<PAGE> 1
The SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB MARK ONE:
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
Commission file number 0-12850
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 13-3152648
------------------------------- --------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification
No.)
200 N. Westlake Blvd., Suite 202, Westlake Village, CA 91362
(Address of principal executive offices)
Issuer's telephone number, including area code (805) 381-2700.
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the issuer was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
State the number of shares of registrant's common stock outstanding as of August
11, 1997: 5,055,537
Transitional Small Business Disclosure Format Yes [ ] No [X]
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DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
FORM 10-QSB REPORT
June 30, 1997
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE
----
<S> <C> <C>
Item 1. Interim Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheet-June 30, 1997 3
Condensed Consolidated Statements of Operations 4
Three and Six Month Periods Ended June 30, 1997 and Thirteen
Week and Twenty-Six Week Periods Ended August 31, 1996
Condensed Consolidated Statements of Cash Flows 5
Six Month Period Ended June 30, 1997 and Twenty-Six Week
Period Ended June 1, 1996
Notes to Interim Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis or Plan of Operation 8
PART II - OTHER INFORMATION
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
(a) Exhibits 16
(b) Reports on Form 8-K 16
Signatures 17
</TABLE>
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PART I - FINANCIAL INFORMATION
ITEM 1 - INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
JUNE 30,1997
------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 7,219,760
Accounts receivable, less allowance for bad debts
and sales returns of $20,975 at June 30, 1997 1,805,436
Inventories 1,924,840
Deferred income taxes 90,000
Prepaid expenses and other 145,589
------------
Total current assets 11,185,625
Property and equipment, net 437,585
Loans receivable from related parties 126,000
Other assets 15,442
------------
Total assets $ 11,764,652
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligations $ 18,468
Accounts payable 1,236,798
Accrued liabilities 529,582
Income taxes payable 60,462
Customer deposits 15,112
------------
Total current liabilities 1,860,422
Notes payable to related parties 119,114
Capital lease obligations 56,874
Other long term liabilities 11,774
------------
Total liabilities 2,048,184
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred stock, par value $.01 per share;
1,000,000 shares authorized, none issued and
outstanding
Common stock, par value $.01
per share; 20,000,000 shares authorized:
5,055,537 shares issued and outstanding 50,555
Paid in capital 11,248,722
Accumulated deficit (1,582,809)
------------
Total stockholders' equity 9,716,468
------------
Total liabilities and stockholders' equity $ 11,764,652
============
</TABLE>
The accompanying notes are an integral part of these
interim consolidated financial statements.
3
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DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND THE
THIRTEEN AND TWENTY-SIX WEEKS ENDED AUGUST 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
Three Months Thirteen Weeks Six Months Twenty-Six Weeks
Ended Ended Ended Ended
June 30, 1997 Aug 31, 1996 June 30, 1997 Aug 31,
------------- ------------ ------------- -------
<S> <C> <C> <C> <C>
Net sales $ 4,254,981 $ 3,526,279 $ 8,183,263 $ 6,784,910
Cost of sales 2,550,076 2,098,391 5,027,720 3,865,972
----------- ----------- ----------- -----------
Gross profit 1,704,905 1,427,888 3,155,543 2,918,938
Selling, general & administrative expenses 1,496,707 1,247,007 2,697,427 2,683,343
Research & development expenses 37,573 73,676 73,334 161,301
----------- ----------- ----------- -----------
Operating income 170,625 107,205 384,782 74,294
Interest income 48,965 -- 48,965 --
Interest expense (42,427) (5,482) (132,119) (12,561)
Amortization of debt issuance costs (28,370) -- (76,431) --
----------- ----------- ----------- -----------
Income before income taxes and
extraordinary item 148,793 101,723 225,197 61,733
Provision for income taxes 56,541 26,000 85,795 26,000
----------- ----------- ----------- -----------
Income before extraordinary item 92,252 75,723 139,402 35,733
Extraordinary loss on early extinguishment
of debt (net of tax benefit of $143,511) (234,149) -- (234,149) --
----------- ----------- ----------- -----------
Net income (loss) $ (141,897) $ 75,723 $ (94,747) $ 35,733
=========== =========== =========== ===========
Income (loss) per share of common stock:
Income before extraordinary item
$ 0.02 $ 0.02 $ 0.03 $ 0.01
Extraordinary loss on early
extinguishment of debt $ (0.06) $ -- $ (0.07) $ --
----------- ----------- ----------- -----------
Net income (loss) $ (0.03) $ 0.02 $ (0.03) $ 0.01
=========== =========== =========== ===========
Shares used in the per share calculation:
Weighted average common and common
equivalent shares outstanding 4,819,200 3,088,899 4,068,576 2,923,293
=========== =========== =========== ===========
Weighted average common shares
outstanding 4,168,395 -- 3,580,234 --
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these
interim consolidated inancial statements.
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DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1997 AND THE
TWENTY-SIX WEEK PERIOD ENDED AUGUST 31, 1996
(unaudited)
<TABLE>
<CAPTION>
Six Months Twenty-Six Weeks
Ended Ended
June 30, 1997 August 31, 1996
------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (94,747) $ 35,733
Adjustments to reconcile net
income (loss) to net cash used by
operating activities:
Depreciation and amortization 171,743 34,186
Allowances for returns and doubtful
accounts (86,428) (7,305)
Inventory write-downs 10,000 70,822
Extraordinary item 234,149 --
Other (795) 1,351
Changes in operating assets and liabilities:
Accounts receivable (560,564) (853,539)
Inventories (420,970) (531,163)
Prepaid expenses and other 62,964 (52,146)
Other assets 26,828 252
Accounts payable 147,466 62,857
Accrued liabilities 67,126 136,150
Income taxes payable 35,403 26,000
Customer deposits (18,495) (244,785)
----------- -----------
Net cash used by operating activities (426,320) (1,321,587)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (99,592) (137,057)
Loan to related party (126,000) --
----------- -----------
Net cash used in investing activities (225,592) (137,057)
----------- -----------
Cash flows from financing activities:
Decrease in book overdraft -- (49,906)
Decrease in other long term liabilities (6,902) --
Net proceeds from issuance of common
stock 8,573,590 1,055,000
Payment of accounts payable in excess of
terms to related party -- (79,218)
Repayment of notes payable (1,600,000) --
Repayments on borrowings to related
parties (153,852) (25,000)
Proceeds from borrowings from related
parties -- 25,000
----------- -----------
Net cash provided by financing activities 6,812,836 925,876
----------- -----------
Net increase (decrease) in cash and
cash equivalents 6,160,924 (532,768)
Cash and cash equivalents, beginning of
period 1,058,836 666,611
----------- -----------
Cash and cash equivalents, end of period $ 7,219,760 $ 133,843
=========== ===========
Supplemental cash flow information:
Interest paid $ 92,962 $ --
Income taxes paid $ 48,904 $ --
Capital lease obligation incurred -- 5,997
</TABLE>
The accompanying notes are an integral part of these
interim consolidated financial statements.
