The SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB MARK ONE:
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarter ended September 30, 1999
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 [ ]
Number of shares of registrant's common stock outstanding as of
November 12, 1999: 6,394,998
Transitional Small Business Disclosure Format Yes [ ] No [X]
<PAGE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
FORM 10-QSB REPORT
September 30, 1999
PART I - FINANCIAL INFORMATION PAGE
Item 1. Interim Condensed Consolidated Financial
Statements (Unaudited)
Condensed Consolidated Balance Sheet as of 3
September 30, 1999
Condensed Consolidated Statements of Operations 4
For the Three and Nine Month Periods Ended
September 30, 1999 and 1998
Condensed Consolidated Statements of Cash Flows 5
For the Nine Month Periods Ended September 30,
1999 and 1998
Consolidated Statements of Comprehensive Income 6
For the Three and Nine Month Periods Ended
September 30, 1999 and 1998
Notes to Interim Condensed Consolidated 7
Financial Statements
Item 2. Management's Discussion and Analysis or Plan of Operation 10
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and Use of Proceeds 17
Item 3. Defaults in Senior Securities 18
Item 4. Submission of Matters to Vote of Security Holders 18
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 18
Page 2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
<TABLE>
<CAPTION>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1999
(Unaudited)
ASSETS
<S> <C>
Current assets:
Cash and cash equivalents $ 4,780,324
Accounts receivable, net 5,461,454
Inventories 9,214,256
Prepaid expenses and other current assets 3,751,644
-----------
Total current assets 23,207,678
Property and equipment, net of accumulated depreciation 1,353,790
Intangible assets, net of accumulated amortization 2,332,639
Loans to related parties 70,000
Other assets 162,522
-----------
Total assets $27,126,629
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligations $ 22,440
Current portion of long-term debt 2,840,417
Borrowings under revolving line of credit 4,000,000
Accounts payable 3,726,449
Accrued liabilities 1,542,001
Customer deposits 780,833
-----------
Total current liabilities 12,912,140
Long-term debt 124,645
Capital lease obligations 703
-----------
Total liabilities 13,037,488
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:
6,394,998 shares issued and outstanding 63,949
Additional paid in capital 19,967,686
Accumulated deficit (6,106,424)
Cumulative translation adjustment 163,930
-----------
Total stockholders' equity 14,089,141
-----------
Total liabilities and stockholders' equity $27,126,629
===========
</TABLE>
The accompanying notes are an integral part of these interim
condensed consolidated financial statements.
Page 3
<PAGE>
<TABLE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND 1998
(Unaudited)
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net sales 6,447,961 6,157,358 27,626,340 10,886,402
Cost of sales 4,331,978 2,866,104 14,471,503 6,363,099
Gross profit 2,115,983 3,291,254 13,154,837 4,523,303
Selling, general and administrative
expenses 4,785,244 1,845,232 12,256,043 5,709,490
Abandoned offering costs 566,893 0 566,893 0
Research and development expenses 228,712 197,283 447,974 521,972
Total operating expenses 5,580,849 2,042,515 13,270,910 6,231,462
Operating income (loss) (3,464,866) 1,248,739 (116,073) (1,708,159)
Interest and other income 85,284 47,103 216,714 155,433
Interest expense (141,880) (551,416) (773,053) (1,184,705)
Amortization of debt issuance costs 0 (75,000) (64,519) (160,484)
Income (loss) before income taxes (3,521,462) 669,426 (736,931) (2,897,915)
Provision (benefit) for income taxes (141,080) 0 20,000 0
Net income (loss) $ (3,380,382) $ 669,426 $ (756,931) $(2,897,915)
Earnings (loss) per share
Basic $(0.54) $0.13 $(0.13) $(0.57)
Diluted $(0.54) $0.13 $(0.13) $(0.57)
Weighted average number of shares:
Basic 6,205,709 5,122,072 5,656,592 5,119,061
Diluted 6,205,709 5,210,236 5,656,592 5,119,061
</TABLE>
The accompanying notes are an integral part of these interim
condensed consolidated financial statements.
Page 4
<PAGE>
<TABLE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND 1998
(Unaudited)
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (756,931) $(2,897,915)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 613,262 367,080
Inventory write-down 310,000 156,620
Amortization of debt discount 348,435 866,733
Changes in operating assets and liabilities:
Accounts receivable (2,303,260) (1,767,350)
Inventories (3,942,943) (1,249,855)
Prepaid expenses and other (2,754,109) (306,225)
Other assets (183,403) 432,804
Accounts payable 1,311,605 (47,578)
Accrued liabilities and income taxes 292,683 (161,337)
Customer deposits 720,000 1,958
------------ ------------
Net cash used by operating activities (5,944,661) (4,605,065)
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (512,883) (398,368)
Loan to related party - 56,000
------------ -------------
Net cash used in investing activities (512,883) (342,368)
------------ -------------
Cash flows from financing activities:
Borrowings from revolving line of credit 4,000,000 -
Net proceeds from issuance of notes payable 2,953,890 4,971,304
Payment of debt issuance cost - (300,000)
Repayment of notes payable (4,957,362) -
Repayments on borrowings to related parties - (48,477)
Principal payments on capital lease obligations (22,232) (12,602)
Issuance of common stock through exercise of options 174,192 27,592
Issuance of common stock 4,991,540 -
Increase in other long term liabilities - 2,749
------------ -------------
Net cash provided by financing activities 7,140,028 4,640,566
----------- -----------
Net increase (decrease) in cash and cash equivalents 682,484 (306,867)
Effect of exchange rate changes on cash and cash equivalents 156,535 13,244
Cash and cash equivalents, beginning of period 3,941,305 3,981,062
----------- -----------
Cash and cash equivalents, end of period $ 4,780,324 $ 3,687,439
=========== ===========
Non-cash investing and financing activities:
Acquisitions of businesses
Issuance of common stock $ 1,143,750 $ -
Forgiveness of receivables 592,497 -
Acquisition of intangibles
Issuance of common stock 200,000
Supplemental cash flow information:
Interest paid $ 316,698 $ 291,563
Income taxes paid 48,840 14,981
</TABLE>
The accompanying notes are an integral part of these interim
condensed consolidated financial statements.
