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, 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 May 13, 1999:
5,439,561
Transitional Small Business Disclosure Format Yes [ ] No [X]
<PAGE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
FORM 10-QSB REPORT
March 31, 1999
PART I - FINANCIAL INFORMATION PAGE
Item 1. Interim Condensed Consolidated Financial Statements
(Unaudited)
Condensed Consolidated Balance Sheet-March 31, 1999 3
Condensed Consolidated Statements of Operations 4
Three Month Periods Ended March 31, 1999 and 1998
Condensed Consolidated Statements of Cash Flows 5
Three Month Periods Ended March 31, 1999 and 1998
Consolidated Statements of Comprehensive Income 6
Three Month Periods Ended March 31, 1999 and 1998
Notes to Interim Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis or Plan of Operation 11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 18
Item 3. Defaults in Senior Securities 19
Item 4. Submission of Matters to Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
(a) Exhibits 19
(b) Reports on Form 8-K 19
Signatures 20
Page 2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 1999
(Unaudited)
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................... $ 3,544,795
Accounts receivable, net .................................... 3,880,829
Inventories ................................................. 6,423,330
Prepaid expenses and other current assets ................... 2,022,671
------------
Total current assets ................................... 15,871,625
Property and equipment, net of accumulated depreciation ....... 1,166,577
Intangible assets, net of accumulated amortization ............ 2,441,956
Loans to related parties ...................................... 70,000
Other assets .................................................. 104,831
------------
Total assets ........................................... $ 19,654,989
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligations ................ $ 22,440
Current portion of long-term debt ........................... 273,541
Borrowings under revolving line of credit ................... 2,234,000
Accounts payable ............................................ 2,572,420
Accrued liabilities ......................................... 1,217,053
Customer deposits ........................................... 66,847
------------
Total current liabilities .............................. 6,386,301
Long-term debt ................................................ 2,764,769
Capital lease obligations ..................................... 17,553
------------
Total liabilities ............................................. 9,168,623
============
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:
5,435,694 shares issued and outstanding .................. 54,356
Paid in capital ............................................... 14,749,672
Accumulated deficit ........................................... (4,189,716)
Accumulated translation adjustment ............................ (127,946)
------------
Total stockholders' equity .................................... 10,486,366
------------
Total liabilities and stockholders' equity .................... $ 19,654,989
============
</TABLE>
The accompanying notes are an integral part of these interim condensed
consolidated financial statements.
Page 3
<PAGE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 1999 AND 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Net sales ................................................ $ 10,214,485 $ 2,110,531
Cost of sales ............................................ 4,912,475 1,550,089
------------ ------------
Gross profit ........................................... 5,302,010 560,442
Selling, general and administrative expenses ............. 3,390,083 1,729,619
Research and development expenses ........................ 142,580 142,387
------------ ------------
Operating income (loss) ................................ 1,769,347 (1,311,564)
Interest income .......................................... (31,558) (44,273)
Interest expense ......................................... 505,532 83,793
Amortization of debt issuance costs ...................... 64,516 10,484
------------ ------------
Income (loss) before income taxes ........................ 1,230,857 (1,361,568)
Provision for income taxes ............................... 71,080 -
------------ ------------
Net income (loss) ....................................... $ 1,159,777 $ (1,361,568)
============ ============
Earnings (loss) per share:
Basic ................................................. $ .22 $ (.27)
Diluted ............................................... $ .17 $ (.27)
Weighted average number of shares:
Basic ................................................. 5,321,027 5,115,777
Diluted ............................................... 7,026,970 5,115,777
</TABLE>
The accompanying notes are an integral part of these interim condensed
consolidated financial statements.
