intraoral camera. See "Business--Growth Strategy
Product Development Activities."
Approximately $1,300,000 of the net proceeds of this Offering will be
allocated to possible business acquisitions and joint ventures for the primary
purposes of obtaining technical personnel and obtaining and expanding
technologies, products and markets. The Company is currently considering joint
ventures relating to the development of teeth whitening and digital x-ray
technology. The Company is not currently negotiating to acquire any business.
There can be no assurance that the Company will be able to successfully
negotiate any joint venture or identify and acquire any complementary business.
Approximately $300,000 of the net proceeds of this Offering will be used to
repay certain loans made by an affiliate and former affiliate of the Company,
including the Company's Chairman of the Board, in order to fund the start-up of
the Company's current operations. See "Certain Transactions."
The balance of the net proceeds of this Offering will be allocated to
working capital and general corporate purposes, including, among other things,
additional inventory and payment of general corporate expenses. If the
Underwriter exercises the over-allotment option in full, the Company will
realize additional net proceeds of approximately $1,201,500 which will also be
added to the Company's working capital. See "Risk Factors--Broad Discretion of
Management in Use of Proceeds."
Based on its current operating plan, the Company anticipates that the
proceeds of this Offering, and existing resources and cash generated from
operations, if any, will be sufficient to satisfy the Company's contemplated
working capital requirements through the next twelve months. The Company is also
currently negotiating a line of credit which, if obtained, would provide
additional working capital. There can be no assurance, however, 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. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
17
<PAGE>
The Company intends to maintain flexibility with respect to the use of these
funds and the amounts actually expended for each such use, if any, are at the
discretion of the Company and may vary significantly depending upon a number of
factors, including the progress of the Company's research and development and
marketing programs, technological advances, determinations as to the commercial
potential of the Company's products and the status of competitive products.
Accordingly, management reserves the right to reallocate the proceeds of the
Offering as it deems appropriate.
Proceeds not immediately required for the purposes described above will be
invested in United States government securities, short-term certificates of
deposit, money market funds or other short-term interest-bearing investments.
18
<PAGE>
DILUTION
The difference between the public offering price per share of Common Stock
(attributing no value to the Warrants and, instead, adding the per-Warrant
public offering price to the price of the Common Stock) in this Offering and the
pro forma net tangible book value per share of Common Stock after this Offering
constitutes the dilution per share of Common Stock to investors in this
Offering. Net tangible book value per share is determined by dividing the net
tangible book value (total tangible assets less total liabilities) by the number
of outstanding shares of Common Stock. At December 31, 1996, the net tangible
book value of the Company was $893,939 or approximately $.30 per share of Common
Stock (based on 2,985,537 shares of Common Stock outstanding). After giving
effect to the sale of the Securities offered hereby at an offering price of
$4.50 per share and $.50 per Warrant (less underwriting commissions and
estimated expenses of this Offering) and the application of the net proceeds
therefrom, the pro forma net tangible book value of the Company at that date
would have been $8,285,189, or approximately $1.73 per share. See "Use of
Proceeds." This represents an immediate increase in pro forma net tangible book
value of approximately $1.43 per share to existing stockholders and an immediate
dilution of approximately $3.27 per share or approximately 65%, to investors in
this Offering. If the public offering price is higher or lower, the dilution of
the investors in this Offering will be, respectively, greater or less.
The following table illustrates the per share dilution without giving effect
to results of operations of the Company subsequent to December 31, 1996:
<TABLE>
<S> <C> <C>
Assumed public offering price................................. $ 5.00
Net tangible book value per share as of December 31, 1996... $ .30
Increase per share attributable to new investors............ 1.43
---------
Net tangible book value after the Offering.................... 1.73
---------
Dilution per share to new investors........................... $ 3.27
---------
---------
</TABLE>
The following table summarizes, at December 31, 1996, the number and
percentage of shares of Common Stock purchased from the Company, the amount and
percentage of consideration paid and the average price per share paid by
existing stockholders and by investors pursuant to this Offering (attributing no
value to the Warrant and, instead, adding the per-Warrant public offering price
to the price of the Common Stock).
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
----------------------- -------------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Existing Stockholders................................... 2,985,537 62% $ 2,725,687 23% $ .91
Investors in this Offering.............................. 1,800,000 38 9,000,000 77 $ 5.00
---------- ----- ------------- -----
Total............................................. 4,785,537 100% $ 11,725,687 100%
---------- ----- ------------- -----
---------- ----- ------------- -----
</TABLE>
19
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company: (i) at
December 31, 1996; and (ii) as adjusted at December 31, 1996 to give effect to
the sale of the Securities offered hereby and the application of the estimated
net proceeds therefrom. See "Use of Proceeds." This table should be read in
conjunction with the Consolidated Financial Statements and related Notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
----------------------------
AS
ACTUAL ADJUSTED(2)
------------- -------------
<S> <C> <C>
Short-term debt:
Current portion of capital lease obligations...................................... $ 18,468 $ 18,468
Long-term debt:
Notes payable (1)................................................................. 1,355,291 --
Notes payable to related parties.................................................. 272,966 --
Capital lease obligations......................................................... 66,028 66,028
Stockholders' equity:
Preferred Stock, par value $0.01 per share, 1,000,000 shares authorized; no shares
outstanding..................................................................... -- --
Common Stock, par value $0.01 per share, 20,000,000 shares authorized; 2,985,537
shares issued and outstanding actual; 4,785,537 issued and outstanding, as
adjusted........................................................................ 29,855 47,855
Additional paid-in capital.......................................................... 2,695,832 10,069,082
Accumulated deficit................................................................. (1,488,062) (1,865,493)
------------- -------------
Total stockholders' equity........................................................ 1,237,625 8,251,444
------------- -------------
Total capitalization.............................................................. $ 2,950,378 $ 8,335,940
------------- -------------
------------- -------------
</TABLE>
- ------------------------
(1) Represents Bridge Notes payable, net of $244,709 discount.
(2) Reflects the receipt and application of the net proceeds to (i) the
repayment of the Bridge Notes in the principal amount of $1,600,000 and
accrued interest of $100,000 and the related effect of writing off
approximately $190,000 in financing costs related to the Bridge Financing
and the discount on the Bridge Notes of $188,000 relating to the valuation
of the Bridge Warrants; and (ii) the repayment of loans in the principal
amount of $273,000 made by an affiliate and former affiliate of the Company.
20
<PAGE>
PRICE RANGE OF THE COMMON STOCK
The Common Stock was quoted on the OTC Bulletin Board through the date of
this Prospectus under the symbol "DMDI." The Common Stock is traded on a
sporadic basis; therefore, the prices quoted below are not necessarily
indicative of market value. The following table sets forth the range of the high
and low bid quotations of the Common Stock on the OTC Bulletin Board for the
periods indicated as reported by NASDAQ Trading and Market Services. These
quotations reflect inter-dealer prices, without mark-up, mark-down or
commission, and may not represent actual transactions.
<TABLE>
<CAPTION>
PERIOD ENDED HIGH LOW
- ----------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
June 30, 1996................................................................ $ 5.86 $ .94
August 31, 1996.............................................................. 5.48 3.66
November 30, 1996............................................................ 5.86 3.66
December 31, 1996............................................................ 5.68 4.39
</TABLE>
On May 8, 1997, the high bid and low ask price of the Common Stock were
$5.50 and $6.25, respectively. As of April 4, 1997, there were 244 stockholders
of record and approximately 400 beneficial holders of the Common Stock.
DIVIDEND POLICY
The Company has not paid any cash dividends on the Common Stock since its
inception and does not intend to pay any dividends on the Common Stock in the
foreseeable future. The payment of any dividends in the future will depend on
the evaluation by the Company's Board of Directors of such factors as it deems
relevant at the time and restrictions imposed by the terms of the Company's debt
obligations, if any. As of the date of this Prospectus, the Company has no debt
obligations that impose restrictions on the payment of dividends. Currently, the
Board of Directors believes that all of the Company's earnings, if any, should
be retained for the development of the Company's business.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE DISCUSSION BELOW SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED
FINANCIAL STATEMENTS OF THE COMPANY AND NOTES THERETO INCLUDED ELSEWHERE IN THIS
PROSPECTUS.
INTRODUCTION
This discussion summarizes the significant factors affecting the
consolidated operating results, financial condition and liquidity/cash flows of
the Company for the ten-month period ended December 31, 1996, and for the period
from inception (October 23, 1995) to March 2, 1996. Except for the historical
information contained herein, the matters discussed in this Management's
Discussion and Analysis are forward looking statements that involve risks and
uncertainties and are based upon judgments concerning various factors that are
beyond the Company's control.
On March 1, 1996, the Company purchased all of the outstanding membership
interests of DMD and all of the outstanding capital stock of BDI. Immediately
subsequent to the transaction, the former members of DMD and stockholders of BDI
owned approximately 66.6% of the Company's outstanding common stock and
management control of the Company was transferred to the former management of
DMD and BDI. Accordingly, for accounting purposes the acquisition was treated as
a recapitalization of DMD and BDI with DMD and BDI combined as the acquiror
(reverse acquisition). As a result, the combined historical financial statements
of DMD and BDI became the financial statements of the Company. From inception,
on October 23, 1995, through March 2, 1996, the Company generated net sales of
only $220,623 and incurred a net loss of $1,625,213. Because both DMD and BDI
were only formed in October and November of 1995, incurred substantial losses in
connection with the commencement of their respective operations, and commenced
sales in February 1996, a comparison of the financial information of the Company
for the ten-month period ended December 31, 1996 to the period from inception
through March 2, 1996 is not meaningful. See "The Company."
DMD was formed in October 1995 and has been primarily involved in designing,
developing, manufacturing, and marketing TeliCam Systems. The first shipments to
customers of the TeliCam System commenced in early February 1996. BDI was formed
in November 1995 and has been primarily involved in the marketing and
distribution of dental burs imported from Russia. The first sales of burs
commenced in March 1996. On July 9, 1996, the Company determined to focus future
strategic development primarily upon high value added dental/medical products
and technology and, accordingly, decided to discontinue the dental bur product
line, comprised of low-margin, low-technology products. The Company thereafter
commenced an orderly liquidation of its inventory of dental burs, and expects
the liquidation to be completed in 1997 without significant adverse effect on
operations.
On January 13, 1997 the Company changed its name from Edudata Corporation to
Dental/Medical 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.
The Company has a limited history of operations which includes results of
operations of the BDI product line, now discontinued. Although no assurance can
be given, the Company believes that results of operations for the period
presented may not be indicative of future results because the period presented
includes the period immediately following initial introduction of the TeliCam
System, includes the results of the business of BDI which has been discontinued,
and because the Company expects to introduce the TeliCam II and other new
products in future periods. The Company's prospects for increasing sales and
profits is subject to a number of risks, including competitive and economic
conditions, as well as the market acceptance of new technologies the Company may
seek to introduce. See "Risk Factors."
22
<PAGE>
RESULTS OF OPERATIONS
For the ten-month period ended December 31, 1996, net sales totaled
$11,673,102, generating an operating profit of $304,435. Included in these
results were sales of approximately $235,000 and an operating loss of
approximately $196,000 related to the Company's discontinued dental bur product
line. As described above, the Company expects to complete the sale of inventory
related to this product line in fiscal 1997 without any significant adverse
impact on operating results.
Net sales totaled $11,673,102 for the ten-month period ended December 31,
1996, and are comprised primarily of sales of TeliCam Systems and related
products. Total sales for this period included approximately $2,200,000 in sales
to international distributors. Sales for the period from inception (October 23,
1995) through March 2, 1996 were not significant as the Company spent the
majority of the period developing its initial product offering with sales
commencing in February 1996. As further described below, under the caption
"Fluctuations in Quarterly Results," the Company's sales are generally expected
to be higher in the fourth quarter due to the purchasing patterns of dentists in
the United States. During the ten month period ended December 31, 1996, the
month of December alone accounted for approximately $2,100,000 in net sales due
to a combination of increasing domestic and foreign sales. Domestic sales in
December were higher than normal primarily due to year end purchases by dentists
taking advantage of a $17,000 Federal tax credit for capital equipment
purchases, and to the introduction of the InTELInet system. The Company believes
that the tax credit accelerated certain TeliCam System sales that would
ordinarily have occurred in January and February 1997 and may result in reduced
first quarter 1997 sales.
Cost of sales for the ten-month period ended December 31, 1996 were
$6,685,464 or 57% of sales. As a percentage of sales, the Company expects costs
of international sales to be higher than domestic sales due to higher discounts
being required on international sales; however, this effect should be offset by
reduced warranty and service costs as well as reduced selling costs on
international sales.
Selling, general, and administrative expenses totaled $4,360,736 or 37% of
sales for the ten-month period ended December 31, 1996. These expenses relate to
administering the continuing design, development, manufacturing, and marketing
of the Company's TeliCam Systems. These expenses include advertising and
promotion expenses of $1,008,879 comprised primarily of trade show fees, trade
magazine advertising and direct mail promotions. Salaries and wages totaled
$966,745 comprised primarily of expenses for sales and production
administration, marketing, sales and customer support staff and finance and
accounting personnel. Commissions resulting from sales of TeliCam Systems and
the InTELInet product introduced in November 1996 totaled $1,223,547. These
expenses are expected to increase in absolute dollars relative to net sales in
future periods, due to the need for additional support functions as the
Company's sales increase.
Research and development expenses totaled $322,467 or 3% of sales for the
ten-month period ended December 31, 1996, and related primarily to direct
expenses of ongoing design and development of enhancements to the Company's
TeliCam I and, to a lesser extent, the Company's TeliCam II. 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
for the TeliCam System. However research and development expenses will increase
for the development of new products. Increased expenditures on research and
development, resulting from application of the proceeds of the Offering to
further research and development projects and joint ventures and possible
acquisitions, are expected to result in increased expenses and may result in
correspondingly reduced earnings in future periods. See "Use of Proceeds."
Amortization of debt issuance cost totaled $31,548 for the ten-month period
ended December 31, 1996, and is the result of the cost of the sale of the Bridge
Notes, issued in November 1996, being amortized over the term of the Notes.
These costs will continue into future periods until the debt is paid. The
Company will pay such debt out of the proceeds of this Offering and,
accordingly, expects to take a
23
<PAGE>
charge of approximately $190,000 for the write-off of unamortized debt issuance
costs in the second quarter of fiscal 1997. See "Use of Proceeds."
Interest expense totaled $57,166 for the ten-month period ended December 31,
1996, and consisted of interest paid on capital lease obligations and interest
accrued on the Bridge Notes and notes payable to related parties.
Net income for the ten-month period ended December 31, 1996 totaled $137,151
or $.05 per share.
LIQUIDITY AND CAPITAL RESOURCES
For the ten-month period ended December 31, 1996, the Company used net cash
of $1,631,343 in operations. The Company financed its operating cash
requirements through the sale of 422,219 shares of Common Stock in April 1996
which generated cash proceeds of approximately $1,055,000, net of issuance
costs, and through the Bridge Financing in November 1996, which generated cash
proceeds of approximately $1,315,000, net of issuance costs.
Accounts receivable increased by $1,188,544 to $1,305,143 at December 31,
1996, primarily due to the increasing sales volumes during the ten-month period
ended December 31, 1996, and further due to the level of international sales
during December. Sales for the period from inception (October 23, 1995) through
March 2, 1996 were only $220,000. Accounts payable and accrued liabilities
totalling $1,720,358 at December 31, 1996 decreased slightly from $1,806,640 at
the prior year-end period. Inventory levels increased $461,812 to $1,513,075 due
to increased sales and production levels for TeliCam Systems.
Capital expenditures totaled $200,686 for the ten-month period ended
December 31, 1996, and resulted primarily from purchases of additional computer
equipment and test equipment to support the administrative and production
functions of the Company. Book overdrafts decreased in the current period by
$49,906. Cash on hand at the end of the period was $1,058,836.
The Company requires additional cash to continue to pay down its liabilities
(including, without limitation, the Bridge Notes issued in the November 1996
Bridge Financing) for working capital purposes to support anticipated increased
sales levels and to fund its research and development activities. Approximately
$1,700,000 of the net proceeds of this Offering will be used to repay the Bridge
Notes. The Bridge Notes consist of secured convertible promissory notes in the
aggregate principal amount of $1,600,000, bear interest at the rate of 10% per
annum and are payable upon the consummation of this Offering. The interest to be
paid on the Bridge Notes will be approximately $74,000.