5
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DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
June 30,1997
1. General
The accompanying unaudited interim condensed consolidated financial
statements include the accounts of Dental/Medical Diagnostic Systems, Inc.
and Subsidiaries (the "Company"). The interim consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with instructions
to Form 10-QSB and Item 10 of Regulation S-B. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair representation have been included. Operating
results for the three and six month periods ended June 30, 1997 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 1997. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's annual
report on Form 10-KSB for the period ended December 31, 1996.
2. Summary of Significant Accounting Policies
Basis of Presentation
On February 5, 1997 the Company changed its fiscal year-end from a fiscal
year ending on the nearest Saturday to February 28th to a December 31 year
end. The accompanying condensed consolidated financial statements reflect the
operating results of the Company for the six month period from January 1,
1997 to June 30, 1997 and the twenty-six week period ended August 31, 1996.
Concentration of Credit Risk and Major Customers
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of trade accounts
receivable.
For the six month period ended June 30, 1997 and the twenty-six week period
ended August 31, 1996, five of the Company's customers accounted for 27% and
15% of sales, respectively. At June 30, 1997 five of the Company's customers
accounted for approximately 69% of trade accounts receivable.
The Company performs ongoing credit evaluations of its customers' financial
condition and generally does not require collateral. Estimated credit losses
and returns, have been provided for in the financial statements.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. The significant estimates made in the preparation of
the consolidated financial statements relate to the assessment of the
carrying value of accounts receivable, inventories and warranty provisions.
Actual results could differ from those estimates.
Earnings (Loss) Per Share
Earnings (loss) per share is computed based on the weighted average number of
common shares outstanding during the periods presented and common stock
equivalents unless antidilutive.
Recently Issued Accounting Standards
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("SFAS No. 128"). SFAS No. 128 requires dual presentation of newly defined
basic and diluted earnings per share on the face of the income statement for
all entities with complex capital structures. This method is considered
6
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more compatible with International Accounting Standards. SFAS No. 128 is
effective for all fiscal years ending after December 15, 1997. The Company
has not yet determined the impact of SFAS No. 128.
In June 1997, the FASB issued SFAS No. 130, Comprehensive Income. SFAS No.
130 becomes effective in 1998 and requires reclassification of earlier
financial statements for comparative purposes. SFAS No. 130 requires that
changes in the amounts of certain items, including foreign currency
translation adjustments and gains and losses on certain securities be shown
in the financial statements. SFAS No. 130 does not require a specific format
for the financial statement in which comprehensive income is reported, but
does require that an amount representing total comprehensive income be
reported in that statement. Management has not yet determined the effect, if
any, of SFAS No. 130 on the consolidated financial statements.
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an
Enterprise and related Information. This statement will change the way public
companies report information about segments of their business in their annual
financial statements and requires them to report selected segment information
in their quarterly reports issued to shareholders. It also requires
entity-wide disclosures about the products and services an entity provides,
the material countries in which it holds assets and reports revenues, and its
major customers. The Statement is effective for fiscal years beginning after
December 15, 1997. Management has not yet determined the effect, if any, of
SFAS No. 131 on the consolidated financial statements.
3. Related Party Transactions
From December 1995 through February 1996, Robert H. Gurevitch, Chairman of
the Board and Chief Executive Officer of the Company, and Boston Marketing
Company, Ltd. ("Boston Marketing"), an affiliate of Hiroki Umezaki, a former
Director of the Company, loaned the Company an aggregate of $377,015. The
Promissory Notes evidencing such loans bear interest at 6% per annum and were
originally payable within six months. On February 26, 1996, the Company
repaid $50,000 to each of Mr. Gurevitch and Boston Marketing. In November
1996, Mr. Gurevitch and Boston Marketing each agreed to extend the term of
their respective notes. On May 23, 1997, Boston Marketing was paid the
remaining principal balance of $150,000 of its loan plus the accrued interest
of $3,526. Mr. Gurevitch was paid $25,000 on July 10, 1997 leaving
approximately $94,000 outstanding.
On May 27, 1997 the Company loaned Dewey Perrigo, Vice President of Sales of
the Company, and Andrea Niemiec-Perrigo, an employee of the Company, $126,000
for the purpose of buying a home. The Promissory Notes evidencing such loans
bear interest at prime plus .25% (presently 8.75%), and are due and payable
on May 27, 1997.
4. Inventories
Inventories consisted of the following:
<TABLE>
<CAPTION>
JUNE 30, 1997
-------------
<S> <C>
Raw materials $1,089,495
Work in progress 315,851
Finished goods 519,494
----------
Total $1,924,840
==========
</TABLE>
5. Capital Transactions
On November 27, 1996, the Company raised $1,314,766, net of issuance costs of
$285,234, through a private placement of 32 Units to certain accredited
investors. Each Unit consists of a secured promissory note in the principal
amount of $50,000 ("Bridge Note") and a warrant to purchase 18,750 shares of
Common Stock ("Bridge Warrant") at a purchase price of $2.67 per share. The
Notes bear interest at a rate of 10% per annum and the principal and all accrued
interest are payable upon the earliest to occur of: (a) May 27, 1998; (b)
certain change in control events effecting the Company; ( c ) a public offering
of the Company's securities; or (d) the sale by the Company's Chief Executive
Officer of all or substantially all of his holdings of the Common Stock. Upon
the happening of certain events the holders of the Notes will have the right to
convert the outstanding balances of their Notes into shares of the Common Stock
at a rate of $2.67 per share. The Warrants are first exercisable on November 27,
1997 and expire on November 27, 2002. As a result of the warrants, these notes
have been discounted by $259,104, which amount is being amortized over the term
of the notes.
