<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 March 31, 1998
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 13-3185553
------------------------------- -------------------
(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
May 13, 1998: 5,120,897
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
March 31, 1998
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
PART I - FINANCIAL INFORMATION
Item 1. Interim Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheet-March 31, 1998 3
Condensed Consolidated Statements of Operations
Three Month Periods Ended March 31, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows
Three Month Periods Ended March 31, 1998 and 1997 5
Notes to Interim Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis or Plan of Operation 9
PART II - OTHER INFORMATION
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
(a) Exhibits 18
(b) Reports on Form 8-K 18
Signatures 19
</TABLE>
2
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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>
March 31, 1998
--------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,904,675
Accounts receivable, less allowance for
bad debts and sales returns of $20,975 1,226,066
Inventories 3,132,714
Deferred income taxes --
Debt issuance costs, net 289,516
Prepaid expenses and other 673,592
------------
Total current assets 11,226,563
Property and equipment, net 572,222
Intangible assets, net 83,845
Loans receivable from related parties 126,000
Other assets 1,037,649
------------
Total assets $ 13,046,279
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligations $ 25,282
Notes payable to related parties 23,458
Accounts payable 1,135,344
Notes payable 2,936,396
Accrued liabilities 508,712
Customer deposits 53,061
------------
Total current liabilities 4,682,253
Notes payable 267,686
Capital lease obligations 36,035
Other long term liabilities 11,968
------------
Total liabilities 4,997,942
------------
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:
5,115,777 shares issued and outstanding 51,157
Paid in capital 12,891,539
Accumulated deficit (4,894,359)
------------
Total stockholders' equity 8,048,337
------------
Total liabilities and stockholders' equity $ 13,046,279
============
</TABLE>
The accompanying notes are an integral part of these interim condensed
consolidated financial statements.
3
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DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 1998 AND 1997
(Unaudited)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
March 31, 1998 March 31, 1997
-------------- --------------
<S> <C> <C>
Net sales $ 2,110,531 $ 3,928,282
Cost of sales 1,550,089 2,477,644
------------ ------------
Gross profit 560,442 1,450,638
Selling, general & administrative expenses 1,729,619 1,200,720
Research and development expenses 142,387 35,761
------------ ------------
Operating (loss) income (1,311,564) 214,157
Interest income (44,273) --
Interest expense 83,793 89,692
Amortization of debt issuance costs 10,484 48,061
------------ ------------
(Loss) income before income taxes (1,361,568) 76,404
Provision for income taxes -- 29,254
------------ ------------
Net (loss) income $ (1,361,568) $ 47,150
============ ============
Comprehensive (loss) income $ (1,361,568) $ 47,150
============ ============
(Loss) earnings per share:
Basic $ (.27) $ .02
Diluted (.27) .01
Weighted average number of shares:
Basic 5,115,777 2,985,538
Diluted 5,115,777 3,451,357
</TABLE>
The accompanying notes are an integral part of these interim condensed
consolidated financial statements.
4
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DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 1998 AND 1997
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1998 March 31, 1997
------------------ ------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (1,361,568) $ 47,150
Adjustments to reconcile net
income (loss) to net cash used by
operating activities:
Depreciation and amortization 121,732 110,385
Allowances for returns and
doubtful accounts -- (86,428)
Other -- (795)
Changes in operating assets and liabilities:
Accounts receivable 741,548 (581,717)
Inventories (236,444) 130,965
Income taxes receivable --
Prepaid expenses and other (284,531) 32,805
Other assets (545,700) (298,963)
Accounts payable (387,069) 231,936
Accrued liabilities (499,461) 27,594
Income taxes payable (9,000) (9,224)
Customer deposits 10,066 (5,011)
------------ ------------
Net cash used by operating activities (2,450,427) (401,303)
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (70,625) (12,949)
------------ ------------
Net cash used in investing activities (70,625) (12,949)
------------ ------------
Cash flows from financing activities:
Decrease in other long term liabilities -- (1,328)
Net proceeds from issuance of
notes payable 4,500,000 --
Debt issuance cost (300,000) --
Long term note payable 267,686
Repayments on borrowings to
related parties (21,572) --
Principal payments on capital
lease obligations (1,897) --
Increase in other long term liabilities 448 --
------------ ------------
Net cash provided by (used in)
financing activities 4,444,665 (1,328)
------------ ------------
Net increase (decrease) in cash
and cash equivalents 1,923,613 (415,580)
Cash and cash equivalents,
beginning of period 3,981,062 1,058,836
------------ ------------
Cash and cash equivalents,
end of period $ 5,904,675 $ 643,256
============ ============
Supplemental cash flow information:
Interest paid $ 5,924 $ 15,792
Income taxes paid $ 9,000 $ 38,104
</TABLE>
The accompanying notes are an integral part of these interim condensed
consolidated financial statements.
5
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DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 1998
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-month period ended March 31, 1998 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 1998. 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, 1997.
2. Summary of Significant Accounting Policies
Concentration of Credit Risk and Major Customers
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of trade accounts
receivable. Also, at various times throughout the year, cash balances are
maintained in excess of Federally insured limits.
For the three-month period ended March 31, 1998 and 1997, five and five of
the Company's customers accounted for 12% and 28% of sales, respectively. At
March 31, 1998 and 1997 five and five of the Company's customers accounted
for approximately 57% and 55% of trade accounts receivable, respectively.
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.
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.
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.
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 sales 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.
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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
provides warranties on 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.
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 currently payable for the period and
the change during the period in deferred tax assets and liabilities.