Based on its current operating plan, the Company believes that the proceeds
of the Offering, together with existing resources and cash generated from
operations, if any, will be sufficient to satisfy the Company's contemplated
working capital requirements for at least the next twelve months. There can be
no assurance that the 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 expansion.
On February 13, 1997, the Company received a Commitment Letter from Comerica
Bank ("Comerica") confirming Comerica's intent to extend up to a $2,000,000 line
of credit to the Company, to be secured by a first priority security interest in
the Company's assets and by an assignment of the Company's rights under the
Boston Marketing Distribution Agreement. The credit facility will bear interest
monthly at the rate of the Comerica Bank Prime plus one-quarter of one percent
(0.25%), as it may change from time to time, through June 1, 1998. All
borrowings under the facility will be subject to a formula based, generally, on
accounts receivable and inventory. The Company intends to use the proceeds of
this credit facility for working capital and general corporate purposes.
Although the Company is in the final stages of documentation of a definitive
credit agreement, certain issues remain the subject of negotiation. The
commitment of Comerica is contingent upon the parties' execution and delivery of
a definitive credit agreement, the closing of the Offering, the repayment of the
Bridge Notes, the provision to Comerica of a
24
<PAGE>
first-priority lien on the Company's assets and upon the absence of any material
adverse change in the Company's business or financial condition. There can be no
assurance that the Company will be successful in obtaining the credit facility,
and the failure of the Company to do so could have a material adverse effect on
the Company's business, operating results and financial condition.
FLUCTUATIONS IN QUARTERLY RESULTS
The Company's business is subject to certain quarterly influences. Net sales
and operating profits are generally higher in the fourth quarter due to the
purchasing patterns of dentists in the United States and are generally lower in
the first quarter due primarily to the effect upon demand of increased purchases
in the prior quarter. It is also expected that the Company's business will
experience lower sales in the summer months as a consequence of holiday
vacations and a lesser number of trade shows.
In anticipation of the introduction of the TeliCam II, in March, 1997, the
Company offered promotional pricing on sales of the TeliCam I to reduce
inventory levels of the TeliCam I and to increase cash available to finance
increased inventories of the TeliCam II. The Company expects demand for the
TeliCam II upon its introduction to significantly supplant demand for the
TeliCam I. As a result of the TeliCam I price promotion, the Company expects
remaining inventories of the TeliCam System to be significantly reduced, cash
flow for March and April of the current year to be increased over levels which
would normally occur without the price promotion, and that gross margins for the
period of the price promotion will be reduced. Additionally, use by the Company
of a portion of the proceeds of the Offering to repay the Bridge Notes will
cause the Company to incur a charge in the second quarter of 1997 of
approximately $378,000.
Quarterly results may 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 in joint ventures and
acquisitions. To the extent that such expenses precede or are not subsequently
followed by increased revenues, the Company's business, operating results and
financial condition will be adversely affected.
25
<PAGE>
BUSINESS
GENERAL BUSINESS DESCRIPTION OF THE COMPANY
The Company designs, develops, manufactures and sells high technology dental
equipment. Currently, the Company's primary emphasis is on the manufacture and
sale of an intraoral camera system known as the TeliCam System and a dental
office networking system, known as InTELInet, for use in connection with the
TeliCam System. The TeliCam System displays close-up color video images of
dental patients' teeth and gums. These TeliCam images assist dentists in
displaying dental health and hygiene problems to patients and, as a result of
such display, promote patient acceptance of treatment plans. The TeliCam System
offers dentists the ability to capture and display multiple video images without
an expensive external capture device such as a video cassette recorder or color
printer, thereby providing a low-cost alternative to the more expensive
traditional intraoral dental camera systems. For this reason, the Company
believes that the TeliCam System should be particularly attractive to the
overseas market because printed copies of dental images are not generally
required by foreign insurance companies. The Company commenced shipments of
TeliCam Systems to customers in February 1996. Through December 31, 1996, the
Company had sold 2,070 TeliCam Systems to dentists throughout the United States,
as well as several dental schools, and 940 TeliCam Systems internationally. The
Company is in the process of finalizing the development of an enhanced version
of the TeliCam System, the TeliCam II, which it anticipates introducing in the
current quarter.
In November 1996, the Company introduced its InTELInet Networking System
("InTELInet") for use with the TeliCam System. InTELInet creates a
video-electronic information link between the different operatories of the
dental office. InTELInet is different from other intra-office networking systems
known to the Company in that it enables simultaneous use of two or more
intraoral cameras, which allows dentists and their staff to conduct more than
one patient examination at a time using two or more intraoral cameras
simultaneously. In addition, the TeliCam, unlike other intraoral cameras on the
market today has its own microprocessor video capture device (or "frame
grabber") built in, facilitating the need for only one central video printer
regardless of the number of intraoral cameras being used at the same time.
Competing systems require a separate color video printer or other image storage
device to capture the video images from each intraoral camera that is in use.
The color printer or other image storage device is typically the second most
expensive element of an intraoral camera system. The TeliCam System and
InTELInet presently enable the Company to offer its customers more efficient and
cost-efficient networking of multiple operatories. From the time of its first
introduction in late November 1996, through March 25, 1997, 145 InTELInet
multiple operatory networking systems have been sold by the Company.
In addition to its work on the TeliCam II and the InTELInet system, the
Company is currently working with third parties in the development of a teeth
whitening system. This system would utilize a high energy, high pressure ionized
gas in the presence of an electrical current to create a laser-type light to
effect teeth whitening. The Company believes that the teeth whitening system can
produce faster results at lower cost than currently available teeth whitening
systems. Currently, the leading system for teeth whitening in the dental office
requires more than two hours of the dentist's time. The Company is currently
testing technologies for whitening teeth that have the potential to whiten teeth
in a dentist's office in substantially less time and by a dental hygienist
instead of the dentist. The testing involves the compatibility of the light
source and catalytic chemicals to produce effective and rapid teeth whitening.
The technology also functions as a curing system for curing composites,
adhesives and sealants used in dental bonding and repair. Currently available
light curing systems can achieve similar results to those anticipated to be
produced by the system currently being tested by the Company. However, the
Company believes the curing system it is testing can be sold at a price point
significantly below that of functionally competitive systems. If the teeth
whitening system is successfully developed, the Company may be required to enter
into contractual arrangements with the third party developers retained by the
Company prior to marketing the system. The Company is also negotiating a joint
venture to develop digital x-ray technology for the dental market. This
technology, if successfully developed, would provide a more user-friendly
digital x-ray
26
<PAGE>
system comparable to functionally competing systems at a significantly lower
price point. Digital x-ray systems, including those currently on the market,
reduce radiation exposure compared to conventional x-ray systems and allow
dentists to view x-ray images in real-time without the time-consuming process of
film development and eliminate the need to use and dispose of chemicals required
to develop conventional x-ray film. This technology also will allow database
storage and recall of images for comparison purposes.
BDI, a subsidiary of the Company, distributes and markets reusable diamond
dental burs pursuant to certain agreements with Russian manufacturers. 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, as extrinsic to the Company's strategic goals. 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.
INDUSTRY OVERVIEW
Based on the results of a recent study commissioned by the American Dental
Association ("ADA") the Company estimates that the number of U.S. dental visits
has grown, from 467 million in 1986, to 540 million in 1995; and that the total
expenditure for dental care in the U.S. in 1994 was approximately $40 billion.
According to industry estimates, during 1995 there were approximately 150,000
active dentists serving the United States marketplace in about 115,000 dental
practices.
According to industry estimates, in 1994, the U.S. dental medical/surgical
equipment market was a $2.5 billion annual industry, with a projected annual
growth rate of between 6% and 8%, reaching $3.5 billion annually by the year
2000. In the ADA's study, owner-dentists reported that the average annual
purchase of dental supplies and equipment in 1993 was approximately $24,000 per
practice. Factors contributing to this growth include the general aging of the
population, technological advances, increasing regulatory requirements relating
to infection control, and the proliferation of dental insurance coverage. In
addition to the domestic market for dental supplies and equipment, the Company
estimates that there is a multi-billion dollar annual market for such items in
Europe and Asia.
GROWTH STRATEGY
The Company's goal is to be a leading manufacturer and distributor of high
technology dental products. The Company believes that its focus on the following
business strategies will help it to achieve this goal:
DELIVERY OF INNOVATIVE, VALUE-ORIENTED PRODUCTS. The Company seeks to
provide innovative products that offer a strong price-value relationship to
its customers. The Company endeavors to deliver products that offer, or will
offer, greater or differentiated operating features at competitive prices.
COMMITMENT TO PRODUCT DEVELOPMENT. From inception (October 23, 1995)
through December 31, 1996, the Company has devoted over $850,000 to product
development activities. The Company also intends to use up to $1,300,000 of
the proceeds of this Offering to the enhancement of its current product and
the development and/or acquisition of new technologies. The Company believes
that this focus on new and improved technologies is essential if the Company
is to establish and maintain a competitive position in the marketplace.
GROWTH THROUGH ACQUISITIONS AND JOINT VENTURES. The Company anticipates
that it will complement its internal growth, both in number of products and
sales, through acquisitions and joint ventures and a focus on developing and
marketing new technologies for the dental practice. The Company believes
that acquisitions and joint ventures present an effective means of obtaining
technical personnel and obtaining or expanding technologies, products and
markets. The Company
27
<PAGE>
continually evaluates opportunities for acquisitions and joint ventures,
although it is not currently party to any commitment, understanding or
agreement related to such endeavors. The Company currently intends to use up
to $1,300,000 of the proceeds of this Offering for acquisitions and joint
venture financing.
EXPANSION OF DOMESTIC AND INTERNATIONAL SALES. Although both the
domestic and international dental supply markets are highly competitive, the
Company believes that the size of these markets provides an excellent
opportunity for growth. See "--Industry Overview." The Company intends to
increase its domestic sales through the introduction of new high technology
products and to increase its international sales through entry into
additional distribution agreements with foreign distributors. The Company
intends to capitalize on its experienced management and sales team to
increase its domestic and international sales. See "Marketing and Sales."
TELICAM SYSTEM
Currently, the Company's primary product is an intraoral dental camera known
as the TeliCam System. Management believes that the TeliCam System, a video
memory, full color intraoral dental camera system is unlike any other system
currently available on the market. Traditional intraoral dental cameras consist
of: (i) a handpiece, the end of which contains the camera lens and light source;
(ii) a camera chip ("CCD chip"), with a camera chip processing unit ("CCU
processor"), which interprets the camera's video signals; (iii) video and light
source cables which connect the handpiece to the CCU processor; and (iv) an
external capture device, such as a video recorder or printer so that the dentist
and patient can view the video image. The primary distinguishing feature of the
TeliCam System is its ability to capture and "freeze" video images and display
multiple images simultaneously without an external capture device. The heart of
the TeliCam System's image capture capabilities is the Teli CCU processor which
is incorporated therein. The Teli CCU processor, which was designed specifically
for intraoral dental camera use, has a built-in image capturing mechanism or
"frame grabber" computer chip. This gives the dental professional the ability to
capture from one to four images with the touch of a button on the handpiece or
the use of a foot pedal, and eliminates the need for network installation and
the hardwiring of external capture devices. Additionally, the Teli CCU
processor's frame grabber incorporates an automatic light intensity control
which eliminates reflection and glare from the fiberoptic illumination for
clearer video images. The Company has exclusive world-wide rights to market the
Teli CCU processor to the dental market.
Another feature of the TeliCam System is its 1/3 inch camera with near-focus
capabilities as close as two millimeters and magnification capabilities of up to
120 times the actual image, all available without the necessity of changing
lenses. The Company believes that this functionality is only available in
significantly more expensive competing models. Additionally, the TeliCam System
features an ergonomically designed, easy-to-use monocoil cable, which connects
the camera's handpiece to the CCU processor. To the extent permanent images may
be required by insurance companies, auxiliary printing systems are available
from the Company. See "Risk Factors--Competition."
The Company is currently completing the development of its TeliCam II
intraoral camera. This system, designed for the medium-priced dental market, is
distinguished from the Company's current TeliCam I by its increased fiber optic
illumination, rotary focus capability which increases ease of use, and increased
image clarity. The TeliCam II may also be used with the InTELInet network. The
Company will introduce the TeliCam II in the second quarter of 1997. No
assurances can be given that, after its introduction the TeliCam II will achieve
market success. See "Risk Factors--Importance of New Product Development to
Growth" and "Risk Factors--Governmental Regulation." Following introduction of
the TeliCam II, the Company will continue to market the TeliCam I because the
TeliCam I will continue to offer certain functions not available in the TeliCam
II. Among these functions is a button mechanism on the TeliCam I camera
handpiece which can be used to initiate image capture while the TeliCam II
requires a foot pedal to initiate image capture. However, the Company expects
that in future periods, sales of the TeliCam II will generally exceed same
period sales of the TeliCam I.
28
<PAGE>
INTELINET VIDEO MONITORING SYSTEM
The Company has commenced marketing of its InTELInet Video Monitoring System
("InTELInet") which generally includes two TeliCam Systems, a printer, a
video-cassette monitor, cabling and installation. InTELInet is designed to be a
cost-effective solution to the problems generally associated with standard
networking of various intraoral cameras in multiple operatories within a single
dental practice. With traditional intraoral camera networks, each camera must be
wired to a centralized printer in order to capture and store the desired image,
which must then be relayed back to the camera's monitor for viewing the image,
and back to the printer for ultimate printout. These requirements result in
substantial and expensive wiring. Also, competing intraoral cameras require
networking implementations which do not permit the simultaneous use of multiple
cameras unless a costly printer is attached to each camera. Consequently, this
type of network requires the dental practice to make a significant expenditure
for cabling and installation and on-site printers in every operatory. The
InTELInet requires significantly less cabling and eliminates the need for
purchasing multiple printers because of the built-in image capture capabilities
of the TeliCam System. The Company emphasizes the savings to dental practices
and the ease of use of the InTELInet in its marketing campaigns. The InTELInet
is being marketed by the Company only in the U.S. due to the general absence of
multiple operatory practices outside of the United States. The InTELInet
facilitates simple network expansion and is only compatible with intraoral
dental cameras marketed by the Company.
From November 1996 through March 25, 1997, the Company has sold 145
InTELInet systems. Currently, the average sales price for a two operatory
installation is approximately $9,100 plus an additional $2,000 for each
additional operatory networked.
PRODUCT DEVELOPMENT ACTIVITIES
The Company intends to use up to $2,600,000 of the proceeds of this Offering
for the development and/or acquisition of new dental high technology products.
See "Use of Proceeds." The Company expended $322,467 and $528,426 for research
and development of its products for the ten months ended December 31, 1996 and
from Inception to March 2, 1996, respectively. In addition to its work on the
TeliCam II, the Company is currently participating with third parties in the
development of a teeth whitening system product. This system would utilize a
high energy, high pressure ionized gas in the presence of an electrical current
to create a laser type light to effect teeth whitening. The Company believes
that the teeth whitening system can produce faster results at a lower cost than
currently available teeth whitening systems. Currently, the leading system for
teeth whitening in the dental office requires more than two hours of the
dentist's time. The Company is currently testing technologies for whitening
teeth that have the potential to whiten teeth in a dentist's office in
substantially less time and by a dental hygienist instead of the dentist. The
testing involves the compatibility of the light source and catalytic chemicals
to produce effective and rapid teeth whitening. The technology also functions as
a curing system for curing composites, adhesives and sealants used in dental
bonding and repair. Currently available light curing systems can achieve similar
results to those anticipated to be produced by the system currently being tested
by the Company. However, the Company believes the curing system it is testing
can be marketed at a price point significantly below that of functionally
competitive systems. If the teeth whitening system is successfully developed,
the Company may be required to enter into contractual arrangements with the
third party developers retained by the Company prior to marketing the system.
There can be no assurance that the development of the teeth whitening system
will be successful or commercially viable, or that, if required, the Company
will be able to enter into marketing agreements with third parties on terms
acceptable to the Company. See "Risk Factors--Government Regulation" and
"Business--Government Regulation."
The Company is also negotiating to obtain marketing rights to digital dental
x-ray technology through a possible joint venture or through an exclusive
worldwide distribution agreement. This technology, if successfully developed or
obtained through a marketing agreement, would enable the Company to provide
29
<PAGE>
a more user-friendly digital x-ray system comparable to functionally competitive
systems at a significantly lower price point. Digital x-ray systems, including
those currently on the market, reduce radiation exposure compared to
conventional x-ray systems and allow dentists to view x-ray images in real-time
without the time-consuming process of film development and eliminate the need to
use and dispose of chemicals required to develop conventional x-ray film. This
technology will allow database storage and recall of images for comparison
purposes. No assurance can be given that the Company will be able to acquire the
digital x-ray technology, or if the technology is acquired, that the Company
will be able to commercially exploit it. Additionally, the Company believes that
the teeth whitening and digital x-ray systems being considered by the Company
will require FDA approval prior to marketing, and as a consequence, the timing
of the domestic introduction of such products is uncertain. The Company will
determine whether or not to proceed with the marketing of such products based
upon the results of the development of the teeth whitening process and the
Company's negotiations with respect to the digital x-ray system.