On May 14, 1997, the Company closed a secondary offering of 2,070,000 shares of
common stock and 2,070,000 redeemable common stock purchase warrants. This
resulted in gross proceeds of $10,350,000 prior to expenses associated with the
offering. Approximately $1,700,000 of the net proceeds were used to repay the
Bridge Notes plus accrued interest. The Bridge Notes consisted of secured
convertible promissory notes in the aggregate principal amount of $1,600,000
bearing interest at 10% per annum and were payable the earlier of May 27, 1998
or consummation of the offering. Approximately $175,000 was used to repay loans
from related parties. The remaining proceeds net of associated expenses will be
used for product development, acquisition, joint venture financing, to repay the
remaining loans from related parties, and working capital and general corporate
purposes.
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6. Extraordinary Item
On May 14, 1997, the Company repaid the $1,600,000 principal amount Bridge Notes
in connection with the Company's Offering. An extraordinary charge of $234,149
(net of tax benefit of $143,511) was incurred for the early extinguishment of
those notes.
7. Income Taxes
The Company has accrued federal and state income taxes at the effective tax rate
of approximately 38 percent for the three and six month periods ended June 30,
1997. Federal and state income taxes were accrued at the statutory rate of 42%
for the thirteen and twenty-six week periods ended August 31, 1997.
Item 2. - Management's Discussion and Analysis or Plan of Operation
Introduction
This discussion summarizes the significant factors affecting the consolidated
operating results, financial condition and liquidity/cash flows of the Company
for the three and six month periods ended June 30, 1997 and for the thirteen and
twenty-six week periods ended August 31, 1996. Except for the historical
information contained herein, the matters discussed in this Management's
Discussion and Analysis are forward looking statements that involve risks and
uncertainties and are based upon judgments concerning various factors that are
beyond the Company's control. Actual results could differ materially from those
projected in the forward looking statements as a result of, among other factors,
the factors set forth under the caption "Cautionary Statements and Risk Factors"
below.
On March 1, 1996, the Company purchased all of the outstanding membership
interests of Dental/Medical Diagnostic Systems, LLC ("DMD") and all of the
outstanding capital stock of Bavarian Dental Instruments, Inc. ("BDI").
Immediately subsequent to the transaction, the former members of DMD and
stockholders of BDI owned approximately 66.6% of the Company's outstanding
common stock and management control of the Company was transferred to the former
management of DMD and BDI. Accordingly, for accounting purposes the acquisition
was treated as a recapitalization of DMD and BDI with DMD and BDI combined as
the acquirer (reverse acquisition). As a result, the combined historical
financial statements of DMD and BDI became the financial statements of the
Company.
DMD was formed in October 1995 and has been primarily involved in designing,
developing, manufacturing, and marketing intra-oral camera systems referred to
as "TeliCam Systems". The first shipments to customers of the TeliCam System
commenced in early February 1996. BDI was formed in November 1995 and has been
primarily involved in the marketing and distribution of dental burs imported
from Russia. The first sales of burs commenced in March 1996. On July 9, 1996,
the Company determined to focus future strategic development primarily upon high
value added dental/medical products and technology and, accordingly, decided to
discontinue the dental bur product line, comprised of low-margin, low-technology
products. The Company thereafter commenced an orderly liquidation of its
inventory of dental burs, and expects the liquidation to be completed in 1997
without significant adverse effect on operations.
On January 13, 1997 the Company changed its name from Edudata Corporation to
Dental/Medical Diagnostics Systems, Inc. On February 5, 1997, the Company
changed its fiscal year end from a fiscal year ending on the nearest Saturday to
February 28th to a December 31 fiscal year end. On January 13, 1997 the Company
effected a one-for-2.197317574 reverse stock split and on March 24, the
Company's stockholders approved an additional one-for-1.33333333 reverse stock
split. All information in this Report has been adjusted to reflect both stock
splits.
On May 14, 1997, the Company closed an underwritten offering (the "Offering") of
2,070,000 shares of Common Stock, and 2,070,000 Redeemable Common Stock Purchase
Warrants, raising gross proceeds of $10,350,000 prior to expenses associated
with the Offering. Of these proceeds, $1,700,000 was applied to repay the Bridge
Notes issued by the Company in November 1996 and $175,000 was applied to repay
loans from related parties.
Results of Operations
For the three and six month periods ended June 30, 1997 and the thirteen and
twenty-six week periods ended August 31, 1996, net sales totaled $4,254,981 and
$3,183,263, respectively for the quarters and $8,183,263 and $6,784,910,
respectively year to date. This resulted in an operating profit of $170,625 and
$107,205, respectively for the quarters and $384,782 and $74,294, respectively
year
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to date. Included in the results of the twenty-six week period ended August 31,
1996 are sales of approximately $185,000 and an operating loss of approximately
$217,000 related to the Company's discontinued dental bur line.
Net sales for the three and six month periods ended June 30, 1997 were
$4,254,981 and $8,183,263, respectively compared to $3,526,279 and $6,784,910,
respectively for the thirteen and twenty-six week periods ended August 31, 1996,
or an increase of approximately 21%, respectively for the periods. This
increase was primarily due to increased international sales volume. The sales in
the twenty-six week period ended August 31, 1996 were significantly assisted by
an approximate $1,255,000 back order position from inception to the commencement
of sales in the period. Back orders on hand as of January 1, 1997 amounted to
$65,448 in the aggregate. Sales are comprised primarily of sales of TeliCam
Systems and related products.