Page 5
<PAGE>
<TABLE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND 1998
(Unaudited)
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------- --------------------------
September September September September
30, 1999 30, 1998 30, 1999 30, 1998
------------ ----------- ---------- ------------
<S> <C> <C> <C> <C>
Net income (loss) $(3,380,382) $669,426 $(756,931) $(2,897,915)
Other comprehensive income (loss):
Foreign currency translation adjustment 312,391 12,073 162,725 12,769
------------ -------- ---------- ------------
Comprehensive income (loss) $(3,067,991) $681,499 $(594,206) $(2,885,146)
============ ======== ========== ============
</TABLE>
The accompanying notes are an integral part of these interim
consolidated financial statements.
<PAGE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. General
The accompanying unaudited interim condensed consolidated financial
statements include the accounts of Dental/Medical Diagnostic Systems, Inc.
and Subsidiaries (the "Company"). All significant intercompany accounts and
transactions have been eliminated in the consolidated financial statements.
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
presentation have been included. Operating results for the three- and
nine-month periods ended September 30, 1999 are not necessarily indicative
of the results that may be expected for the year ending December 31, 1999.
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, 1998.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Dental
Medical Diagnostics Systems, Inc. and its wholly owned subsidiaries. All
intercompany balances and transactions have been eliminated.
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 deposit limits.
For the three-month periods ended September 30, 1999 and 1998,
international customers accounted for 38% and 33% of sales, respectively.
For the nine-month periods ended September 30, 1999 and 1998, international
customers accounted for 46% and 34% of sales, respectively. At September
30, 1999 and 1998, international customers accounted for approximately 72%
and 59% of trade accounts receivable, respectively. There were no customers
that accounted for more than 10% of revenues for the three-month and
nine-month periods ended September 30, 1999 and 1998. Five customers
accounted for 31% of the Company's accounts receivable at September 30,
1999.
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 and independent distributors. 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.
Page 7
<PAGE>
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
two product families. The Company believes that the inability to attract
new customers, the loss of one or more of its major customers, a
significant reduction in business from such customers, or the
uncollectibility of amounts due from any of its larger customers, could
have a material adverse affect on the Company.
Revenue Recognition
The Company recognizes revenue from the sales of systems and supplies at
the time of shipment, 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.
Computation of Earnings Per Share
Basic 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 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 numerator and denominator of the
basic and diluted earnings per share (EPS) computations for the three and
nine-month periods ended September 30, 1999 and 1998:
<TABLE>
<CAPTION>
Three months Three months Nine months Nine months
ended ended ended ended
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
============ ============= ============= ============
<S> <C> <C> <C> <C>
Numerator:
Basic and diluted income available to
common stockholders:
Net income (loss) $(3,380,382) $ 669,426 $(756,931) $(2,897,915)
============ ========= ========== ============
Denominator:
Basic weighted average shares 6,205,709 5,122,072 5,656,592 5,119,061
Effect of dilutive securities:
Stock options and warrants 0 88,164 0 0
------------ --------- ---------- ------------
Diluted weighted average shares 6,205,709 5,210,236 5,656,592 5,119,061
============ ========= ========== ============
</TABLE>
Common shares related to stock options and stock warrants that are
antidilutive amounted to approximately 5,515,363 and 4,906,500 for the
three-month periods ended September 30, 1999 and 1998, respectively. For
the nine-month periods ended September 30, 1999 and 1998, the antidilutive
stock options and stock warrants amounted to 5,515,363 and 5,081,223,
respectively.
Comprehensive Income
SFAS 130 "Reporting Comprehensive Income" establishes standards for
reporting and displaying comprehensive income and its components (revenues,
expenses, gains and losses) in financial statements. SFAS 130 requires that
all items that are
Page 8
<PAGE>
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements.
No tax effect has been allocated to the foreign currency translation
adjustment for the periods presented.
The following is a reconciliation of accumulated other comprehensive income
balance for the nine-month period ended September 30, 1999:
Beginning balance $ 1,205
Current period change 162,725
--------
Ending balance $163,930
========
3. Related Party Transactions
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 November 30, 1999. On August 19, 1998, a principal payment
of $56,000 and an interest payment of $6,152 were made leaving a loan
balance of $70,000.
4. Inventories
Inventories consisted of the following at September 30, 1999:
Raw materials $4,945,348
Work in process 422,739
Finished goods 3,846,169
----------
$9,214,256
==========
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 is being
amortized over the term of the Notes. On September 16, 1998, accrued
interest of $270,000 was paid to the Note holders in accordance with the
Debt Placement agreement. On January 27, 1999, the Company repaid the
Senior Subordinated Notes, in full, plus $189,000 of accrued interest. As a
result, the remaining unamortized debt discount of $348,434 was written-off
in the period ended March 31, 1999.
On July 16, 1999, we raised approximately $5,000,000 in additional capital
by selling 901,000 shares of Common Stock to eight investors. The shares
were issued in a private placement and were then registered for resale on a
Form S-3 Registration Statement filed on July 23, 1999 and subsequently
declared effective. The proceeds of the offering are being used for working
capital purposes.
In the month of September, the Company entered into a covenant not to
compete with Plasma X Europe. Under the terms of the agreement Plasma X
Europe has agreed not to compete with the Company in exchange for 50,000
shares of common stock.
Page 9
<PAGE>
6. Segment Information
The Company operates in one segment - dental medical equipment which, at
September 30, 1999, comprised four main products: TeliCam Systems - an
intraoral camera and dental networking system; Apollo 95E tooth whitening
and curing system; other accessories including the Apollo Secret whitening
product and ASAP composite materials; and MPDx digital x-ray systems.