MANUFACTURING AND COMPONENT PARTS
The Company assembles and tests the TeliCam System, as well as develops new
products, at its facility located in Irvine, California. With the exception of
the camera's CCU processor, the Company believes that there are multiple sources
from which it may purchase the components of the TeliCam System. The Company,
however, anticipates that it will obtain certain of the components of the
TeliCam System from a single, in the case of the CCU processor, or limited
number of sources of supply. Although the Company believes it will be able to
negotiate satisfactory alternative supply arrangements, 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. See "Risk
Factors--Dependence on Third Party Suppliers."
Effective October 1, 1996, the Company amended its distribution agreement
("BMC Distribution Agreement") with Boston Marketing, a licensed distributor of
the Teli manufactured CCD chip which includes the Teli CCU processor. Pursuant
to the BMC Distribution Agreement, the Company has the exclusive right (i) to
market certain Teli manufactured CCD chip assemblies with CCU processors (model
numbers CS6110 S/B with Frame Grabber, CS6110 P S/B with Frame Grabber and the
CS6110 S/B without Frame Grabber (each a "Teli Unit" and collectively the "Teli
Units")) to the dental market, and (ii) to use the "TeliCam" trademark. The Teli
Units are key components of the Company's intraoral digital cameras. See "--The
TeliCam System." The BMC Distribution Agreement has a five-year initial term.
The Company has agreed to purchase a minimum of 2,500 Teli Units per year for
each of the five years, at an initial price of $750 per Teli Unit, subject to
increase after October 1, 1998. The Company has the option to cancel the BMC
Distribution Agreement if any price increase is unacceptable. The Boston Market
Distribution Agreement is terminable by Boston Marketing if the Company fails to
meet its annual minimum purchase obligation. The term of the BMC Distribution
Agreement may be extended by mutual agreement of the Company and Boston
Marketing for an additional five year term. Management believes that, if
necessary, other CCD chips, CCU processors and frame grabbers could be obtained
from third-party suppliers on comparable terms, although a disruption in
supplies of components could extend for up to six months, which would materially
adversely affect the Company's operating results. See "Risk Factors--Dependence
on Third Party Suppliers."
BACKLOG
The Company generally does not operate with significant order backlog and a
substantial portion of its revenues in any quarter is derived from orders booked
in that quarter.
30
<PAGE>
MARKETING AND SALES
U.S. SALES AND DISTRIBUTION. The Company's domestic sales are made by four
full-time employees who are based at corporate headquarters, and a national
field force of independent sales representatives under the supervision of 16
independent Regional Managers. The Company's full time sales employees are
generally experienced in the business of marketing and distribution of intraoral
cameras to the dental industry. The Company markets its products through direct
mail solicitations, professional publications advertising, and attendance at
dental conferences. During 1996, the Company ran advertisements in "Dental
Products Report" and attended in excess of 70 dental conferences and trade
shows. In addition, the Company has sold TeliCam Systems to five dental schools
including the University of Chicago, Tufts University and the University of
Louisville. The Company believes that these and anticipated future dental school
sales will generate additional interest in, as well as familiarity with, the
Company's products at the initial stages of a dental professional's career. In
the U.S. dental marketplace, the Company's marketing campaign has focused on the
advantages of the intra-office networking capabilities and the significantly
lower price of the TeliCam System.
INTERNATIONAL SALES AND DISTRIBUTION. In the international market, the
Company sells the TeliCam System through independent dealers and distributors.
Presently, the Company has six contracts with independent distributors, which
agreements cover key international markets including Northern and Western
Europe, the Middle East, the Far East, Russia, Australia, Canada and South
America. These distributors provide important support, including customer
support and product service, to customers in each of their respective countries.
Under an agreement with Boston Marketing, Boston Marketing receives a 15%
commission on all sales made by the Company in the People's Republic of China,
and a 12% commission on all sales made by the Company in Japan. Hiroki Umezaki,
a former officer, director and principal stockholder of the Company is a
substantial stockholder and president of Boston Marketing. This agreement
resulted in Boston Marketing earning $15,000 in commissions through December 31,
1996. See "Certain Transactions--Related Party Transactions." Furthermore,
Olympus Camera Company of Japan ("Olympus") has commenced purchases and has
recently signed a letter of intent with the Company relating to Olympus becoming
the exclusive distributor of the TeliCam System in Japan; however, no assurance
can be given that the parties will enter into a distribution agreement. The
Company's international sales, which commenced in April 1996, aggregated
approximately $2,200,000 through December 31, 1996. See "Risk
Factors--International Operations." Since printed copies of dental images are
not generally required by foreign insurance companies, the Company believes that
the TeliCam System Frame-grabber image capturing mechanism, which enables dental
professionals to avoid the costs of external capture devices, and their
requisite networking demands, makes the TeliCam System particularly attractive
in international markets. The Company currently does not intend to market the
InTELInet network outside the United States.
TRAINING, CUSTOMER SUPPORT AND PRODUCT SERVICE
Management believes that operating the TeliCam System requires very little
training. Nevertheless, as part of the Company's customer service program, the
sales representative or international distributor responsible for the sale of
the TeliCam System schedules an installation and training appointment when the
system is delivered. In addition, the Company provides a TeliCam System
operating manual to its customers which provides answers to frequently asked
questions about the product's operations. The Company's technical support
personnel, and internationally, the support personnel of the Company's
distributors, are also available to answer customers telephone inquiries during
normal business hours. All TeliCam Systems come with a one-year complete parts
and labor warranty and extended warranties are also available. InTELInet
installation and maintenance is provided through independent installers retained
by the Company.
31
<PAGE>
PATENTS AND PROPRIETARY RIGHTS
The patents pertaining to the various components of the TeliCam System are
all owned by third parties. Pursuant to the Boston Marketing Distribution
Agreement, the Company has exclusive rights to market products which incorporate
the Teli Units to the dental market. Also pursuant to this agreement, the
Company has the rights to use the "TeliCam" trademark. See "Management--Related
Party Transactions."
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 is
implementing a policy that all 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 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.
GOVERNMENT REGULATION
The products which the Company sells are considered to be medical devices
and the Company is considered to be a medical device manufacturer and is subject
to control by, among other governmental entities, the FDA and the corresponding
agencies of the states and foreign countries in which the Company sells its
products. These regulations govern the introduction of new medical devices, the
observance of certain standards with respect to the manufacture and labeling of
medical devices, the maintenance of certain records and the reporting of
potential product problems and other matters. A failure to comply with such
regulations could have material adverse effects on the Company. See "Risk
Factors--Extensive Government Regulation."
The Federal Food, Drug and Cosmetic Act ("FDC Act") regulates medical
devices in the United States by classifying them into one of three classes based
on the extent of regulation believed necessary to ensure safety and
effectiveness. Class I devices are those devices for which safety and
effectiveness can reasonably be ensured through general controls, such as device
listing, adequate labeling, premarket notification and adherence to good
manufacturing practices ("GMP") as well as medical device reporting ("MDR"),
labeling and other regulatory requirements. Class II devices are those devices
for which safety
32
<PAGE>
and effectiveness can reasonably be ensured through the use of special controls,
such as performance standards, post-market surveillance and patient registries,
as well as adherence to the general controls provisions applicable to Class I
devices. Class III devices are devices which generally must receive premarket
approval by the FDA pursuant to a premarket approval ("PMA") application to
ensure their safety and effectiveness. Generally, Class III devices are limited
to life sustaining, life supporting or implantable devices; however, this
classification can also apply to novel technology or new intended uses or
applications for existing devices.
Before they can be marketed, most medical devices introduced to the United
States market are required by the FDA to secure either clearance of a pre-market
notification pursuant to Section 510(k) of the FDC Act (a "510(k) Notification")
or approval of a PMA. Obtaining approval of a PMA application can take several
years. In contrast, the process of obtaining 510(k) Notification clearance
generally requires a submission of substantially less data and generally
involves a shorter review period. Most Class I and Class II devices enter the
market via the 510(k) Notification procedure, while new Class III devices
ordinarily enter the market via the more rigorous PMA procedure. In general,
clearance of a 510(k) Notification may be obtained if a manufacturer or seller
of medical devices can establish that a new device is "substantially equivalent"
to a predicate device other than one that has an approved PMA. The claim for
substantial equivalence may have to be supported by various types of
information, including clinical data, indicating that the device is as safe and
effective for its intended use as its legally marketed equivalent device. The
510(k) Notification is required to be filed and cleared by the FDA prior to
introducing a device into commercial distribution. Market clearance for a 510(k)
Notification submission may take 3 to 12 months or longer. If the FDA finds that
the device is not substantially equivalent to a predicate device, the device is
deemed a Class III device, and a manufacturer or seller is required to file a
PMA application. Approval of a PMA application for a new medical device usually
requires, among other things, extensive clinical data on the safety and
effectiveness of the device. PMA applications may take years to be approved
after they are filed. In addition to requiring clearance or approval for new
medical devices, FDA rules also require a new filing and review period prior to
marketing a changed or modified version of an existing legally marketed device
if such changes or modifications could significantly affect the safety or
effectiveness of that device. The FDA also prohibits an approved device from
being promoted or marketed for unapproved applications.
Over time, the FDA has adopted classification regulations for certain
medical devices and has designated some of these devices as Class I, while
exempting certain of them from the 510(k) Notification requirements. The dental
burs currently sold by the Company's BDI subsidiary have been classified by the
FDA as Class I devices and are exempt from the 510(k) Premarket Notification
requirements. They are not exempt from GMP, medical device reporting, labeling
and other regulatory requirements. The FDA has not specifically classified
intraoral dental cameras. The FDA, however, has classified certain other
devices, including a surgical camera and a fiber-optic dental light, as Class I
devices exempt from 510(k) Notification and the Company believes that its
intraoral dental camera is likely to be treated in the same manner provided that
it continues to market this device only for use in assisting patient
communications and in providing a record in order to facilitate insurance
payment or reimbursement. While the Company believes its position is correct,
there can be no assurance that the FDA will agree with such position. If the FDA
disagrees, the Company will be required to file a 510(k) Notification and may be
required to suspend sales of the TeliCam System until FDA clearance is granted.
The Company does not promote the TeliCam System for diagnostic uses. If
intraoral dental cameras are marketed or promoted for diagnostic uses or for
treatment uses, the FDA takes the position that a 510(k) Notification must be
filed for clearance by the FDA.
The Company believes that it will be required to obtain FDA approval or
clearance prior to introduction of any teeth whitening and digital x-ray product
lines, if such product lines are, in fact, developed.
33
<PAGE>
Pursuant to FDA requirements, the Company has registered its manufacturing
facility with the FDA as a medical device manufacturer, and listed the medical
devices it manufactures. The Company also is subject to inspection on a routine
basis for compliance with FDA regulations. These regulations include those
covering GMP which require that the Company manufacture its products and
maintain its documents in a prescribed manner with respect to manufacturing,
testing and control activities. Further, the Company is required to comply with
other FDA requirements with respect to labeling, and the MDR regulations which
require that the Company provide Information to the FDA on deaths or serious
injuries alleged to have been associated with the use of its products, as well
as product malfunctions that are likely to cause or contribute to death or
serious injury if the malfunction were to recur. The Company believes that it is
currently in material compliance with all relevant GMP and MDR requirements.
In addition, the Company is required to be licensed as a medical device
manufacturer by the State of California. The Company has applied for such a
license to cover its manufacturing activities. In general, because of the
Company's belief that its products are Class I devices and exempt from 510(k)
Notification, the Company believes that the California Department of Health
Services, Food and Drug Branch ("California DHS") will permit the Company to
continue to manufacture and sell its products prior to the required prelicensing
inspection. Approval of the license generally requires that the Company comply
with the FDA's GMP, labeling and MDR regulations, as well as any other
applicable regulatory requirements. This State license is not transferable and
must be renewed annually.
Generally, if the Company is in compliance with FDA and California
regulations, it may market its devices in other states in the United States.
International sales of medical devices are also subject to the regulatory
requirements of each country, and in Europe, the regulations of the European
Union. The regulatory review process varies from country to country. The
Company, in general, will rely upon its distributors and sales representatives
in the foreign countries in which it markets its products to ensure that the
Company complies with the regulatory laws of such countries. The Company
believes that its international sales to date have been in compliance with the
laws of the foreign countries in which it has made sales. Failure to comply with
the laws of such countries could have a material adverse effect on the Company's
operations and, at the very least, could prevent the Company from continuing to
sell products in such countries. Exports of Class I and Class II medical devices
are also subject to certain limited FDA regulatory controls.
PRODUCT LIABILITY AND INSURANCE
The nature of the Company's present and planned products may expose the
Company to product liability risks. No product liability claims have been
brought against the Company to date. 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 such 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. Product liability claims or product recalls could have a material
adverse effect on the business and financial condition of the Company. In
addition, the Company is required under certain of its licensing agreements to
indemnify its licensors against certain product liability claims by third
parties.
COMPETITION
The distribution and manufacture of dental supplies and equipment is
intensely competitive. For example, there are at least five companies offering
intraoral camera systems which are competitive with the TeliCam System. Many of
the Company's competitors have greater financial and other resources than the
Company, and, consequently, such entities may be able to develop, manufacture,
market and/or distribute systems which are functionally similar or superior to
the Company's products. Moreover, significant price reductions by the Company's
competitors could result in a similar reduction in the Company's prices. Any
34
<PAGE>
of these competitive pressures may have a material adverse effect on operating
results. See "Risk Factors--Competition."
In the United States, the Company competes with other companies that sell
dental products, distributors and several major manufacturers of dental
products, primarily on the basis of price, customer service and value-added
services and products. The Company's principal domestic competitors are
Patterson Dental Co., Henry Schein, Inc., New Image Industries, Inc. and Ultrak.
The Company also faces competition in its international markets, where the
Company competes on the basis of price and product quality against the same
dental product distributors and manufacturers.
EMPLOYEES
At March 9, 1997, the Company had 46 full-time employees. Of these
employees, 25 were involved in production, 5 were in customer service, 10 were
in administration, 4 were engaged in sales and marketing, and 2 were involved in
engineering and research and development. The Company believes it has a good
relationship with its employees and none of its employees are represented by a
collective bargaining agreement.
PROPERTIES
The corporate headquarters and principal offices of the Company are located
in Westlake Village, California, consisting of approximately 3,900 square feet
space under a lease that expires on November 14, 2000 ("Office Lease"). The
Office Lease provides for aggregate minimum monthly rental payments of
approximately $5,800. In addition, the Company, on behalf of BDI, leases an
additional 605 square feet in Westlake Village, California ("BDI Lease"), at a
rental rate of approximately $844 per month, on a month-to-month basis. Further,
under a lease that expires on November 1, 1998 ("Plant Lease"), the Company has
approximately 5,700 square feet of space in a building in Irvine, California,
where it manufactures and distributes the TeliCam System and conducts research
and development activities. The rental payment under the Plant Lease is
approximately $5,310 per month. Both the Office Lease and the Plant Lease
require the Company to pay taxes, maintenance fees, insurance, and periodic rent
increases based on a published price index. The Company is currently looking for
additional facilities to replace or supplement the property which is subject to
the Plant Lease.
LEGAL PROCEEDINGS
There is no material litigation pending to which the Company is a party or
to which any of its property is subject.
35
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------------ --- ------------------------------------------------
<S> <C> <C>
Robert H. Gurevitch............................. 55 Chairman of the Board of Directors/Chief
Executive Officer/President/Secretary
Marvin H. Kleinberg............................. 68 Director
Jack D. Preston................................. 63 Director
Ronald E. Wittman............................... 50 Chief Financial Officer, Chief Accounting
Officer and Vice President
Dewey Perrigo................................... 43 Vice President of Sales
Merle Roberts................................... 47 Vice President of Manufacturing
</TABLE>
MR. GUREVITCH has been Chairman of the Board, Chief Executive Officer and
President of the Company since March 1996 and was appointed Secretary of the
Company in February 1997. Mr. Gurevitch founded DMD in October 1995 and was its
Chief Executive Officer until it was acquired by the Company. From November 1994
until February 1995, Mr. Gurevitch served as Chief Executive Officer of Dycam,
Inc., a manufacturer and marketer of digital cameras. From 1987 until his
retirement in August 1993, Mr. Gurevitch served as Chief Executive Officer and
Chairman of the Board at New Image, a manufacturer and distributor of intraoral
cameras.
