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, 2000
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 (IRS Employer
of incorporation or Identification No.)
organization)
6416 VARIEL AVE., WOODLAND HILLS, CA 91367
------------------------------------------
(Address of principal executive offices)
Issuer's telephone number, including area code (818) 932-2300.
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 12, 2000: 6,497,564
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, 2000
PART I - FINANCIAL INFORMATION PAGE
Item 1. Interim Condensed Consolidated Financial Statements
(Unaudited)
Condensed Consolidated Balance Sheet as of March 31, 2000 3
Condensed Consolidated Statements of Operations
For the Three Month Periods Ended March 31, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows
For the Three Month Periods Ended March 31, 2000 and 1999 5
Consolidated Statements of Comprehensive Income
For the Three Periods Ended March 31, 2000 and 1999 6
Notes to Interim Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis or Plan of Operation 10
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities and Use of Proceeds 19
Item 3. Defaults in Senior Securities 20
Item 4. Submission of Matters to Vote of Securities Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
(a) Exhibits 20
(b) Reports on Form 8-K 20
Signatures 20
Page 2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
<TABLE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 2000
(Unaudited)
<CAPTION>
ASSETS
Current assets:
<S> <C>
Cash and cash equivalents $ 3,880,892
Accounts receivable, net 4,945,045
Inventories 6,830,679
Prepaid expenses and other current assets 1,573,777
-----------
Total current assets 17,230,393
Property and equipment, net of
accumulated depreciation 1,233,365
Intangible assets, net of accumulated amortization 1,903,756
Loans to related parties 70,000
Other assets 822,413
-----------
Total assets $21,259,927
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligations $ 18,670
Line of credit 1,351,297
Accounts payable 4,236,461
Accrued liabilities 1,025,114
Customer deposits 158,034
-----------
Total current liabilities 6,789,576
Borrowings under line of credit 5,213,472
-----------
Total liabilities 12,003,048
-----------
Commitments and contingencies
Mandatorily redeemable Series A exchangeable
preferred stock, stated value $1,000 per share;
2,000 shares issued and outstanding at March
31, 2000 (liquidation value of $2,000,000) 1,816,343
Mandatorily redeemable Series B exchangeable
preferred stock, stated value $1,000 per share;
2,750 shares authorized; 2,250 issued and
outstanding at March 31, 2000 (liquidation value
of $2,250,000) 1,253,757
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:
6,497,564 shares issued and outstanding 64,975
Additional paid in capital 21,418,678
Accumulated deficit (15,076,876)
Cumulative translation adjustment (219,998)
------------
Total stockholders' equity 6,186,779
------------
Total liabilities and stockholders' equity $ 21,259,927
============
</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 MONTH PERIODS ENDED MARCH 31, 2000 AND 1999
(Unaudited)
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
2000 1999
---- ----
<S> <C> <C>
Net sales $ 7,998,681 $ 10,214,485
Cost of sales 5,168,253 4,912,475
------------ -------------
Gross profit 2,830,428 5,302,010
Selling, general and administrative
expenses 5,517,466 3,390,083
Research and development expenses 277,801 142,580
------------ -------------
Total operating expenses 5,795,267 3,532,663
Operating income (loss) (2,964,839) 1,769,347
Interest and other income 198,218 31,558
Interest expense (176,740) (505,532)
Amortization of debt issuance
costs 0 (64,516)
------------ -------------
Income (loss) before income taxes (2,943,361) 1,230,857
Provision for income taxes 56,384 71,080
----------- -------------
Net income (loss) (2,999,745) 1,159,777
Charges relating to manditorily
redeemable preferred stock:
Preferred dividends 38,958 -
Beneficial conversion feature
relating to Series B preferred
stock 97,478 -
----------- -------------
Net income (loss) attributable
to common stockholders $(3,136,181) 1,159,777
=========== =============
Earnings (loss) per share
Basic $ (0.48) $ 0.22
Diluted $ (0.48) $ 0.17
Weighted average number of
Basic 6,497,564 5,321,027
Diluted 6,497,564 7,026,970
</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 THREE MONTH PERIODS ENDED MARCH 31, 2000 AND 1999
(Unaudited)
<CAPTION>
2000 1999
---- ----
Cash flows from operating activities:
<S> <C> <C>
Net income (loss) $(2,999,745) $ 1,159,777
Adjustments to reconcile net
income (loss) to net cash used by
operating activities:
Depreciation and amortization 336,863 137,243
Amortization of debt discount - 348,434
Allowance for returns and doubtful accounts (19,257) -
Changes in operating assets and liabilities:
Accounts receivable 796,555 (782,160)
Inventories 983,604 (887,453)
Prepaid expenses and other (225,512) (636,870)
Other assets 174,637 (125,712)
Accounts payable (271,455) 173,165
Accrued liabilities and income taxes (1,260,248) (25,321)
Customer deposits (47,068) 6,014
----------- -----------
Net cash used by operating activities (2,531,626) (682,883)
----------- -----------
Cash flows from investing activities:
Payment of patent registration costs (21,349) -
Purchase of property and equipment (92,859) (163,763)
---------- -----------
Net cash used in investing activities (114,208) (163,763)
---------- -----------
Cash flows from financing activities:
Borrowings from revolving line of credit - 2,234,000
Net proceeds from issuance of notes payable - 2,953,890
Repayment of notes payable (257,880) (4,881,714)
Principal payments on capital lease obligations - (5,382)
Issuance of preferred stock 2,042,480 -
Issuance of common stock through exercise of options - 138,125
--------- -----------
Net cash provided by financing activities 1,784,600 438,919
--------- -----------
Net decrease in cash and cash equivalents (861,234) (357,727)
Effect of exchange rate changes on cash and cash equivalents 126,625 (38,783)
Cash and cash equivalents, beginning of period 4,615,501 3,941,305
--------- -----------
Cash and cash equivalents, end of period $3,880,892 $ 3,544,795
========== ===========
Non-cash investing and financing activities:
Acquisitions of businesses
Issuance of common stock - $ 1,143,750
Supplemental cash flow information:
Interest paid $ 25,964 $ 5,924
Income taxes paid 11,240 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 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2000 AND 1999
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
2000 1999
---- ----
<S> <C> <C>
Net income (loss) $(2,999,745) $1,159,777
Other comprehensive income
Foreign currency translation 108,075 (129,151)
----------- -----------
Comprehensive income (loss) $(2,891,670) $1,030,626
=========== ==========
</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)
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-month period
ended March 31, 2000 are not necessarily indicative of the results that may
be expected for the year ending December 31, 2000. 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, 1999.