Page 4
<PAGE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 1999 AND 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ......................................... $ 1,159,777 $(1,361,568)
Adjustments to reconcile net income (loss)
to net cash used by operating activities:
Depreciation and amortization ........................... 137,243 111,248
Amortization of debt discount ........................... 348,434 10,484
Changes in operating assets and liabilities:
Accounts receivable ..................................... (782,160) 741,548
Inventories ............................................. (887,453) (236,444)
Prepaid expenses and other .............................. (636,870) (284,531)
Other assets ............................................ (125,712) (545,700)
Accounts payable ........................................ 173,165 (387,069)
Accrued liabilities and income taxes .................... (25,321) (508,461)
Customer deposits ....................................... 6,014 10,066
----------- -----------
Net cash used by operating activities ..................... (632,883) (2,450,427)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment ...................... (163,763) (70,625)
----------- -----------
Net cash used in investing activities ..................... (163,763) (70,625)
----------- -----------
Cash flows from financing activities:
Borrowings from revolving line of credit ............... 2,234,000 --
Net proceeds from issuance of notes payable ............. 2,953,890 4,467,686
Repayment of notes payable .............................. (4,881,714) --
Repayments on borrowings to related parties ............. -- (21,572)
Principal payments on capital lease obligations ......... (5,382) (1,897)
Increase in other long term liabilities ................. -- 448
Issuance of common stock through exercise of options .... 138,125 --
----------- -----------
Net cash provided by financing activities ................. 438,919 4,444,665
----------- -----------
Net increase (decrease) in cash and cash equivalents ..... (357,727) 1,923,613
Effect of exchange rate changes on cash and cash
equivalents ............................................... (38,783) --
Cash and cash equivalents, beginning of period ............ 3,941,305 3,981,062
----------- -----------
Cash and cash equivalents, end of period .................. $ 3,544,795 $ 5,904,675
=========== ===========
Non-cash investing and financing activities:
Acquisitions of businesses
Issuance of common stock ................................ $ 1,143,750 --
Forgiveness of receivables .............................. 592,497 --
Supplemental cash flow information:
Interest paid ............................................. $ 69,073 $ 5,924
Income taxes paid ......................................... -- 9,000
</TABLE>
The accompanying notes are an integral part of these interim condensed
consolidated financial statements.
Page 5
<PAGE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 1999 AND 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Net income (loss) ........................ $ 1,159,777 $(1,361,568)
Other comprehensive income:
Foreign currency translation adjustment (129,151) --
Comprehensive income (loss) .............. $ 1,030,626 $(1,361,568)
=========== ===========
</TABLE>
The accompanying notes are an integral part of these interim
consolidated financial statements.
Page 6
<PAGE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 1999
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
representation have been included. Operating results for the three-month
period ended March 31, 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 DMDS 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 March 31, 1999 and 1998, international
customers accounted for 54% and 21% of sales, respectively. At March 31,
1999 and 1998, international customers accounted for approximately 78% and
51% of trade accounts receivable, respectively. For the three month period
ended March 31, 1999 there was one customer who accounted for more than 10%
of revenues. There were no customers that accounted for more than 10% of
revenues for the three months ended March 31, 1998. Five customers
accounted for 49% of the Company's accounts receivable at March 31, 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
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 numerator and denominator of the
basic and diluted earnings per share (EPS) computations for the quarters
ended March 31, 1999 and 1998:
<TABLE>
<CAPTION>
MARCH 31, 1999 MARCH 31, 1998
<S> <C> <C>
Numerator:
Basic and diluted income available to common
stockholders:
Net income (loss) ............................. $1,159,777 $(1,361,568)
========== ===========
Denominator:
Basic weighted average shares ............... 5,321,027 5,115,777
Effect of dilutive securities:
Stock options and warrants .................. 1,705,943 -
---------- -----------
Diluted weighted average shares ............... 7,026,970 5,115,777
========== ===========
</TABLE>
Common shares related to stock options and stock warrants that are
antidilutive amounted to approximately 33,000 and 5,026,987 for the
three-month periods ended March 31, 1999 and 1998, respectively.
Comprehensive Income
In January 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS 130"). SFAS 130 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
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.
Page 8
<PAGE>
The following is a reconciliation of accumulated other comprehensive income
balance for the three months ended March 31, 1999:
Beginning balance .................... $ 1,205
Current period change ................ (129,151)
---------
Ending balance ...................... $(127,946)
=========
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 May 27, 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 March 31, 1999:
Raw materials ........... $3,138,858
Work in process ......... 611,375
Finished goods ........... 2,673,097
----------
$6,423,330
==========
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.