Computation of Earnings Per Share
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
128; "Earnings Per Share" for the year ended December 31, 1997, and has
reported earnings per common share for all periods presented in accordance
with the new standard. Net income (loss) per common share is computed by
dividing net income (loss) by the weighted average number of shares of
common stock outstanding during the period. Net income (loss) per common
share assuming dilution is computed by dividing net income (loss) by the
weighted average number of shares of common stock outstanding plus the
number of additional common shares that would have been outstanding if all
dilutive potential common shares had been issued. Potential common shares
related to stock options and stock warrants are excluded from the
computation when their effect is antidilutive.
The following is a reconciliation of the number and denominator of the basic
and diluted earnings per share (EPS) computations for the quarters ended
March 31, 1998 and 1997:
<TABLE>
March 31, 1998 March 31, 1997
-------------- --------------
<S> <C> <C>
Numerator:
Net (loss) income - numerator for net income per
common share and net income per common share
assuming dilution $(1,361,568) $ 47,150
Denominator:
Denominator for net income per common share -
weighted average shares 5,115,777 2,985,538
Effect of dilutive securities:
Stock options and warrants -- 465,819
Denominator for net income per common share,
assuming Dilution:
Adjusted weighted average shares and assumed conversions 5,115,777 3,451,357
</TABLE>
Common shares related to stock options and stock warrants that are
antidilutive amounted to approximately 5,026,987 and 824,831 for the
quarters ended March 31, 1998 and 1997, respectively.
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Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," which requires prominent disclosure of
comprehensive income, as defined in the SFAS, including comparative
disclosures in interim financial statements.
Recently Issued Accounting Standards
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. This statement will change the way
public companies report information about segments of their business in
their annual financial statements and requires them to report selected
segment information in their quarterly reports issued to shareholders. It
also requires entity-wide disclosures about the products and services an
entity provides, the material countries in which it holds assets and reports
revenues, and its major customers. The Statement is effective for fiscal
years beginning after December 15, 1997. Management has not yet determined
the effect, if any, of SFAS No. 131 on the consolidated financial
statements.
3. Related Party Transactions
From December 1995 through February 1996, Robert H. Gurevitch, Chairman of
the Board and Chief Executive Officer of the Company, and Boston Marketing
Company, Ltd. ("Boston Marketing"), an affiliate of Hiroki Umezaki, a former
Director of the Company, loaned the Company an aggregate of $377,015. The
Promissory Notes evidencing such loans bear interest at 6% per annum and
were originally payable within six months. On February 26, 1996, the Company
repaid $50,000 to each of Mr. Gurevitch and Boston Marketing. In November
1996, Mr. Gurevitch and Boston Marketing each agreed to extend the term of
their respective notes. On May 23, 1997, Boston Marketing was paid the
remaining principal balance of $150,000 of its loan plus the accrued
interest of $3,526. Mr. Gurevitch was paid $25,000 on July 10, 1997 and
$26,850 on October 22, 1997; $5,000 on October 30, 1997; $13,787 on November
1, 1997; $3,447 on December 1, 1997; $3,447 on January 1, 1998; $5,319 on
February 1, 1998; $12,806 on February 19, 1998 leaving approximately $23,458
outstanding.
On May 27, 1997, the Company loaned Dewey Perrigo, Vice President of Sales
of the Company, and Andrea Niemiec-Perrigo, an employee of the Company,
$126,000 for the purpose of buying a home. The Promissory Notes evidencing
such loans bear interest at prime plus .25% (presently 8.75%), and are due
and payable on May 27, 1999.
4. Inventories
Inventories consisted of the following:
<TABLE>
<CAPTION>
MARCH 31, 1998
--------------
<S> <C>
Raw materials $ 821,458
Work in progress 895,359
Finished goods 1,415,897
----------
Total $3,132,714
==========
</TABLE>
5. Capital Transactions
On March 2, 1998, the Company entered into an agreement with accredited
investors and institutional purchasers for the private placement (the "Debt
Placement") of its 12% Senior Subordinated Notes due 1999 (the "Notes") and
450,000 warrants (the "1998 Warrants"). The Debt Placement was consummated
on March 19, 1998. The 1998 Warrants are (i) exercisable commencing on May
15, 1998, and for five years thereafter for the purchase of one share of
Common Stock per Warrant; and (ii) at an exercise price of $5.812 per share.
The Notes (i) bear interest payable semi-annually at a rate of 12% per
annum; (ii) mature on the first anniversary of the date of issuance; and
(iii) may be repaid by the Company prior to maturity at one hundred and two
(102%) percent of the amount of the unpaid principal plus interest due as of
the date of repayment. As a result of the warrant issuance, the Senior
Subordinated Notes were discounted by $1,620,225, which will be amortized
over the term of the Notes. If the Notes are unpaid at maturity, each Note
holder has the option to convert the outstanding principal and interest then
due on such Note into Common Stock of the Company (the "Conversion Shares")
at a conversion price equal to eighty (80%) percent of the average of the
five lowest closing bid prices for the twenty consecutive trading days prior
to the date of conversion. The unpaid principal and interest then due on the
Notes is convertible into a maximum aggregate amount of 500,000 shares of
Common Stock. Depending on the stock price at the time of conversion, more
than 500,000 shares of
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common stock may be required to permit conversion of one hundred (100%)
percent of the unpaid principal and interest then due on the Notes into
Common Stock. The Company has agreed to present a proposal to its
stockholders at the next annual meeting of its stockholders to approve
issuance of a sufficient number of shares of Common Stock to permit
conversion upon default of one hundred (100%) percent of the unpaid
principal and interest then due on all of the outstanding Notes to Common
Stock.
6. Income Taxes
Due to the loss position of the Company, a full valuation allowance has been
provided against the deferred tax asset as realization is not reasonably
assured at this time.