Cost of sales for the three and six month periods, ended June 30, 1997 were
$2,550,076 or 60% of sales and $5,027,720 or 61% of sales, respectively. For the
thirteen and twenty-six week periods ended August 31, 1996 cost of sales were
$2,098,391 or 60% of sales and $3,865,972 or 57% of sales, respectively. Cost of
sales increased as a percentage of sales primarily due to the increased
international sales that require price discounts on sales, however, this should
be partially offset by anticipated reduced warranty and service costs.
International sales and anticipated reduced warranty costs on same are subject
to a number of risks, including the Company's dependence on third party
suppliers for non-defective components and the Company's dependence on foreign
distribution. See " Cautionary Statements and Risk Factors - Dependence on Third
Party Suppliers and - Reliance on International Sales and Distributors and
General Risks on International Operations". Also contributing to the increase in
cost of sales was a TeliCam I sales promotion, at a reduced selling price
intended to reduce the inventory of the TeliCam I in preparation of the
introduction of TeliCam II, primarily occurring in the first quarter.
Selling general and administrative expenses totaled $1,496,707 and $2,697,427,
respectively for the three and six month period ended June 30, 1997, and
$1,247,007 and $2,683,343, respectively for the thirteen and twenty-six week
periods ended August 31, 1996. The increase in expense is primarily due to
increased sales commissions as a result of the increase in sales volume,
increased salary and wages and legal expenses. These expenses are expected to
continue to increase as sales volume increases and possible acquisition costs
are incurred. Partially offsetting these were decreased advertising, show
expenses and salaries as a result of discontinuing the dental bur line.
Research and development expenses totaled $37,573 and $73,334, respectively for
the three and six month periods ended June 30, 1997 and $73,676 and $161,301,
respectively for the thirteen and twenty-six week periods ended August 31, 1996.
The decrease is the result of phasing out expenditures on TeliCam with the
introduction of TeliCam II. However, the Company currently anticipates that
research and development expenses will increase for the development of new
products if the Company is able to successfully identify and negotiate
development arrangements with owners of promising technologies. See "Cautionary
Statements and Risk Factors - Importance of New Product Development to Growth.",
and "Cautionary Statements and Risk Factors - Expansion through Undetermined
Acquisitions and Joint-Ventures.". Increased expenditures on research and
development, 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.
Amortization of debt issuance cost totaled $28,370 and $76,431, respectively for
the three and six month periods ended June 30, 1997, 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; therefore, these costs were not incurred in the
comparable periods. The Company has repaid such debt out of the proceeds of the
Offering, and as a result this cost will not continue into future periods.
Interest income totaled $48,965 for the three and six month periods ended June
30, 1997, and is the result of investing the net proceeds of the Offering in a
short term management account through Comerica Securities. These funds were not
available in the prior periods.
Interest expense totaled $42,427 and $132,119, respectively for the three and
six-month periods ended June 30, 1997 and $5,482 and $12,561, respectively for
the thirteen and twenty-six week periods ended August 31, 1996, and consisted of
interest paid on capital lease obligations and interest accrued on the Bridge
Notes and notes payable to related parties. The increase is primarily due to the
Bridge Notes, which were repaid in May 1997 with proceeds of the Offering. As a
result, that expense will not continue into future periods.
Income before extraordinary item for the three and six month periods ended June
30, 1997 totaled $92,252 or $.02 per share and $139,402 or $.03 per share as
compared to net income of $75,723 or $.02 per share and $35,733 or $.01 per
share, respectively for the thirteen and twenty-six week periods ended August
31, 1996.
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Extraordinary loss on early extinguishment of debt totaled $234,149 (net of tax
benefit of $143,511) for the three and six month periods ended June 30, 1997 is
the result of the payment of the $1,600,000 Bridge Notes with the proceeds of
the Offering. The amount is comprised of the write-off of unamoritized debt
issuance cost and the discount to the Bridge Notes that was being amortized over
the term of the Notes.
Capital Resources and Liquidity
For the six month period ended June 30, 1997, the Company used net cash of
$426,320 in operations. Accounts receivable increased by $560,564 to $1,805,436
at June 30, 1997 primarily due to the level of international sales during the
period. Accounts payable and accrued liabilities totaling $1,826,842 at June 30,
1997, increased slightly from $1,720,358 at the prior year-end period. Inventory
levels increased $420,970 primarily due to the increased sales volume.
Capital expenditures totaled $99,592 for the six month period ended June 30,
1997. Approximately $49,000 was for the purchase of an exhibit booth used at
dental shows. Cash and cash equivalents on hand at the end of the period was
$7,219,760.
Based on its current operating plan, the Company anticipates 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 operations.
On July 1, 1997, the Company finalized a credit agreement with Comerica Bank
("Comerica") extending up to a $2,000,000 line of credit to the Company, secured
by a first priority security interest in the Company's assets and by an
assignment of the Company's rights under the Boston Marketing Distribution
Agreement. The credit facility bears interest monthly at the rate of the
Comerica Bank Prime plus one-quarter of one percent (0.25%), as it may change
from time to time, through June 1, 1998. All borrowings under the facility are
subject to a formula based, generally, on accounts receivable and inventory. The
Company intends to use the credit facility, when needed, for working capital and
general corporate purposes.
Fluctuations in Quarterly Results
The Company's business is subject to certain quarterly influences. Net sales and
operating profit are generally higher in the fourth quarter due to the
purchasing patterns of dentists in the United States and are generally lower in
the first quarter due primarily to the effect upon demand of increased purchases
in the prior quarter. It is also expected that the Company's business will
experience lower sales in the summer months as a consequence of holiday
vacations and a lesser number of trade shows.
Quarterly results may be adversely affected in the future by a variety of other
factors, including the timing of acquisitions and their related costs, as well
as the release of new products and promotions taking place within the quarter.
The Company plans to increase expenses to fund greater levels of research and
development and to fund investments 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.
Recently Issued Accounting Standards
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128").
SFAS No. 128 requires dual presentation of newly defined basic and diluted
earnings per share on the face of the income statement for all entities with
complex capital structures. This method is considered more compatible with
International Accounting Standards. SFAS 128 is effective for all fiscal years
ending after December 15, 1997. The Company has not yet determined the impact of
SFAS No. 128.