Accordingly no separate segment information is provided other than
Enterprise Wide disclosures as required by SFAS No. 131.
The following are sales by product lines for the three and nine month
periods ended September 30, 1999 and 1998:
<TABLE>
<CAPTION>
Three months Three months Nine months Nine months
ended ended ended ended
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
------------------------------------------------------------------
<S> <C> <C> <C> <C>
TeliCam $ 1,310,786 $1,298,061 $ 4,032,140 $4,165,168
Apollo 95E 4,245,330 4,578,630 20,606,269 6,009,909
MPDx 72,100 - 72,100 -
Other 819,745 280,667 2,915,831 711,325
------------------------------------------------------------------
$ 6,447,961 $ 6,157,358 $27,626,340 $10,886,402
==================================================================
</TABLE>
The Company ships products from its operations in the US and Europe. The
following are sales by its US and European locations for the three- and
nine-months ended September 30, 1999 and 1998:
<TABLE>
<CAPTION>
Three months Three months Nine months Nine months
ended ended ended ended
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales by geography:
United States $4,047,578 $4,147,788 $18,103,182 $7,469,293
Europe 2,400,383 2,009,570 9,523,158 3,417,109
-------------------------------------------------------------------
$6,447,961 $6,157,358 $27,626,340 $10,886,402
===================================================================
</TABLE>
The following is long-lived asset information by geographic area as of
September 30, 1999:
<TABLE>
<CAPTION>
September 30, 1999
----------------------
<S> <C>
Long Lived assets:
United States $1,105,836
Europe 247,954
$1,353,790
</TABLE>
Item 2. - Management's Discussion and Analysis or Plan of Operation
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ TOGETHER WITH THE
CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY AND NOTES THERETO INCORPORATED
ELSEWHERE IN THIS FORM 10QSB.
EXCEPT FOR HISTORICAL INFORMATION, THE MATTERS DISCUSSED IN THIS MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ARE
FORWARD LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES AND ARE BASED
UPON JUDGMENTS CONCERNING VARIOUS FACTORS THAT ARE BEYOND OUR CONTROL. ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD LOOKING
STATEMENTS AS A RESULT OF, AMONG OTHER THINGS, THE FACTORS DESCRIBED BELOW UNDER
THE CAPTION "CAUTIONARY STATEMENTS AND RISK FACTORS."
Page 10
<PAGE>
INTRODUCTION
We design, develop, manufacture and sell high technology dental equipment
and related consumables. Our highest grossing product is the tooth curing and
whitening device known as the "Apollo 95E." We also market and sell a line of
whitening products known as "Apollo Secret" for use in conjunction with the
Apollo 95E, a line of composite resin materials known as "ASAP - Accelerated
Solutions for Aesthetic Procedures," also for use in conjunction with the Apollo
95E. We continue to manufacture and sell intraoral camera systems, known as the
"TeliCam II System," and "TeliCam Elite," and a multi-operatory intraoral camera
system, known as the InTELInet, for use in connection with the TeliCam II System
and TeliCam Elite. In addition, we began shipping a digital x-ray system known
as the "MPDx" at the end of the third quarter.
From early 1996 to mid 1998, we were primarily involved in designing,
developing, manufacturing, and marketing the TeliCam Systems. The first
shipments to customers of the TeliCam System commenced in early February 1996.
On October 2, 1997, we purchased the assets of S.E.D. Gerant, a company
organized under the laws of France. Among the acquired assets was a patent for
S.E.D.'s "Biotron" curing and whitening device products. From this technology,
we developed the "Apollo 95E" a unique, visible-light curing instrument which is
designed for two different applications: the hardening of tooth-colored dental
composite materials in three seconds or less and for single appointment,
in-office tooth whitening in less than forty minutes. This plasma-arc lamp uses
a high-frequency electrical field to generate plasma energy, which is ideal for
the fast-curing (hardening) of photosensitive composites. The Apollo 95E also
produces light and heat which, when used in conjunction with the Apollo Secret
whitening materials, activates the whitening chemicals in the Apollo Secret. The
result of this activation is dramatic whitening of discolored teeth. The rapid
performance of the Apollo 95E in both hardening composite materials and
whitening teeth enables an average dental practice to save about 5 to 8 hours
per month of a dentists examination time.
The Apollo 95E was introduced into markets outside of the US and Canada
in March 1998, and in the US and Canadian markets in August 1998. The Apollo 95E
accounted for $4,245,330 in revenues for the three-month period ended September
30, 1999 and $20,606,269 in revenues for the nine-month period ended September
30, 1999, as compared to $4,578,630 and $6,009,909 for the same periods in 1998.
Revenues attributed to the TeliCam intraoral cameras have increased slightly to
$1,310,786 for the three-month period ended September 30, 1999 and declined
slightly to $4,032,140 for the nine-month period ended September 30, 1999 as
compared to $1,298,061 and $4,165,168 for the same periods in 1998.
The Company entered into an agreement with Suni Imaging Microsystems, Inc.
("Suni") to develop digital x-ray technology in September 1998. The Company has
obtained exclusive rights to market products to the dental market incorporating
the digital x-ray technology developed by Suni. Suni will retain the rights to
the developed microchip technology underlying the x-ray system. The resulting
product, MPDx, is used in place of the traditional x-ray machines in dentist
offices and has been shown to give out as much as 90% less radiation as the
traditional x-ray machines. In addition, the images are displayed on a computer
screen, eliminating the need for film and film processing and the retaking of
photos due to over- or under- exposure. The Company began shipping MPDx in
September 1999.