7. Subsequent Event
The Company had obtained distribution rights under an agreement with Ion
Laser Technology, Inc. ("ILT") for a composite curing and whitening device
under development by ILT. That device, which was similar in many respects to
the Apollo 95E, was intended to be marketed by the Company as the Apollo
9500 in the United States and Canada. On May 4, 1998, ILT announced that it
would not be able to perform its obligations under ILT's agreement with the
Company. According to the terms of the agreement, ILT is required to repay
the Company approximately $500,000 in inventory advances and prepaid license
fees. The Company now intends to introduce the Apollo 95E into the United
States and Canada. Shipment of the 95E into the United States requires
regulatory approval from the Food and Drug Administration and, while no
assurance of receipt of the required approvals can be given, the Company
expects that a period of 60 to 90 days will be required to obtain
necessary approvals. See "Cautionary Statements and Risk Factors --
Extensive Government Regulation."
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-month periods ended March 31, 1998 and 1997. 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.
Dental Medical Diagnostic Systems, Inc. ("Company") designs, develops,
manufactures and sells high technology dental equipment. The Company was
organized in New York in 1981 under the name Edudata Corporation and
reincorporated in Delaware in 1983. 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. From 1988 to early 1996, the Company's operations were limited to
exploring opportunities to acquire or to become an operating business.
Currently, the Company's primary existing product emphasis is on the
manufacture and sale of an intraoral camera system known as the "TeliCam II
System," a multi-operatory intraoral camera system known as the InTELInet, for
use in connection with the TeliCam II System, and a teeth whitening and curing
device known as the Apollo 95E which the Company markets internationally. The
Company had obtained distribution rights under an agreement with Ion Laser
Technology, Inc. ("ILT") for a composite curing and whitening device under
development by ILT. That device, which was similar in many respects to the
Apollo 95E, was intended to be marketed by the Company as the Apollo 9500 in the
United States and Canada. On May 4, 1998, ILT announced that it would not be
able to perform its obligations under ILT's agreement with the Company. The
Company now intends to introduce the Apollo 95E into the United States and
Canada. Shipment of the 95E into the United States requires regulatory approval
from the Food and Drug Administration and, while no assurance of receipt of the
required approvals can be given, the Company expects that a period of 60 to
90 days will be required to obtain necessary approvals See "Cautionary
Statements and Risk Factors -- Extensive Government Regulation." The Company is
also developing an updated version of its intraoral camera system, the "TeliCam
Elite" and plans to introduce the updated camera in the second quarter of fiscal
year 1998.
The TeliCam II 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
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treatment plans. The TeliCam II 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.
The Company commenced shipments of a predecessor of the TeliCam II System known
as the "TeliCam I System" to customers in February 1996, and shipped TeliCam II
Systems commencing in the second quarter of 1997. The Company believes that the
market for intraoral cameras such as the TeliCam II system is a market which has
matured. TeliCam System II sales have recently been below levels of prior
comparable periods, a trend which the Company expects to continue.
The Company recently introduced a curing and whitening device, the Apollo 95E,
to markets outside of the US and Canada. The Apollo 95E was developed by S.E.D.
Gerant ("S.E.D."), a developer and manufacturer of medical and dental devices
organized under the laws of France which was acquired by the Company in 1997.
The Company believes that the Apollo 95E produces faster results than products
currently available in that market place. This product is designed to cure
composite material in three seconds or less, and to produce teeth whitening in a
dental operatory in less than one hour. The Company will also market the
chemical composite and whitening materials to be used with this product.
See "Cautionary Statements and Risk Factors -- Substantial Dependence on Third
Parties -- Suppliers."
The Company has entered into an agreement with Suni Imaging Microsystems, Inc.
("Suni") to develop digital x-ray technology for incorporation into systems for
the dental market. The Company has obtained exclusive rights to market products
to the dental market incorporating certain digital x-ray technology developed by
Suni. Suni will retain the rights to developed microchip technology underlying
the x-ray system it develops for the Company. 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, if successfully developed for the Company by Suni, would provide an
improved image quality digital x-ray system at a price expected to be lower than
competitive systems. This technology also is designed to allow database storage
and recall of images for comparison purposes. The development of the technology
will be done by Suni and funded by the Company. No assurance can be given that
digital x-ray technology will be successfully developed, or if the technology is
developed, that the Company will be able to commercially exploit it.
Additionally, the Company believes that any products it may develop
incorporating the digital x-ray technology will require FDA approval prior to
marketing, and as a consequence, the timing of the domestic introduction of such
product is uncertain. The Company will determine whether or not to proceed with
the marketing of such product based upon the results of the development. See
"Cautionary Statements and Risk Factors -- Substantial Dependence on Third
Parties -- Suppliers."
In November 1996, the Company introduced its InTELInet Video Monitoring System
("InTELInet") which generally includes two TeliCam systems, a printer, a
video-cassette monitor, cabling and installation. InTELInet creates a
video-electronic information link between the different operatories of the
dental office. InTELInet is different from most 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 staffs to conduct more than
one patient examination at a time using two or more intraoral cameras
simultaneously. InTELInet is thus 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. 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 US 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. While
there can be no assurance that digital x-ray technology will be developed, the
Company has designed the InTELInet system to be compatible with the digital
x-ray technology the Company is currently developing with Suni Imaging
Microsystems, Inc.
On February 2, 1988 the Company formed "DMDS, Ltd." a wholly owned subsidiary
created under the laws of the United Kingdom. DMDS, Ltd. will hold the assets
acquired from S.E.D. In addition, the Company currently plans to market certain
of its new products internationally through DMDS, Ltd.