MR. KLEINBERG has been a director of the Company since March 1996. Mr.
Kleinberg is a founding partner of the law firm Arant, Kleinberg, Lerner & Ram
LLP, and has been a member of that law firm and its various predecessors since
1980. Mr. Kleinberg has practiced in the area of intellectual property law since
1954. Mr. Kleinberg serves as an adjunct lecturer in Patent Law at the Franklin
Pierce Law Center and is on the advisory council of the PTC Foundation, which
publishes "IDEA."
JACK D. PRESTON, D.D.S. has been a director of the Company since March 1997.
He is the Don and Sybil Harrington Foundation Professor of Esthetic Dentistry at
the University of Southern California School of Dentistry. Dr. Preston has been
on the teaching staff there since 1979, and he also serves as Chairman of the
Department of Oral and Maxillofacial Imaging and the Director of Informatics.
Dr. Preston is also currently a Diplomate of the American Board of
Prosthodontics as well as the Editor-in-Chief of the International Journal of
Prosthodontics. Dr. Preston is an international lecturer on various aspects of
dentistry, an author of three textbooks and numerous articles and invited
chapters, and is widely considered to be a leading expert on current and future
applications of computer technology in dentistry.
MR. WITTMAN has been the Chief Financial Officer of the Company since
September 1996 and was elected Vice President of the Company in March 1997.
Mr.Wittman was also elected director of the Company in February 1997. From
September 1994 to September 1996, Mr. Wittman was the Vice President of Finance
and Administration and the Chief Financial Officer of FMS Corporation, a
manufacturer of defense related products which declared bankruptcy in 1995. Mr.
Wittman served as Corporate Controller of Whittaker Corporation, an aerospace,
defense electronics and manufacturing corporation from May 1993 to September
1994. From 1987 to May 1993, Mr. Wittman served as Corporate Controller at DAK
Industries, a manufacturer and distributor of consumer electronics, computers,
and computer software.
MR. PERRIGO has served as the Company's Vice President of Sales since March
1996. Commencing in October 1995, he served in the same capacity at DMD. From
1988 through September 1995, Mr. Perrigo served as the Director of Sales of New
Image.
MR. ROBERTS joined the Company in February 1996 as Director of Operations.
On July 1, 1996, he was promoted to Vice President of Manufacturing. From 1988
until May 1994, Mr. Roberts served as Materials
36
<PAGE>
Manager for Advanced Interventional Systems, a medical laser manufacturer. From
June 1994 until January 1996 Mr. Roberts was an independent consultant providing
materials, management and purchasing services to a variety of businesses. Mr.
Roberts has taught material management and related subjects at several Southern
California colleges and universities, and has served as a professional
consultant on these topics.
Directors are elected annually to serve until the next annual meeting of
stockholders and until their successors are elected and qualified. Officers
serve at the pleasure of the Board of Directors subject to other contractual
arrangements.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board maintains an Audit Committee consisting of Mr. Kleinberg and Dr.
Preston, each of whom are independent directors. The Audit Committee reviews
with the Company's independent accountants, the scope and timing of their audit
services, any other services they are asked to perform, and the report of
independent accountants on the Company's financial statements following
completion of their audit of the Company's financial statements. In addition,
the Audit Committee makes an annual recommendation to the Board of Directors
concerning the appointment of independent accountants for the coming year.
The Board also maintains a Compensation Committee consisting of Messrs.
Gurevitch and Kleinberg and Dr. Preston. The Compensation Committee is
responsible for the review of compensation and benefits paid to the Company's
executive officers and the review of general policy matters relating to
compensation and benefits of all of the Company's employees. Pursuant to the
Underwriting Agreement, for a period of three years from the date of this
Prospectus, all compensation and other arrangements between the Company and its
executive officers, directors and affiliates must be approved by the
Compensation Committee, a majority of whose members must be independent.
DIRECTOR COMPENSATION
The Company's directors receive no cash compensation for serving as
directors. During 1996, each member of the Board of Directors was granted a
fully vested option to purchase 5,120 Shares of the Common Stock at an exercise
price equal to the fair market value of the Common Stock on the date of grant.
On a going forward basis, the Company currently intends to compensate its
independent directors in the amount of $500 per meeting attended and to grant
options to its directors, for serving as directors. Dr. Preston was granted
options to purchase 33,000 shares of Common Stock, vesting in three annual
installments of 11,000 shares on each of the first three anniversaries of his
service as a director.
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation paid
by the Company during the year ended December 31, 1996 to Robert H. Gurevitch,
the principal executive officer of the Company, and each of the Company's most
highly compensated executive officers whose salary and bonus exceeded $100,000
during such year ("Named Executive Officers").
37
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
-------------
ANNUAL COMPENSATION NUMBER OF
YEAR ENDED SECURITIES
DECEMBER 31, --------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION 1996 SALARY BONUS OPTIONS(1) COMPENSATION
- --------------------------------------------- --------------- ---------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Robert H. Gurevitch ......................... 1996 $ 152,300 -- 5,120 $ 1,400
Chairman of the Board of Directors, Chief
Executive Officer, President, and Secretary
Dewey Perrigo ............................... 1996 103,800 -- 34,133 2,700
Vice President of Sales
</TABLE>
(1) Certain of the officers of the Company routinely receive other benefits from
the Company, including travel reimbursement, the amounts of which are
customary in the industry. The Company has concluded, after reasonable
inquiry, that the aggregate amounts of such benefits during fiscal 1996, did
not exceed the lesser of $50,000 or 10% of the compensation set forth above
as to any named individual.
EMPLOYMENT AGREEMENTS WITH EXECUTIVE OFFICERS
The Company and Mr. Gurevitch have entered into an agreement whereby Mr.
Gurevitch has agreed to serve as Chairman of the Board of Directors and Chief
Executive Officer of the Company until October 1, 1999. Mr. Gurevitch's
compensation will include salary at a minimum annual base compensation rate of
$180,000 prior to March 1, 1997 and $275,000 thereafter, plus a car allowance
and a standard benefits package. Pursuant to the terms of that agreement, Mr.
Gurevitch may not have any ownership interest, or participate in any way, in any
venture which competes with the Company for a period of three years after the
termination of that agreement; provided, however, that the Company must pay Mr.
Gurevitch a fee of $10,000 annually for each of the three years.
The Company has also entered into an agreement with Mr. Perrigo pursuant to
which Mr. Perrigo has agreed to serve as the Company's Vice President of Sales
until October 1, 1999. Mr. Perrigo's compensation will include salary at a
minimum annual base compensation rate of $100,000 prior to March 1, 1997 and
$150,000 thereafter, plus a car allowance and a standard benefits package.
1997 STOCK INCENTIVE PLAN
INTRODUCTION. The Company adopted the DENTAL/MEDICAL DIAGNOSTIC SYSTEMS,
INC. 1997 Stock Incentive Plan ("1997 Plan") on February 11, 1997. The 1997 Plan
was approved by the Company's shareholders at the annual meeting held on March
24, 1997, subject to the qualification of the 1997 Plan with the California
Department of Corporations. The 1997 Plan provides for the grant of stock awards
to directors, employees, officers and consultants of the Company. Subject to
adjustment for stock splits, stock dividends and other similar events, 350,000
shares of the Company's Common Stock have been reserved for awards under the
1997 Plan and options to purchase 25,000 shares of Common Stock have been
granted.
The 1997 Plan will be administered by the Board of Directors or another
committee of two or more non-employee directors appointed by the Board
("Committee"), each of whom shall be an "outside director" for purposes of
162(m) of the Internal Revenue Code of 1986, as amended. The Committee shall
have power, subject to, and within the limitations of, the express provisions of
the 1997 Plan to select the persons to whom awards will be granted, and to
determine the terms and conditions of the awards.
38
<PAGE>
AWARDS. The 1997 Plan authorizes the Committee to enter into any type of
arrangement with an eligible employee that, by its terms, involves or might
involve the issuance of shares of Common Stock or an option, stock appreciation
right or similar right with an exercise or conversion privilege at a price
related to the Common Stock. Awards under the plans may not be issued at less
than the fair market value of the underlying shares of Common Stock. Awards
under the 1997 Plan are not restricted to any specified form or structure and
may include arrangements such as sales, bonuses and other transfers of stock,
stock options, reload stock options and stock appreciation rights. An award may
consist of one such arrangement or two or more such arrangements in tandem or in
the alternative. An award may provide for the issuance of Common Stock for any
lawful consideration, including services rendered or, to the extent permitted by
applicable state law, to be rendered. Currently, Delaware law does not permit
the issuance of common stock for services to be rendered.
An award granted under the 1997 Plan may include a provision conditioning or
accelerating the receipt of benefits, either automatically or in the discretion
of the Committee, upon the occurrence of specified events, including a change of
control of the Company, an acquisition of a specified percentage of the voting
power of the Company or a dissolution, liquidation, merger, reclassification,
sale of substantially all of the property and assets of the Company or other
significant corporate transaction. Any stock option granted may be an incentive
stock option within the meaning Section 422 of the Code or a nonqualified stock
option.
An award under the 1997 Plan may permit the recipient to pay all or part of
the purchase price of the shares or other property issuable pursuant to the
award and/or to pay all or part of the recipient's tax withholding obligations
with respect to such issuance, by delivering previously owned shares of capital
stock of the Company or other property, or by reducing the amount of shares or
other property otherwise issuable pursuant to the award.
AMENDMENTS. The Committee may amend or terminate the 1997 Plan at any time
and in any manner, subject to the following: (1) no recipient of any award may,
without his or her consent, be deprived thereof or of any of his or her rights
thereunder or with respect thereto as a result of such amendment or termination;
and (2) if any rule or regulation promulgated by the Commission, the Internal
Revenue Service or any national securities exchange or quotation system upon
which any of the Company's securities are listed requires that any such
amendment be approved by the Company's stockholders, then such amendment will
not be effective until it has been approved by the Company's stockholders.
FORM S-8 REGISTRATION. The Company intends to file a registration statement
under the Securities Act to register the 350,000 shares of Common Stock reserved
for issuance under the 1997 Plan. Pursuant to an agreement with the Underwriter,
such registration statement may not be filed until at least one year following
the date of this Prospectus and will become effective immediately upon filing
with the Commission.
39
<PAGE>
The following table sets forth information concerning individual grants of
stock options made during the year ended December 31, 1996 to each of the Named
Executive Officers.
OPTION GRANTS IN 1996
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------------------
NUMBER OF PERCENT OF TOTAL
SECURITIES OPTIONS GRANTED
UNDERLYING TO EMPLOYEES IN
OPTIONS TEN-MONTH PERIOD EXERCISE OF BASE EXPIRATION
NAME GRANTED ENDED DECEMBER 31 PRICE ($/SH) DATE
- ---------------------------------------------------- ----------- ----------------- ----------------- -----------
<S> <C> <C> <C> <C>
Robert H. Gurevitch................................. 5,120 4% $ .88 03/04/01
Dewey Perrigo....................................... 34,133 24% 2.93 03/31/06
</TABLE>
FISCAL YEAR END OPTION VALUES
No options were exercised by the Named Executive Officers during the year
ended December 31, 1996. The following table shows the number of shares covered
by both exercisable and unexercisable employee stock options, as of December 31,
1996.
FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED OPTIONS VALUE OF UNEXERCISED
AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1996 DECEMBER 31, 1996
------------------------------ ------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------------------------- ----------- ----------------- ----------- -----------------
<S> <C> <C> <C> <C>
Robert H. Gurevitch.................................... 5,120 -- $ 21,760 --
Dewey Perrigo.......................................... 34,133 -- 75,092 --
</TABLE>
40
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth as of May 9, 1997 certain information
relating to the ownership of the Common Stock by (i) each person known by the
Company to be the beneficial owner of more than 5% of the outstanding shares of
the Common Stock, (ii) each of the Company's directors, (iii) each of the
Company's Named Executive Officers, and (iv) all of the Company's executive
officers and directors as a group. Except as may be indicated in the footnotes
to the table and subject to applicable community property laws, each of such
persons has the sole voting and investment power with respect to the shares
owned. Unless otherwise indicated, the address for each of the principal
stockholders is c/o Dental/Medical Diagnostic Systems, Inc., 200 N. Westlake
Boulevard, Suite 202, Westlake Village, California 91362.
<TABLE>
<CAPTION>
PERCENTAGE
NUMBER OF SHARES ----------------------
BENEFICIALLY BEFORE AFTER
NAME OWNED(1) OFFERING OFFERING
- --------------------------------------------------------------------------- ----------------- ---------- ----------
<S> <C> <C> <C>
Robert H. Gurevitch(2)..................................................... 875,500 29.3% 18.3%
Marvin H. Kleinberg(2)..................................................... 5,120 * *
Dewey Perrigo(3)........................................................... 119,464 4.0% 2.5%
Richard M. Bliss........................................................... 224,592 7.5% 4.7%
Jack D. Preston(4)......................................................... 0 * *
G. Tyler Runnels(5) ....................................................... 200,699 6.7% 4.2%
T.R. Winston & Co., Inc.
1999 Avenue of the Stars, Suite 1950
Los Angeles, California 90067
All Officers and Directors as a Group (6 Persons)(6)....................... 1,017,150 33.4% 21.0%
</TABLE>
- ------------------------
* Less than one percent.
(1) Beneficial ownership has been determined in accordance with Rule 13d-3 under
the Exchange Act. Pursuant to the rules of the Securities and Exchange
Commission, shares of Common Stock which an individual or group has a right
to acquire within 60 days pursuant to the exercise of options or warrants
are deemed to be outstanding for the purpose of computing the percentage
ownership of such individual or group, but are not deemed to be beneficially
owned and outstanding for the purpose of computing the percentage ownership
of any other person shown in the table.
(2) Includes 5,120 shares of Common Stock underlying options which were
exercisable on or which will become exercisable within 60 days of March 31,
1997.
(3) Includes 34,133 shares of Common Stock underlying options which were
exercisable on or which will become exercisable within 60 days of March 31,
1997.
(4) Does not include 33,000 shares of Common Stock underlying options which will
become exercisable in three installments of 11,000 shares on each of
February 28, 1998, 1999, 2000 if, on such respective dates, Dr. Preston is
serving as director.
(5) Includes 40,959 shares of Common Stock underlying options which were
exercisable on or which will become exercisable within 60 days of March 31,
1997.
(6) Includes 61,439 shares of Common Stock underlying options which were
exercisable on or which will become exercisable within 60 days of March 31,
1997 and excludes 25,000 shares of Common Stock underlying options granted
to the Company's Chief Financial Officer which will become exercisable after
July 9, 1997.
41
<PAGE>
CERTAIN TRANSACTIONS
In October 1996, the Company entered into an agreement with Boston Marketing
pursuant to which the Company obtained worldwide marketing rights in the dental
market for the Teli Units as well as the right to use the "TeliCam" trademark.
See "Business--Manufacturing and Component Parts." At the time the Company
entered into this agreement, Hiroki Umezaki was an officer, director and
principal stockholder of the Company and is a substantial stockholder and the
President of Boston Marketing. At December 31, 1996, the Company owed Boston
Marketing approximately $247,500 in connection with Teli Units purchased by the
Company prior to that date. From March 3, 1996 to December 31, 1996, the Company
purchased 2,509 Teli Units at an aggregate cost of $1,881,750 from Boston
Marketing. In addition, the Company has an agreement with Boston Marketing
pursuant to which Boston Marketing is entitled to receive a 15% commission on
all sales made by the Company in the People's Republic of China, and a 12%
commission on all sales made by the Company in Japan. This agreement resulted in
Boston Marketing earning $15,000 in commissions through December 31, 1996.
From December 1995 through February 1996, Robert H. Gurevitch, Chairman of
the Board and Chief Executive Officer of the Company, and Boston Marketing, an
affiliate of Mr. Umezaki, each loaned the Company $177,015 and $200,000,
respectively. The promissory notes evidencing such loans bear interest at 6% per
annum and were originally payable within six months. On February 26, 1996, the
Company repaid $50,000 to each of Mr. Gurevitch and Boston Marketing. No
interest has been paid on the remaining principal balance of these notes
although interest has been accrued on the Company's books. In November 1996, Mr.