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 March 31, 2000 and 1999, international
customers accounted for 55% and 54% of sales, respectively. International
customers accounted for approximately 78% of trade accounts receivable at
March 31, 2000 and 1999. There was one customer that accounted for more than
10% of revenues for the three-month periods ended March 31, 2000 and 1999.
Five customers accounted for 31% of the Company's accounts receivable at
March 31, 2000.
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 estimated provision
for warranty provisions. Actual results could differ from those estimates.
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<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
four 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.
On April 17, 2000 Boston Marketing filed suit in Los Angeles Superior Court
alleging breach of contract and unspecified damages. The Company intends to
defend the action vigorously and believes that it has meritorious defenses to
the suit. However, because the discovery process has not yet commenced, the
Company is unable to estimate the extent of liability, if any, that could
result from this suit.
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-month
periods ended March 31, 2000 and 1999:
<TABLE>
<CAPTION>
Three Three
months ended months ended
MARCH 31, 2000 MARCH 31, 1999
Numerator:
Basic and diluted income available to
common stockholders:
<S> <C> <C>
Net income (loss) attributable to
common stockholders $(3,136,181) $ 1,159,777
============ ===========
Denominator:
Basic weighted average shares 6,497,564 5,321,027
Effect of dilutive securities:
Stock options and warrants 0 1,705,943
------------ -----------
Diluted weighted average shares 6,497,564 7,026,970
============ ===========
</TABLE>
Common shares related to stock options and stock warrants that are
antidilutive amounted to approximately 5,829,660 and 33,000 for the
three-month periods ended March 31, 2000 and 1999, respectively. In addition,
at March 31, 2000 common shares issuable on the conversion of exchangeable
preferred stock amounted to 1,914,414 shares, which are excluded from the
weighted average number of shares because they are antidilutive.
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 three-month period ended March 31, 2000:
<TABLE>
<CAPTION>
<S> <C>
Beginning balance $ (328,073)
Current period change 108,075
----------
Ending balance $ (219,998)
==========
</TABLE>
3. Inventories
Inventories consisted of the following at March 31, 2000:
<TABLE>
<CAPTION>
<S> <C>
Raw materials $2,408,480
Work in process 750,231
Finished goods 3,671,968
----------
$6,830,679
==========
</TABLE>
4. Capital Transactions
On February 29, 2000 the Company sold an aggregate of 2,250 shares of Series
B Exchangeable Preferred Stock, "Series B Preferred Stock", B-1 Warrants to
purchase up to 225,000 shares of common stock and B-2 Warrants to purchase up
to 450,000 shares of common stock. The Company received $2,250,000 in gross
proceeds less costs of $207,520. The net proceeds of $2,042,480 were
allocated based on the relative fair value to the mandatorily redeemable
preferred stock ($1,253,757) and to the warrants ($788,723). The holders of
Series B Preferred Stock may exchange their shares for shares of common stock
at the lower of (i) $2.85 or (ii) 100% of the market price of the common
stock, as defined on the date of exchange. Holders of Series B Preferred
Stock will receive $30 in dividends per year with payments due quarterly. The
Series B Preferred Stock is non voting, however, without the consent of at
least 75% of the holders of the Series B Preferred Stock, the Company may not
alter the terms or preferences of the Series B Preferred Stock, or create any
additional classes of preferred stock having liquidation preference over the
Series B Preferred Stock. The Series B Preferred Stock ranks equally with the
Series A Exchangeable Preferred Stock with respect to dividends and
preferences upon liquidation. The Series B Preferred Stock agreement also
contains provisions that a change in control is deemed a liquidating event
and accordingly the Series B Preferred Stock has been classified as
mandatorily redeemable in the balance sheet. The Company can require the
Series B Preferred Stock to convert to common stock after the third
anniversary or in the event the common stock price is at least $10 per share
and the trading volume exceeds a specified volume. The Company also has the
option to redeem the preferred stock after the third anniversary.
In connection with the issuance of the Series B Preferred Stock, the Company
recorded additional paid in capital of $97,478 offset by a non-cash charge to
equity relating to the beneficial conversion feature of the Series B
Preferred Stock. This charge is calculated using the fair value of the common
stock on the commitment date for the issuance of the Series B Preferred
Stock, subtracting the conversion price and then multiplying the resulting
amount by the number of shares of common stock into which the Series B
Preferred Stock are convertible. This non-cash charge resulted in an increase
in the Company's net loss per share attributable to common stockholders for
the quarter ended March 31, 2000.
The B-1 Warrants are exercisable into an aggregate of 225,000 shares of
common stock at a purchase price of $2.51 per share. The B-2 Warrants are
exercisable into an aggregate of 450,000 shares of common stock at a purchase
price of $3.50 per share. In addition, the Company issued as a finders fee
warrants to purchase 64,725 shares of common stock at an exercise price of
$2.51.