On March 2, 1998, the Company entered into an agreement with accredited
investors and institutional purchasers for the private placement (the "Debt
Placement") of its 12% Senior Subordinated Notes due 1999 (the "Notes") and
450,000 warrants (the "1998 Warrants"). The Debt Placement was consummated on
March 19, 1998. The 1998 Warrants are (i) exercisable commencing on May 15,
1998, and for five years thereafter for the purchase of one share of Common
Stock per Warrant; and (ii) at an exercise price of $5.812 per share. The Notes
(i) bear interest payable semi-annually at a rate of 12% per annum; (ii) mature
on the first anniversary of the date of issuance; and (iii) may be repaid by the
Company prior to maturity at one hundred and two (102%) percent of the amount of
the unpaid principal plus interest due as of the date of repayment. As a result
of the warrant issuance, the Senior Subordinated Notes were discounted by
$1,620,225, which will be amortized over the term of the Notes. If the Notes are
unpaid at maturity, each Note holder has the option to convert the outstanding
principal and interest then due on such Note into Common Stock of the Company
(the "Conversion Shares") at a conversion price equal to eighty (80%) percent of
the average of
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the five lowest closing bid prices for the twenty consecutive trading days prior
to the date of conversion. The unpaid principal and interest then due on the
Notes is convertible into a maximum aggregate amount of 500,000 shares of Common
Stock. Depending on the stock price at the time of conversion, more than 500,000
shares of common stock may be required to permit conversion of one hundred
(100%) percent of the unpaid principal and interest then due on the Notes into
Common Stock. The Company has agreed to present a proposal to its stockholders
at the next annual meeting of its stockholders to approve issuance of a
sufficient number of shares of Common Stock to permit conversion upon default of
one hundred (100%) percent of the unpaid principal and interest then due on all
of the outstanding Notes to Common Stock.
Results of Operations
For the three-month periods ended March 31, 1998 and 1997, net sales totaled
$2,110,531 and $3,928,282, respectively for the quarters. The Company incurred
an operating loss of $1,311,564 for the quarter ended March 31, 1998 and an
operating profit of $214,157 for the quarter ended March 31, 1997.
Net sales for the three-month period ended March 31, 1998 were $2,110,531
compared to $3,928,282 for the three-month period ended March 31, 1997, or a
decrease of approximately 46%. Sales are comprised primarily of sales of TeliCam
Systems and related products. The decrease in sales was primarily due to reduced
TeliCam sales both domestically and internationally resulting from weaker demand
and increased competition as the market for intraoral cameras matured. The
Company expects the decline in TeliCam sales to continue into the future.
Partially offsetting the reduced TeliCam volume was the introduction of the
Apollo 95E, a tooth whitening and curing device, in Europe. [Although no
assurance can be given that Apollo 95E sales will ultimately offset the reduced
TeliCam sales, the Company expects it will not have the opportunity to fully
offset the decline in TeliCam sales until it is able to introduce the Apollo 95E
in the United States.]
Cost of sales for the three month period ended March 31, 1998 were $1,550,089 or
73% of sales as compared to $2,477,644 or 63% of sales for the three months
ended March 31, 1997. Cost of sales increased as a percentage of sales primarily
due to the reduced sales volume effect on fixed overhead and a change in sales
mix to lower margin InTELInet sales. The Company expects margins on the sale of
the TeliCam's will be reduced in the next quarter as inventory of the TeliCam
II's will be sold at a discount in preparation for the introduction of the
TeliCam Elite.
Selling, general and administrative expenses totaled $1,729,619 and $1,200,720
for the three-months ended March 31, 1998 and 1997, respectively. The increase
in expense is primarily due to increased salary and wages, advertising, legal
and accounting expenses. These increases were primarily due to preparation for
the curing and whitening product introductions. These expenses are expected to
continue to increase as sales volume increases and as new products are
introduced. The Company expects that significant expenses will be incurred in
connection with introduction of the Apollo 95E.
Research and development expenses totaled $142,387 and $35,761 for the
three-month periods ended March 31, 1998 and 1997, respectively. The increase is
primarily the result of continued expenditures on the development of the digital
x-ray technology. 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 are expected to continue into future
periods, particularly in connection with the Company's digital x-ray product and
in connection with the investigation and/or development of additional product
lines.
Amortization of debt issuance cost totaled $10,484 and $48,061 for the three
months periods ended March 31, 1998 and 1997, respectively. The amortization in
the first quarter of 1998 is a result of the costs associated with the $4.5
million Debt Placement on March 19, 1998 and in the first quarter of 1997, was a
result of the Bridge Notes issued in November 1996. This cost will continue into
future periods.
Interest income totaled $44,273 for the three-month period ended March 31, 1998.
This is primarily the result of investing the net proceeds of the Offering and
Private Placement in a short-term management account through Comerica
Securities. The funds from the private debt placement and the public offering
were not available in the prior period, therefore, there was no interest income
reported in the three-month period ended March 31, 1997.
Interest expense totaled $83,793 and $89,692, respectively for the three month
periods ended March 31, 1998 and 1997, and consisted of interest paid on capital
lease obligations, interest accrued on the $4.5 million Debt Placement, interest
accrued on the Comerica capital expenditure line, and notes payable to related
parties. The increase year-to-date is primarily due to the amortization of debt
discount and accrued interest on the $4.5 million Debt Placement. This expense
will also continue into future periods.
Capital Resources and Liquidity
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For the three-month period ended March 31, 1998, the Company used net cash of
$2,450,427 in operations. Accounts receivable increased by $741,548 to
$1,226,066 at March 31, 1998 primarily due to the introduction of the Apollo 95E
in Europe. Accounts payable and accrued liabilities totaling $1,644,056 at March
31, 1998 decreased from $2,539,585 at the prior year-end period primarily due to
the reduced sales volume. Inventory levels increased $236,444 primarily due to
lack of anticipated sales volume.