6. Other
On March 1, 1999, DMDS, Ltd. purchased the assets of DMD Germany, an
independent company organized under the laws of Germany, for a purchase
price consisting of 100,000 shares of the common stock of the Company and
forgave receivables of $362,041. DMD Germany's sole business was the sale
and distribution of the Company's products in Germany. The assets that
DMDS, Ltd. purchased include the business (as a going concern), customer
lists, goodwill, the benefit of the lease and other contracts with third
parties and all other items of whatever nature owned by DMD Germany and
used in the conduct of the business of DMD Germany. Under the terms of the
agreement, if DMD Germany generates greater than (1) $4 million in
revenues, or (2) Apollo and/or TeleCam unit sales of at least 780 units
during the first year under the agreement, the Company shall pay contingent
consideration equal to the difference between $1.6 million and the market
value of 100,000 shares of common stock. The Company also entered into an
employment agreement with Ralf Muller, the General Manager of DMD Germany.
The Company intends to continue the business of DMD Germany as currently
operated. The Company purchased the assets of DMD Germany for the purpose
of increasing its revenues and the margins on products sold in Germany.
Page 9
<PAGE>
On March 1, 1999, DMDS, Ltd. purchased the assets of Midas, Ltd., an
independent company organized under the laws of the United Kingdom, for a
purchase price consisting of 50,000 shares of the common stock of the
Company and forgave receivables of $230,456. Midas, Ltd.'s primary business
was the sale and distribution of the Company's products in the United
Kingdom. The assets that DMDS, Ltd. purchased include the business (as a
going concern), customer lists, goodwill, the benefit of the lease and
other contracts with third parties and all other items of whatever nature
owned by Midas, Ltd. and used in the conduct of the business of Midas, Ltd.
The Company also entered into a non-compete agreement with Sostre NV, the
entity that has distributed the Company's products for Midas, Ltd. The
Company intends to continue the business of Midas, Ltd. substantially as
currently operated. The Company purchased the assets of Midas, Ltd. for the
purpose of increasing its revenues and the margins on products sold in the
UK.
No proforma finanacial information has been presented for these two
acquisitions as they are immaterial to the consolidated financial
statements of the Company.
On March 17, 1999, the Company entered into a manufacturing agreement with
Suni under which Suni will assemble, test and package the Company's digital
x-ray system incorporating the digital x-ray technology developed by Suni
for the Company. The Company is currently working with Suni to produce a
digital x-ray system that meets the Company's specifications. While the
Company believes that an acceptable device will be manufactured, no
assurance can be given that Suni will be able to produce a product which
will meet the Company's specifications. Under the agreement, which has a
three year term, the Company has guaranteed payment in full for at least
3,000 units per year and has agreed to place orders for at least 750 units
per quarter. The Company has also agreed to fulfill all of its requirements
for the x-ray product from Suni during the term of the agreement. The
Company cannot begin shipping products under this agreement to the market
until it receives 510(k) notification. If, and when, 510(k) notification is
received, the Company intends to begin introducing the digital x-ray system
for sale worldwide.
8. Segment Information
The Company operates in one segment - dental medical equipment which, at
March 31, 1999, comprised three main products: TeliCam Systems - an
intraoral camera and dental networking system; Apollo 95E tooth whitening
and curing system; and other accessories including the Apollo Secret
whitening product. 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-month periods ended
March 31, 1999 and 1998:
1999 1998
----------- ----------
TeliCam .......................... $ 1,600,903 $1,615,769
Apollo 95E ....................... 8,324,448 298,134
Other ............................ 289,134 196,628
----------- ----------
$10,214,485 $2,110,531
=========== ==========
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 months
ended March 31, 1999 and 1998:
1999 1998
----------- ----------
Sales by geography:
United States .................... $7,231,348 $1,812,381
Europe ........................... 2,983,137 298,150
----------- ----------
$10,214,485 $2,110,531
=========== ==========
The following is long-lived asset information by geographic area as of
March 31, 1999 and 1998:
March 31,
---------------------------
1999 1998
---------- --------
Long Lived assets:
United States $939,263 $572,222
Europe 227,314 -
---------- --------
$1,166,577 $572,222
========== ========
Page 10
<PAGE>
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.
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, and in the second quarter of 1999 intend to introduce a line of
composite resin materials known as "ASAP - Accelerated Solutions for Aesthetic
Procedures," also for use in conjunction with the Apollo 95E. In addition, 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
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,
wedeveloped 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, and accounted for
$8,324,448 in revenues in the first three months of 1999, as compared to
$298,134 for the same period in 1998. However, revenues attributed to the
TeliCam intraoral cameras declined slightly to $1,600,903 for the three month
period ended March 31, 1999 as compared to $1,615,769 for the same period in
1998. While we expect that the trend of increasing revenues each fiscal quarter
attributable to the Apollo 95E to continue for the near future, we also expect
the trend in the decline in sales of our TeliCam intraoral cameras to continue
and therefore to at least partially offset the increased revenues realized on
the Apollo 95E.