In June 1997, the FASB issued SFAS No. 130, Comprehensive Income. SFAS No. 130
becomes effective in 1998 and requires reclassification of earlier financial
statements for comparative purposes. SFAS No. 130 requires that changes in the
amounts of certain items, including foreign currency translation adjustments and
gains and losses on certain securities be shown in the financial statements.
SFAS No. 130 does not require a specific format for the financial statement in
which comprehensive income is reported, but does require that an amount
representing total comprehensive income be reported in that statement.
Management has not yet determined the effect, if any, of SFAS No. 130 on the
consolidated financial statements.
In June 1997, the FASB issued SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information. This statement will change the way public
companies report information about segments of their business in their annual
financial statements
10
<PAGE> 11
and requires them to report selected segment information in their quarterly
reports issued to shareholders. It also requires entity-wide disclosures about
the products and services an entity provides, the material countries in which it
holds assets and reports revenues, and its major customers. The Statement is
effective for fiscal years beginning after December 15, 1997. Management has not
yet determined the effect, if any, of SFAS No. 131 on the consolidated financial
statements.
CAUTIONARY STATEMENTS AND RISK FACTORS
Several of the matters discussed in this document contain forward looking
statements that involve risks and uncertainties. Factors associated with the
forward looking statements which could cause actual results to differ materially
from those projected or forecast in the statements that appear below. In
addition to other information contained in this document, readers should
carefully consider the following cautionary statements and risks factors:
Limited Operating History; History of Losses and Accumulated Deficit. While
the Company has been in existence since 1981, its operations between 1988 and
its acquisition of DMD and BDI in March 1996, were limited to the exploration of
acquisition opportunities. Dental/Medical Diagnostic Systems, the division of
the Company which designs and markets the Company's TeliCam System, and BDI, a
subsidiary of the Company, have only been in operation since October 1995. For
the period from inception (October 23, 1995) to March 2, 1996, the Company
incurred a net loss of $1,625,213, and for the ten month period ended December
31, 1996, the Company had net income of $137,151. For the six months ended June
30, 1997 the Company had a net loss after extraordinary item of $94,747. At June
30, 1997, the Company's accumulated deficit was $1,582,809. The ability of the
Company to obtain and sustain profitability will depend, in part, upon the
successful marketing of existing products and the successful and timely
introduction of new products. There can be no assurance that the Company will be
able to generate and sustain net sales or profitability in the future.
Dependence Upon a Single Product. The TeliCam I, and its enhanced version,
the TeliCam II, are currently the Company's primary product and, together with
related products such as the InTELInet system, will account for a substantial
portion of the Company's revenue for the foreseeable future. There can be no
assurance that the TeliCam System will be more effective than competing products
or technologies, or will be successfully marketed. The Company is still in the
early stages of marketing the TeliCam System and related products, and,
consequently, the degree to which the market will accept this product is still
uncertain. If the TeliCam System and related products cannot be marketed
successfully on a sustained basis, it is likely that the Company's business
operations would be substantially and adversely impacted.
Importance of New Product Development to Growth. The Company's ability to
develop and introduce new products successfully on a timely basis will be a
significant factor in the Company's ability to grow and remain competitive. New
product development often requires long-term forecasting of market trends, the
development and implementation of new designs, compliance with extensive
governmental regulatory requirements and a substantial capital commitment. The
medical and dental device industry is characterized by rapid technological
change. As technological changes occur in the marketplace, the Company may have
to modify its products in order to keep pace with these changes and
developments. The introduction of products embodying new technologies, or the
emergence of new industry standards, may render existing products, or products
under development, obsolete or unmarketable. Any failure by the Company to
anticipate or respond in a cost-effective and timely manner to government
requirements, market trends or customer requirements, or any significant delays
in product development or introduction, could have a material adverse effect on
the Company's business, operating results and financial condition.
Possible Need for Additional Capital. Although the Company believes that the
net proceeds of the Offering, together with the Comerica credit line, existing
resources and cash generated from operations, if any, will be sufficient to
satisfy the Company's working capital requirements for the next twelve months,
there can be no assurance that this will be the case or that these funds will be
sufficient to meet the Company's longer-term cash requirements for expansion. To
the extent that the funds generated by the Offering, together with existing
resources, are insufficient to fund the Company's planned activities the Company
will need to raise additional funds through bank borrowings, public or private
financings, or otherwise. If additional funds are raised through the issuance of
equity securities, additional dilution to stockholders may occur. No assurance
can be given that additional financing will be available when needed or that, if
available, it will be on terms favorable to the Company or its stockholders. If
needed funds are not available, the Company may be required to curtail its
operations, which could have a material adverse effect on the Company's
business, operating results and financial condition.
Expansion through Undetermined Acquisitions and Joint Ventures. The Company
intends to expand its product lines and domestic and international markets, in
part, through acquisitions. The Company's ability to expand successfully through
acquisitions will depend upon the availability of suitable acquisition
candidates at prices acceptable to the Company, the Company's ability to
11
<PAGE> 12
consummate such transactions and the availability of financing on terms
acceptable to the Company. There can be no assurance that the Company will be
successful in completing acquisitions. Such transactions involve numerous risks,
including possible adverse short-term effects on the Company's operating results
or the market price of the Common Stock. These acquisitions and joint ventures
may not be subject to approval or review by the Company's stockholders. The
Company does not expect that it will obtain an appraisal by any independent
appraisers with respect to any such acquisition. Certain of the Company's future
acquisitions may also give rise to an obligation by the Company to make
contingent payments or to satisfy certain repurchase obligations, which payments
could have an adverse financial effect on the Company. In addition, integrating
acquired businesses may result in a loss of customers or product lines of the
acquired businesses and also requires significant management attention and may
place significant demands on the Company's operations, information systems and
financial resources. The failure effectively to integrate acquired businesses
with the Company's operations could adversely affect the Company. In addition,
the Company competes for acquisition opportunities with companies which have
significantly greater financial and management resources than those of the
Company. There can be no assurance that suitable acquisition opportunities will
be identified, that any such transactions can be consummated, or that, if
acquired, such new businesses can be integrated successfully and profitably into
the Company's operations. Moreover, there can be no assurance that the Company's
historic rate of growth will continue, that the Company will continue to
successfully expand, or that growth or expansion will result in profitability.