5. Segment Information
The Company operates in one segment - dental medical equipment which, at
March 31, 2000, comprised four main products: TeliCam Systems - an intraoral
camera and dental networking system; ApolloTM tooth whitening and curing
system; other accessories including the Apollo Secret(R) whitening product
and ASAP composite materials; and MPDxTM digital x-ray
Page 9
<PAGE>
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 month periods ended
March 31, 2000 and 1999:
<TABLE>
<CAPTION>
Three months Three months
ended ended
March 31, March 31,
2000 1999
-------------------------------
<S> <C> <C>
TeliCam $ 1,132,603 $ 1,380,259
Apollo 95E 4,310,985 7,968,867
MPDx 1,443,035 -
Consumables 615,599 589,810
Other 496,459 275,549
-------------------------------
$ 7,998,681 $10,214,485
===============================
</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 months
ended March 31, 2000 and 1999:
<TABLE>
<CAPTION>
Three months Three months
ended ended
March 31, March 31,
2000 1999
-------------------------------
Sales by geography:
<S> <C> <C>
United States $ 5,195,086 $ 7,231,348
Europe 2,803,595 2,983,137
-------------------------------
$7,998,681 $10,214,485
===============================
</TABLE>
The following is long-lived asset information by geographic area as of March
31, 2000:
<TABLE>
<CAPTION>
March 31, 2000
----------------
Long Lived assets:
<S> <C>
United States $928,249
Europe 305,116
----------
$1,233,365
==========
</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 10-QSB.
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."
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 "ApolloTM." We also market and sell a line of
whitening products known as "Apollo Secret(R)" for use in conjunction with the
ApolloTM, and a line of composite resin materials known as "ASAP - Accelerated
Solutions for Aesthetic Procedures," which product line was discontinued in the
first quarter of 2000, also for use in conjunction with the ApolloTM. Starting
in September of 1999, we began marketing and selling the MPDxTM digital x-ray
system. In addition, we continue to manufacture and sell intraoral camera
systems, known as the "TeliCam II System," and "TeliCam
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<PAGE>
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 intra-oral camera systems referred to
as 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. ("S.E.D."), a company
organized under the laws of France. Among the acquired assets was a patent for
S.E.D.'s "Biotron" soft tissue surgical device. From this technology, we
developed the "ApolloTM" 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 ApolloTM also
produces light and heat which, when used in conjunction with the Apollo
Secret(R) whitening materials, activates the whitening chemicals in the Apollo
Secret(R). The result of this activation is dramatic whitening of stained teeth.
The rapid performance of the ApolloTM in both hardening composite materials and
whitening teeth enables an average dental practice to save about 5 to 8 hours
per month of a dentist's time.
On October 10, 1997, the Company entered into an agreement with Suni
Imaging Microsystems, Inc. ("Suni") to develop digital x-ray technology for
incorporation into a digital x-ray system for the dental market. 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. Digital x-ray
systems, including those currently on the market, reduce radiation exposure
compared to conventional x-ray systems and allow dentists to view x-ray images
in real-time without the time-consuming process of film development while
eliminating the need to use and dispose of chemicals required to develop
conventional x-ray film. The resulting MPDxTM digital x-ray system was
introduced in September 1999.
RESULTS OF OPERATIONS
We derive our revenues primarily from the sale of four product lines: TeliCam
intra-oral camera systems, ApolloTM curing and whitening devices, Apollo
Secret(R) tooth whitening chemicals which began shipping in the fourth quarter
of 1998 and the MPDxTM digital x-ray system which began shipping at the end of
the third quarter of 1999. Through March 31, 2000, the sales of Apollo Secret,
ASAP and other systems have been less than 15% of total sales.
Revenues by product line for the three month periods ended March 31, 2000 and
1999, are reflected in the following table:
<TABLE>
<CAPTION>
FOR THE THREE-MONTH PERIODS ENDED MARCH 31,
2000 % 1999 %
---- --- ---- ---
<S> <C> <C> <C> <C>
ApolloTM $4,310,985 54% $ 7,968,867 78%
TeliCam 1,132,603 14% 1,380,259 13%
MPDxTM 1,443,035 18% - -
Consumables 615,599 8% 589,810 6%
Other 496,459 6% 275,549 3%
$7,998,681 100% $10,214,485 100%
============ ==== =========== ====
</TABLE>
NET SALES. Net sales for the three-month periods ended March 31, 2000 and 1999,
were $7,998,681 and $10,214,485 respectively.
Net sales for the three-month period ended March 31, 2000 decreased
approximately 22% from the three-month period ended March 31, 1999. For the
three-month periods ended March 31 for 2000 and 1999, TeliCam System sales
represented 14% and 13% of total sales, respectively. For the three-month
periods ended March 31, 2000 and 1999, Apollo 95 E represented 54% and 78% of
total sales, respectively. For the three-month periods ended March 31, 2000 and
1999, MPDx represented 18% and 0% of total sales, respectively. Comparing
product line sales in dollars for the three-month period ended March 31, 1999 to
the three-month period ended March 31, 2000, Apollo sales decreased $3,657,882
and TeliCam sales decreased $247,656. The decrease in Apollo sales from 1999 to
2000 was caused by the competitor's lamps curing time becoming closer to that of
the ApolloTM. In addition, the composite material companies and several
lecturing dentists still question the curing properties of high intensity curing
lamps. We expect, but do not guarantee that, the sales of both the TeliCam and
the Apollo to remain level into the future. No assurance can be given that the
MPDx sales growth will continue in the future.