Capital expenditures totaled $70,625 for the three month period ended March 31,
1998 and was primarily due to the new computer network system hardware and
software that is currently being implemented. Cash and cash equivalents on hand
at the end of the period were $5,904,675. The Debt Placement of the Company in
March 1998 provided approximately $4,230,000 in cash to the Company after
expenses.
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 at the rate of prime plus .25% per
annum (8.75% at March 31, 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. No amounts were outstanding at March 31, 1998.
On December 10, 1997, the Company finalized a second agreement with Comerica
Bank ("Comerica") extending up to a $500,000 line of credit to the Company for
capital expenditures, secured by a first priority interest in the Company's
assets. The credit facility bears interest at a rate of prime plus .5% per annum
(9.0% at March 31, 1998). The line expires on December 10, 1998. The principal
balance will amortize over a thirty-six--(36) month period. Borrowings are at
80% of the capital expenditure.
At March 31, 1998, $267,686 was outstanding.
At present, the expenditures for continued research and development for products
incorporating digital x-ray technology is the only significant future commitment
and will be financed by the remaining proceeds of the May 14, 1997 secondary
public offering and the $4.5 million Debt Placement. Based on its current
operating plan, the Company anticipates that unless a substantial portion of the
Company's outstanding redeemable warrants are exercised during the current
fiscal year, in addition to the remaining proceeds of the Offering, together
with the credit facility and proceeds from the Debt Placement, further capital
will be required during the next twelve months to satisfy the Company's expected
increased working capital and research and development requirements for the new
products. Exercise of the Company's redeemable warrants is unlikely unless the
market price of the Company's common stock is in excess of the exercise of the
redeemable warrants and, consequently, there can be no assurance that a
significant portion of the Company's outstanding redeemable warrants will be
exercised. The Company is currently exploring alternatives to fulfill its
financing requirements. No assurance can be given that additional financing will
be available when needed or that, if available, it will be on terms favorable to
the Company or its stockholders. If needed funds are not available, the Company
may be required to curtail its operations, which could have a material adverse
effect on the Company's business, operating results and financial condition.
There can be no assurance that the Company's working capital requirements during
this period will not exceed its available resources or that these funds will be
sufficient to meet the Company's longer-term cash requirements for operations.
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 possible costs of obtaining capital, as well as the
release of new products and promotions taking place within the quarter. The
Company plans to continue to fund research and development and to increase
working capital requirements for the new products. 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.
Year 2000 Issue
Many computer systems experience problems handling dates beyond the year 1999.
Therefore, some computer hardware and software will need to be modified prior to
the year 2000 in order to remain functional. The Company is assessing both the
internal readiness of its computer systems and compliance of its computer
products and software sold to customers for handling the year 2000. The Company
expects to implement successfully the systems programming changes necessary to
address year 2000 issues,
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and does not believe that the cost of such actions will have a material effect
on the Company's results of operations or financial condition. There can be no
assurance, however, that there will not be a delay in, or increased costs
associated with the implementation of such changes, and the inability to
implement such changes could have an adverse effect on future results of
operations.
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, 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 II 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 twelve months ended
December 31, 1997 the Company had a net loss after extraordinary item of
$2,044,729, and for the three months ended March 31, 1998 the Company had a net
loss of $1,361,568. At March 31, 1998, the Company's accumulated deficit was
$4,894,359. 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 II System has been the
Company's primary product and, together with related products such as the
InTELInet system, accounted for a substantial portion of the Company's revenue.
See " -- Importance of New Product Development to Growth." The Company believes
that the market for intraoral cameras such as the TeliCam II system is a market
which has matured. TeliCam System II sales have recently been below levels of
prior comparable periods, a trend which the Company expects to continue. If the
Company is unable to successfully develop and introduce additional products and
product lines, 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 successfully introduce new products, particularly, a tooth whitening
and curing device suitable for the United States market such as the Apollo 95E,
a line of tooth whitening chemicals and composites, and the digital x-ray
technology under development for the Company by Suni, will be a significant
factor in the Company's ability to grow and remain competitive. See "Cautionary
Statements and Risk Factors -- Substantial Dependence on Third Parties --
Suppliers." Development of new product lines is risk intensive as evidenced by
ILT's recent announcement that it will be unable to perform its obligations
under its agreement with the Company to develop and supply the Apollo 9500 to
the Company. 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. There are a number of manufacturing and design risks inherent in
engineering high cost custom built prototypes upon which development and
contracting decisions are often made, into commercial products able to be
manufactured in large quantities at acceptable cost. Also, 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.
Need For Additional Financing. Based on its current operating plan, the
Company anticipates that unless a substantial portion of the outstanding
warrants of the Company are exercised by the respective holders thereof, in
addition to the remaining proceeds of the Offering, the credit facility and the
proceeds of the Debt Placement, further capital will be required during the next
twelve months to satisfy the Company's expected increased working capital and
research and development requirements for its planned new products. The Company
is currently exploring alternatives to fulfill these requirements. No assurance
can be given that additional financing will be available when needed or that, if
available, it will be on terms favorable to the Company or its stockholders. If
needed funds are not available, the Company may be required to curtail its
operations, which could have a material adverse effect on the Company's
business, operating results and financial condition. If additional funds are
raised through
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the issuance of equity securities, additional dilution to stockholders may
occur. In addition, if sufficient funds to repay the Notes are not available,
the Notes may be converted to shares of Common Stock and additional dilution to
stockholders may occur.