Gurevitch and Boston Marketing each agreed to extend the term of their
respective notes until the earlier to occur of: (i) twenty-four months following
the closing of the Bridge Financing; (ii) at such time as the Company receives
proceeds from the sale of the Common Stock in connection with this Offering; or
(iii) the repayment of the Bridge Notes in full. A portion of the proceeds of
this Offering will be used to satisfy these obligations. See "Use of Proceeds."
In addition, on April 11, 1996, Boston Marketing loaned the Company an
additional $25,000 under similar terms ("April Loan"). The April Loan was repaid
in full on August 26, 1996.
Mr. Gurevitch and Mr. Umezaki have guaranteed the performance by the Company
under the Company's leases for its Irvine and Westlake premises, and Mr.
Gurevitch has also personally guaranteed the Company's credit card processing
agreement with the Checkfree Corporation. The Company intends to attempt to
obtain releases from the recipients of each of these guarantees and it is
possible that the elimination of the availability of these guarantees may
require the Company to post collateral or incur increased expense.
The Company believes that the transactions described above were on terms no
less favorable to the Company than could be obtained in arm's length
transactions from unaffiliated third parties. The Company has adopted a policy
whereby all future transactions between the Company and its officers, directors,
principal stockholders or affiliates will be approved by a committee of the
Board of Directors, a majority of the members of which shall be independent
directors, or, if required by law, a majority of disinterested directors, and
will be on terms no less favorable to the Company than could be obtained in
arm's length transactions from unaffiliated third parties.
42
<PAGE>
DESCRIPTION OF SECURITIES
AUTHORIZED STOCK
The authorized capital stock of the Company consists of 20,000,000 shares of
Common Stock, $0.01 par value per share, and 1,000,000 shares of Preferred
Stock, $0.01 par value per share ("Preferred Stock"). As of the date of this
Prospectus, 2,985,537 shares of Common Stock are outstanding. Upon completion of
this Offering, there will be 4,785,537 shares of Common Stock outstanding
(5,055,537 if the Underwriters over-allotment option is exercised in full).
COMMON STOCK
Subject to any preference that may be applicable to any outstanding shares
of Preferred Stock, holders of Common Stock are entitled to receive dividends
when and if declared by the Board of Directors out of funds of the Company
legally available therefor. Any such dividends may be paid in cash, property or
shares of the Company's Common Stock. The Company has no present intention to
pay dividends. See "Dividend Policy." Each holder of Common Stock is entitled to
cast one vote per share in all matters to be voted upon by stockholders.
Cumulative voting is not allowed in the election of directors or for any other
purpose. Therefore, the holders of more than 50% of the outstanding Common Stock
can elect all directors. The holders of a majority of the outstanding Common
Stock constitute a quorum at any meeting of stockholders and the vote by the
holders of a majority of the outstanding shares is required to effect certain
fundamental corporate changes, such as liquidation, merger or amendment of the
Amended and Restated Certificate of Incorporation. The shares of the Common
Stock have no preemptive or conversion rights, or redemption or sinking fund
provisions. In the event of any liquidation, dissolution or winding up of the
affairs of the Company, whether voluntary or otherwise, after payment or
provision for payment of the debts and other liabilities of the Company,
including the liquidation preference on the Preferred Stock of the Company, if
any, each holder of the Common Stock will be entitled to receive a pro rata
portion of the remaining net assets of the Company, if any.
All of the issued and outstanding shares of Common Stock have been duly
authorized and validly issued and are fully paid and non-assessable, and the
shares of Common Stock issued upon completion of this Offering have been duly
authorized and, when issued, will be fully paid and non-assessable.
PREFERRED STOCK
The Company's Board of Directors may without further action by the Company's
stockholders, from time to time, direct the issuance of shares of the Preferred
Stock in series and may, at the time of issuance, determine the rights,
preferences and limitations of each series. The holders of the Preferred Stock
normally would be entitled to receive a preference payment in the event of any
liquidation, dissolution or winding-up of the Company before any payment is made
to the holders of the Common Stock. At the present time, no shares of Preferred
Stock are outstanding and the Company does not presently intend to issue any
shares of Preferred Stock.
The overall effect of the ability of the Company's Board of Directors to
issue the Preferred Stock may be to render more difficult the accomplishment of
mergers or other takeover or change in control attempts. To the extent that this
ability has this effect, removal of the Company's incumbent Board of Directors
and management may be rendered more difficult. Further, this may have an adverse
impact on the ability of stockholders of the Company to participate in a tender
or exchange offer for the Common Stock and in so doing diminish the market value
of the Common Stock.
WARRANTS
The Warrants will be issued in registered form pursuant to the terms of a
Warrant Agreement dated as of May 8, 1997 ("Warrant Agreement") between the
Company and American Stock Transfer and Trust
43
<PAGE>
Company, New York, New York, as Warrant Agent. Reference is made to said Warrant
Agreement (which has been filed as an Exhibit to the Registration Statement of
which this Prospectus is a part) for a complete description of the terms and
conditions thereof. The description herein is qualified in its entirety by
reference to the Warrant Agreement.
Unless previously redeemed, each Warrant (including the Warrants converted
from the Bridge Warrants) entitles the registered holder thereof to purchase one
share of Common Stock at any time during the four-year period commencing one
year from the date of this Prospectus, at a per share price equal to $5.00
subject to adjustment in certain circumstances.
Unless extended by the Company at its discretion, the Warrants will expire
at 5:00 p.m., New York time, on the fifth anniversary of the date of this
Prospectus. In the event a holder of the Warrants fails to exercise the Warrants
prior to their expiration, the Warrants will expire and the holder thereof will
have no further rights with respect to the Warrants.
The Company may, with the prior written consent of the Underwriter, redeem
the Warrants at any time once they become exercisable, for a redemption price of
$.01 per Warrant if notice of not less than 30 days is given and the last sale
price of the Common Stock has been at least 190% of the then current exercise
price of the Warrants on each of the ten consecutive trading days ending on the
third day prior to the day on which notice is given. The Warrants will be
exercisable until the close of business on the date fixed for redemption.
The Company will be able to issue shares of its Common Stock upon exercise
of the Warrants only if there is then a current prospectus relating to such
Common Stock, and only if such Common Stock is qualified for sale or exempt from
qualification under applicable state securities laws of the jurisdictions in
which the various holders of the Warrants reside. Although the Company has
undertaken and intends to file and keep current a prospectus which will permit
the exercise of the Warrants and to qualify for sale the shares of Common Stock
underlying the Warrants in those states in which the Securities are to be
offered until the expiration of the Warrants, subject to the terms of the
Warrant Agreement, there can be no assurance that the Company will be able to do
so. See "Risk Factors -- Current Prospectus and State Blue Sky Registration
Required to Exercise Warrants."
The exercise prices and number of shares of Common Stock or other securities
issuable on exercise of the Warrants are also subject to adjustment in the event
of a stock dividend, stock split, recapitalization, reorganization, or merger or
consolidation of the Company or other similar event.
The Warrants may be exercised upon surrender of the Warrant certificate on
or prior to the expiration date at the offices of the Warrant Agent, with the
exercise form on the reverse side of the Warrant certificate completed and
executed as indicated, accompanied by full payment of the exercise price (by
certified check payable to the Company) to the Warrant Agent for the number of
warrants being exercised. The Company is required to keep available a sufficient
number of authorized shares of the Common Stock to permit exercise of the
Warrants. The Warrant holders do not have the rights or privileges of the
holders of Common Stock prior to exercise of the Warrants.
DELAWARE LAW
The Company is subject to Section 203 of the DGCL, which prevents an
"interested stockholder" (defined in Section 203, generally, as a person owing
15% or more of a corporation's outstanding voting stock) from engaging in a
"business combination" with a publicly held Delaware corporation for three years
following the date such person became an interested stockholder, unless: (i)
before such person became an interested stockholder, the board of directors of
the corporation approved the transaction in which the interested stockholder
became an interested stockholder or approved the business combination; (ii) upon
consummation of the transaction that resulted in the interested stockholder's
becoming an interested stockholder, the interested stockholder owns at least 85%
of the voting stock of the corporation
44
<PAGE>
outstanding at the time the transaction commenced (subject to certain
exceptions); or (iii) following the transaction in which such person became an
interested stockholder, the business combination is approved by the board of
directors of the corporation and authorized at a meeting of stockholders by the
affirmative vote of the holders of 66% of the outstanding voting stock of the
corporation not owned by the interested stockholder. A "business combination"
includes mergers, stock or asset sales and other transactions resulting in a
financial benefit to the interested stockholder.
The provisions of Section 203 of the DGCL could have the effect of delaying,
deferring or preventing a change in control of the Company.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Amended and Restated Certificate of Incorporation and Bylaws
provide for the indemnification by the Company of each director and officer of
the Company to the fullest extent permitted by the Delaware General Corporation
Law ("DGCL"), as the same exists or may hereafter be amended. Section 145 of the
DGCL provides in relevant part that a corporation may indemnify any person
against whom any pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the corporation) is threatened by reason of the fact that such person
is or was a director or officer of the corporation against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding if such person acted in good faith and in a manner such person
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe such person's conduct was unlawful. In addition,
Section 145 provides that a corporation may indemnify any such person against
expenses (including attorneys' fees) actually and reasonably incurred by such
person in connection with the defense or settlement of such action or suit if
such person acted in good faith and in a manner such person reasonably believed
to be in or not opposed to the best interests of the corporation and except that
no indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Delaware Court of Chancery or the court
in which such action or suit was brought shall determine upon application that,
despite the adjudication of liability but in view of all the circumstances of
the case, such person is fairly and reasonably entitled to indemnity for such
expenses which the Delaware Court of Chancery or such other court shall deem
proper. Delaware law further provides that nothing in the above-described
provisions shall be deemed exclusive of any other rights to indemnification or
advancement of expenses to which any person may be entitled under any bylaw,
agreement, vote of stockholders or disinterested directors or otherwise.
The Company's Amended and Restated Certificate of Incorporation also
provides that a director of the Company shall not be liable to the Company or
its stockholders for monetary damages for breach of fiduciary duty as a
director. Section 102(b)(7) of the Delaware General Corporation Law provides
that a provision so limiting the personal liability of a director shall not
eliminate or limit the liability of a director for, among other things: breach
of the duty of loyalty; acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of the law; unlawful payment of
dividends; and transactions from which the director derived an improper personal
benefit.
The Company has entered into separate but identical indemnity agreements
(the "Indemnity Agreements") with each director of the Company and certain of
its officers (the "Indemnitees"). Pursuant to the terms and conditions of the
Indemnity Agreements, the Company has agreed to indemnify each Indemnitee
against any amounts which he or she becomes legally obligated to pay in
connection with any claim against him or her based upon any action or inaction
which he or she may commit, omit or suffer while acting in his or her capacity
as a director and/or officer of the Company or its subsidiaries; provided,
however, that Indemnitee acted in good faith and in a manner Indemnitee
reasonably believed to be in or
45
<PAGE>
not opposed to the best interests of the Company and, with respect to any
criminal action, had no reasonable cause to believe Indemnitee's conduct was
unlawful.
At present there is no pending litigation or proceeding involving a
director, officer, employee or agent of the Company where indemnification will
be required or permitted. The Company is not aware of any threatened litigation
or proceeding that may result in a claim of indemnification by any director or
officer. Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission
("Commission") such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
The Company has purchased a Director and Officer and Corporate Reimbursement
("D&O") policy from an A or higher rated insurance Company admitted in
California. The D&O policy provides coverage for certain claims made against
directors and officers of the Company that are typically covered by standard D&O
policies. In addition, the D&O policy provides coverage for claims made against
the Company for certain "securities claims" as defined by the policy. The D&O
policy is a claims-made policy and has aggregate limits of $3,000,000.
TRANSFER AGENT, REGISTRAR AND WARRANT AGENT
American Stock Transfer and Trust Company, New York, New York, is the
transfer agent and registrar for the Common Stock and warrant agent for the
Warrants.
46
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have outstanding
4,785,537 shares of Common Stock (5,055,537 shares if the Underwriter's
over-allotment option is exercised in full), not including shares of Common
Stock issuable upon exercise of outstanding options or warrants. For purposes of
determining dates upon which outstanding shares of Common Stock may first be
sold, it is assumed that the amendment to Rule 144 adopted by the Commission on
February 20, 1997 is currently in effect.
- Of these outstanding shares, 1,800,000 shares of Common Stock sold to the
public in this Offering may be freely traded without restriction or
further registration under the Securities Act, except that any shares that
may be held by an "affiliate" of the Company (as that term is defined in
the rules and regulations under the Securities Act) may be sold only
pursuant to a registration under the Securities Act or pursuant to an
exemption from registration under the Securities Act, including the
exemption provided by Rule 144 adopted under the Securities Act.
- Of the 2,985,537 shares of Common Stock which were outstanding prior to
the completion of this Offering, 1,054,316 may be freely traded without
restriction and without registration under the Securities Act. The
remaining 1,931,221 shares of Common Stock which were outstanding prior to
the completion of this Offering are restricted by contract or are
"restricted securities" as that term is defined in Rule 144 under the
Securities Act ("Restricted Shares") and may not be sold unless such sale
is registered under the Securities Act, or is made pursuant to an
exemption from registration under the Securities Act, including the
exemption provided by Rule 144. Of these restricted shares, 1,385,100
shares become eligible for resale under Rule 144 commencing in March 1997,
204,794 shares become eligible commencing in January 1998 and 341,327
shares become eligible commencing in February 1998. Of the 1,931,221
Restricted Shares, 68,265, 546,117 and 1,180,303 shares are subject to
contractual restrictions pursuant to which the holders have agreed not to
sell such shares without prior written consent of the Underwriter for a
period of 12 months, 13 months and 18 months, respectively from the date
of this Prospectus. In addition, the 1,180,303 shares subject to the
18-month lock-up with the Underwriter may not be sold, pledged or
otherwise transfered for a period of 12 months from the date of this
Prospectus without the consent of the Pennsylvania Securities Commission.
The Company has agreed to file a registration statement prior to December
31, 1997 relating to the offer and sale of 546,117 shares of Common Stock
that would otherwise become eligible for resale under Rule 144 in January
and February of 1998, all of which shares, however, will remain subject to
contractual restrictions on resale expiring 13 months from the date of
this Prospectus.
In general, under Rule 144 as currently in effect, a stockholder (or
stockholders whose shares are aggregated) who has beneficially owned any
restricted securities for at least one year (including a stockholder who may be
deemed to be an affiliate of the Company), will be entitled to sell, within any
three-month period, that number of shares that does not exceed the greater of
(i) 1% of the then outstanding shares of Common Stock or (ii) the average weekly
treading volume of the Common Stock during the four calendar weeks preceding the
date on which notice of such sale is given to the Commission, provided certain
public information, manner of sale and notice requirements are satisfied. A
stockholder who is deemed to be an affiliate of the Company, including members
of the Board of Directors and senior management of the Company, will still need
to comply with the restrictions and requirements of Rule 144, other than the
one-year holding period requirement, in order to sell shares of Common Stock
that are not restricted securities, unless such sale is registered under the
Securities Act. A stockholder (or stockholders whose shares are aggregated) who
is deemed not to have be an affiliate of the Company at any time during the 90
days preceding a sale by such stockholder, and who has beneficially owned
restricted securities for at least two years, will be entitled to sell such
shares under Rule 144 without regard to the volume limitations described above.
47
<PAGE>
No predictions can be made of the effect, if any, that future sales of
shares or the availability of shares for sale will have on the market price
prevailing from time to time. Nevertheless, sales of substantial amounts of the
Common Stock in the public market could adversely affect the then-prevailing
market price.
48
<PAGE>
SELLING SECURITYHOLDERS AND PLAN OF DISTRIBUTION
The Company has agreed to register for sale under the Securities Act
concurrently with this Offering the Warrants converted from the Bridge Warrants.
An aggregate of 1,600,000 Warrants may be offered and sold pursuant to this
Prospectus by the Selling Securityholders. The Warrants offered by the Selling
Securityholders are not part of the underwritten Offering. The Company will not
receive any of the proceeds from the sale of the Warrants by the Selling
Securityholders.
