The SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB MARK ONE:
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarter ended June 30, 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 of (IRS Employer
incorporation or organization) Identification
No.)
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 August 4, 2000: 8,767,067
Transitional Small Business Disclosure Format Yes [ ] No [X]
<PAGE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
FORM 10-QSB REPORT
June 30, 2000
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE
Item 1. Interim Condensed Consolidated Financial Statements (Unaudited)
<S> <C> <C>
Condensed Consolidated Balance Sheet as of June 30, 2000 3
Condensed Consolidated Statements of Operations 4
For the Three and Six Month Periods Ended June 30, 2000 and 1999
Condensed Consolidated Statements of Cash Flows 5
For the Six Month Periods Ended June 30, 2000 and 1999
Consolidated Statements of Comprehensive Income 6
For the Three and Six Month Periods Ended June 30, 2000 and 1999
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 20
Item 2. Changes in Securities and Use of Proceeds 20
Item 3. Defaults in Senior Securities 20
Item 4. Submission of Matters to Vote of Security 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 21
</TABLE>
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 JUNE 30, 2000
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
Current assets:
<S> <C>
Cash and cash equivalents $ 1,252,955
Accounts receivable, net 3,565,903
Inventories 7,128,450
Prepaid expenses and other current assets 2,222,879
-----------
Total current assets 14,170,187
Property and equipment, net of accumulated depreciation 1,560,991
Intangible assets, net of accumulated amortization 1,642,833
Loans to related parties 70,000
Other assets 850,836
-----------
Total assets $18,294,847
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligations $ 8,695
Borrowings under line of credit 6,239,553
Accounts payable 5,259,164
Accrued liabilities 964,466
Customer deposits 101,818
------------
Total current liabilities 12,573,696
Capital lease obligations 50,837
------------
Total liabilities 12,624,533
------------
Commitments and contingencies
Mandatorily redeemable Series A exchangeable preferred stock,
stated value $1,000 per share; 2,000 shares authorized and
issued; 1,207 outstanding at June 30, 2000
(liquidation value of $1,207,000) 1,096,052
Mandatorily redeemable Series B exchangeable preferred stock,
stated value $1,000 per share; 2,750 shares authorized; 2,250
issued; and 2,233 outstanding at June 30, 2000
(liquidation value of $2,233,000) 1,244,284
Stockholders' equity:
Preferred stock, par value $.01 per share;
995,250 shares authorized, none issued and -
outstanding
Common stock, par value $.01
per share; 20,000,000 shares authorized:
7,198,220 shares issued and outstanding 71,982
Additional paid in capital
22,148,149
Accumulated deficit
(18,222,865)
Cumulative translation adjustment (667,288)
-----------
Total stockholders' equity 3,329,978
-----------
Total liabilities and stockholders' equity $18,294,847
===========
</TABLE>
The accompanying notes are an integral part of these interim
condensed consolidated financial statements.
Page 3
<PAGE>
<TABLE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2000 AND 1999
(Unaudited)
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------- -----------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 5,641,582 $ 10,963,894 $ 13,756,391 $ 21,178,379
Cost of sales 4,138,146 5,227,050 9,306,399 10,139,525
---------------------------------------------------------------
Gross profit 1,503,436 5,736,844 4,449,992 11,038,854
Selling, general and administrative
expenses 4,486,300 4,080,719 10,003,766 7,470,799
Research and development expenses 294,978 76,682 572,779 219,262
--------------------------------------------------------------
Total operating expenses 4,781,278 4,157,401 10,576,545 7,690,061
Operating income (loss) (3,277,842) 1,579,443 (6,126,553) 3,348,793
Interest and other income 107,918 99,872 190,008 131,430
Interest and other expense (89,665) (125,641) (266,405) (631,173)
Amortization of debt issuance costs 0 0 0 (64,519)
--------------------------------------------------------------
Income (loss) before income taxes (3,259,589) 1,553,674 (6,202,950) 2,784,531
Provision (benefit) for income taxes (113,600) 90,000 (57,216) 161,080
--------------------------------------------------------------
Net income (loss) (3,145,989) 1,463,674 (6,145,734) 2,623,451
Charges relating to manditorily
redeemable preferred stock:
Preferred dividends 30,982 - 69,940 -
Beneficial conversion feature
relating to Series B
preferred stock - - 97,478 -
--------------------------------------------------------------
Net income (loss) attributable
to common stockholders $ (3,176,971) $ 1,463,674 $ (6,313,152) $ 2,623,451
============ =========== ============ ===========
Earnings (loss) per share
Basic $ (0.47) $ 0.27 $ (0.98) 0.49
Diluted $ (0.47) $ 0.20 $ (0.98) 0.36
Weighted average number of shares:
Basic 6,692,392 5,438,900 5,379,964 6,455,403
Diluted 6,692,392 7,496,689 6,455,403 7,281,218
</TABLE>
The accompanying notes are an integral part of these
interim condensed consolidated financialstatements.