Expansion through Undetermined Acquisitions and Joint Ventures. The Company
intends to expand its product lines and domestic and international markets, in
part, through acquisitions. The Company's ability to expand successfully through
acquisitions will depend upon the availability of suitable acquisition
candidates at prices acceptable to the Company, the Company's ability to
consummate such transactions and the availability of financing on terms
acceptable to the Company. There can be no assurance that the Company will be
successful in completing acquisitions. Such transactions involve numerous risks,
including possible adverse short-term effects on the Company's operating results
or the market price of the Common Stock. These acquisitions and joint ventures
may not be subject to approval or review by the Company's stockholders. The
Company does not expect that it will obtain an appraisal by any independent
appraisers with respect to any such acquisition. Certain of the Company's future
acquisitions may also give rise to an obligation by the Company to make
contingent payments or to satisfy certain repurchase obligations, which payments
could have an adverse financial effect on the Company. In addition, integrating
acquired businesses may result in a loss of customers or product lines of the
acquired businesses and also requires significant management attention and may
place significant demands on the Company's operations, information systems and
financial resources. The failure effectively to integrate acquired businesses
with the Company's operations could adversely affect the Company. In addition,
the Company competes for acquisition opportunities with companies which have
significantly greater financial and management resources than those of the
Company. There can be no assurance that suitable acquisition opportunities will
be identified, that any such transactions can be consummated, or that, if
acquired, such new businesses can be integrated successfully and profitably into
the Company's operations. Moreover, there can be no assurance that the Company's
historic rate of growth will continue, that the Company will continue to
successfully expand, or that growth or expansion will result in profitability.
The Company also intends to expand its product lines and domestic and
international markets through joint ventures. The Company's ability to expand
successfully through joint ventures will depend upon the availability of
suitable joint venture candidates whose terms are acceptable to the Company, the
Company's ability to consummate such transactions and the availability of
financing on terms acceptable to the Company. There can be no assurance that the
Company will be successful in completing joint ventures. Such transactions
involve numerous risks, including possible adverse short-term effects on the
Company's operating results or the market price of the Common Stock. The failure
effectively to integrate joint ventures with the Company's operations could
adversely affect the Company. In addition, the Company competes for expansion
opportunities with companies which have significantly greater financial and
management resources than those of the Company. There can be no assurance that
suitable investment opportunities will be identified, that any such transactions
can be consummated, or that such new businesses can be integrated successfully
and profitably into the Company's operations. Moreover, there can be no
assurance that the Company's historic rate of growth will continue, that the
Company will continue to successfully expand, or that growth or expansion will
result in profitability.
Substantial Dependence on Third Parties: The Company substantially depends upon
third parties for several critical elements of its business including the
development and licensing for distribution of its products.
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. The Company has an oral agreement with
S.E.D. to manufacture its Apollo 95E product for sale internationally. Dr.
Duret, president of S.E.D. will oversee manufacturing of the Apollo 95E for the
Company, and will render consulting services for the Company. If S.E.D. were
unable to
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meet the Company's requirements, the Company would have to obtain an alternative
manufacturing arrangement. The Company believes that such manufacturing
capability could be developed by the Company or obtained from third parties, but
that developing or obtaining alternative capacities may take up to four months.
The potential delay associated with either developing or locating an alternative
source of supply could have a significant adverse effect on the Company's
operating results and financial condition.
The Company will be dependent upon third party developers and suppliers for the
development and manufacture of tooth whitening chemicals and composites for sale
with the Apollo 95E. Although tooth whitening chemicals and composites usable
with the Apollo 95E are commercially available, failure by the Company to
develop and market a proprietary line of tooth whitening and composite chemicals
would have an adverse effect on the companies earnings and revenues because of
higher cost of goods associated with and lesser functionality of commercially
available products.
Suni. Under the Company's licensing and development arrangements with Suni
for the development of digital x-ray technology for the dental market, the
Company has obtained exclusive marketing rights to products incorporating
certain digital x-ray technology developed by Suni. The Company has paid
significant advances to, and is dependent upon Suni to successfully develop the
digital x-ray technology and to commercialize the digital x-ray technology.
There can be no assurance that Suni will be successful in this endeavor. If Suni
should not develop a digital x-ray product acceptable to the Company or the
marketplace, this would have a material adverse effect on the Company's
operating results and financial condition. The agreement with Suni provides that
the Company is obligated to make minimum royalty payments if products
incorporating the developed technology are introduced to the market in order to
maintain exclusivity. There can be no assurance that the Company will be able to
meet the royalty payments required to maintain exclusivity. Suni would then be
able to license the developed technology to the Company's competitors, or grant
an exclusive license to a competitor, which could have a material adverse effect
on the Company's operating results and financial condition.
Fluctuations in Quarterly Results. The Company's business is subject to
certain quarterly influences. Management's prior experience in the industry
would indicate that net sales and operating profits are generally higher in the
fourth quarter due to the purchasing patterns of dentists and are generally
lower in the first quarter due primarily to increased purchases in the prior
quarter and during the summer months due to a reduced volume of trade shows and
increased unavailability of dentists due to summer vacations. The Company plans
to increase expenses to fund greater levels of research and development and to
fund investments in joint ventures and acquisitions. To the extent that such
expenses precede or are not subsequently followed by increased revenues, the
Company's business, quarterly operating results and financial condition will be
adversely affected. Quarterly results may also be adversely affected by a
variety of other factors, including the timing of acquisitions and their related
costs, as well as the release of new products and promotions taking place within
the quarter. Other factors that may influence the Company's quarterly operating
results include the timing of introduction or enhancement of products by the
Company or its competitors, market acceptance of the TeliCam II, the InTELInet
System and other new products, development and promotional expenses relating to
the introduction of new products or enhancements of existing products, reviews
in the industry press concerning the products of the Company or its competitors,
changes or anticipated changes in pricing by the Company or its competitors, mix
of distribution channels through which products are sold, mix of products sold,
product returns, the timing of orders from major distributors, order
cancellations, delays in shipment and general economic conditions. Due to all of
the foregoing factors, it is also likely that in some future periods the
Company's operating results may be below the expectations of analysts and
investors. In such event, the price of the Company's Common Stock would likely
be materially adversely affected.