RESULTS OF OPERATIONS
We derive our revenues primarily from the sale of four product lines:
TeliCam intra-oral camera systems, Apollo 95E curing and whitening devices,
Apollo Secret tooth whitening chemicals and ASAP composite materials for use in
conjunction with the Apollo 95E, which began shipping in the fourth quarter of
1998 and second quarter 1999, respectively, and the MPDx digital x-ray system
which began shipping at the end of the third quarter of 1999. Through September
30, 1999, the sales of Apollo Secret, ASAP and the MPDx systems have been less
than 15% of total sales.
Page 11
<PAGE>
Revenues by product line for the three and nine month periods ended
September 30, 1999 and 1998, are reflected in the following table:
<TABLE>
<CAPTION>
FOR THE THREE-MONTH PERIODS ENDED SEPTEMBER 30, FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30,
----------------------------------------------- ----------------------------------------------
1999 % 1998 % 1999 % 1998 %
---- - ---- - ---- - ---- -
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Apollo 95E $4,245,330 66% $4,578,630 74% $20,606,269 75% $ 6,009,909 55%
TeliCam 1,310,786 20% 1,298,061 21% 4,032,140 15% 4,165,168 38%
MPDx 72,100 1% - - 72,100 0% - -
Other 819,745 13% 280,667 5% 2,915,831 10% 711,325 7%
----------- ---- ---------- ---- ----------- ---- -----------
$6,447,961 100% $6,157,358 100% $27,626,340 100% $10,886,402 100%
=========== ==== ========== ==== =========== ==== =========== ====
</TABLE>
NET SALES. Net sales for the three-month periods ended September 30, 1999
and 1998, were $6,447,961 and $6,157,358 respectively. For the nine-month
periods ended September 30, 1999 and 1998, net sales totaled $27,626,340 and
$10,888,402, respectively.
Net sales for the three-month period ended September 30, 1999 increased
approximately 5% from the three-month period ended September 30, 1998. Net sales
for the nine-month period ended September 30, 1999 increased approximately 154%
from the nine-month period ended September 30, 1998. For the three-month periods
ended September 30 for 1999 and 1998, TeliCam System sales represented 20% and
21% of total sales, respectively whereas for the nine-month periods ended
September 30, 1999 and 1998 TeliCam Systems sales represented 15% and 38%,
respectively. For the three-month periods ended September 30, 1999 and 1998,
Apollo 95 E represented 66% and 74% of total sales, respectively. For the
nine-month periods ended September 30, 1999 and 1998 Apollo 95E represented 75%
and 55% of total sales, respectively. Apollo 95E began shipping in Europe during
the first quarter of 1998 and in the United States during the third quarter of
1998. Comparing product line sales in dollars for the three-month period ended
September 30, 1998 to the three-month period ended September 30, 1999, Apollo
sales decreased $333,300 while TeliCam sales increased $12,725. The decrease in
Apollo sales from 1998 to 1999 was caused by an increase in demand in 1998
resulting from pre-launch advertising, publicity and focused selling efforts.
Comparing product line sales in dollars for the nine-month period ended
September 30, 1998 to the nine-month period ended September 30, 1999, Apollo
sales increased $14,596,360 while TeliCam sales decreased $133,028. Sales of
other accessories, including ASAP and Apollo Secret, increased $2,204,506
primarily due to increased sales in consumable products. The MPDx digital x-ray
systems began shipping at the end of the third quarter. We expect, but do not
guarantee that, the steady trend in TeliCam sales will continue into the future.
No assurance can be given that the Apollo 95E sales growth will continue in the
future.
COST OF SALES. Cost of sales for the three-month periods ended September 30,
1999 and 1998, were $4,331,978, or 67% of net sales, and $2,866,104, or 47% of
net sales, respectively. Cost of sales for the nine-month periods ended
September 30, 1999 and 1998, were $14,471,503, or 52% of net sales, and
$6,363,099, or 58% of net sales, respectively. Cost of sales as a percentage of
net sales for the three-month period ended September 30, 1999 increased from the
same period in 1998 primarily due to a decrease in the margin on the TeliCam
resulting from increased market saturation and a write down of inventory value
to net realizable value during the three-month period ended September 30, 1999.
Cost of sales as a percentage of net sales for the nine-month period ended
September 30, 1999 decreased from the period in 1998 primarily due to more
favorable margins on the Apollo 95E, which represented 75% of net sales as
opposed to 55% for the nine-month period ended September 30, 1998. While the
more favorable margins on the Apollo 95E have helped to decrease the cost of
sales as a percentage of net sales, we expect that margins on the sale of the
TeliCams will continue to shrink, and thus the cost of sales of the TeliCams as
a percentage of net sales of the TeliCams is expected to continue to increase in
the future.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses totaled $4,785,244, or 74% of net sales, and $1,845,232,
or 30% of net sales, for the three-month periods ended September 30, 1999 and
1998, respectively. Selling, general and administrative expenses totaled
$12,256,043, or 44% of net sales, and $5,709,490 or 52% of net sales, for the
nine-month periods ended September 30, 1999 and 1998, respectively. The absolute
dollar increases in this expense category for both the three and nine month
periods ended September 30, 1999 and 1998 are primarily attributed to a
combination of increased sales commissions resulting from increased sales
volumes, increased salaries, and increased marketing costs resulting from
enhanced marketing efforts. The decrease in selling, general and administrative
expenses as a percentage of net sales for the nine month period ended September
30, 1999 versus 1998 can be attributed to the substantial increase in net sales.
These expenses are expected to continue to increase on an absolute dollar basis
as sales volumes increase and additional marketing costs are incurred for the
introduction of new products. The increase in selling, general and
administrative expenses as a percentage of net sales for
Page 12
<PAGE>
the three-month period ended September 30, 1999 versus 1998 is due to the
increase in salaries and increased marketing costs resulting from the
introduction of the MPDx digital x-ray which began selling late in the third
quarter, and enhanced marketing efforts on our other products.