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<PAGE>
COST OF SALES. Cost of sales for the three-month periods ended March 31, 2000
and 1999, were $5,168,253, or 65% of net sales, and $4,912,475, or 48% of net
sales, respectively. Cost of sales as a percentage of net sales for the
three-month period ended March 31, 2000 increased from the same period in 1999
primarily due to a decrease in the margins on the TeliCam and Apollo resulting
from increased market saturation. In addition, royalty fees increased from
$14,015 during the three-month period ended March 31, 1999 to $443,129 for the
same period in 2000 due to royalties incurred on sales of digital x-ray and
consumable . We expect that margins on the sale of the TeliCams and Apollos will
continue to shrink, and thus the cost of sales of the TeliCams and Apollos as a
percentage of net sales is expected to continue to increase in the future.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses totaled $5,517,466, or 69% of net sales, and $3,390,083,
or 33% of net sales, for the three-month periods ended March 31, 2000 and 1999,
respectively. The absolute dollar increases in this expense category for both
the three month periods ended March 31, 2000 and 1999 are primarily attributed
to a combination of increased salaries and increased marketing costs resulting
from enhanced marketing efforts. The increase in selling, general and
administrative expenses as a percentage of net sales for the three-month period
ended March 31, 2000 versus 1999 is due to the increase in salaries and
increased marketing costs resulting from the introduction of the MPDxTM digital
x-ray which began selling late in the third quarter 1999, and enhanced marketing
efforts on our other products. Salaries and employee benefits increased from
$794,683 during the first quarter 1999 to $1,179,012 during the same period in
2000, and advertising and marketing costs increased from $638,910 during the
first quarter of 1999 to $1,688,896 during the first quarter of 2000. The
remaining increase in selling, general, and administrative expenses consisted
primarily of increased travel and entertainment expenses of $320,829 due to an
increased number of trade shows attended. As a result of the increased costs
discussed above, we are reassessing our corporate structure and methods of
operations, in the areas of headcount and marketing. We are currently
reorganizing our operations to increase efficiency and reduce costs, through
personnel reductions. In addition, we have reevaluated our marketing strategy,
with a corresponding reduction in monthly marketing and advertising budgets. We
believe these initiatives will result in a reduction in overhead costs, to align
with management expectations based upon current operations.
RESEARCH AND DEVELOPMENT. Research and development expenses totaled $277,801,
or 3% of net sales, and $142,580, or 1% of net sales, for the three-month
periods ended March 31, 2000 and 1999, respectively. The increase in research
and development from first quarter 1999 is due to continued development of a new
cordless camera and a hand-held curing light. We expect research and development
expenses to increase in future periods, as we continue to pursue the development
of new technologies.
INTEREST AND OTHER INCOME. Interest income totaled $198,218, and $31,588 for
the three-month periods ended March 31, 2000 and 1999. This income is primarily
attributable to the interest earned by investing available cash in a short-term
money market account through Imperial Bank.
INTEREST EXPENSE. Interest expense totaled $176,740, and $505,532 for the
three-month periods ended March 31, 2000 and 1999, respectively. This expense
category includes interest paid on capital lease obligations, on bridge notes,
on our senior subordinated notes and amortization of debt discount. The
substantial decrease in the three-month period ended March 31, 2000 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 $64,516 for the three-month period
ended March 31, 1999. For the three-month period ended March 31, 2000, there was
no amortization of debt issuance costs. 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 month period ended March 31, 2000
totaled $2,999,745 or $0.48 per share on a diluted basis and net income for the
three month period ended March 31, 1999 totaled $1,159,777 or $.17 per share on
a diluted basis, respectively.
CAPITAL RESOURCES AND LIQUIDITY
For the three-month period ended March 31, 2000, we used net cash of
approximately $2.5 million in operations as compared to $682,883 for the
three-month period ended March 31, 1999. Accounts receivable decreased from
$5,756,048 at the prior year-end to $4,945,045 at March 31, 2000, primarily as a
result of the decrease in sales during the three-month period ended March 31,
2000. Accounts payable and accrued liabilities totaling $5,444,920 at March 31,
2000 decreased from $6,765,718 at the prior year-end primarily due to a decrease
in inventory purchases. Inventory levels decreased approximately $1,004,698.
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Capital expenditures for the three-month period ended March 31, 2000 were
approximately $93,000, with approximately $48,000 spent for the purchase of
software, and approximately $26,000 spent for computer equipment with the
remainder consisting of equipment, and furniture and fixture acquisitions. Cash
and cash equivalents on hand for the three-month period ended March 31, 2000
were $3,880,892 as compared to $3,544,795 for the three-month period ended March
31, 1999.
For the three-month period ended March 31, 2000, we received net cash of
$1,785,000 from financing activities as compared to $439,000 for the three-month
period ended March 31, 1999. On February 29, 2000 the Company sold an aggregate
of 2,250 shares of Series B Exchangeable Preferred Stock, B-1 Warrants to
purchase up to 225,000 shares of Common Stock and B-2 Warrants to purchase up to
450,000 shares of common stock. The Company received $2,250,000 in gross
proceeds less costs of $207,520.
On January 4, 1999, the Company replaced its credit agreements with Comerica
with a $6,950,000 facility with Imperial Bank ("Imperial"). The Imperial
facility was comprised of 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 loan due
May 31, 2000 and a $450,000 variable interest rate loan repayable in 16 monthly
installments through May 31, 2000. The facilities are collateralized by the
assets of the Company. The credit facility also requires the Company to comply
with certain financial and non-financial covenants. The Company has use the
credit facilities for working capital, capital expenditures and general
corporate purposes. On January 21, 1999, the Company borrowed against the
Imperial facility to repay the balance owed to Comerica capital credit line of
$343,890 plus accrued interest of $1,120. On January 25, 1999, the Company
borrowed against the Imperial facility to repay the $4,500,000 12% Senior
Subordinated Notes plus accrued interest of $189,000.