Extensive Government Regulation. The Company's products and its
manufacturing practices are subject to regulation by the United States Food and
Drug Administration ("FDA") pursuant to the Federal Food, Drug and Cosmetic Act
("FDC Act"), and by other state and foreign regulatory agencies. Under the FDC
Act, medical and dental devices, including those under development by the
Company must receive FDA clearance or approval before they may be sold, or be
exempted from the need to obtain such clearance or approval. FDA regulations
also require the Company to adhere to certain "Good Manufacturing Practices"
("GMP") regulations, which include validation testing, quality control and
documentation procedures. The Company's compliance with applicable regulatory
requirements is subject to periodic inspections by the FDA.
The Company will need 510(k) approval for its Apollo 95E and for any new
products which are developed in the future using digital x-ray technology. 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.
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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 twelve major competitors. Some
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 March 31, 1998, 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 three-month period ended March 31, 1998,
international sales have accounted for approximately 12% 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
US dollar which could materially adversely affect US 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 March 31, 1998, five of the Company's
international distributors accounted for 57% of the Company's accounts
receivable, and five of these distributors accounted for approximately $254,809
or 12 %, of the Company's total sales for the three-month period ended March 31,
1998. Certain of the Company's third party distributors may also act as
resellers for competitors of the Company and could devote greater effort and
resources to marketing competitive products. The loss of, or other significant
reduction in sales to, certain of these third party distributors could have a
material adverse effect on the Company's business and results of operations. The
Company is also subject to general geopolitical risks, such as political and
economic instability and changes in diplomatic and trade relationships, in
connection with its international operations. There can be no assurance that
these risks of conducting business internationally will not have a material
adverse effect on the Company's business. Further, any failure by the Company to
predict or plan for changes in the international arena could have a material
adverse effect on the Company's business, operating results and financial
condition.
Dependence on Key Personnel. The Company's future performance will depend
significantly upon its Chairman of the Board and Chief Executive Officer, Robert
H. Gurevitch, and upon certain other key employees of the Company. The loss of
service of one or more of these persons could have a material adverse effect on
the Company's business and operations. The Company has entered into Employment
Agreements with Robert H. Gurevitch and Dewey Perrigo, the Company's Vice
President of Sales, pursuant to which they each have agreed to render services
to the Company until October 1, 1999. The Company has obtained "key person" life
insurance on Mr. Gurevitch in the amount of $2,000,000, of which the Company is
the sole beneficiary, but there can be no assurance that the proceeds of such
insurance will be sufficient to offset the loss to the Company in the event of
his death. The Company does not maintain any insurance on the lives of its other
senior management. In addition, the Company's success will be dependent upon its
ability to recruit and retain qualified personnel. Any failure by the Company to
retain and attract key personnel could have a material adverse effect on the
Company's business, operating results, and financial condition.
Limited Proprietary Protection. The Company's success and ability to compete
is dependent in part upon its proprietary technology. The Company's proprietary
technology is not protected by any patents, with the exception of the Apollo 95E
which has a patent pending. 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.
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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 (Technology Drive) 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 or executive officers 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) and to
advance their expenses incurred as a result of any proceeding against them as to
which they could be indemnified. The Company has purchased director's and
officer's liability insurance in the amount of $3.0 million. Section 145 of the
Delaware Law provides that a corporation may indemnify a director, officer,
employee or agent made, or threatened to be, a party to an action by reason of
the fact that he was a director, officer, employee or agent of the corporation
or was serving at the request of the corporation against expenses actually and
reasonably incurred in connection with such action if he acted in good faith and
in a manner he reasonably believed to be in or not opposed to the best interests
of the corporation, and, with respect to any criminal action or proceeding, if
he had no reasonable cause to believe his conduct was unlawful. Delaware Law
does not permit a corporation to eliminate a director's duty of care, and the
provisions of the Company's Amended and Restated Certificate of Incorporation
have no effect on the availability of equitable remedies, such as injunction or
rescission, for a director's breach of the duty of care.
Anti-Takeover Provisions. The Company has an authorized class of 1,000,000
shares of preferred stock, which may be issued by the Board of Directors on such
terms, and with such rights, preferences and designations as the Board of
Directors may determine. Issuance of such preferred stock, depending upon the
rights, preferences and designations thereof, may have the effect of delaying,
deterring or preventing a change in control of the Company. In addition, certain
"anti-takeover" provisions of the Delaware Law, among other things, restrict the
ability of stockholders to effect a merger or business combination or obtain
control of the Company, and may be considered disadvantageous by a stockholder.
Product Liability. Although the Company has not experienced any product
liability claims to date, the sale and support of products by the Company may
entail the risk of such claims, and there can be no assurance that the Company
will not be subject to such claims in the future. A successful product liability
claim or claim arising as a result of use of the Company's products brought
against the Company, or negative publicity attendant to any such claim, could
have a material adverse effect upon the Company's business, operating results
and financial condition. The Company maintains product liability insurance with
coverage limits of $1,000,000 per occurrence and $1,000,000 per year. While the
Company believes that it maintains adequate insurance coverage, there can be no
assurance that the amount of insurance will be adequate to satisfy claims made
against the Company in the future, or that the Company will be able to obtain
insurance in the future at satisfactory rates or in adequate amounts.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities and Use of Proceeds.