Page 4
<PAGE>
<TABLE>
DENTAL/MEDICAL DIAGNOSTIC SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTH PERIODS ENDED JUNE 30, 2000 AND 1999
(Unaudited)
<CAPTION>
2000 1999
---- ----
Cash flows from operating activities:
<S> <C> <C>
Net income (loss) $ (6,145,734) $ 2,623,451
Adjustments to reconcile net income (loss) to net cash used by
operating activities:
Depreciation and amortization 618,367 337,327
Amortization of debt discount - 348,434
Allowance for doubtful accounts (44,659) -
Changes in operating assets and liabilities:
Accounts receivable 2,121,099 (3,664,742)
Inventories 609,974 (2,840,510)
Prepaid expenses and other (538,652) (1,614,382)
Other assets (326,958) (167,686)
Accounts payable 770,038 1,413,889
Accrued liabilities and income taxes (1,227,575) 232,672
Customer deposits (103,284) 148,491
------------ -------------
Net cash used by operating activities (4,267,384) (3,183,056)
------------ -------------
Cash flows from investing activities:
Payment of patent registration costs (21,349) -
Purchase of property and equipment (517,368) (347,696)
------------ -------------
Net cash used in investing activities (538,717) (347,696)
------------ -------------
Cash flows from financing activities:
Borrowings from revolving line of credit - 4,000,000
Net proceeds from issuance of notes payable - 2,953,890
Repayment of notes payable - (4,919,538)
Repayment of lines of credit (577,022) -
Principal payments on capital lease obligations - (10,913)
Issuance of preferred stock 2,042,480 -
Issuance of common stock through exercise of options - 168,192
------------ -------------
Net cash provided by financing activities 1,465,458 2,191,631
------------ -------------
Net decrease in cash and cash equivalents (3,340,643) (1,339,121)
Effect of exchange rate changes on cash and cash equivalents (21,903) 98,960
Cash and cash equivalents, beginning of period 4,615,501 3,941,305
------------ -------------
Cash and cash equivalents, end of period $ 1,252,955 $ 2,701,144
============ =============
Non-cash investing and financing activities:
Acquisitions of businesses
Issuance of common stock - $1,143,750
Acquisitions of furniture & equipment
Capital lease financing $ 40,862 -
Supplemental cash flow information:
Interest paid $ 26,897 $167,480
Income taxes paid 11,240 18,840
</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 AND SIX MONTH PERIODS ENDED JUNE 30, 2000 AND 1999
(Unaudited)
<TABLE>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
-----------------------------------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) $(3,145,989) $1,463,674 $(6,145,734) $2,623,451
Other comprehensive income (loss):
Foreign currency translation
adjustment (447,290) (20,515) (339,215) (149,666)
--------- ------------ --------- ----------
Comprehensive income (loss) $(3,593,279) $1,443,159 $(6,484,949) $2,473,785
============ ========== ============ ==========
</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- and
six-month periods ended June 30, 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 June 30, 2000 and 1999, international
customers accounted for 44% and 51% of sales, respectively. For the six
month periods ended June 30, 2000 and 1999, international customers
accounted for 50% and 49% of sales, respectively. International customers
accounted for approximately 67% and 76% of trade accounts receivable at June
30, 2000 and 1999, respectively. There was one customer that accounted for
more than 10% of revenues for the six month periods ended June 30, 2000 and
1999 and for the three month period ended June 30, 2000. There were no
customers that accounted for more than 10% of revenues for the three month
period ended June 30, 1999. Five customers accounted for 20% of the
Company's accounts receivable at June 30, 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.