On March 24, 2000, the Company amended its facility with Imperial Bank to
modify certain of its financial covenants and extend the repayment terms. Under
this amendment, the fixed rate non-revolving line of credit is due in monthly
installments of $100,000 commencing March 31, 2000 until April 30, 2001 with the
balance due on May 31, 2001. Interest under this line of credit increased to
10.0% per annum. The $4,000,000 variable rate revolving line of credit and the
variable rate loan repayment dates were extended to May 31, 2001, with no
principal payments required at any earlier dates. The interest rate under the
variable rate revolving line of credit was amended to 0.5% plus the bank's index
rate. In addition, the Company granted the bank 75,000 warrants at an exercise
price of $2.50 per share. At March 31, 2000, $2,300,000, $4,000,000, and
$264,769 was outstanding under the fixed rate non-revolving line of credit, the
variable revolving line of credit, and the variable rate loan, respectively.
As of March 31, 2000, the minimum purchase obligations under the
manufacturing agreement with Suni Microsystems, the minimum purchase obligations
under the Exclusive License Agreement with Chrysalis Dental, and the two
facility leases are significant future commitments. On January 25, 2000, the
Company leased a second facility under an operating lease that expires in 2005.
The leases require the Company to pay taxes, maintenance fees, and insurance and
provide for periodic fixed rent increases based on a published price index.
These commitments will be financed by cash from continuing operations, the
proceeds of the Imperial credit facility and the proceeds from the mandatory
redeemable Series A and Series B exchangeable preferred stock. We believe that
we will need to raise additional capital in order to finance our research and
development of new products during the next twelve months. We can 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 which could have a material adverse effect on our business, operating
results and financial condition.
The Company also had minimum purchase obligations with Boston Marketing
("BMC") under the BMC Distribution Agreement. During the fiscal year ended
December 31, 1999, the Company purchased fewer than 2,500 units under the BMC
Distribution Agreement. BMC filed suit in Los Angeles Superior Court alleging
breach of contract and seeking unspecified damages. The Company is investigating
the allegations and has not yet responded to the suit. The Company intends to
defend the action vigorously and believes that it has meritorious defenses to
the suit. The Company may not be able to market the units incorporating those
CCD chips, CCU processors and frame grabbers under the "TeliCam" trademark which
could adversely affect the Company's operating results. The Company has now
obtained other CCD chips, CCU processors and frame grabbers from third-party
suppliers. Management believes that disruption in the supply of these products
will not materially affect production of the intraoral cameras.
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.
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<PAGE>
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.
CAUTIONARY STATEMENTS AND RISK FACTORS
WE HAVE A LIMITED OPERATING HISTORY UPON WHICH TO EVALUATE OUR LIKELIHOOD OF
SUCCESS.
We have only manufactured and distributed our digital x-ray systems since
September 1999, our TeliCam systems since October 1995 and 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 new
business and the development and marketing of new products must be considered in
evaluating the likelihood of our success.
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 incurred a net loss of
$1,625,213. For the fiscal years ended December 31, 1997, 1998, and 1999 we had
net losses of $2,044,729, $1,816,702, and $6,727,638, respectively, and for the
quarter ended March 31, 2000, we had a net loss of $2,999,745. At March 31,
2000, our accumulated deficit was $15,076,876. 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. We
can give no assurances that we will achieve profitability or, if achieved, that
we will sustain profitability.
FLUCTUATION IN QUARTERLY RESULTS MAY RESULT IN DECLINES IN OUR STOCK PRICE.
Certain quarterly influences may affect our business. Historically, sales have
been generally higher in the fourth quarter due to the purchasing patterns of
dentists in the United States and have been generally lower in the first quarter
due primarily to the effect upon demand of increased purchases in the prior
quarter. Historically we have experienced lower sales in the summer months as a
result of holiday vacations and fewer trade shows. These fluctuations in
quarterly operating results could result in increased volatility, including
significant declines, of the trading price of our common stock.
TWO OF OUR PRIMARY PRODUCTS HAD A SIGNIFICANT DECLINE IN SALES AND IF THIS
DECLINE CONTINUES WE MAY NOT BE ABLE TO ACHIEVE OR SUSTAIN PROFITABILITY.
The TeliCam systems, together with related products such as the InTELInet
system, and the ApolloTM have been our primary products since inception. 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 which we expect to continue. In
addition there has been a decrease in ApolloTM sales as competitor's lamps
curing times become closer to that of the ApolloTM, a trend which we also expect
to continue.
AS A RESULT OF THE DECLINE IN SALES OF THE TELICAM SYSTEMS AND APOLLOTM
PRODUCTS, 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 develop and successfully introduce new products to make up
for the diminished sales of the Telicam systems and Apollo products. 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.
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<PAGE>
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 to
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 demands, or if there are any significant delays in
product development or introduction, our revenues and profit margins may decline
which could adversely affect our cash flows, liquidity and operating results.
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 LIMIT CURRENT OPERATIONS.
We anticipate that we will need to raise additional capital during the next 12
months to satisfy our expected increased research and development requirements.
We are currently exploring alternatives to fulfill these requirements, but
cannot assure that additional financing will be available when needed or that,
if available, it will be on terms favorable to us or our stockholders. If needed
funds are not available, we may be required to limit or forego the development
of new products or limit the scope of our current operations, which could have a
material adverse effect on our business, operating results and financial
condition. If we raise needed funds through the sale of additional shares of our
common stock or securities convertible into shares of our common stock it may
result in dilution to current stockholders.
WE SUBSTANTIALLY DEPEND UPON UNAFFILIATED THIRD PARTIES FOR SEVERAL CRITICAL
ELEMENTS OF OUR BUSINESS, INCLUDING THE DEVELOPMENT AND LICENSING FOR
DISTRIBUTION OF OUR PRODUCTS.
We are dependent upon unaffiliated 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.