ABANDONED OFFERING COSTS. During the quarter ended September 30, 1999, we
wrote off $566,893 of costs related to an abandoned secondary offering.
RESEARCH AND DEVELOPMENT. Research and development expenses totaled
$228,712, or 4% of net sales, and $197,283, or 3% of net sales, for the
three-month periods ended September 30, 1999 and 1998, respectively. Spending in
research and development is slightly up as our overseas facilities increases
their research into new technologies. Research and development expenses totaled
$447,974, or 2% of net sales, and $521,972, or 5% of net sales, for the
nine-month periods ended September 30, 1999 and 1998, respectively. Spending in
this category is slightly down for the nine-month period as development of the
digital x-ray is largely complete. We expect research and development expenses
to increase in future periods if we are able to identify and continue to pursue
the development of new technologies.
INTEREST AND OTHER INCOME. Interest income totaled $85,284, and $47,103 for
the three-month periods ended September 30, 1999 and 1998. Interest and other
income totaled $216,714, and $155,433 for the nine-month periods ended September
30, 1999 and 1998, respectively. This income is primarily attributable to the
interest earned by investing available cash in a short-term management account
through Imperial Bank and Comerica Bank.
INTEREST EXPENSE. Interest expense totaled $141,880, and $551,416 for the
three-month periods ended September 30, 1999 and 1998, respectively. Interest
expense totaled $773,053, and $1,184,705 for the nine-month periods ended
September 30, 1999 and 1998, respectively. This expense category includes
interest paid on capital lease obligations, on bridge notes, on notes payable to
related parties, on our senior subordinated notes and amortization of debt
discount. The substantial decrease in the three-month period ended September 30,
1999 is primarily due to the repayment of the $4.5 million of senior
subordinated notes, which were repaid in January 1999 with proceeds from the new
credit facility with Imperial Bank and the corresponding full amortization of
the debt discount associated with the warrants issued with the $4.5 million
notes
Amortization of debt issuance costs was $75,000 for the three-month period
ended September 30, 1998. For the three-month period ended September 30, 1999,
there was no amortization of debt issuance costs. Amortization of debt issuance
costs totaled $64,519 and $160,484 for the nine-month periods ended September
30, 1999 and 1998, respectively. This represents the amortization of the
issuance costs incurred in connection with the $4.5 million Senior Subordinated
Notes issued in March 1998. These costs were amortized over the term of the
Notes, with the remaining unamortized costs written-off in January 1999 when we
repaid the Senior Subordinated Notes out of the proceeds of our new credit
facility with Imperial Bank.
NET INCOME (LOSS). Net loss for the three- and nine-month periods ended
September 30, 1999 totaled $3,380,382 or $0.54 per share on a diluted basis and
$756,931 or $.13 per share on a diluted basis, respectively. Net income for the
three-month period ended September 30, 1998 totaled $669,426, or $0.13 per
share, and net loss for the nine-month period ended September 30, 1998 totaled
$2,897,915, or $0.57 per share.
CAPITAL RESOURCES AND LIQUIDITY
For the nine-month period ended September 30, 1999, we used net cash of
$5,944,661 in operations as compared to $4,605,065 for the nine-month period
ended September 30, 1998. Accounts receivable increased from $3,757,865 at the
prior year-end to $5,461,454 at September 30, 1999, primarily as a result of the
increase in sales during the nine-month period ended September 30, 1999.
Accounts payable and accrued liabilities totaling $5,268,450 at September 30,
1999 increased from $3,653,831 at the prior year-end primarily due to increased
inventory purchases. Inventory levels increased approximately $3,655,000 to
accommodate the increased sales volume generated by the Apollo 95E and in
preparation of the product launch of our MPDx digital x-ray, which began
shipping at the end of the third quarter.
Capital expenditures for the nine-month period ended September 30, 1999 were
approximately $513,000, with approximately $78,000 spent for the purchase of
furniture and fixtures approximately $317,000 spent for computer equipment with
the remainder consisting of equipment, tooling and software acquisitions. Cash
and cash equivalents on hand for the nine-month period ended September 30, 1999
were $4,780,324 as compared to $3,687,439 for the nine-month period ended
September 30, 1998.
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For the nine-month period ended September 30, 1999, we received net cash of
$7,340,028 from financing activities as compared to $4,640,566 for the
nine-month period ended September 30, 1998. On July 16, 1999 we raised
approximately $5,000,000 in additional capital by selling 901,000 shares of
common stock to eight investors. The shares were issued in a private placement
and were then subsequently registered for resale on a Form S-3 Registration
Statement filed on July 23, 1999 and subsequently declared effective.
On January 4, 1999, we replaced our credit agreements with our previous
lender, Comerica, with a $6,950,000 facility with Imperial Bank. The Imperial
facility comprises a $2,500,000 fixed rate non-revolving line of credit due May
31, 2000; a $4,000,000 variable rate revolving line of credit due May 31, 2000;
and a $450,000 variable interest rate loan repayable in 16 monthly installments.
The facilities are collateralized by our assets. We intend to use the credit
facilities, when needed, for working capital, capital expenditures and general
corporate purposes. On January 21, 1999, we borrowed against the Imperial
facility to repay the balance owing on the Comerica capital credit line of
$343,890 plus accrued interest of $1,120. On January 25, 1999, we borrowed
against the Imperial facility to repay the $4,500,000 12% Senior Subordinated
Notes plus accrued interest of $189,000. At September 30, 1999, $6,840,417 was
outstanding under the Imperial facility.