The Warrants registered for sale on behalf of the Selling Securityholders
under the Registration Statement of which this Prospectus forms a part may be
offered and sold from time to time in regular brokerage transactions (which may
include block transactions) on the Nasdaq SmallCap Market and the Boston Stock
Exchange, in transactions directly with market makers, in certain
privately-negotiated transactions, or through a combination of such methods of
sale, at fixed prices which may be changed, at market prices prevailing at the
time of sale or at negotiated prices. The Selling Securityholders may effect
such transactions by selling their Warrants directly to purchasers or to or
through broker-dealers (including the Underwriter), which may act as agents or
principals. Such broker-dealers may receive compensation in the form of
discounts, concessions, or commissions from the Selling Securityholders and/or
the purchasers of the Warrants for whom such broker-dealers may act as agents or
to whom they sell as principal, or both. The Selling Securityholders have
advised the Company that they have not entered into any agreements,
understandings, or arrangements with any underwriters or broker-dealers
regarding the sale of their Warrants. The Selling Securityholders and any
broker-dealers that act in connection with the sale of the Warrants may be
deemed to be "underwriters" within the meaning of Section 2(11) of the
Securities Act.
The following table sets forth the name of each Selling Securityholder and
each Selling Optionholder and the number of Warrants or Option Shares registered
for resale on such party's behalf. All of such Warrants and Option Shares are
being registered for sale under the Registration Statement of which this
Prospectus forms a part, and the Company believes that all such Warrants and
Option Shares will be owned by the respective holders thereof following the
completion of this Offering and prior to resale. Notwithstanding that such
Warrants are being registered, the Selling Securityholders have agreed that none
of such Warrants may be sold prior to November 27, 1998 without the prior
written consent of the Underwriter. Notwithstanding the foregoing, the Selling
Securityholders will not be permitted to sell their Warrants for a period of
twelve months from the date of this Prospectus. The Underwriter may, depending
upon market conditions, release the lock-up after said twelve month period but
prior to November 27, 1998. The Option Shares are not subject to any contractual
resale restriction.
None of the Selling Securityholders has ever held any position or office
with the Company or had any other material relationship with the Company, nor do
any of the Selling Securityholders beneficially own any shares of Common Stock
of the Company at March 31, 1997. The Selling Optionholders, Messrs. Umezaki and
Kitano, are both former directors of the Company, and Mr. Umezaki is a party to
certain material transactions with the Company. See "Certain Transactions." To
the Company's knowledge, neither Mr. Umezaki nor Mr. Kitano is currently a
beneficial holder of any shares of the Company's Common Stock other than the
Option Shares issuable upon exercise of their respective options.
<TABLE>
<CAPTION>
NUMBER OF
WARRANTS
REGISTERED
FOR RESALE
-----------
<S> <C>
Bear Stearns Securities Corp. ................................................... 25,000
as IRA Custodian FBO Paul Breslow
Bear Stearns Securities Corp. ................................................... 50,000
as IRA Custodian FBO David J. Carr
Bear Stearns Securities Corp. ................................................... 25,000
as IRA Custodian FBO Sharon Carr
Henry M. Cohn ................................................................... 50,000
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF
WARRANTS
REGISTERED
FOR RESALE
-----------
William M. De Arman ............................................................. 50,000
<S> <C>
Donehew Fund Limited Partnership ................................................ 50,000
Bear Stearns Securities Corp. ................................................... 25,000
as Custodian FBO Empire Medical
Diagnostic PC Defined Contribution
Profit Sharing Plan
Ronald J. Frank ................................................................. 25,000
Louis Gigante ................................................................... 25,000
Stephen Goldman ................................................................. 25,000
Stanley D. Goodman .............................................................. 25,000
Janice Halle-Nesses ............................................................. 175,000
H&S Advisors, Inc. .............................................................. 20,000
IF Consulting Ltd. .............................................................. 50,000
Jo-Bar Enterprises, L.L.C. ...................................................... 50,000
KCID Industries, Bradley S. Cooper .............................................. 25,000
Richard M. Kirshner ............................................................. 25,000
Jacqueline Knapp ................................................................ 187,500
Larry Kupferberg ................................................................ 152,500
Christina Litt .................................................................. 25,000
Private Trust Corp. Ltd. ........................................................ 50,000
TTEE New Amsterdam Investment Trust
Joseph Reiss, M.D. .............................................................. 50,000
Marc Roberts .................................................................... 50,000
Claudia C. Rouhana .............................................................. 25,000
William J. Rouhana, Jr. ......................................................... 25,000
William J. Rouhana, Sr. ......................................................... 25,000
Trustee for Rouhana
1990 GRIT dtd 7/30/90
William J. Rouhana, Sr. ......................................................... 25,000
Trustee for Rouhana
1995 GRAT dtd 3/2/95
Richard Semble, M.D. ............................................................ 25,000
Dr. Larry Sheer ................................................................. 50,000
Stanley Snyder .................................................................. 140,000
Jeffrey M. Spiegel .............................................................. 25,000
Gibbs A. Williams ............................................................... 25,000
Keough Trust
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF
OPTION
SHARES
REGISTERED
FOR RESALE
-----------
<S> <C>
Hiroki Umezaki .................................................................. 5,120
Gerald Kitano ................................................................... 5,120
</TABLE>
50
<PAGE>
UNDERWRITING
M.H. Meyerson & Co., Inc. ("Underwriter") has agreed, subject to the terms
and conditions of the Underwriting Agreement, to purchase from the Company a
total of 1,800,000 shares of the Common Stock and 1,800,000 Warrants. The
obligations of the Underwriter under the Underwriting Agreement are subject to
approval of certain legal matters by counsel and various other conditions
precedent, and the Underwriter is obligated to purchase all of the Securities
offered by this Prospectus (other than the Securities covered by the
over-allotment option described below and those being offered on behalf of the
Selling Securityholders) if any are purchased.
The Underwriter has advised the Company that it proposes to offer the
Securities to the public at the initial offering price set forth on the cover
page of this Prospectus and to certain dealers at that price less a concession
not in excess of $.18 per share of the Common Stock and $.02 per Warrant. The
Underwriter may allow, and such dealers may reallow, a concession not in excess
of $.09 per share of Common Stock and $.01 per Warrant to certain other dealers.
After this Offering, the offering price and other selling terms may be changed
by the Underwriter.
The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act. The Company has
also agreed to pay to the Underwriter an expense allowance on a nonaccountable
basis equal to 3% of the gross proceeds derived from the sale of the Securities
offered by this Prospectus (including the sale of any Securities subject to the
Underwriter's over-allotment option but excluding the Warrants being sold by the
Selling Securityholders), $50,000 of which has been paid to date. The Company
also has agreed to pay all expenses in connection with qualifying the shares of
Common Stock offered hereby for sale under the laws of such states as the
Underwriter may designate and registering this Offering with the National
Association of Securities Dealers, Inc., including fees and expenses of counsel
retained for such purposes by the Underwriter.
The Company has granted to the Underwriter an option, exercisable during the
45-day period after the date of this Prospectus, to purchase from the Company at
the offering price, less underwriting discounts and the nonaccountable expense
allowance, up to an aggregate of 270,000 additional shares of Common Stock
and/or 270,000 additional Warrants for the sole purpose of covering
over-allotments, if any.
In connection with this Offering, the Company has agreed to sell to the
Underwriter for an aggregate of $100, the Underwriter's Purchase Option,
consisting of the right to purchase up to an aggregate of 180,000 shares of the
Common Stock and/or an aggregate of 180,000 Warrants. The Underwriter's Purchase
Option is exercisable initially at a price of $4.95 per share and $.55 per
Warrant for a period of four years commencing one year from the date hereof. The
Underwriter's Purchase Option may not be transferred, sold, assigned or
hypothecated during the one year period following the date of this Prospectus
except to officers of the Underwriter and the selected dealers and their
officers or partners. The Underwriter's Purchase Option grants to the holders
thereof certain "piggyback" and demand rights for periods of five and seven
years, respectively, from the date of this Prospectus with respect to the
registration under the Securities Act of the securities directly and indirectly
issuable upon exercise of the Underwriter's Purchase Option.
Pursuant to the Underwriting Agreement, all of the directors, executive
officers, and certain of existing stockholders of the Company as of the date of
this Prospectus (who hold in the aggregate 1,794,685 outstanding shares of
Common Stock) have agreed not to sell any of their shares of Common Stock for
periods ranging between 12 and 18 months from the date of this Prospectus. In
addition, the Underwriting Agreement provides that, for a period of three years
from the date of this Prospectus, the Company will recommend and use its best
efforts to elect a designee of the Underwriter as a member of the Board of
Directors. Alternatively, the Underwriter will have the right to send a
representative to observe each meeting of the Board of Directors. The
Underwriter has not yet selected such designee or representative.
51
<PAGE>
The Company has engaged the Underwriter, on a nonexclusive basis, as its
agent for the solicitation of the exercise of the Warrants. Additionally, other
NASD members may be engaged by the Underwriter in its solicitation efforts. To
the extent not inconsistent with the guidelines of the NASD and the rules and
regulations of the Commission, the Company has agreed to pay the Underwriter for
bona fide services rendered a commission equal to 4% of the exercise price for
each Warrant exercised if the exercise was solicited by the Underwriter. In
addition to soliciting, either orally or in writing, the exercise of the
Warrants, such services may also include disseminating information, either
orally or in writing, to warrantholders about the Company or the market for the
Company's securities, and assisting in the processing of the exercise of the
Warrants. No compensation will be paid to the Underwriter in connection with the
exercise of the Warrants if the market price of the underlying shares of Common
Stock is lower than the exercise price, the Warrants are held in a discretionary
account, the Warrants are exercised in an unsolicited transaction, the warrant
holder has not confirmed in writing that the Underwriter solicited such
exercise, or the arrangement to pay the commission is not disclosed in the
prospectus provided to warrant holders at the time of exercise. In addition,
unless granted an exemption by the Commission from Regulation M under the
Exchange Act, while it is soliciting exercise of the Warrants, the Underwriter
will be prohibited from engaging in any market activities or solicited brokerage
activities with regard to the Company's securities unless the Underwriter has
waived its right to receive a fee for the exercise of the Warrants.
Prior to this Offering, there has been only a limited public market for any
of the Common Stock. Accordingly, the Offering Price of the Securities and the
terms of the Warrants have been determined by negotiation between the Company
and the Underwriter and do not necessarily bear any relation to established
valuation criteria. Factors considered in determining such prices and terms, in
addition to prevailing market conditions, included an assessment of the prospect
for the industry in which the Company will compete, the Company's management and
the Company's capital structure.
The Underwriter may engage in over-allotment, stabilizing transactions,
syndicate short covering transactions and penalty bids in accordance with
Regulation M under the Exchange Act. Over-allotment involves sales by the
underwriting syndicate in excess of the offering size, which creates a syndicate
short position. Stabilizing transactions permit bids to purchase the Securities
so long as the stabilizing bids do not exceed a specified maximum. Syndicate
short covering transactions involve purchases of the Securities in the open
market after the distribution has been completed in order to cover syndicate
short positions. Penalty bids permit the Underwriter to reclaim a selling
concession from a selling group member when the Securities originally sold by
such selling group member are repurchased in the open market by the
Underwriters. Such stabilizing transactions, syndicate short covering
transactions and penalty bids may cause the prices of the Securities to be
higher than they would otherwise be in the absence of such transactions. These
transactions may be effected on the Nasdaq SmallCap Market, the Boston Stock
Exchange, or otherwise, and, if commenced, may be discontinued at any time.
In November 1996, the Underwriter acted as placement agent in the Bridge
Financing and was paid commissions of $160,000 (10%) and a nonaccountable
expense allowance of $48,000 (3%).
52
<PAGE>
LEGAL MATTERS
The legality of the securities offered hereby are being passed upon for the
Company by Troop Meisinger Steuber & Pasich, LLP, Los Angeles, California.
Graubard Mollen & Miller, New York, New York, has served as counsel to the
Underwriter in connection with this Offering.
EXPERTS
The consolidated balance sheets of the Company as of December 31, 1996 and
March 2, 1996 and the consolidated statements of operations, stockholders'
equity and cash flows for the ten-month period ended December 31, 1996 and for
the period from inception (October 23, 1995) to March 2, 1996 have been included
herein and in the Registration Statement of which this Prospectus is a part, in
reliance on the report of Coopers & Lybrand, L.L.P., independent accountants,
given on their authority as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith files reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information filed by the Company may be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Judiciary Plaza, Washington, D.C. 20549, and at the Commission's
following Regional Offices: Chicago Regional Office, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661; and New York Regional Office, 7 World Trade
Center, 13th Floor, 75 Park Place, New York, New York 10048. Copies of such
material can also be obtained at prescribed rates from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Judiciary Plaza,
Washington, D.C. 20549. Additionally, the Commission maintains a Web Site
(http://www.sec.gov) that contains certain reports, proxy and information
statements and other information relating to the Company.
A Registration Statement on Form SB-2, including amendments thereto,
relating to the Securities offered hereby has been filed by the Company with the
Commission, Washington, D.C. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereof. For further information with respect to the Company and the
Securities offered hereby, reference is made to such Registration Statement,
exhibits and schedules. Statements contained in this Prospectus as to the
contents of any contract or other document referred to are not necessarily
complete and in each instance reference is made to the copy of such contract or
other document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference. A copy of the
Registration Statement may be inspected without charge at the Commission's
public reference facilities at the offices described above and copies of all or
any part thereof may be obtained from the Commission upon the payment of certain
fees prescribed by the Commission.
53
<PAGE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of Independent Accountants.......................................................................... F-2
Consolidated Balance Sheets as of December 31, 1996 and March 2, 1996...................................... F-3
Consolidated Statements of Operations for the Ten-month period ended December 31, 1996 and for the Period
from Inception (October 23, 1995) to March 2, 1996....................................................... F-4
Consolidated Statements of Stockholders' Equity for the Ten-month period ended December 31, 1996 and for
the Period from Inception (October 23, 1995) to March 2, 1996............................................ F-5
Consolidated Statements of Cash Flows for the Ten-month period ended December 31, 1996 and for the Period
from Inception (October 23, 1995) to March 2, 1996....................................................... F-6
Notes to Consolidated Financial Statements................................................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholders of
Dental/Medical Diagnostic Systems, Inc.
We have audited the accompanying consolidated financial statements of
Dental/Medical Diagnostic Systems, Inc. and Subsidiaries ("the Company") listed
in the index on page F-1 of this Registration Statement on Form SB-2. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Dental/Medical
Diagnostic Systems, Inc. and Subsidiaries as of December 31, 1996 and March 2,
1996 and the consolidated results of their operations and their cash flows for
the ten-month period ended December 31, 1996 and for the period from inception
(October 23, 1995) to March 2, 1996 in conformity with generally accepted
accounting principles.
Coopers & Lybrand, LLP
Los Angeles, California
January 31, 1997, except for the effects of the stock split
described in Note 2, as to which the date is March 24, 1997.