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
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 7, 2000, Boston Marketing filed suit in Los Angeles Superior Court
making numerous claims including the allegation that we failed to make
minimum purchases for calendar year 1999 and 2000, and further claiming that
the Company failed to pay certain commissions to Boston Marketing. The
complaint seeks 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 still is ongoing, the Company is
unable to estimate the extent of liability, if any, that could result.
Revenue Recognition
The Company recognizes revenue from the sales of systems and supplies at the
time of shipment, net of an allowance for estimated sales returns. The
Company generally provides warranties on its systems for one year. A
provision for estimated future costs relating to warranty is recorded when
systems are shipped.
Computation of Earnings Per Share
Basic net income (loss) per common share is computed by dividing net income
(loss) by the weighted average number of shares of common stock outstanding
during the period. Net income (loss) per common share assuming dilution is
computed by dividing net income by the weighted average number of shares of
common stock outstanding plus the number of additional common shares that
would have been outstanding if all dilutive potential common shares had been
issued. Potential common shares related to stock options and stock warrants
are excluded from the computation when their effect is antidilutive.
The following is a reconciliation of the numerator and denominator of the
basic and diluted earnings per share (EPS) computations for the three- and
six-month periods ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
Three months Three months Six months Six months
ended ended ended ended
JUNE 30, 2000 JUNE 30, 1999 JUNE 30, 2000 JUNE 30, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Numerator:
Basic and diluted income available
to common stockholders:
Net income (loss) attributable to
common stockholders $(3,176,971) $1,463,674 $(6,313,152) $2,623,451
============ ========== ============ ==========
Denominator:
Basic weighted average shares 6,692,392 5,438,900 6,455,403 5,379,964
Effect of dilutive securities:
Stock options and warrants 0 2,057,789 0 1,901,254
------------ ---------- ------------ ----------
Diluted weighted average shares 6,692,392 7,496,689 6,455,403 7,281,218
============ ========== ============ ==========
</TABLE>
Common shares related to stock options and stock warrants that are
antidilutive amounted to approximately 6,613,207 and 10,000 for the
three-month periods ended June 30, 2000 and 1999, respectively. For the
six-month periods ended June 30, 2000 and 1999, the antidilutive stock
options and stock warrants amounted to 6,613,207 and 53,000, respectively.
In addition, at June 30, 2000 common shares issuable on the conversion of
exchangeable preferred stock amounted to 3,476,029 shares, which are
excluded from the weighted average number of shares because they are
antidilutive.
Page 8
<PAGE>
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 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 six-month period ended June 30, 2000:
<TABLE>
<CAPTION>
<S> <C>
Beginning balance $ (328,073)
Current period change (339,215)
-----------
Ending balance $ (667,288)
===========
</TABLE>
3. Inventories
Inventories consisted of the following at June 30, 2000:
<TABLE>
<CAPTION>
<S> <C>
Raw materials $3,158,524
Work in process 389,970
Finished goods 3,579,956
----------
$7,128,450
==========
</TABLE>
4. Bank Borrowings
As of June 30, 2000, the Company has outstanding borrowing of approximately
$6.2 million under its bank credit facilities. At June 30, 2000, the
Company was not in compliance with certain financial covenants of its
credit agreement with Imperial Bank. As of August 21, 2000, the Company has
obtained a forbearance agreement providing that so long as we remain
current in our payments of principal and interest, and so long as we reduce
our overdraft balance to zero by August 29, 2000, Imperial Bank will not
exercise any remedies it may have resulting from such lack of compliance
until September 21, 2000. If we are not able to meet all of these
conditions by such dates, Imperial Bank can declare the loans in default
and require us to pay the balance of the loan, which is currently
approximately $6.2 million. In such event, we would seek to obtain
alternative financing. There can be no assurance, however, that alternative
financing, whether from equity or debt financing agreements, will be
available, if at all, on favorable terms to us or our stockholders.
5. 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 six-month period ended June 30, 2000.
The B-1 Warrants are exercisable into an aggregate 225,000 shares of common
stock at a purchase price of $2.7188 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. 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.