As of the end of September 1999, the expenditures for continued research
and development for products incorporating digital x-ray technology, the minimum
purchase obligations under the manufacturing agreement with Suni Microsystems,
and the minimum purchase obligations under the Exclusive License Agreement with
Chrysalis Dental are the only significant future commitments. These commitments
will be financed by cash from continuing operations, the proceeds of the
Imperial credit facility and approximately $5,000,000 from the July 16, 1999
sale of 901,000 shares of common stock to eight investors. The shares were
offered and sold in a private placement and were then subsequently registered
for resale under the Securities Act of 1933We believe that we will need to raise
additional capital in order to finance inventory and meet our cash requirements
during the next twelve months. We are currently in negotiations with a group of
prospective investors to sell a series of preferred stock which would enjoy
rights and preferences senior to the Common Stock and would be exchangeable into
Common Stock. We can give no assurance that our current negotiations will result
in a definitive agreement or, if an agreement is reached, that the funds raised
will be sufficient to meet our current cash requirements. We can also give no
assurance that additional financing will be available when needed or that, if
available, that it will be on terms we consider to be favorable. If needed funds
are not available, we may be required to limit or forego the development of new
products, limit purchases of inventory or even limit current operations, which
could have a material adverse effect on our business, operating results and
financial condition.
FLUCTUATIONS IN QUARTERLY RESULTS
Our 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 or increased purchases
in the prior quarter. We also expect that our 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. Also, the expenses of the
Company are to a large extent fixed and not susceptible to rapid reduction. To
the extent that such expenses precede or are not subsequently followed by
increased revenues, our business, operating results and financial condition will
be adversely affected.
YEAR 2000 ISSUE
The Year 2000 readiness issue, which is common to most businesses, arises
from the inability of information systems, and other time and date sensitive
products and systems, to properly recognize and process date-sensitive
information or system failures. Estimates of the potential cost and effects of
Year 2000 issues vary significantly among businesses, and it is extremely
difficult to predict the actual impact. Recognizing this uncertainty, management
is continuing to actively analyze, assess and plan for various Year 2000 issues
across its businesses.
The Year 2000 issue has an impact on both information technology systems and
non-information technology systems, such as manufacturing systems and physical
facilities including, but not limited to, security systems and utilities. We
have tested all of our information technology systems and non-information
technology systems for Year 2000 readiness. All of our non-information
technology systems are Year 2000 compliant. With respect to information
technology systems, our in-house data network and workstations are Year 2000
compliant.
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The Year 2000 readiness of our customers varies. We are not investigating
whether or not our customers are evaluating and/or preparing their own systems
to be Year 2000 compliant. These efforts by customers to address Year 2000
issues may affect the demand for certain products and services; however, the
impact on our revenue is highly uncertain.
We have investigated the Year 2000 readiness of our key suppliers. Our
direction of this effort is to ensure that there are adequate components and
supplies available to us to minimize any potential business interruptions. Our
assessment of our key suppliers is now complete and we have determined that our
policy of maintaining an inventory of components and supplies sufficient to last
a minimum of a one to three months will be adequate to minimize almost any
potential business interruptions. We believe that our one to three month
inventories will allow enough time for our suppliers to remedy Year 2000
problems that may arise in their respective businesses.
The Year 2000 issue presents a number of other risks and uncertainties that
could impact us, such as public utilities failures, potential claims against us
for damages arising from products and services that are not Year 2000 compliant,
and the response ability of certain government commissions of the various
geographic areas where Dental/Medical conducts business. While we continue to
believe the Year 2000 issues described above will not materially affect our
financial position, it remains uncertain as to what extent, if any, we may be
impacted.
If we, our customers or suppliers are unable to resolve any Year 2000
compliance problems in a timely manner, we could face business interruptions or
a shutdown, financial loss, regulatory actions, reputational harm and/or legal
liability. We will have adequate components and supplies in our inventories to
minimize any potential business interruptions that may result from Year 2000
compliance problems suffered by our suppliers. As a result, we have determined
that we will not be developing any contingency plans that address a reasonably
likely worst case scenario.
RISK FACTORS
WE HAVE A LIMITED OPERATING HISTORY UPON WHICH TO EVALUATE OUR LIKELIHOOD OF
SUCCESS.
We have only manufactured and distributed our TeliCam systems since October
1995 and manufactured and distributed our Apollo 95E since March 1998 and we
began manufacturing and distributing our digital x-ray systems in September
1999. Therefore, we have a limited relevant operating history upon which to
evaluate the likelihood of our success. Factors such as the risks, expenses and
difficulties frequently encountered in the operation and expansion of a
relatively new business and the development and marketing of new products must
be considered in evaluating the likelihood of success of our company.
WE HAVE A HISTORY OF LOSSES AND ACCUMULATED DEFICIT AND THIS TREND OF LOSSES MAY
CONTINUE IN THE FUTURE.
For the period from October 23, 1995 to March 2, 1996 we had a net loss of
$1,625,213. For the fiscal year ended December 31, 1997 we had a net loss of
$2,044,729 and for the fiscal year ended December 31, 1998 we had a net loss of
$1,816,702. For the three and nine-month periods ended September 30, 1998, we
had net income of $669,426 and incurred a net loss of $2,897,915, respectively,
and for the three and nine-month periods ended September 30, 1999 we had net
losses of $3,380,382 and $756,931, respectively. At September 30, 1999, our
accumulated deficit was $6,106,424. Our ability to obtain and sustain
profitability will depend, in part, upon the successful marketing of our
existing products and the successful and timely introduction of new products.
Although the Company was profitable in the quarter and six-month period ended
March 31, 1999 and June 30, 1999, respectively, there can be no assurance that
the Company will return to profitability.
FLUCTUATION IN QUARTERLY RESULTS MAY RESULT IN DECLINES IN OUR STOCK PRICE.
Certain quarterly influences may affect our business. Sales 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 our business will experience lower sales in the summer months as a
consequence of holiday vacations and a lesser number of trade shows. These
fluctuations could result in significant fluctuations, including significant
declines in our stock price.
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ONE OF OUR PRIMARY PRODUCTS HAS HAD A SIGNIFICANT DECLINE IN SALES AND IF THIS
DECLINE CONTINUES WE MAY NOT BE ABLE TO ACHIEVE PROFITABILITY.