F-2
<PAGE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND MARCH 2, 1996
<TABLE>
<CAPTION>
DECEMBER 31,
1996 MARCH 2, 1996
------------- -------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents......................................................... $ 1,058,836 $ 666,611
Accounts receivable, less allowance for returns and doubtful accounts of $146,699
and $28,280 at December 31, 1996 and March 2, 1996.............................. 1,158,444 49,023
Inventories....................................................................... 1,513,075 1,072,085
Deferred tax asset................................................................ 90,000 --
Prepaid expenses and other current assets......................................... 208,552 152,985
------------- -------------
Total current assets............................................................ 4,028,907 1,940,704
Property and equipment, net of accumulated depreciation........................... 393,578 249,000
Debt issuance costs, net of accumulated amortization.............................. 253,686 --
Other assets...................................................................... 42,270 36,040
------------- -------------
Total assets.................................................................... $ 4,718,441 $ 2,225,744
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Book overdraft.................................................................... $ -- $ 49,906
Current portion of capital lease obligations...................................... 18,468 15,505
Notes payable to related parties.................................................. -- 277,015
Accounts payable.................................................................. 1,089,332 1,616,866
Accrued liabilities............................................................... 462,456 189,974
Income taxes payable.............................................................. 168,570 --
Customer deposits................................................................. 33,607 249,345
------------- -------------
Total current liabilities....................................................... 1,772,433 2,398,611
Notes payable..................................................................... 1,355,291 --
Notes payable to related parties.................................................. 272,966 --
Capital lease obligations......................................................... 66,028 74,836
Other long term liabilities....................................................... 14,098 12,629
------------- -------------
Total liabilities............................................................... 3,480,816 2,486,076
------------- -------------
Commitments and contingencies
Stockholders' equity (deficit)
Preferred stock, par value $.01 per share; 1,000,000 shares authorized; none
issued and outstanding........................................................ -- --
Common stock, par value $.01 per share; 20,000,000 shares authorized; 2,985,537
and 2,563,318 shares issued and outstanding at December 31, 1996 and March 2,
1996.......................................................................... 29,855 25,633
Additional paid in capital...................................................... 2,695,832 1,339,248
Accumulated deficit............................................................. (1,488,062) (1,625,213)
------------- -------------
Total stockholders' equity (deficit)............................................ 1,237,625 (260,332)
------------- -------------
Total liabilities and stockholders' equity (deficit)............................ $ 4,718,441 $ 2,225,744
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE TEN-MONTH PERIOD ENDED DECEMBER 31, 1996
AND FOR THE PERIOD FROM INCEPTION (OCTOBER 23, 1995) TO MARCH 2, 1996
<TABLE>
<CAPTION>
TEN MONTHS ENDED INCEPTION TO
DECEMBER 31, 1996 MARCH 2, 1996
----------------- -------------
<S> <C> <C>
Net sales....................................................................... $ 11,673,102 $ 220,623
Cost of sales................................................................... 6,685,464 202,115
----------------- -------------
Gross profit.................................................................. 4,987,638 18,508
Selling, general and administrative expense..................................... 4,360,736 1,111,391
Research and development expense................................................ 322,467 528,426
----------------- -------------
Operating income (loss)....................................................... 304,435 (1,621,309)
Interest expense................................................................ 57,166 3,904
Amortization of debt issuance costs............................................. 31,548 --
----------------- -------------
Income (loss) before income taxes............................................. 215,721 (1,625,213)
Provision for income taxes...................................................... 78,570 --
----------------- -------------
Net income (loss)............................................................. $ 137,151 $ (1,625,213)
----------------- -------------
----------------- -------------
Net income (loss) per share..................................................... $ .05 $ (1.57)
----------------- -------------
----------------- -------------
Number of shares used in computing per share amounts............................ 3,019,213 1,035,778
----------------- -------------
----------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE TEN-MONTH PERIOD ENDED DECEMBER 31, 1996
AND FOR THE PERIOD FROM INCEPTION (OCTOBER 23, 1995) TO DECEMBER 31, 1996
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
--------------------- PAID IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
---------- --------- ----------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance, October 23, 1995 (date of
inception)............................. -- $ -- $ -- $ -- $ --
Issuance of common stock for cash........ 1,416,500 14,165 617,070 -- 631,235
Issuance of common stock for services.... 290,126 2,901 125,216 -- 128,117
Issuance of common stock for cash, net of
issuance costs......................... 856,692 8,567 596,962 -- 605,529
Net loss................................. -- -- -- (1,625,213) (1,625,213)
---------- --------- ----------------- ------------- -------------
Balance, March 2, 1996................... 2,563,318 25,633 1,339,248 (1,625,213) (260,332)
Issuance of common stock for cash, net of
issuance costs......................... 422,219 4,222 1,050,281 -- 1,054,503
Issuance of warrants for cash............ -- -- 259,103 -- 259,103
Issuance of stock options to
nonemployees........................... -- -- 47,200 -- 47,200
Net income............................... -- -- -- 137,151 137,151
---------- --------- ----------------- ------------- -------------
Balance, December 31, 1996............... 2,985,537 $ 29,855 $ 2,695,832 $ (1,488,062) $ 1,237,625
---------- --------- ----------------- ------------- -------------
---------- --------- ----------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE TEN-MONTH PERIOD ENDED DECEMBER 31, 1996
AND FOR THE PERIOD FROM INCEPTION (OCTOBER 23, 1995) TO MARCH 2, 1996
<TABLE>
<CAPTION>
TEN MONTHS ENDED INCEPTION TO
DECEMBER 31, 1996 MARCH 2, 1996
----------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)............................................................. $ 137,151 $ (1,625,213)
Adjustments to reconcile net income (loss) to net cash used by operating
activities:
Depreciation and amortization............................................... 108,047 9,219
Allowance for returns and doubtful accounts................................. 79,123 28,280
Inventory write down........................................................ 20,822 91,556
Deferred taxes.............................................................. (90,000) --
Deferred rent............................................................... 1,469 12,629
Common stock and stock options issued for services.......................... 47,200 128,117
Changes in operating assets and liabilities:
Accounts receivable....................................................... (1,188,544) (77,303)
Inventories............................................................... (461,812) (1,163,641)
Prepaid expenses and other current assets................................. (55,567) (152,985)
Other assets.............................................................. (6,230) (36,040)
Accounts payable.......................................................... (448,316) 1,524,470
Accrued liabilities....................................................... 272,482 131,991
Income taxes payable...................................................... 168,570 --
Customer deposits......................................................... (215,738) 249,345
----------------- --------------
Net cash used by operating activities................................... (1,631,343) (879,575)
----------------- --------------
Cash flows from investing activities:
Purchase of property and equipment.......................................... (200,686) (144,537)
----------------- --------------
Net cash used in investing activities................................... (200,686) (144,537)
----------------- --------------
Cash flows from financing activities:
(Decrease) increase in book overdraft....................................... (49,906) 49,906
Accounts payable to related party in excess of terms........................ (79,218) 79,218
Net proceeds from issuance of common stock.................................. 1,054,503 1,291,113
Net proceeds from issuance of notes payable................................. 1,314,766 --
Proceeds from borrowings from related parties............................... 25,000 377,015
Payments on borrowings from related parties................................. (29,049) (100,000)
Principal payments on capital lease obligations............................. (11,842) (6,529)
----------------- --------------
Net cash provided by financing activities............................... 2,224,254 1,690,723
----------------- --------------
Net increase in cash and cash equivalents............................... 392,225 666,611
Cash and cash equivalents, beginning of period................................ 666,611 --
----------------- --------------
Cash and cash equivalents, end of period...................................... $ 1,058,836 $ 666,611
----------------- --------------
----------------- --------------
Supplemental cash flow information:
Capital lease obligations incurred............................................ $ 5,997 $ 96,870
Property and equipment not paid for at period end............................. -- 16,812
Common stock issuance costs not paid for at period end........................ -- 54,349
Interest paid................................................................. 8,219 --
Income taxes paid............................................................. -- --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The Company was organized in New York in 1981 under the name Edudata
Corporation and reincorporated in Delaware in 1983 by Sun Equities Corporation
("Sun") which owned approximately 81 percent of the Company's outstanding common
stock until August 11, 1995. At that time, Sun distributed the shares of the
Company that it owned to its stockholders in the form of a dividend.
The Company was initially organized to provide education in the use of
personal computers, to market software programs developed by others, and to
provide a broad range of advisory services to businesses in conjunction with
both computer and non-computer related management issues. The Company's original
concept was modified, however, and until 1987, the Company was engaged in the
ownership and operation of technical schools through its subsidiaries, Betty
Owen Secretarial Systems, Inc. and Taylor Business Institute, Inc., and in the
development, construction and sale of single-family homes and commercial
buildings through its majority-owned subsidiary, Lytton & Tolly, Inc. In 1988
the Company disposed of its subsidiaries and their operations and determined to
use the proceeds to acquire another business. From 1988 to early 1996, the
Company's operations were limited to exploring opportunities to acquire or to
become an operating business.
On March 1, 1996, the Company acquired all the outstanding securities of
Dental/Medical Diagnostic Systems LLC, a California limited liability company
("DMD"), and Bavarian Dental Instruments, Inc., a California close corporation
("BDI"), in exchange for the issuance by the Company of a total of 1,706,626
restricted shares of its Common Stock. DMD and BDI were initially formed in
October 1995 and November 1995, respectively. As a result of these transactions,
the former members of DMD and former stockholders of BDI gained a majority of
the Company's voting securities and management control of the Company was
transferred to the former management of DMD and BDI. For accounting purposes
these transactions were treated as a recapitalization of DMD and BDI, with DMD
and BDI combined as the acquiror (reverse acquisition). As a result, the
combined historical financial statements of DMD and BDI became the financial
statements of the Company.
On January 28, 1997 the Company changed its name to Dental/Medical
Diagnostic Systems, Inc. ("DMDS") from Edudata Corporation. Collectively, DMDS
and its wholly owned subsidiaries are referred to as the Company.
The Company designs, develops, manufactures and sells high technology dental
equipment. Currently, the Company's primary emphasis is on the manufacture and
sale of an intraoral camera system known as the TeliCam System and a dental
office networking system, known as InTELInet, for use in connection with the
TeliCam System. The Company commenced shipments of TeliCam Systems to customers
in February 1996 and, in November 1996, introduced the InTELInet networking
system for the TeliCam System.
BDI was formed to import from Russia, distribute and market dental burs in
the United States and elsewhere. The first sales of the burs commenced in early
March 1996. On July 9, 1996, the Company decided to discontinue the dental bur
product line.
2. BASIS OF PRESENTATION
On October 23, 1996, the Company authorized an increase in the authorized
number of shares of Common Stock from 10,000,000 shares to 20,000,000 shares.
The Board of Directors also authorized a new class of 1,000,000 shares of
Preferred Stock with a par value of $.01 per share.
F-7
<PAGE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. BASIS OF PRESENTATION (CONTINUED)
On January 13, 1997, the Company effected a reverse stock split of 1 share
for 2.197317574 shares of its issued and outstanding Common Stock. In addition,
on March 24, 1997, the Company's stockholders approved a reverse stock split of
1 share for 1.33333333 shares of its issued and outstanding Common Stock. All
share and per share amounts have been retroactively restated to reflect these
reverse splits.
On February 5, 1997 the Company changed its fiscal year-end from a fiscal
year ending on the nearest Saturday to February 28th to a December 31 fiscal
year-end. The accompanying consolidated financial statements reflect the
operating results of the Company for the ten-month period from March 3, 1996
through December 31, 1996 and for the period from inception (October 23, 1995)
through March 2, 1996.
3. ACQUISITION OF DMD AND BDI
On March 1, 1996, DMDS (formerly Edudata) completed the acquisition of BDI
and DMD. The acquisition was affected pursuant to the terms of the two
Contribution Agreements dated February 29, 1996 ("Contribution Agreements")
between DMDS and BDI and between DMDS and DMD. Pursuant to the Contribution
Agreements the former shareholders of BDI and members of DMD received a total of
1,706,626 shares of newly issued DMDS restricted common stock, then constituting
approximately 66.6% of DMDS' outstanding common stock, taking into consideration
the newly issued shares. As part of the transaction, DMDS' prior Board of
Directors resigned and were replaced by Robert H. Gurevitch, Chief Executive
Officer, director and member/shareholder of DMD and BDI, Hiroki Umezaki,
President of DMD's International Operations, director and member of DMD and two
outside directors. In addition, existing management and security holders of both
DMD and BDI assumed management control of DMDS.
Accordingly, for accounting purposes the acquisition was treated as a
recapitalization of DMD and BDI with DMD and BDI combined as the acquiror
(reverse acquisition). As a result, the combined historical financial statements
of DMD and BDI became the financial statements of DMDS.
Further, since DMDS' assets consisted solely of approximately $660,000 in
cash and cash equivalents and had no operations in the seven years prior to the
acquisition, for accounting purposes this transaction was recorded by the
Company as the issuance of common stock for cash held by DMDS. Therefore no
proforma information has been presented.
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of DMDS and its
wholly owned subsidiaries as of December 31, 1996 and March 2, 1996 and for the
ten-month period ended December 31, 1996 and for the period from inception
(October 23, 1995) to March 2, 1996. All intercompany balances and transactions
have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. The significant estimates
F-8
<PAGE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
made in the preparation of the consolidated financial statements relate to the
assessment of the carrying value of accounts receivable, inventories, and
estimated provision for warranty costs. Actual results could differ from those
estimates.
RISKS AND UNCERTAINTIES
The Company buys certain key components from one supplier or from a limited
number of suppliers. Although there are a limited number of suppliers of the key
components, management believes that other suppliers could provide similar
components on comparable terms. Changes in key suppliers could cause delays in
manufacturing and distribution of products and a possible loss in sales, which
could adversely affect operating results.
The Company has derived substantially all of its revenues from the sale of
one product family. The Company believes that the inability to attract new
customers, the loss of one or more of its major customers, a significant
reduction in business from such customers, or the uncollectibility of amounts
due from any of its larger customers, could have a material adverse affect on
the Company.
REVENUE RECOGNITION
The Company recognizes revenue from the sales of systems and supplies at the
time of shipment and satisfaction of significant vendor obligations, if any, net
of an allowance for estimated sales returns. The Company generally warrants its
systems for one year. A provision for estimated future costs relating to
warranty is recorded when systems are shipped.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all
highly liquid investments purchased with an original maturity of three months or
less to be cash equivalents.
INVENTORIES
Inventories are carried at standard costs which approximate the lower of
actual cost (first-in; first-out) or market. Such amounts include the cost of
materials and, when applicable, labor and overhead.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation.
Capitalized leases are recorded at the lower of fair market value or the present
value of future minimum lease payments, less accumulated amortization.
Maintenance and repairs are expensed as incurred. The cost and related
accumulated depreciation and amortization of property and equipment sold or
retired are removed from the accounts and the resulting gains or losses are
included in current operations. Depreciation and amortization are provided on a
straight line basis over the estimated useful lives of the related asset, or
with respect to leasehold improvements and capital leases by the primary term of
the lease, whichever is less, as follows:
<TABLE>
<S> <C>
Equipment and software, including capitalized leases............... 5 years
Furniture and fixtures............................................. 7 years
Leasehold improvements............................................. 3 years
</TABLE>
F-9
<PAGE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LONG-LIVED ASSETS
In March 1995, Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of," was issued. SFAS No. 121 requires that long-lived assets and
certain identifiable intangibles to be held and used or disposed of by an entity
be reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. SFAS No. 121 was
effective for fiscal years beginning after December 15, 1995. The impact of the
adoption of SFAS No. 121 was not material to the Company's consolidated
financial statements.
ADVERTISING AND PROMOTION COSTS
Production costs of future media advertising and costs of dental industry
trade shows are deferred until the advertising or trade show occurs. All other
advertising and promotion costs are expensed as incurred. Total advertising and
promotion expenses incurred for the ten-month period ended December 31, 1996
were $1,008,879 and for the period from inception (October 23, 1995) through
March 2, 1996 were $437,590.
RESEARCH AND DEVELOPMENT COSTS
Costs related to research and development are expensed as incurred.
INCOME TAXES
The Company accounts for income taxes under the liability method. Under this
method, deferred tax assets and liabilities are determined based on the
differences between the financial statement and tax bases of assets and
liabilities, using enacted tax rates in effect for the year in which the
differences are expected to reverse. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized.
Income tax expense is the tax payable for the period and the change during the
period in deferred tax assets and liabilities.
STOCK-BASED EMPLOYEE COMPENSATION AWARDS
Statement of Financial Accounting Standards No. 123, "Accounting for the
Awards of Stock-Based Compensation to Employees" ("SFAS No. 123") encourages,
but does not require companies to record compensation cost for stock-based
compensation plans at fair value. The Company has adopted the disclosure
requirements of SFAS No. 123, which involves proforma disclosure of net income
under SFAS No. 123, detailed descriptions of plan terms and assumptions used in
valuing stock option grants. The Company has chosen to continue to account for
stock-based employee compensation awards in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees".
CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash deposits and trade
accounts receivable. The Company's cash deposits are placed with various
financial institutions and, from time to time, may exceed the Federal Deposit
Insurance Corporation limit.
F-10
<PAGE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
For the ten month period ended December 31, 1996, five of the Company's
customers accounted for approximately 21% of sales and as of December 31, 1996,
six of the Company's customers, primarily international distributors, accounted
for approximately 75% of trade accounts receivable. For the ten-month period
ended December 31, 1996, the Company had export sales of approximately
$2,200,000 ($1,200,000 Europe; $400,000 Australia; $310,000 Canada and $290,000
other). No customer accounted for more than 10% of revenues and there were no
export sales in the period ended March 2, 1996.
The Company extends credit based on an ongoing credit evaluation of its
customers' financial condition and generally does not require collateral.
Estimated credit losses and returns have been provided for in the financial
statements and, to date, have been within management's expectations.
The majority of the Company's current customers consist of dental
professionals. Certain of the dental professionals lease the Company's products
through third party leasing companies. Under the terms of the sales, the leasing
companies have no recourse against the Company.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosure About Fair
Value of Financial Instruments," requires disclosure of fair value information
about all financial instruments held by a company except for certain excluded
instruments and instruments for which it is not practical to estimate fair
value. The carrying value of the Company's financial instruments approximates
their fair value.
EARNINGS (LOSS) PER SHARE
Earnings (loss) per share is computed based on the weighted average number
of common and common equivalent shares outstanding during the periods presented,
using the treasury stock method. Common stock equivalents related to warrants
and stock options are excluded from the computation when their effect is
antidilutive.