Page 9
<PAGE>
As of June 30, 2000, $793,122 stated value of Series A Exchangeable
Preferred stock has been converted into 684,723 shares of common stock,
while $67,000 stated value of Series B Exchangeable Preferred stock has been
converted into 65,986 shares of common stock.
6. Segment Information
The Company operates in one segment - dental medical equipment which, at
June 30, 2000, comprised five 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; MPDxTM digital x-ray systems; and Forever
WhiteTM home-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 and six month periods
ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
Three months Three months Six months Six months
ended ended ended ended
June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
TeliCam $ 836,986 $ 1,341,095 $ 1,969,589 $ 3,721,354
ApolloTM 2,594,142 8,392,072 6,905,128 16,360,939
MPDxTM 1,018,309 - 2,461,344 -
Consumables 519,007 856,416 1,134,606 1,446,226
Forever WhiteTM 63,674 - 63,674 -
Other 725,592 374,311 1,222,050 649,860
----------- ------------ ----------- ------------
$ 5,757,710 $ 10,963,894 $13,756,391 $ 21,178,379
=========== ============ =========== ============
</TABLE>
The Company ships products from its operations in the US and Europe. The
following are sales by its US and European locations for the three and six
month periods ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
Three months Three Six months Six months
ended months ended ended ended
June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
-------------- ------------- -------------- -------------
Sales by geography:
<S> <C> <C> <C> <C>
United States $4,373,376 $6,824,256 $9,568,462 $14,055,604
Europe 1,384,334 4,139,638 4,187,929 7,122,775
-------------- ------------- -------------- -------------
$5,757,710 $10,963,894 $13,756,391 $21,178,379
============== ============= ============== =============
</TABLE>
The following is long-lived asset information by geographic area as of
June 30, 2000:
<TABLE>
<CAPTION>
June 30, 2000
------------------
Long Lived assets:
<S> <C> <C>
United States $1,126,784
Europe 434,207
--------------
$1,560,991
</TABLE>
7. Subsequent Event
In July 2000, the Company completed a $1,550,000 private placement, selling
an aggregate of 1,396,396 shares of common stock at $1.11 a share, and
warrants to purchase 465,465 shares of common stock. In connection with
this transaction, a) the placement agent received a placement fee of
$93,000, and b) the placement agent and certain individuals affiliated with
the placement agent received warrants to purchase 300,000 shares of common
stock of the Company.
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.
Page 10
<PAGE>
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 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.
In April 2000, the company established Forever White, Inc. as a wholly-owned
subsidiary to market our home tooth whitening system, Forever WhiteTM. The
product will be marketed through informercials in a national advertising
campaign on both national cable and select regional network television stations.
Test marketing of the product began June 9, 2000 in select areas with national
coverage beginning in August of 2000.
RESULTS OF OPERATIONS
We derive our revenues primarily from the sale of five 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, the MPDxTM digital x-ray system which began shipping at the end of the
third quarter of 1999, and the Forever WhiteTM home-whitening kits which began
shipping at the end of the second quarter of 2000 on a test basis, but which we
anticipate will be fully launched in the middle of August. Through June 30,
2000, the sales of Forever WhiteTM and other systems have been less than 15% of
total sales. In addition, in the end of August, we anticipate the launch of
Apollo e, a wireless, fast curing device that cures dental fillings without
heat. Additionally, in our fourth quarter of 2000, we anticipate the launch of
Apollo Cam, a wireless, handheld intraoral camera.
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Revenues by product line for the three and six month periods ended June 30,
2000 and 1999, are reflected in the following table:
<TABLE>
<CAPTION>
FOR THE THREE-MONTH PERIODS ENDED JUNE 30, FOR THE SIX-MONTH PERIODS ENDED JUNE 30,
------------------------------------------ ----------------------------------------
2000 % 1999 % 2000 % 1999 %
---- - ---- - ---- - ---- -
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ApolloTM $2,594,142 45% $8,392,072 77% $6,905,128 50% $16,360,939 77%
TeliCam 836,986 15% 1,341,095 12% 1,969,589 14% 2,721,354 13%
MPDxTM 1,018,309 18% - - 2,461,344 18% - -
Consumables 519,007 9% 856,416 8% 1,134,606 8% 1,446,226 7%
Forever White 63,674 1% - 63,674 1%
Other 725,592 12% 374,311 3% 1,222,050 9% 649,860 3%
---------- ---- ----------- ---- ------------ ---- ----------- ----
$5,757,710 100% $10,963,894 100% $13,756,391 100% $21,178,379 100%
=========== ==== =========== ==== ============ ==== =========== ====
</TABLE>
NET SALES. Net sales for the three-month periods ended June 30, 2000 and
1999, were $5,757,710 and $10,963,894, respectively. Net sales for the six-month
periods ended June 30, 2000 and 1999, were $13,756,391 and $21,178,379,
respectively.