The TeliCam systems, together with related products such as the InTELInet
system, and the Apollo 95E have been our primary products and during the first
nine months of 1999 and have made up a substantial portion of our revenue. We
believe that the market for intraoral cameras, such as the TeliCam systems, is a
market that has declined. TeliCam systems sales have recently been at or below
levels of prior comparable periods, a trend that we expect to continue.
AS A RESULT OF DECLINING INTRAORAL CAMERA MARKET, OUR FUTURE DEPENDS ON OUR
ABILITY TO DEVELOP AND INTRODUCE NEW PRODUCTS.
As a result of the decline in the intraoral camera market, our future
depends upon our ability to increase demand for our other products and our
ability to develop and successfully introduce new products to make up for the
diminished sales of the Telicam systems. Development of new product lines is
risk intensive and often requires:
o long-term forecasting of market trends;
o the development and implementation of new designs;
o compliance with extensive governmental regulatory requirements; and
o a substantial capital commitment.
Also, the medical and dental device industry is characterized by rapid
technological change. As technological changes occur in the marketplace, we may
have to modify our products in order to become or remain competitive or ensure
that our products do not become obsolete. If we fail to anticipate or respond in
a cost-effective and timely manner to government requirements, market trends or
customer requirements, or if there are any significant delays in product
development or introduction, this could have a material adverse effect on our
business.
IF WE ARE UNABLE TO RAISE ADDITIONAL CAPITAL TO FINANCE RESEARCH AND DEVELOPMENT
OF OUR NEW PRODUCTS WE MAY BE FORCED TO FOREGO THE DEVELOPMENT OF NEW PRODUCTS
AND POSSIBLY EVEN LIMIT CURRENT OPERATIONS.
We anticipate that we will need additional capital during the next 12 months
to satisfy our expected increased working capital and research and development
requirements for our planned new products. We are currently in negotiations with
a group of prospective investors to sell a series of preferred stock which would
enjoy rights and preferences senior to the Common Stock and would be
exchangeable into Common Stock. We can give no assurance that our current
negotiations will result in a definitive agreement or, if an agreement is
reached, that the funds raised will be sufficient to meet our current cash
requirements. We can also give no assurance that additional financing will be
available when needed or that, if available, that it will be on terms we
consider to be favorable. If needed funds are not available, we may be required
to limit or forego the development of new products or even limit current
operations, which could have a material adverse effect on our business,
operating results and financial condition.
WE SUBSTANTIALLY DEPEND UPON THIRD PARTIES FOR SEVERAL CRITICAL ELEMENTS OF OUR
BUSINESS, INCLUDING THE DEVELOPMENT AND LICENSING FOR DISTRIBUTION OF OUR
PRODUCTS AND IF THESE THIRD PARTIES DO NOT DELIVER WE MAY BE FORCED TO LIMIT
OPERATIONS.
We are dependent upon third party developers and suppliers for the
development and manufacture of all of the components used in our dental
equipment and for the development and manufacture of our consumable products.
Outside of updating our current products, we do not develop any of our
technology. Instead of developing technology, we continually seek out third
parties that own new and innovative technology that they may be willing to
license to us or develop into new dental products under a development agreement.
We have had problems in the past obtaining a marketable product from companies
with whom we had entered into a licensing arrangement. We entered into a
licensing agreement with Ion Laser Technology under which ILT was unable to
develop a product in accordance with the delivery schedule established by our
agreement that met our specifications; as a result, we were forced to find an
alternative product to that which we had contracted with ILT.
Under licensing and development arrangements we have obtained exclusive
marketing rights to products for the dental market incorporating certain digital
x-ray technology developed by Suni. We have paid significant non-refundable
advances to, and are dependant upon Suni to successfully develop the digital
x-ray technology and to commercialize the digital x-ray technology. We do not
guarantee that Suni will be successful in this endeavor. If Suni should not
develop a digital x-ray product which is
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accepted in the marketplace, and has sufficient sales to achieve profits,
this could have a material adverse effect on our future prospects.
IF WE DO NOT MAKE CERTAIN REQUIRED MINIMUM ROYALTY PAYMENTS TO SUNI, WE WILL
LOSE OUR EXCLUSIVE RIGHTS TO THE DIGITAL X-RAY TECHNOLOGY DEVELOPED FOR US BY
SUNI.
In order to maintain our rights to be the exclusive dental licensee of the
digital x-ray technology developed by Suni, our agreement with Suni requires us
to make minimum royalty payments. The royalty payments begin coming due when
products incorporating the developed technology are introduced to the market. We
cannot guarantee that we will be able to make the minimum royalty payments
required to maintain our rights to be the exclusive distributor. If we do not
make the required royalty payments, Suni will be able to license the developed
technology to our competitors, or grant an exclusive license to a competitor,
which could have a material adverse effect on our operating results and
financial condition.
THE GOVERNMENT EXTENSIVELY REGULATES OUR PRODUCTS AND FAILURE TO COMPLY WITH
APPLICABLE REGULATIONS COULD RESULT IN FINES, SUSPENSIONS, SEIZURE ACTIONS,
PRODUCT RECALLS, INJUNCTIONS AND CRIMINAL PROSECUTIONS.
The United States Food and Drug Administration, as well as state and foreign
agencies, regulate almost all aspects of our medical devices including:
o entry into the marketplace;
o design;
o testing;
o manufacturing procedures;
o reporting of complaints;
o labeling; and
o promotional activities.
Under the Federal Food, Drug, and Cosmetic Act, FDA has the authority to
control the introduction of new products into the marketplace. Unless
specifically exempted by the agency, medical devices enter the marketplace
through either FDA clearance of premarket approval application or FDA approval
of an application for 510k clearance. FDA conducts periodic inspections to
assure compliance with its regulations.