RESULTS OF OPERATIONS
We derive our revenues primarily from the sale of three product lines:
TeliCam intra-oral camera systems, Apollo 95E curing and whitening devices, and
Apollo Secret tooth whitening chemicals for use in conjunction with the Apollo
95E, which began shipping in the fourth quarter of 1998. Through March 31, 1999,
revenues from Apollo Secret have been immaterial.
Revenues by product line for the three month periods ended March 31, 1999
and 1998, are reflected in the following table:
FOR THE THREE-MONTH PERIODS ENDED MARCH 31,
----------------------------------------------
1999 % 1998 %
----------- ---- ---------- ----
Apollo 95E ........... $ 8,324,448 81% $ 298,134 14%
TeliCam .............. 1,600,903 16% 1,615,769 77%
Other ................ 289,134 3% 196,628 9%
$10,214,485 100% $2,110,531 100%
=========== ==== ========== ====
Page 11
<PAGE>
NET SALES. Net sales for the three-month periods ended March 31, 1999 and
1998, were $10,214,485 and $2,110,531 respectively. We had operating income of
$1,769,347 for the three-month period ended March 31, 1999, while incurring an
operating loss of $1,311,564 for the three-month period ended March 31, 1998.
Net sales for the three-month period ended March 31, 1999 increased
approximately 384% from the three-month period ended March 31, 1998. Sales were
comprised primarily of TeliCam Systems for the three-month period ended March
31, 1998, whereas sales for the three-month period ended March 31, 1999 were
comprised primarily of the Apollo 95E, which 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 March
31, 1998 to the three-month period ended March 31, 1999, Apollo sales increased
$8,026,298 while Telecam sales decreased $14,866. TeliCam sales both
domestically and internationally have declined as a result of weaker demand and
increased competition as the market for intraoral cameras matured. We expect the
decline in TeliCam sales to continue into the future. No assurance can be given
that the Apollo 95E sales will continue to offset the reduced TeliCam sales in
the future.
COST OF SALES. Cost of sales for the three-month periods ended March 31,
1999 and March 31, 1998, were $4,912,475, or 48% of net sales, and $1,550,089,
or 73% of net sales, respectively. Cost of sales as a percentage of net sales
decreased from 1998 to 1999 primarily due to more favorable margins on the
Apollo 95E, which represented 81% of net sales for the three-month period ended
March 31, 1999, as opposed to 14% for the three-month period ended March 31,
1998, offset by the increased cost of sales (63% for the three-month period
ended March 31, 1999 as compared to 60% for the three-month period ended March
31, 1998) as a percentage of sales resulting from the reduced selling price of
its TeliCams effective in the first quarter of 1999 in response to the pressure
of competition in the marketplace as well as the fact that the Apollo 95E was
not available domestically in the first quarter of 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 will increase in the future.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses totaled $3,390,083, or 33% of net sales, and $1,729,619,
or 82% of net sales, for the three-month periods ended March 31, 1999 and 1998,
respectively. The absolute dollar increases in this expense category from year
to year are primarily attributed to a combination of increased sales commissions
resulting from increased sales volumes ($550,000), increased salaries
($391,000), and increased marketing costs ($139,000) resulting from enhanced
marketing efforts. The decrease in selling, general and administrative expenses
as a percentage of net sales from 1998 to 1999 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 the new products.
RESEARCH AND DEVELOPMENT. Research and development expenses totaled
$142,580, or 1% of net sales, and $142,387, or 7% of net sales, for the
three-month periods ended March 31, 1999 and 1998, respectively. Spending in
this category remained substantially constant. We expect research and
development expenses to increase in future periods, as we continue to pursue the
development of new technologies.
INTEREST INCOME. Interest income totaled $31,558, and $44,273 for the
quarters ended March 31, 1999 and 1998. This income is primarily attributable to
the interest earned by investing available cash in a short-term management
account through Imperial Bank.