IF WE DO NOT MAKE CERTAIN REQUIRED MINIMUM ROYALTY PAYMENTS TO SUNI, AND IF WE
DO NOT PURCHASE REQUIRED AMOUNTS OF CERTAIN PRODUCTS MANUFACTURED BY SUNI, WE
WILL LOSE OUR EXCLUSIVE RIGHTS TO THE DIGITAL X-RAY TECHNOLOGY DEVELOPED FOR US
BY SUNI.
In order to maintain our right to be the exclusive dental licensee of the
digital x-ray technology developed by Suni, we must make significant minimum
periodic royalty payments to Suni, and we must purchase a significant amount of
certain products manufactured by Suni. We cannot guarantee that we will be able
to make the minimum periodic royalty payments, nor can we guarantee that we will
be able to purchase the amount of products that are required to maintain our
right to be the exclusive distributor. If we do not make the required periodic
royalty payments and purchase the required products, 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
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<PAGE>
assure compliance with it's regulations. The Company has applications pending
for a hand held cordless curing lamp and a cordless, remote controlled, high
resolution, intraoral camera. The Company expects to receive FDA 510k
notification for these products prior to or during the third quarter of 2000.
Any delay in receipt of FDA 510k notification for these products will delay our
ability to market and sell these products and could allow our competitors to
develop and introduce competing products.
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 render services to us until September 30,
2002. 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. We are currently seeking patent protection 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
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.
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ISSUANCE OF PREFERRED STOCK MAY HAVE THE EFFECT OF PREVENTING A CHANGE OF
CONTROL.
We have authorized 1,000,000 shares of preferred stock, which may be issued by
the Board of Directors with certain rights not granted to the holders of common
stock. Issuance of such preferred stock, depending upon the terms and rights
thereof, may have the effect of delaying, deterring or preventing a change of
control.
OUR RECENT SALES OF SERIES A AND B EXCHANGEABLE PREFERRED STOCK, COMMON STOCK
AND WARRANTS TO PURCHASE COMMON STOCK MAY RESULT IN SUBSTANTIAL DILUTION TO OUR
COMMON SHAREHOLDERS.
On November 23, 1999 we sold an aggregate of 2,000 shares of Series A
Exchangeable Preferred Stock ($2 million face value), 2,500 shares of Common
Stock and Warrants to purchase up to 40,000 shares of Common Stock. On March 3,
2000 we sold an aggregate of 2,250 shares of Series B Exchangeable Preferred
Stock ($2.25 million face value) and Warrants to purchase up to 675,000 shares
of Common Stock.
Prior to March 15, 2000, holders of Series A Exchangeable Preferred Stock could
exchange their shares into common stock at $4.00 per share based upon a stated
value of $1,000 per share of Series A Exchangeable Preferred Stock. On and after
March 15, 2000, holders of Series A Exchangeable Preferred Stock may exchange
their shares for shares of common stock at the lesser of $4.00 per share or the
average of the closing bid prices of the common stock during any three (3) of
the prior thirty (30) consecutive trading days selected by the holder of the
Series A Exchangeable Preferred Stock then being exchanged. As a result, the
holders will likely be in a position to exchange their shares for shares of
common stock at a discount to the then current trading price of our common
stock.
Holders of Series B Exchangeable Preferred Stock may exchange their shares into
common stock at a price per share equal to the lesser of $2.85 or one hundred
percent (100%) of the Market Price on the date of exchange. The Market Price is
the average of the closing bid prices of any three (3) of the prior thirty (30)
days consecutive trading days selected by the holder of the Series B
Exchangeable Preferred Stock then being exchanged. As a result, the holders of
Series B Exchangeable Preferred Stock may be in a position to exchange their
shares of common stock at a discount to the then current trading price of our
common stock.
The conversion price of our Series A Preferred Stock and Series B Preferred
Stock is variable and may dilute the price of our common stock. On May 10, 2000,
the high and low prices of our common stock were $1.56 and $1.44, respectively.
If the trading price of our common stock declines, the number of shares of
common stock into which the Series A Preferred Stock and Series B Preferred
Stock may exchange will increase. The following table illustrates this effect:
<TABLE>
<CAPTION>
---------------------------------------------------------------------
Number of Shares Number of Shares Percentage
of Common Stock of Common Stock of
Average into which 2,000 into which 2,250 Outstanding
Trading shares of Series shares of Series Shares of
Price of A Preferred Stock B Preferred after
Common Stock may be exchanged Stock may be Exchange
------------ ----------------- exchanged --------
---------
---------------------------------------------------------------------
<S> <C> <C> <C>
$2.75 727,273 818,182 23.8%
---------------------------------------------------------------------
2.50 800,000 900,000 26.2%
---------------------------------------------------------------------
2.25 888,889 1,000,000 29.1%
---------------------------------------------------------------------
2.00 1,000,000 1,125,000 32.7%
---------------------------------------------------------------------
1.75 1,142,857 1,285,714 37.4%
---------------------------------------------------------------------
1.50 1,333,333 1,500,000 43.6%
---------------------------------------------------------------------
1.25 1,600,000 1,800,000 52.3%
---------------------------------------------------------------------
1.00 2,000,000 2,250,000 65.4%
---------------------------------------------------------------------
</TABLE>
WE REQUIRE STOCKHOLDER APPROVAL OR AN ADDITIONAL CASH PAYMENT FOR WHICH WE MAY
NOT HAVE SUFFICIENT FUNDS AND MAY HAVE TO SEEK ADDITIONAL FINANCING.