Net sales for the three-month period ended June 30, 2000 decreased approximately
47% from the three-month period ended June 30, 1999. Net sales for the six-month
period ended June 30, 2000 decreased approximately 35% from the same period in
1999. For the three-month periods ended June 30, 2000 and 1999, TeliCam System
sales represented 15% and 12% of total sales, respectively. Telicam System sales
represented 14% and 13% of total sales for the six-month periods ended June 30,
2000 and 1999, respectively. For the three-month periods ended June 30, 2000 and
1999, ApolloTM represented 45% and 77% of total sales, respectively. For the
six-month periods ended June 30, 2000 and 1999, Apollo represented 50% and 77%
of total sales, respectively. For the three and six-month periods ended June 30,
2000 and 1999, MPDxTM represented 18% and 0% of total sales, respectively.
Comparing product line sales in dollars for the three-month period ended June
30, 1999 to the three-month period ended June 30, 2000, ApolloTM sales decreased
$5,797,930 and TeliCam sales decreased $504,109. Comparing product line sales in
dollars for the six-month period ended June 30, 1999 to the six-month period
ended June 30, 2000, Apollo sales decreased $9,455,811 and TeliCam sales
decreased $751,765. 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 anticipate,
but cannot guarantee that, the sales of both the TeliCam and the ApolloTM to
remain level into the future. No assurance can be given that the MPDxTM sales
growth will continue in the future.
COST OF SALES. Cost of sales for the three-month periods ended June 30, 2000
and 1999, were $4,138,146, or 72% of net sales, and $5,227,050, or 48% of net
sales, respectively. Cost of sales for the six-month periods ended June 30, 2000
and 1999, were $9,306,339 or 68% of net sales, and $10,139,525, or $48% of net
sales, respectively. Cost of sales as a percentage of net sales for the three-
and six-month periods ended June 30, 2000 increased from the same periods 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 $60,676 during the six-month period ended June 30, 1999 to $640,294 for the
same period in 2000 due to royalties incurred on sales of digital x-ray and
consumables. 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 $4,486,300, or 78% of net sales, and $4,080,719,
or 37% of net sales, for the three-month periods ended June 30, 2000 and 1999,
respectively. For the six-month periods ended June 30, 2000 and 1999, selling,
general and administrative expenses totaled $10,003,766, or 73% of net sales,
and $7,470,799, or 35% of net sales, respectively. The absolute dollar increases
in this expense category for the three month periods ended June 30, 2000 and
1999 are primarily attributed to a combination of increased salaries and
increased travel and entertainment costs. Salaries and employee benefits
increased from $900,984 during the second quarter of 1999 to $1,169,726 for the
same period in 2000, and travel and entertainment costs increased from $139,074
during the second quarter of 1999 to $329,385 for the same period in 2000. The
increase in selling, general and administrative expenses as a percentage of net
sales for the three-and six-month periods ended June 30, 2000 versus 1999 is
mainly due to the decrease in sales. The absolute dollar increases in this
expense category for the six-month periods ended June 30, 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 $1,736,475 during the first six months of 1999
to $2,348,738 during the same period in 2000, and advertising and marketing
costs increased from $1,860,387 during the first six months of 1999 to
$2,852,150 during the same period of 2000. The remaining increase in selling,
general, and administrative expenses consisted primarily of increased travel and
entertainment expenses of $511,140 due to an increased number of trade shows
attended. As a result of the increased costs discussed above, we have
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reassessed our corporate structure and methods of operations in the areas of
headcount and marketing. We reorganized our operations to increase efficiency
and reduce costs through personnel reductions and have reevaluated our marketing
strategy with a corresponding reduction in monthly marketing and advertising
budgets. While these initiatives will be fully realized during the third quarter
2000, the quarterly selling, general, and administrative expenses have already
decreased approximately $1,000,000 from the first quarter of 2000.