INTEREST EXPENSE. Interest expense totaled $505,532, and $83,793 for the
three-month periods ended March 31, 1999 and 1998, respectively. This expense
category includes interest paid on capital lease obligations, on bridge notes,
on notes payable to related parties, and on our senior subordinated notes. The
substantial increase in the three-month period ended March 31, 1999 is primarily
due to the accrued interest and the amortization of the remaining unamortized
debt discount on the $4.5 million of senior subordinated notes, which was repaid
in January 1999 with proceeds from the new credit facility with Imperial Bank.
Amortization of debt issuance cost totaled $64,516 and $10,484 for the
three-month periods ended March 31, 1999 and 1998, respectively. This represents
the amortization of the issuance costs incurred in connection with the 12%
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 income for the three-month period ended March 31,
1999 totaled $1,159,777 or $0.22 per share. Net loss for the three-month period
ended March 31, 1998 totaled $1,361,568, or $0.27 per share.
Page 12
<PAGE>
CAPITAL RESOURCES AND LIQUIDITY
For the three-month period ended March 31, 1999, we used net cash of
$632,883 in operations. Accounts receivable increased from $3,757,865 at the
prior year end to $3,880,829 at March 31, 1999, primarily as a result of the
increase in sales during the three-month period ended March 31, 1999. Accounts
payable and accrued liabilities totaling $3,789,473 at March 31, 1999 increased
from $3,653,831 at the prior year end primarily due to increased inventory
purchases. Inventory levels increased approximately $860,000 to accommodate the
increased sales volume generated by the Apollo 95E.
Capital expenditures for the three-month period ended March 31, 1999 were
approximately $164,000, with approximately $74,000 spent for the purchase of
furniture and fixtures and approximately $60,000 spent for computer equipment.
Cash and cash equivalents on hand at the end of the period were $3,544,795.
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. Weintend 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 March 31, 1999, $5,150,066 was
outstanding under the Imperial facility.
As of the end of March 1999, the expenditures for continued research and
development for products incorporating digital x-ray technology (including the
additional development fee due to Suni upon acceptance by us of the final
prototype subsystem), the minimum purchase obligations under the distribution
agreement with Boston Marketing, 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 which will be financed by cash from
continuing operations and the proceeds of the Imperial credit facility. In
addition, we have filed a registration statement with the SEC for a secondary
public offering of our common stock. We believe that the net proceeds from our
secondary offering, together with our Imperial facility and our existing cash
and cash equivalents and cash from operations, will be sufficient to meet our
cash requirements for at least the next twelve months. However, we cannot
guarantee that the secondary offering will be successful and if the secondary
offering is not closed, we will explore other alternatives to fulfill our
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
us.
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
Page 13
<PAGE>
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 strategy is to
replace all non-Year 2000 compliant information technology systems by June 30,
1999. As of May 5, 1999, our in-house data network is Year 2000 compliant. Also
as of May 5, 1999, ninety percent of our workstations are Year 2000 compliant,
with the remainder to be replaced with Year 2000 compliant workstations by June
30, 1999. Although our management believes that its efforts will be successful
and the costs will be immaterial to our consolidated financial position and
results of operations, it also recognizes that any failure or delay could cause
a potential impact.
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 anticipate that all of our internal systems will be Year 2000
compliant by June 30, 1999 and that 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.
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-month period ended March 31, 1998, we incurred a net
loss of $1,361,568, while for the three-month period ended March 31, 1999 we had
net income of $1,159,777. At March 31, 1999, our accumulated deficit was
$4,189,716. 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 ended March 31, 1999, there can be no assurance that the Company
will continue to be profitable.
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<PAGE>
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.
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 quarter
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 below levels of prior
comparable periods, a trend that we expect to continue.
AS A RESULT OF THE DECLINE IN SALES OF THE TELICAM, 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 related 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.
If our secondary public offering is not successful, we anticipate that we
will need additional capital during the calendar year 1999 to satisfy our
expected increased working capital and research and development requirements for
our planned new products. If our secondary offering does not close, we will
explore alternatives to fulfill these requirements, but cannot assure you that
additional financing will be available when needed or that, if available, it
will be on terms favorable to us. 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.
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<PAGE>
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 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 it's 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.
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<PAGE>
WE ARE WAITING FOR A CALIFORNIA MEDICAL/DEVICE MANUFACTURING LICENSE AND IF WE
DO NOT RECEIVE THIS LICENSE WE MAY BE FORCED TO DELAY OR SUSPEND THE MANUFACTURE
AND SALE OF OUR PRODUCTS.