17
<PAGE> 18
RECENT SALES
On March 3, 1998, the Company entered into an agreement with accredited
investors and institutional purchasers for the private placement (the "Debt
Placement") of its 12% Senior Subordinated Notes due 1999 (the "Notes") and
450,000 warrants (the "Warrants"). The Debt Placement was consummated on March
19, 1998. The Debt Placement was exempt from Registration under Section 4(2) of
the Act and Rule 506 of Regulation D promulgated under the Act. The Warrants are
(i) exercisable commencing on May 15, 1998, and for five years thereafter for
the purchase of one share of Common Stock per Warrant (the "Warrant Shares");
and (ii) at an exercise price of $5.812 per share. The Company has agreed to
file a registration statement with respect to the Warrant Shares within 45 days
of the date the Warrants were issued. The Notes (i) bear interest at a rate of
12% per annum payable semi-annually; (ii) mature on the first anniversary of the
date of issuance; and (iii) may be repaid by the Company prior to maturity at
one hundred and two (102%) percent of the amount of the unpaid principal plus
the interest due as of the date of repayment. If the Notes are unpaid at
maturity, each Note holder has the option to convert the outstanding principal
and interest then due on such Note into Common Stock of the Company (the
"Conversion Shares") at a conversion price equal to eighty (80%) percent of the
average of the five lowest closing bid prices for the twenty consecutive trading
days prior to the date of conversion. The unpaid principal and interest then due
on the Notes is convertible into a maximum aggregate amount of 500,000 shares of
Common Stock. Depending on the stock price at the time of conversion, more than
500,000 shares of Common Stock may be required to permit conversion of one
hundred (100%) percent of the unpaid principal and interest then due on the
Notes into Common Stock. The Company has agreed to present a proposal to its
stockholders at the next annual meeting of its stockholders to approve issuance
of a sufficient number of shares of Common Stock to permit conversion upon
default of one hundred (100%) percent of the unpaid principal and interest then
due on all of the outstanding Notes to Common Stock. The Company has agreed to
file a registration statement with respect to any Conversion Shares within 45
days of the date the Notes mature, if the Notes are then unpaid. The Company
intends to use the proceeds of the Debt Placement of $4.2 million, net of
commissions and costs, to launch its Apollo 95E product, for product development
and for other working capital purposes.
USE OF PROCEEDS OF OFFERING
On May 14, 1997, the Company closed a secondary offering (the "Offering") of
2,070,000 shares of Common Stock. Each share of Common Stock included one
redeemable warrant (the "Redeemable Common Stock Purchase Warrants") to purchase
one share of common stock at a purchase price of $5.00. The Offering resulted in
gross proceeds of $10,350,000, less expenses of approximately $1,819,628 for net
proceeds of approximately $8,530,372. Approximately $1,600,000 of the net
proceeds were used to repay the principal on the Bridge Notes and an additional
$100,000 was used to pay off 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 $224,000 was used to
repay loans from related parties. Of the remaining proceeds net of associated
expenses, at March 31, 1998, approximately $4,900,000 had been used for product
development, acquisition, and to repay the remaining loans from related parties,
and working capital and general corporate purposes.
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
<TABLE>
<S> <C>
Exhibit 11.1 Statement Regarding Computation of Net Income (Loss)
Per Share
Exhibit 27.1 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
CurrentReport on Form 8-K filed March 17, 1998 reporting under Item 5
the Company's private placement of debt and warrants.
18
<PAGE> 19
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 May 15, 1998 By: /s/ Ronald E. Wittman
--------------------------------------
Ronald E. Wittman
Vice President and
Chief Financial Officer
19
<PAGE> 1
EXHIBIT 11.1
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
STATEMENT REGARDING COMPUTATION OF NET INCOME (LOSS) PER SHARE
<TABLE>
<CAPTION>
NET INCOME PER SHARE WAS Three Months Ended Three Months Ended
CALCULATED AS FOLLOWS: March 31, 1998 March 31, 1997
------------------ ------------------
<S> <C> <C>
Basic:
Weighted average common shares outstanding 5,115,777 2,985,537
============ ============
Diluted:
Weighted average common shares outstanding 5,115,777 2,985,537
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 -- 465,820
------------ ------------
Weighted average common and common
equivalent shares outstanding 5,115,777 3,451,357
============ ============
Income (Loss) amounts
Net income (loss) $ (1,361,568) $ 47,140
============ ============
Income (Loss) per share of common stock:
Basic $ (0.27) $ 0.02
Diluted $ (0.27) $ 0.01
Shares used in the per share calculation:
Basic 5,115,777 2,985,537
Weighted average common shares outstanding 5,115,777 3,451,357
</TABLE>
20
<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 MONTH PERIOD ENDED MARCH 31, 1998 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 5,904,675
<SECURITIES> 0
<RECEIVABLES> 1,226,066
<ALLOWANCES> 20,975
<INVENTORY> 3,132,714
<CURRENT-ASSETS> 11,226,563
<PP&E> 819,610
<DEPRECIATION> 247,388
<TOTAL-ASSETS> 13,046,279
<CURRENT-LIABILITIES> 4,682,253
<BONDS> 0
0
0
<COMMON> 51,157
<OTHER-SE> 7,997,180
<TOTAL-LIABILITY-AND-EQUITY> 13,046,279
<SALES> 2,110,531
<TOTAL-REVENUES> 2,110,531
<CGS> 1,550,089
<TOTAL-COSTS> 1,872,086
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 83,793
<INCOME-PRETAX> (1,361,568)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,361,568)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,361,568)
<EPS-PRIMARY> (.27)
<EPS-DILUTED> (.27)
</TABLE>