The Company also intends to expand its product lines and domestic and
international markets through joint ventures. The Company's ability to expand
successfully through joint ventures will depend upon the availability of
suitable joint venture candidates whose terms are acceptable to the Company, the
Company's ability to consummate such transactions and the availability of
financing on terms acceptable to the Company. There can be no assurance that the
Company will be successful in completing joint ventures. Such transactions
involve numerous risks, including possible adverse short-term effects on the
Company's operating results or the market price of the Common Stock. The failure
effectively to integrate joint ventures with the Company's operations could
adversely affect the Company. In addition, the Company competes for expansion
opportunities with companies which have significantly greater financial and
management resources than those of the Company. There can be no assurance that
suitable investment opportunities will be identified, that any such transactions
can be consummated, or that such new businesses can be integrated successfully
and profitably into the Company's operations. Moreover, there can be no
assurance that the Company's historic rate of growth will continue, that the
Company will continue to successfully expand, or that growth or expansion will
result in profitability.
Dependence on Third-Party Suppliers. With the exception of the TeliCam
System's CCD processor unit, the Company believes that there are multiple
sources from which it may purchase the components of the TeliCam System. The
Company anticipates that it will obtain certain of the components of the TeliCam
System from a single source or a limited number of sources of supply. Although
the Company believes it will be able to negotiate satisfactory supply
arrangements and relationships, the failure to do so may have a material adverse
effect on the Company. Furthermore, there can be no assurance that suppliers
will dedicate sufficient production capacity to satisfy the Company's
requirements within scheduled delivery times or at all. Failure or delay by the
Company's suppliers in fulfilling its anticipated needs may adversely affect the
Company's ability to market the TeliCam System. Pursuant to the Boston Marketing
Distribution Agreement, the Company has the exclusive right to market Teli Units
to the dental market. Boston Marketing is a licensed distributor of the Teli
Units under a separate agreement with their manufacturer. The agreement between
Boston Marketing and the Teli Units manufacturer obligates Boston Marketing to
meet minimum purchase obligations. If Boston Marketing fails to meet these
obligations, Boston Marketing will be terminated as a licensed distributor. In
the event of such termination, the Company, as a sublicensee subdistributor of
Boston Marketing, may lose its right to purchase the Teli Units. Moreover, in
the event the Company is unable to meet its minimum annual purchase obligations
under the Boston Marketing Distribution Agreement, and, as a consequence, such
agreement terminates, the Company may be required to find an alternative source
for the primary component of its TeliCam System. The Company believes that, in
the event the Company loses its right to sell the Teli Units, replacement
components could be developed by and obtained from third parties, but that this
may take more than six months. The potential delay associated with locating an
alternative source of supply would have a significant adverse effect on the
Company's operating results and financial condition. In addition, there is no
guarantee that an intraoral dental camera system utilizing the replacement
components will be accepted by the dental marketplace.
Fluctuations in Quarterly Results. The Company's business is subject to
certain quarterly influences. Management's prior experience in the industry
would indicate that net sales and operating profits are generally higher in the
fourth quarter due to the purchasing patterns of dentists and are generally
lower in the first quarter due primarily to increased purchases in the prior
quarter and during the summer months due to a reduced volume of trade shows and
increased unavailability of dentists due to summer vacations. The Company plans
to increase expenses to fund greater levels of research and development and to
fund investments in joint ventures and acquisitions. To the extent that such
expenses precede or are not subsequently followed by increased revenues, the
Company's business, quarterly operating results and financial condition will be
adversely affected. Quarterly results may also be adversely affected by a
variety of other factors, including the timing of acquisitions and their related
costs, as well as the release of
12
<PAGE> 13
new products and promotions taking place within the quarter. Other factors that
may influence the Company's quarterly operating results include the timing of
introduction or enhancement of products by the Company or its competitors,
market acceptance of the TeliCam II, the InTELInet System and other new
products, development and promotional expenses relating to the introduction of
new products or enhancements of existing products, reviews in the industry press
concerning the products of the Company or its competitors, changes or
anticipated changes in pricing by the Company or its competitors, mix of
distribution channels through which products are sold, mix of products sold,
product returns, the timing of orders from major distributors, order
cancellations, delays in shipment and general economic conditions. Due to all of
the foregoing factors, it is also likely that in some future periods the
Company's operating results may be below the expectations of analysts and
investors. In such event, the price of the Company's Common Stock would likely
be materially adversely affected.
Extensive Government Regulation. The Company's products and its manufacturing
practices are subject to regulation by the United States Food and Drug
Administration ("FDA") pursuant to the Federal Food, Drug and Cosmetic Act ("FDC
Act"), and by other state and foreign regulatory agencies. Under the FDC Act,
medical and dental devices, including those under development by the Company
must receive FDA clearance or approval before they may be sold, or be exempted
from the need to obtain such clearance or approval. FDA regulations also require
the Company to adhere to certain "Good Manufacturing Practices" ("GMP")
regulations, which include validation testing, quality control and documentation
procedures. The Company's compliance with applicable regulatory requirements is
subject to periodic inspections by the FDA.
The process of obtaining required regulatory clearances or approvals can be
time-consuming and expensive, and compliance with the FDA's GMP regulations and
other regulatory requirements can be burdensome. Moreover, there can be no
assurance that the required regulatory clearances will be obtained, and those
obtained may include significant limitations on the uses of the product in
question. In addition, changes in existing regulations or the adoption of new
regulations could make regulatory compliance by the Company more difficult in
the future. Although the Company believes that its products and procedures are
currently in material compliance with all relevant FDA requirements, the failure
to obtain the required regulatory clearances or to comply with applicable
regulations could result in fines, delays or suspensions of clearances, seizures
or recalls of products, operating restrictions and criminal prosecutions, and
would have a material adverse effect on the Company.
Competition. The manufacture and distribution of medical and dental devices
is intensely competitive. The Company competes with numerous other companies,
including several major manufacturers and distributors. With respect to the
intraoral camera market, the Company has at least five major competitors. Most
of the Company's competitors have greater financial and other resources than the
Company. Consequently, such entities may begin to develop, manufacture, market
and distribute systems which are substantially similar or superior to the
Company's products.