The State of California requires that each facility manufacturing a medical
device apply for and obtain from the State's Department of Health Services a
Medical Device Manufacturing License. To qualify for the license, a facility
must be in compliance with FDA's regulatory requirements. We filed a timely
application for this license and in early March of 1999 the DHS conducted an
inspection of our manufacturing facility in Irvine, California and found no
"reportable observations." We received a list of adjustments and clarifications
recommended by the DHS. We filed a response to this list on March 19, 1999 and
we expect to receive a California Medical Device Manufacturing License by the
end of May 1999. We cannot guarantee that DHS will grant our license. We cannot
manufacture devices at our facility if the license is not granted. Inability to
obtain this license could result in a delay or suspension of the manufacture and
sale of our medical devices. Any such delay or suspension would have a material
adverse effect on our business.
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 render services to us until October 1,
1999. 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 ARE PROTECTED BY 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.
THE YEAR 2000 ISSUE COULD HAVE AN IMPACT ON OUR INFORMATION TECHNOLOGY AND
NON-INFORMATION TECHNOLOGY SYSTEMS AS WELL AS THOSE OF OUR SUPPLIERS AND/OR
CUSTOMERS, ANY OF WHICH COULD NEGATIVELY AFFECT SALES OF OUR PRODUCTS.
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.
Page 17
<PAGE>
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 strategy is to replace all non-Year 2000
compliant information technology systems by June 30, 1999. As of May 5, 1999,
our in-house data network is Year 2000 compliant. Also as of May 5, 1999, ninety
percent of our workstations are Year 2000 compliant, with the remainder to be
replaced with Year 2000 compliant workstations by June 30, 1999. Although our
management believes that its efforts will be successful and the costs will be
immaterial to our consolidated financial position and results of operations, it
also recognizes that any failure or delay could cause a potential impact.
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 anticipate that all of our internal systems will be Year 2000
compliant by June 30, 1999 and that 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
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities and Use of Proceeds.
On March 1, 1999, DMDS, Ltd. purchased the assets of DMD Germany, an
independent company organized under the laws of Germany. We issued 100,000
shares of our Common Stock, valued at $762,500, as the consideration for the
purchase of the assets. We relied on Regulation S of the Securities Act of 1933
as an exemption for issuing the shares. The assets that DMDS, Ltd. purchased
include the business (as a going concern), customer lists, goodwill, the benefit
of the lease and other contracts with third parties and all other items of
whatever nature owned by DMD Germany and used in the conduct of the business of
DMD Germany.
On March 1, 1999, DMDS, Ltd. purchased the assets of Midas, Ltd., an
independent company organized under the laws of the United Kingdom. We issued
50,000 shares of our Common Stock, valued at $381,250, as the consideration for
the purchase of the assets. We relied on Regulation S of the Securities Act of
1933 as an exemption for issuing the shares. The assets that DMDS, Ltd.
purchased include the business (as a going concern), customer lists, goodwill,
the benefit of the lease and other contracts with third parties and all other
items of whatever nature owned by Midas, Ltd. and used in the conduct of the
business of Midas, Ltd.
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<PAGE>
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
3.1 Registrant's Certificate of Incorporation*
3.2 Registrant's Bylaws*
27.1 Financial Data Schedule
----------------------------------
*Incorporated by reference to Registrant's Registration Statement on
Form SB-2 filed on April 7, 1997
(b) Reports on Form 8-K
(i) Current Report on Form 8-K was filed March 19, 1999 reporting
under Item 5 that the Company had acquired the assets of two European
distribution companies through its wholly owned subsidiary, DMDS UK.
(ii) Current Report on Form 8-K was filed on January 13, 1999 reporting
under Item 5 that the company had submitted its filing for 510(k) clearance
with the FDA for its digital radiography system.
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<PAGE>
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 MAY 12, 1999 By: /S/ ROBERT H. GUREVITCH
------------ -----------------------------------
Robert H. Gurevitch
Chairman and Chief Executive Officer
Date MAY 12, 1999 By: /S/ STEPHEN F. ROSS
-----------------------------------
Stephen F. Ross
Vice President and Chief Financial
Officer
Page 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, 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-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1.614
<CASH> 3,544,795
<SECURITIES> 0
<RECEIVABLES> 3,901,804
<ALLOWANCES> 20,975
<INVENTORY> 6,423,330
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0
54,356
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</TABLE>