Unless specifically exempted by FDA's regulations, we will need to file a
510k submission or PMA application for any new products developed in the future
including any using digital x-ray technology. The process of obtaining a
clearance or approval can be time-consuming and expensive. Compliance with FDA's
regulatory requirements can be expensive and time consuming. We do not guarantee
that the required regulatory approvals or clearances will be obtained. Any
approval or clearance obtained from FDA may include significant limitations on
the use of the medical device which is the subject of the approval or clearance.
We cannot market a medical device if needed FDA approval or clearance is not
granted. Inability to obtain such approval or clearance could result in a delay
or suspension of the manufacture and sale of affected medical devices. Any such
delay or suspension would have a material adverse effect on our business. In
addition, changes in existing regulations or the adoption of new regulations
could make regulatory compliance by us more difficult in the future. The failure
to obtain the required regulatory clearances or to comply with applicable
regulations could result in one or more of the following:
o fines;
o delays or suspensions of device clearances;
o seizure actions;
o mandatory recalls;
o injunction action; and
o criminal prosecution.
THE LOSS OF OUR CHIEF EXECUTIVE OFFICER COULD RESULT IN THE LOSS OF A
SIGNIFICANT PORTION OF OUR BUSINESS BECAUSE OF HIS PERSONAL RELATIONSHIPS IN THE
INDUSTRY.
Our success is highly dependent upon our Chairman of the Board and Chief
Executive Officer, Robert H. Gurevitch. Unlike larger companies, we rely heavily
on a small number of officers to conduct a large portion of our business. The
loss of service of Robert H. Gurevitch along with the loss of his numerous
contacts and relationships in the industry would have a material adverse effect
on our business. We have entered into an Employment Agreement with Robert H.
Gurevitch under which he has agreed to
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<PAGE>
render services to us until October 1, 2001. We have obtained "key person"
life insurance on Mr. Gurevitch in the amount of $2,000,000, of which we are the
sole beneficiary, but there can be no assurance that the proceeds of such
insurance will be sufficient to offset the loss to us in the event of his death.
NONE OF OUR PRODUCTS HAVE SIGNIFICANT PROTECTION FROM PATENTS, AND THEREFORE,
THEY MAY NOT BE ADEQUATELY PROTECTED FROM COPYING BY COMPETITORS.
Our future success and ability to compete is dependent in part upon our
proprietary technology used in the Apollo 95E. The Apollo 95E is currently only
protected by a patent in France. Patent protection is being sought in all of the
countries of the world in which this technology can be marketed. There can be no
assurance that patents outside of France will be granted for the Apollo 95E
system, and, if granted, the patents will provide adequate protection for the
Company's technologies. Consequently, we rely primarily on trademark, trade
secret and copyright laws to protect our technology. However, there can be no
assurance that third parties will not try to copy our products. In addition,
many foreign countries' laws may not protect us from improper use of our
proprietary technology overseas. We may not have adequate remedies if our
proprietary rights are breached and therefore a breach of our proprietary rights
could have a material adverse effect on our financial condition.
WE ARE SUSCEPTIBLE TO PRODUCT LIABILITY SUITS AND IF A LAWSUIT IS BROUGHT
AGAINST US IT COULD RESULT IN US HAVING TO PAY LARGE LEGAL EXPENSES AND/OR
JUDGMENTS.
Although we have not yet had any product liability claims, because of the
nature of the medical/dental device industry, there can be no assurance that we
will not be subject to such claims in the future. Our products come into contact
with more vulnerable areas of the human body, such as the mouth, tongue, teeth
and gums, and, therefore, the sale and support of dental products makes us
susceptible to the risk of such claims. A successful product liability claim or
claim arising as a result of use of our products brought against us, or the
negative publicity brought up by such claim, could have a material adverse
effect upon our business. We maintain product liability insurance with coverage
limits of $10,000,000 per occurrence and $11,000,000 per year. While we believe
that we maintain adequate insurance coverage, we do not guarantee that the
amount of insurance will be adequate to satisfy claims made against us in the
future, or that we 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.
On July 16, 1999, sold 901,000 shares of Common Stock to eight investors.
The Company received aggregate gross proceeds of $5,000,000 which will be used
for working capital. The offer and sale of these shares were exempt from the
registration requirements of Section 5 of the Securities Act of 1933 (the "Act")
by virtue of Section 4(2) thereof and Rule 506 of Regulation D promulgated
thereunder. The resale of these shares was registered under the Act on a Form
S-3 Registration Statement filed on July 23, 1999 and subsequently declared
effective.
Item 3. Defaults in Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information
None.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
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.
Date NOVEMBER 15, 1999 By: /S/ ROBERT H. GUREVITCH
-------------------------------------------
Robert H. Gurevitch
Chairman and Chief Executive Officer
Date NOVEMBER 15, 1999 By: /S/ STEPHEN F. ROSS
-------------------------------------------
Stephen F. Ross
Vice President and Chief Financial Officer
Page 19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
EXHIBIT 27.1 FINANCIAL DATA SCHEDULE
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 nine-month period ended September 30, 1999
included in this report on Form 10-QSB and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<CURRENCY> U.S.-DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-1-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1.6457
<CASH> 4,780,324
<SECURITIES> 0
<RECEIVABLES> 5,461,454
<ALLOWANCES> 0
<INVENTORY> 9,214,256
<CURRENT-ASSETS> 23,207,678
<PP&E> 2,050,119
<DEPRECIATION> 696,329
<TOTAL-ASSETS> 27,126,629
<CURRENT-LIABILITIES> 12,912,140
<BONDS> 0
<COMMON> 63,949
0
0
<OTHER-SE> 14,025,192
<TOTAL-LIABILITY-AND-EQUITY> 27,126,629
<SALES> 27,626,340
<TOTAL-REVENUES> 27,626,340
<CGS> 14,471,503
<TOTAL-COSTS> 13,270,910
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 733,053
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