Rapid Expansion of the Company's Business. From inception (October 23, 1995)
through June 30, 1997, the Company has experienced rapid and substantial growth
in revenues and geographic scope of operations. Any future growth may place a
significant strain on management and on the Company's financial resources and
information processing systems. The failure to recruit additional staff and key
personnel, to have sufficient financial resources, to maintain or upgrade these
financial reporting systems, or to respond effectively to difficulties
encountered during expansion could have a material adverse effect on the
Company's business, operating results and financial condition.
Reliance on International Sales and Distributors and General Risks of
International Operations. For the six-month period ended June 30, 1997,
international sales have accounted for approximately 27% 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 June 30, 1997, five of the
Company's international distributors accounted for 69% of the Company's accounts
receivable, and five of these distributors accounted for approximately
$2,173,820 or 27%, of the Company's total sales for the six-month period ended
June 30, 1997. Certain of the Company's third party distributors may also act as
resellers for competitors of the Company and could devote greater effort and
resources to marketing competitive products. The loss of, or other significant
reduction in sales to, certain of these third party distributors could have a
material adverse effect on the Company's business and results of operations. The
Company is also subject to general geopolitical risks, such as political and
economic instability and changes in diplomatic and trade relationships, in
connection with its international operations. There can be no assurance that
these risks of conducting business internationally will not have a material
adverse effect on the Company's business. Further, any failure by the Company to
predict or plan for changes in the international arena could have a material
adverse effect on the Company's business, operating results and financial
condition.
13
<PAGE> 14
Dependence on Key Personnel. The Company's future performance will depend
significantly upon its Chairman of the Board and Chief Executive Officer, Robert
H. Gurevitch, and upon certain other key employees of the Company. The loss of
service of one or more of these persons could have a material adverse effect on
the Company's business and operations. The Company has entered into Employment
Agreements with Robert H. Gurevitch and Dewey Perrigo, the Company's Vice
President of Sales, pursuant to which they each have agreed to render services
to the Company until October 1, 1999. The Company has obtained "key person" life
insurance on Mr. Gurevitch in the amount of $2,000,000, of which the Company is
the sole beneficiary, but there can be no assurance that the proceeds of such
insurance will be sufficient to offset the loss to the Company in the event of
his death. The Company does not maintain any insurance on the lives of its other
senior management. In addition, the Company's success will be dependent upon its
ability to recruit and retain qualified personnel. Any failure by the Company to
retain and attract key personnel could have a material adverse effect on the
Company's business, operating results, and financial condition.
Limited Proprietary Protection. The Company's success and ability to compete
is dependent in part upon its proprietary technology. The Company's proprietary
technology is not protected by any patents. Consequently, the Company relies
primarily on trademark, trade secret and copyright laws to protect its
technology. Also, the Company has implemented a policy that most senior and
technical employees and third-party developers sign nondisclosure agreements.
However, there can be no assurance that such precautions will provide meaningful
protection from competition or that competitors will not be able to develop
similar or superior technology independently. Also, the Company has no license
agreements with the end users of its products, so it may be possible for
unauthorized third parties to copy the Company's products or to reverse engineer
or otherwise obtain and use information that the Company regards as proprietary.
If litigation is necessary in the future, to enforce the Company's intellectual
property rights, to protect the Company's trade secrets or to determine the
validity and scope of the proprietary rights of others, such litigation could
result in substantial costs and diversion of resources and could have a material
adverse effect on the Company's business, operating results and financial
condition. Ultimately, the Company may be unable, for financial or other
reasons, to enforce its rights under intellectual property laws. In addition,
the laws of certain countries in which the Company's products are or may be
distributed may not protect the Company's products and intellectual property
rights to the same extent as the laws of the United States.
The Company believes that its products do not infringe upon any valid
existing proprietary rights of third parties. Although the Company has received
no communication from third parties alleging the infringement of proprietary
rights of such parties, there can be no assurance that third parties will not
assert infringement claims in the future. Any such third party claims, whether
or not meritorious, could result in costly litigation or require the Company to
enter into royalty or licensing agreements. There can be no assurance that the
Company would prevail in any such litigation or that any such licenses would be
available on acceptable terms, if at all. If the Company were found to have
infringed upon the proprietary rights of third parties, it could be required to
pay damages, cease sales of the infringing products and redesign or discontinue
such products, any of which alternatives, individually or collectively could
have a material adverse effect on the Company's business, operating results and
financial condition.
Conflict of Interests. Robert Gurevitch, Chairman of the Company, has loaned
money to the Company ("Loan Obligations") and has guaranteed the performance by
the Company under its leases for its Irvine and Westlake, California premises.
The Company believes that all of these transactions were on terms no less
favorable than were available from unaffiliated third parties. The Company
intends to attempt to relieve Mr. Gurevitch from his obligations under each of
these guarantees and it is possible that, in order to achieve the release of Mr.
Gurevitch from these guarantees, the Company will be required to post collateral
or provide other concessions to the recipients of the guarantees. The Company
has, in the past, entered into transactions with affiliates and there can be no
assurance that the Company will not enter into transactions with affiliated
parties in the future.
Limitation of Liability and Indemnification. The Company's Amended and Restated
Certificate of Incorporation limits, to the maximum extent permitted by the
Delaware General Corporation Law ("Delaware Law"), the personal liability of
directors for monetary damages for breach of their fiduciary duties as a
director, and provides that the Company shall indemnify its officers and
directors and may indemnify its employees and other agents to the fullest extent
permitted by law. The Company has entered into indemnification agreements with
its directors and executive officers which may require the Company, among other
things, to indemnify such directors against liabilities that arise by reason of
their status or service as directors or officers (other than liabilities arising
from willful misconduct of a culpable nature), to advance their expenses
incurred as a result of any proceeding against them as to which they could be
indemnified, has obtained director's and officer's insurance. The Company has
purchased director's and officer's liability insurance in the amount of $3.0
million. Section 145 of the Delaware Law provides that a corporation may
indemnify a director, officer, employee or agent made, or threatened to be, a
party to an action by reason of the fact that he was a director, officer,
employee or agent of the corporation or was serving at the request of the
corporation against expenses actually and reasonably incurred in connection with
such action if he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the corporation, and, with respect
to any criminal action or proceeding, if he had no reasonable cause to believe
his conduct was unlawful. Delaware Law does not permit a corporation to
eliminate a director's duty of care, and the
14
<PAGE> 15
provisions of the Company's Amended and Restated Certificate of Incorporation
have no effect on the availability of equitable remedies, such as injunction or
rescission, for a director's breach of the duty of care.