5. RELATED PARTY TRANSACTIONS
In October 1996, the Company entered into an agreement with Boston Marketing
pursuant to which the Company obtained worldwide marketing rights in the dental
market for the Teli Units as well as the right to use the "TeliCam" trademark.
At the time the Company entered into this agreement, Hiroki Umezaki was an
officer, director and principal shareholder of the Company and is a substantial
shareholder and the President of Boston Marketing. At December 31, 1996 and
March 2, 1996 the Company owed Boston Marketing approximately $247,500 and
$674,218, respectively, in connection with Teli Units purchased by the Company.
For the ten-month period ended December 31, 1996, the Company purchased 2,509
Teli Units at an aggregate cost of $1,881,750 and from inception (October 23,
1995) through March 2, 1996, the Company purchased 905 Teli Units at an
aggregate cost of $674,218 from Boston Marketing. In addition, the Company had
an agreement with Mr. Umezaki pursuant to which he was to receive a 15%
commission on all sales made by the Company in Asia, except Japan for which his
commission was to be 12%. This agreement resulted in Mr. Umezaki earning $15,000
in commissions for the ten-month period ended December 31, 1996.
From December 1995 through February 1996, Robert H. Gurevitch, Chairman of
the Board and Chief Executive Officer of the Company, and Boston Marketing, an
affiliate of Mr. Umezaki, loaned the Company an aggregate of $377,015. The
promissory notes evidencing such loans bear interest at 6% per
F-11
<PAGE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. RELATED PARTY TRANSACTIONS (CONTINUED)
annum and were originally payable within six months. On February 26, 1996, the
Company repaid $50,000 to each of Mr. Gurevitch and Boston Marketing. No
interest has been paid on the remaining principal balance of these notes
although interest has been accrued in the Company's financial statements. In
November 1996, Mr. Gurevitch and Boston Marketing each agreed to extend the term
of their respective notes until the earlier to occur of: (i) twenty-four months
following the closing of the Bridge Financing (see Note 11); (ii) at such time
as the Company receives proceeds from the sale of the Common Stock in connection
with a public offering; or (iii) the repayment of the Bridge Notes in full. In
addition, on April 11, 1996, Boston Marketing loaned the Company an additional
$25,000 under similar terms ("April Loan"). The April Loan was repaid in full on
August 26, 1996.
Mr. Gurevitch and Mr. Umezaki have guaranteed the performance by the Company
under the Company's leases for its Irvine and Westlake premises, and Mr.
Gurevitch has also personally guaranteed the Company's credit card processing
agreement with the Checkfree Corporation.
6. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 2,
1996 1996
------------ ------------
<S> <C> <C>
Raw materials.................................................... $ 789,464 $ 754,946
Work in process.................................................. 136,786 49,164
Finished goods................................................... 586,825 267,975
------------ ------------
$1,513,075 $ 1,072,085
------------ ------------
------------ ------------
</TABLE>
7. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 2,
1996 1996
------------ ------------
<S> <C> <C>
Prepaid advertising and industry trade show fees................. $ 178,281 $ 117,495
Other............................................................ 30,271 35,490
------------ ------------
$ 208,552 $ 152,985
------------ ------------
------------ ------------
</TABLE>
F-12
<PAGE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 2,
1996 1996
------------ ----------
<S> <C> <C>
Equipment and software, including $102,867 and $96,870 of
capitalized leases at December 31, 1996 and March 2, 1996........ $ 342,989 $ 191,705
Furniture and fixtures............................................. 116,152 61,352
Leasehold improvements............................................. 5,761 5,162
------------ ----------
464,902 258,219
Less accumulated depreciation and amortization, including $20,341
and $3,368 relating to capitalized leases at December 31, 1996
and at March 2, 1996............................................. (71,324) (9,219)
------------ ----------
$ 393,578 $ 249,000
------------ ----------
------------ ----------
</TABLE>
9. ACCRUED LIABILITIES
Accrued liabilities consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 2,
1996 1996
------------ ----------
<S> <C> <C>
Accrued commissions................................................ $ 257,341 $ 32,516
Accrued warranty................................................... 56,515 38,444
Accrued salaries and wages......................................... 42,159 45,432
Accrued interest................................................... 34,552 1,822
Other.............................................................. 71,889 71,760
------------ ----------
$ 462,456 $ 189,974
------------ ----------
------------ ----------
</TABLE>
10. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases two facilities under various operating leases which
expire in 1998 and 2000. The leases require the Company to pay taxes,
maintenance fees, and insurance and provide for periodic fixed rent increases
based on a published price index. The Company also leases certain equipment
under capital leases which expire in 2000 and has the right to purchase the
underlying equipment at the termination of the leases for its fair market value.
Rent expense for all operating leases was approximately $102,000 and $38,000 for
the ten-month period ended December 31, 1996 and for the period from inception
(October 23, 1995) to March 2, 1996, respectively. All non-cancelable leases are
guaranteed by Robert H. Gurevitch, Chief Executive Officer and Chairman of the
Board of the Company. The other facility lease is co-guaranteed by Hiroki
Umezaki, former Executive Vice President, director, Secretary, and stockholder
of the Company.
F-13
<PAGE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The aggregate liability for future rentals under these lease agreements as
of December 31, 1996, is summarized as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDED DECEMBER 31 LEASES LEASES
- ---------------------------------------------------------------------- ---------- ----------
<S> <C> <C>
1997.................................................................. $ 29,795 $ 116,359
1998.................................................................. 28,077 109,026
1999.................................................................. 25,672 70,008
2000.................................................................. 22,539 61,257
---------- ----------
106,083 $ 356,650
----------
----------
Less amounts representing:
Interest............................................................ 21,587
Current portion..................................................... 18,468
----------
Long term portion..................................................... $ 66,028
----------
----------
</TABLE>
11. CAPITAL TRANSACTIONS
As previously described in Note 3, for accounting purposes, the acquisition
of DMD and BDI was treated as a recapitalization of DMD and BDI, whereby the
previously outstanding shares and interests of DMD and BDI were exchanged for
1,706,626 shares of DMDS (formerly Edudata) restricted common stock and 856,692
shares of common stock were issued for the approximately $660,000 in cash and
cash equivalents held by DMDS ($606,000 net of issuance costs of approximately
$54,000). Accordingly, DMD's and BDI's historical shareholder's equity and
members' interest activity prior to the acquisition has been retroactively
restated for the equivalent number of DMDS' common shares received in the
transaction.
The capital transactions of DMD and BDI prior to the acquisition of DMD and
BDI by the Company have been restated as if (i) the Company issued 870,379
shares of its common stock to Robert Gurevitch, Chief Executive Officer and
Chairman of the Board for cash payments totaling approximately $388,235 or $.44
per share; (ii) the Company issued 546,121 shares of its common stock to Hiroki
Umezaki, Executive Vice-president, director, and Secretary of the Company for
cash payments totaling approximately $243,000, or $.44 per share; and (iii) in
exchange for services, 290,126 shares of the Company's common stock were issued
to three employees and valued at approximately $128,000, or $.44 per share for
which compensation expense was included in the consolidated statements of
operations.
On May 30, 1996, the Company completed the sale of a total of 422,219 shares
of its common stock to six foreign investors. Each share was sold at a price of
$2.58 per share and, consequently, the Company raised approximately $1,055,000
from the sale, net of related expenses of approximately $34,000.
On November 27, 1996, the Company raised $1,314,766, net of issuance costs
of $285,234, through a private placement of 32 Units to certain accredited
investors. Each Unit consisted of a secured promissory note in the principal
amount of $50,000 ("Note") and a warrant ("Bridge Warrant") to purchase 18,750
shares of Common Stock at a purchase price of $2.67 per share. The Notes bear
interest at a rate of 10% per annum and the principal and all accrued interest
are payable upon the earliest to occur of: (a) May 27, 1998; (b) certain change
in control events effecting the Company; (c) a public offering of the Company's
F-14
<PAGE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. CAPITAL TRANSACTIONS (CONTINUED)
securities; or (d) the sale by the Company's Chief Executive Officer of all or
substantially all of his holdings of Common Stock. Upon the happening of certain
events the holders of the Notes will have the right to convert the outstanding
balances of their Notes into shares of Common Stock at a rate of $2.67 per
share. The Warrants are first exercisable on November 27, 1997 and expire on
November 27, 2002. As a result of the warrant issuance, these Notes have been
discounted by $259,103, which amount is being amortized over the term of the
Notes.
12. STOCK OPTIONS
During the ten-month period ended December 31, 1996, the Company granted
stock options to certain executives, key employees and outside directors. The
options were granted with an exercise price equal to the fair value of the
common stock at the date of grant, are fully vested and are exercisable over a
period of five years.
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option pricing model with the following assumptions (i)
risk-free interest rate of 6.85%, (ii) expected option life of 5 years, (iii)
forfeiture rate of 0, (iv) expected volatility of 143% and (v) no expected
dividends.
A summary of stock option activity with executives, key employees and
outside directors is as follows:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED AVERAGE
NUMBER OF AVERAGE OPTION GRANT DATE FAIR
SHARES EXERCISE PRICE VALUE
----------- --------------- -----------------
<S> <C> <C> <C>
Options outstanding at March 2, 1996............................... -- $ -- $ --
Granted............................................................ 139,943 2.63 2.11
Exercised.......................................................... -- -- --
----------- ----- -----
Options outstanding at December 31, 1996........................... 139,943 $ 2.63 $ 2.11
----------- ----- -----
----------- ----- -----
Options exercisable at December 31, 1996........................... 139,943 $ 2.63
----------- -----
----------- -----
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1996:
<TABLE>
<S> <C>
Range of exercise prices........................................ $.88-2.93
Weighted average remaining contractual life..................... 51 months
</TABLE>
The Company has adopted the disclosure only provisions of SFAS No. 123 and
accordingly, no compensation expense has been recognized for stock options
granted to executives, key employees, and outside directors. Had compensation
expense for such grants been determined based on the fair value of the award at
the grant date, consistent with the provisions of SFAS No. 123, the Company's
net income and income per share would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<S> <C>
Net income--as reported.......................................... $ 137,151
---------
---------
Net loss--pro forma.............................................. $(158,129)
---------
---------
Income per share--as reported.................................... $ 0.05
---------
---------
Loss per share--pro forma........................................ $ (0.06)
---------
---------
</TABLE>
F-15
<PAGE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. STOCK OPTIONS (CONTINUED)
Under SFAS No. 123 stock options granted to other than employees have been
excluded from the tables above as such grants are accounted for based on the
fair value of the consideration received or the fair value of the equity
instrument issued, whichever is more reliably measured, similar to the treatment
described below.
In addition to the stock options granted to executives, key employees and
outside directors, the Company also issued stock options to various
non-employees for past or future services. As of December 31, 1996 options to
purchase 80,211 shares of common stock were held by non-employees with an
exercise price of $.88-$2.93 per share, exercisable over five to ten years.
Certain of these options vest 20% per year over five years. Compensation expense
of $47,200 was recognized during the ten-month period ended December 31, 1996 in
connection with the issuance of these options.
13. INCOME TAXES
The income tax expense (benefit) for the ten-month period ended December 31,
1996 is as follows:
<TABLE>
<S> <C>
Current:
Federal......................................................... $ 132,570
State........................................................... 36,000
---------
168,570
---------
Deferred:
Federal......................................................... (67,000)
State........................................................... (23,000)
---------
(90,000)
---------
Total............................................................. $ 78,570
---------
---------
</TABLE>
The Company's effective tax rate for the ten-month period ended December 31,
1996 differs from the statutory federal income tax rate as follows:
<TABLE>
<S> <C>
Tax provision at the statutory rate................................. 34%
Nondeductible expenses.............................................. 10
State taxes, net of federal benefit................................. 14
Reduction in deferred asset valuation allowance..................... (27)
Other............................................................... 5
--
36%
--
--
</TABLE>
There was no tax expense for the period from inception (October 23, 1995)
through March 2, 1996 due principally to DMD being formed as a limited liability
company and, prior to the acquisition by DMDS, having elected to be taxed as a
partnership. Due to the net operating loss incurred, however, treatment as a C
corporation would not have resulted in tax expense for the period from inception
through March 2, 1996.
F-16
<PAGE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. INCOME TAXES (CONTINUED)
The components of the net deferred taxes are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 2,
1996 1996
------------ ----------
<S> <C> <C>
Deferred Tax Assets:
Inventory reserves................................................ $ 28,300 $ 26,900
Warranty accrual.................................................. 22,600 15,400
Allowance for returns and doubtful accounts....................... 37,900 11,000
Other............................................................. 1,200 4,300
Valuation allowance............................................... -- (57,600)
------------ ----------
$ 90,000 $ --
------------ ----------
------------ ----------
</TABLE>
Based on the level of taxable income generated by the Company in the current
period, management believes it is more likely than not that the Company will
realize the benefit of its recorded net deferred tax asset.
14. SUBSEQUENT EVENTS (UNAUDITED)
Effective February 11, 1997 the Company's Board of Directors approved the
adoption of the 1997 Stock Incentive Plan ("Plan"). The Plan provides for the
grant of stock awards to directors, employees, officers and consultants of the
Company. A maximum of 350,000 shares of Common Stock are authorized and reserved
for issuance under the Plan.
On February 13, 1997, the Company received a commitment letter from a bank
to provide a $2,000,000 line of credit, to be secured by a first priority
security interest in the Company's assets and by an assignment of the Company's
rights under the Boston Marketing Distribution Agreement. The credit facility
will bear interest monthly at the bank's prime rate, plus one-quarter of one
percent, through June 1, 1998. All borrowings under the facility will be subject
to a formula based, generally, on the levels of accounts receivable and
inventory.
F-17
<PAGE>
[Back Inside Cover:Photograph and diagrams depicting the InTELInet system and
other systems.]
Captions include:
[IT'S THE DIFFERENCE]
- - Exclusive Microprocessor Technology.
- - Printer is an option, not a requirement.
- - Printer breakdown does not mean system shutdown.
- - Simultaneous use of multiple cameras without printer or external capture
device.
- - Sturdy, fully adjustable wall mounted bracket holds 20" monitor securely.
- - Adjustable wall mounting system operates TeliCam convenience. Pole mount also
available.
- - Built-in VCR for patient education & entertainment.
- - TeliCam is designed for ease of use and efficiency.
- - Convenient shelf for CDI player, etc.
INTELINET -- One cable is routed from each operatory to the printer hub. Monitor
and optional foot pedal connect directly to TeliCam. All cameras in the system
can be used simultaneously.
TYPICAL NETWORK -- Only one camera can be used at a time. Simultaneous use of
cameras requires additional printers, cabling and installation.
<PAGE>
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR BY THE UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE
SECURITIES OFFERED BY THIS PROSPECTUS, OR AN OFFER TO SELL OR A SOLICITATION OF
AN OFFER TO BUY ANY SECURITIES BY ANY PERSON IN ANY JURISDICTION IN WHICH SUCH
OFFER OR SOLICITATION IS NOT AUTHORIZED OR IS UNLAWFUL. THE DELIVERY OF THIS
PROSPECTUS SHALL NOT, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF THIS
PROSPECTUS.
-------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 7
The Company.................................... 16
Use of Proceeds................................ 17
Dilution....................................... 19
Capitalization................................. 20
Price Range of the Common Stock................ 21
Dividend Policy................................ 21
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 22
Business....................................... 26
Management..................................... 36
Principal Stockholders......................... 41
Certain Transactions........................... 42
Description of Securities...................... 43
Shares Eligible For Future Sale................ 47
Selling Securityholders and Plan of
Distribution................................. 49
Underwriting................................... 51
Legal Matters.................................. 53
Experts........................................ 53
Available Information.......................... 53
Index to Financial Statement................... F-1
</TABLE>
DENTAL/MEDICAL
DIAGNOSTIC SYSTEMS, INC.
[LOGO]
1,800,000 SHARES OF COMMON STOCK
AND
1,800,000 REDEEMABLE
COMMON STOCK PURCHASE WARRANTS
---------------------
PROSPECTUS
---------------------
M. H. MEYERSON & CO., INC.
FOUNDED 1960
525 WASHINGTON BOULEVARD
JERSEY CITY, NEW JERSEY 07310
<TABLE>
<S> <C> <C>
INVESTMENT
RETAIL SALES BANKING INSTITUTIONAL
DEPARTMENT DEPARTMENT DEPARTMENT
201-459-9500 201-459-9459 201-332-3513
800-888-8118 800-444-4114 800-422-4114
</TABLE>
MAY 9, 1997
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