Under the rules and regulations of the Nasdaq Stock Market, we require
stockholder approval to issue 20% or more of our outstanding common stock in a
single transaction. Because the rate at which the Series A Preferred Stock and
Series B Preferred Stock exchange into common stock fluctuates, it is possible
that the number of shares of common stock into which the Series A Preferred
Stock or Series B Preferred Stock may exchange could exceed 20%. We have agreed
with the purchasers of the Series A
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Preferred Stock and the Series B Preferred Stock that we will seek stockholder
approval of these issuances at the 2000 Annual Meeting of Stockholders. Prior to
receiving stockholder approval, or if stockholder approval is not obtained, any
attempted exchange of shares of Series A Preferred Stock or Series B Preferred
Stock in excess of 19.9% of the outstanding common stock of the Company must be
paid in cash to the holder of the Series A Preferred Stock or Series B Preferred
Stock. Because, in connection with the sale of shares of Series B Preferred
Stock, we issued warrants to purchase up to 675,000 shares of common stock (10%
of our then outstanding common stock), if we do not receive stockholder approval
of the Series B transaction we will likely have to honor the exchange of a
significant number of shares of Series B Preferred Stock in cash. We would have
to redeem the shares of Series A Preferred Stock at a price equal to 125% of the
Stated Value, which is $1,000 per Share, and would also have to pay all accrued
but unpaid dividends. If all Series A Preferred Stock were exchanged, we would
have a cash obligation of $2.5 million, plus all accrued but unpaid dividends
(if any). We would have to redeem the shares of Series B Preferred Stock at a
price equal to 100% of the Stated Value, which is $1,000 per Share. If all of
the Series B Preferred Stock were exchanged, we could have a cash obligation of
$2.25 million. At the time of exchange, we may not have sufficient funds to
honor the exchange of a significant number of shares of Series A Preferred Stock
or Series B Preferred Stock in cash, and any efforts by the holders of Series A
Preferred Stock or Series B Preferred Stock to receive cash in exchange for
shares of Series A Preferred Stock or Series B Preferred Stock could have a
material adverse effect on our liquidity and financial condition. If we are
obligated to honor the exchange of shares of Series A Preferred Stock or Series
B Preferred Stock in cash, we would likely have to obtain considerable financing
to fulfill the obligation, We cannot guarantee that such financing will be
available or, if available, that it can be obtained on terms satisfactory to us
or on terms favorable to the holders of our common stock.
A DECREASE IN THE PRICE OF OUR COMMON STOCK COULD INCREASE SHORT SALES OF OUR
COMMON STOCK BY THIRD PARTIES WHICH COULD RESULT IN FURTHER REDUCTIONS IN THE
PRICE OF OUR COMMON STOCK.
Exchange of shares of our Series A Preferred Stock or Series B Preferred Stock
into common stock at a discount to the market price of our common stock could
result in reductions in the market price of our common stock. Downward pressure
on the price of our common stock could encourage short sales of our common stock
by third parties. Material amounts of short selling could place further downward
pressure on the market price for our common stock. A short sale is a sale of
stock that is not owned by the seller. The seller borrows the stock for delivery
at the time of the short sale, and buys back the stock when it is necessary to
return the borrowed shares. If the price of the stock declines between the time
the seller sells short the stock and the time the seller subsequently
repurchases the stock, the seller will realize a profit.
IF THE TRADING PRICE OF OUR COMMON STOCK FALLS BELOW $1.00, WE MAY BE DELISTED
FROM THE NASDAQ STOCK MARKET AND THE BOSTON STOCK EXCHANGE.
The closing sale price of our Common Stock on May 10, 2000 was $1.50 per share.
Under the rules and regulations of the Nasdaq Stock Market and the Boston Stock
Exchange, to maintain listing on the Nasdaq Small Cap Market and the Boston
Stock Exchange we must maintain a trading price per share of more than $1.00. If
the trading price per share of our common stock falls below $1.00, we may be
delisted from the Nasdaq Small Cap Market and the Boston Stock Exchange. If we
were delisted from the Nasdaq Small Cap Market and the Boston Stock Exchange,
trading in our common stock, if any, would have to be conducted in the
over-the-counter market in so-called "pink sheets" or, if then available, the
OTC Bulletin Board. As a result, the holders of our common stock would find it
more difficult to dispose of, or to obtain accurate quotations as to the market
value of, our common stock.
If our common stock is delisted from trading on Nasdaq and the Boston Stock
Exchange and the trading price is less than $5.00 per share, trading in our
common stock would also be subject to the requirements of Rule 15g-9 promulgated
under the Securities Exchange Act of 1934. Under such rule, broker/dealers who
recommend these low-priced securities to persons other than established
customers and accredited investors must satisfy special sales practice
requirements, including a requirement that they make an individualized written
suitability determination for the purchaser and receive the purchaser's written
consent prior to the transaction. The Securities Enforcement Remedies and Penny
Stock Reform Act of 1990 also requires additional disclosure in connection with
any trades involving a stock defined as a penny stock (generally any equity
security not traded on an exchange or quoted on Nasdaq that has a market price
of less than $5.00 per share, subject to certain exceptions), including the
delivery, prior to any penny stock transaction, of a disclosure schedule
explaining the penny stock market and the risks associated with the penny stock
market. These requirements would likely severely limit the market liquidity of
our common stock and the ability of our shareholders to dispose of their shares,
particularly in a declining market.
A LARGE VOLUME OF SALES OF OUR COMMON STOCK RESULTING FROM THE EXCHANGE OF
SHARES OF SERIES A AND B EXCHANGEABLE PREFERRED STOCK AND/OR THE EXERCISE OF
WARRANTS MAY RESULT IN DOWNWARD PRESSURE OR INCREASED VOLATILITY IN THE TRADING
PRICE OF OUR COMMON STOCK.
Because we have agreed to register for resale the 2,500 shares of common stock
and the shares of common stock issuable upon
Page 18
<PAGE>
exchange or exercise of the Series A and B Exchangeable Preferred Stock and the
Warrants, the holders thereof may sell without regard to any volume
restrictions, including the volume restrictions set forth in Rule 144
promulgated under the Securities Act of 1933. As a result, sales by the holders
of Series A and B Exchangeable Preferred Stock and the Warrants could lead to an
excess supply of shares of our Common Stock being sold which could, in turn,
result in downward pressure or increased volatility in the trading price of our
Common Stock.