Anti-Takeover Provisions. The Company has an authorized class of 1,000,000
shares of preferred stock which may be issued by the Board of Directors on such
terms and with such rights, preferences and designations as the Board of
Directors may determine. Issuance of such preferred stock, depending upon the
rights, preferences and designations thereof, may have the effect of delaying,
deterring or preventing a change in control of the Company. In addition, certain
"anti-takeover" provisions of the Delaware Law, among other things, restrict the
ability of stockholders to effect a merger or business combination or obtain
control of the Company, and may be considered disadvantageous by a stockholder.
Product Liability. Although the Company has not experienced any product
liability claims to date, the sale and support of products by the Company may
entail the risk of such claims, and there can be no assurance that the Company
will not be subject to such claims in the future. A successful product liability
claim or claim arising as a result of use of the Company's products brought
against the Company, or negative publicity attendant to any such claim, could
have a material adverse effect upon the Company's business, operating results
and financial condition. The Company maintains product liability insurance with
coverage limits of $1,000,000 per occurrence and $1,000,000 per year. While the
Company believes that it maintains adequate insurance coverage, there can be no
assurance that the amount of insurance will be adequate to satisfy claims made
against the Company in the future, or that the Company will be able to obtain
insurance in the future at satisfactory rates or in adequate amounts.
15
<PAGE> 16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities.
None.
Item 3. Defaults in Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security-Holders.
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 11.1 Statement Regarding Computation of Net Income (Loss) Per Share
Exhibit 27.1 Financial Data Schedule
(b) Reports on Form 8-K
None.
16
<PAGE> 17
Signatures
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on behalf by the undersigned, thereto duly authorized.
Dental/Medical Diagnostic Systems, Inc.
Dated August 14, 1997 By: /s/ Ronald E. Wittman
------------------------------------------
Ronald E. Wittman
Vice President and Chief Financial Officer
17
<PAGE> 1
EXHIBIT 11.1
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND
THIRTEEN AND TWENTY-SIX WEEKS ENDED AUGUST 31, 1996
STATEMENT REGARDING COMPUTATION OF NET INCOME (LOSS) PER SHARE
<TABLE>
<CAPTION>
NET INCOME PER SHARE WAS Three Months Ended Thirteen Weeks Ended Six Months Ended Twenty-Six Weeks
CALCULATED AS FOLLOWS: June 30, 1997 August 31, 1996 June 30, 1997 August 31, 1996
---------------------- ------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C>
Primary:
Weighted average common shares outstanding 4,168,395 2,985,539 3,580,234 2,829,068
Incremental shares under stock options computed
under the treasury stock method using the
average market price of the issuer's commons
stock during the period 650,805 103,360 488,342 94,225
----------- ----------- ----------- -----------
Weighted average common and common
equivalent shares outstanding 4,819,200 3,088,899 4,068,576 2,923,293
=========== =========== =========== ===========
Fully diluted:
Weighted average common shares outstanding 4,168,395 2,985,539 3,580,234 2,829,068
Incremental shares under stock options computed
under the treasury stock method using the
market price of the issuer's common stock at
the end of the period if higher than the
average market price 914,386 104,925 630,666 104,926
----------- ----------- ----------- -----------
Weighted average common and common
equivalent shares outstanding 5,082,781 3,090,464 4,210,900 2,933,994
=========== =========== =========== ===========
Income (loss) amounts
Income before extrordinary item $ 92,252 $ 75,723 $ 139,402 $ 35,733
Extraordinary loss on early
extingishment of debt $ (234,149) $ -- $ (234,149) $ --
Net income (loss) $ (141,897) $ 75,723 $ (94,747) $ 35,733
Income (loss) per share of common stock:
Income before extraordinary item $ 0.02 $ 0.02 $ 0.03 $ 0.01
Extraordinary loss on early
extingishment of debt $ (0.06) $ -- $ (0.07) $ --
Net income (loss) $ (0.03) $ (0.02) $ (0.03) $ 0.01
Shares used in the per share calculation:
Weighted average common and common
equivalent shares outstanding 4,819,200 3,088,899 4,068,576 2,923,293
=========== =========== =========== ===========
Weighted average common shares outstanding 4,168,395 -- 3,580,234 --
=========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE INTERIM
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF DENTAL/MEDICAL DIAGNOSTIC
SYSTEMS, INC. AS OF AND FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 1997
INCLUDED IN THIS REPORT ON FORM 10-QSB AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 7,219,760
<SECURITIES> 0
<RECEIVABLES> 1,826,411
<ALLOWANCES> 20,975
<INVENTORY> 1,924,840
<CURRENT-ASSETS> 11,185,625
<PP&E> 559,918
<DEPRECIATION> 122,333
<TOTAL-ASSETS> 11,764,652
<CURRENT-LIABILITIES> 1,860,422
<BONDS> 0
0
0
<COMMON> 50,555
<OTHER-SE> 9,665,913
<TOTAL-LIABILITY-AND-EQUITY> 11,764,652
<SALES> 8,183,263
<TOTAL-REVENUES> 8,183,263
<CGS> 5,027,720
<TOTAL-COSTS> 2,770,761
<OTHER-EXPENSES> 76,431
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 132,119
<INCOME-PRETAX> 225,119
<INCOME-TAX> 85,795
<INCOME-CONTINUING> 139,402
<DISCONTINUED> 0
<EXTRAORDINARY> (234,149)
<CHANGES> 0
<NET-INCOME> (94,747)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> (.03)
</TABLE>