IF WE FAIL TO TIMELY AFFECT AN EXCHANGE OF SERIES A AND B EXCHANGEABLE PREFERRED
STOCK FOR SHARES OF COMMON STOCK, WE MAY BE LIABLE FOR SIGNIFICANT LIQUIDATED
DAMAGES.
We have agreed to effect an exchange of Series A and B Exchangeable Preferred
Stock into Common Stock within four (4) trading days of receipt of a notice from
a holder of Series A or B Exchangeable Preferred Stock requesting an exchange.
If we fail to effect an exchange of Series A Exchangeable Preferred Stock into
Common Stock within four (4) trading days of receipt of a valid notice, we have
agreed to pay to the holder of Series A and B Exchangeable Preferred Stock
requesting the exchange liquidated damages in an amount equal to $100 per day
for the first ten (10) days and $200 per day thereafter for each $5,000 in
liquidation preference amount then being exchanged. An obligation to pay these
liquidated damages could have a material adverse effect on our liquidity and
cash flows.
WE FACE THE POTENTIAL LOSS OF OUR TELICAM COMPONENT SUPPLY, AND OTHER CLAIMS OF
BOSTON MARKETING, WHICH COULD RESULT IN SIGNIFICANT LIABILITY, DISRUPT OUR
OPERATIONS AND ADVERSELY AFFECT OUR OPERATING RESULTS.
Effective October 1, 1996, we amended our distribution agreement ("BMC
Distribution Agreement") with Boston Marketing, a licensed distributor of the
Teli manufactured CCD chip which includes the Teli CCU processor. Pursuant to
the BMC Distribution Agreement, we have the exclusive right (i) to market
certain Teli manufactured CCD chip assemblies with CCU processors (each a "Teli
Unit," and collectively the "Teli Units") to the dental market, and (ii) to use
the "TeliCam" trademark. The Teli Units are key components of our intraoral
digital cameras. The BMC Distribution Agreement has a five-year initial term.
The BMC Distribution Agreement is terminable by Boston Marketing if we fail to
meet our annual minimum purchase obligation. In April 2000 we were served with a
lawsuit that makes numerous claims including the allegation that we failed to
make the minimum purchases for calendar year 1999.
We are investigating the claims made by Boston Marketing in their complaint.
During the fiscal year ended December 31, 1999, we purchased fewer than 2,500
units under the BMC Distribution Agreement. Boston Marketing has refused to
accept a subsequently placed order. We intend to defend this matter vigorously
and believe we have meritorious defenses to this suit. However, if the BMC
Distribution Agreement is canceled because of failure to meet minimum purchase
requirements, we would need to obtain an alternative source of supply. The
Company has obtained other CCD chips, CCU processors and frame grabbers from
third-party suppliers. With other sources for the components secured, Management
believes that the disruption in supplies will not have a materially adverse
affect on the Company's operating results.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
During the fiscal year ended December 31, 1999, the Company purchased fewer than
2,500 units under the Boston Marketing Distribution Agreement. Boston Marketing
has refused to accept a subsequently placed order. On April 7, 2000, Boston
Marketing filed suit in Los Angeles Superior Court alleging breach of contract
and seeking unspecified damages. The Company is investigating the allegations
and has not yet responded to the suit. The Company intends to defend the action
vigorously and believes that it has meritorious defenses to the suit. However,
because the discovery process has not yet commenced, the Company is not able to
estimate the extent of liability, if any, that it faces as a result of this
suit.
Item 2. Changes in Securities and Use of Proceeds.
On February 29, 2000 the Company sold an aggregate of 2,250 shares of Series B
Exchangeable Preferred Stock, B-1 Warrants to purchase up to 225,000 shares of
Common Stock and B-2 Warrants to purchase up to 450,000 shares of common stock.
The Company received $2,250,000 in gross proceeds less costs of $157,500. The
holders of Series B Exchangeable Preferred Stock may exchange their shares for
shares of common stock at the lower of (i) $2.85 or (ii) 100% of the market
price of the common stock, as defined, on the date of the exchange. The
Preferred Stock will receive $30 in dividends per year with payments due
quarterly. The B-1 Warrants are exercisable into an aggregate 225,000 shares of
common stock at a purchase price of $2.51 per share. The B-2 Warrants are
exercisable into an aggregate 450,000 shares of common stock at a purchase price
of $3.50 per share.
Page 19
<PAGE>
In addition we granted warrants to purchase 64,725 shares of our common stock as
a finders fee for our preferred stock investment.
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
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 MAY 12, 2000 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>
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 March 31, 2000 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-31-2000
<PERIOD-START> JAN-1-2000
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1.5922
<CASH> 3,880,892
<SECURITIES> 0
<RECEIVABLES> 4,945,045
<ALLOWANCES> 394,493
<INVENTORY> 6,830,679
<CURRENT-ASSETS> 17,230,393
<PP&E> 2,150,812
<DEPRECIATION> 917,447
<TOTAL-ASSETS> 21,259,927
<CURRENT-LIABILITIES> 6,789,575
<BONDS> 0
3,070,100
0
<COMMON> 64,975
<OTHER-SE> 6,121,804
<TOTAL-LIABILITY-AND-EQUITY> 21,259,927
<SALES> 7,998,681
<TOTAL-REVENUES> 7,998,681
<CGS> 5,168,253
<TOTAL-COSTS> 5,795,267
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 176,740
<INCOME-PRETAX> 2,943,361
<INCOME-TAX> 56,384
<INCOME-CONTINUING> 2,999,745
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,999,745
<EPS-BASIC> (.48)
<EPS-DILUTED> (.48)
</TABLE>