RESEARCH AND DEVELOPMENT. Research and development expenses totaled
$294,978, or 5% of net sales, and $76,682, or 1% of net sales, for the
three-month periods ended June 30, 2000 and 1999, respectively. For the
six-month periods ended June 30, 2000 and 1999, research and development costs
totaled $572,779, or 4% of net sales, and $219,262, or 1% of net sales,
respectively. The increase in research and development from second 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 and other income totaled $190,008, and
$131,430 for the six-month periods ended June 30, 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 $89,665, and $125,641 for the
three-month periods ended June 30, 2000 and 1999, respectively. For the
six-month periods ended June 30, 2000 and 1999, the interest expense totaled
$266,405 and $631,173, 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
six-month period ended June 30, 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 were $0 and $64,519 for the six-month
periods ended June 30, 2000 and 1999, respectively. This represents the
amortization of the issuance costs incurred in connection with the $4.5 million
Senior Subordinated Notes issued in March 1998. These costs were amortized over
the term of the Notes, with the remaining unamortized costs written-off in
January 1999 when we repaid the Senior Subordinated Notes out of the proceeds of
our new credit facility with Imperial Bank.
NET INCOME (LOSS). Net loss for the three month period ended June 30, 2000
totaled $3,145,989 or $0.47 per share on a diluted basis and net income for the
three month period ended June 30, 1999 totaled $1,463,674 or $.20 per share on a
diluted basis, respectively. Net loss for the six-month period ended June 30,
2000 totaled $6,145,734 or $0.98 per share on a diluted basis and net income for
the six-month period ended June 30, 1999 totaled $2,623,451 or $0.36 on a
diluted basis, respectively.
LIQUIDITY AND CAPITAL RESOURCES
For the six-month period ended June 30, 2000, we used net cash of
approximately $4.3 million in operations as compared to $3.2 million for the
six-month period ended June 30, 1999. Accounts receivable decreased from
$5,756,048 at the prior year-end to $3,565,903 at June 30, 2000, primarily as a
result of the decrease in sales during the six-month period ended June 30, 2000
and increased collections efforts. Accounts payable and accrued liabilities
totaling $5,750,459 at June 30, 2000 decreased from $6,765,718 at the prior
year-end primarily due to a decrease in inventory purchases. Inventory levels
decreased approximately $706,927.
Capital expenditures for the six-month period ended June 30, 2000 were
approximately $558,000, with approximately $130,000 spent for the purchase of
software, approximately $49,000 spent for computer equipment, and approximately
$73,000 spent on furniture and fixtures with the remainder consisting of
equipment, tooling, and leasehold improvements. Cash and cash equivalents on
hand for the six-month period ended June 30, 2000 were $1,252,955 as compared to
$2,701,144 for the six-month period ended June 30, 1999.
For the six-month period ended June 30, 2000, we received net cash of
approximately $1,608,000 from financing activities as compared to $2,192,000 for
the six-month period ended June 30, 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
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$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 used 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 June 30, 2000, $2,000,000, $4,000,000, and $239,553
was outstanding under the fixed rate non-revolving line of credit, the variable
revolving line of credit, and the variable rate loan, respectively.
At June 30, 2000, the Company was not in compliance with certain financial
covenants of its credit agreement with Imperial Bank. As of August 21, 2000, the
Company has obtained a forbearance agreement providing that so long as we remain
current in our payments of principal and interest, and so long as we reduce our
overdraft balance to zero by August 29, 2000, Imperial Bank will not exercise
any remedies it may have resulting from such lack of compliance until September
21, 2000. If we are not able to meet all of these conditions by such dates,
Imperial Bank can declare the loans in default and require us to pay the balance
of the loan, which is currently approximately $6.2 million. In such event, we
would seek to obtain alternative financing. There can be no assurance, however,
that alternative financing, whether from equity or debt financing agreements,
will be available, if at all, on favorable terms to us or our stockholders.
As of June 30, 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 proceeds of the July 2000 private
placement.
The Company also had purchase obligations with Boston Marketing ("BMC") under
the BMC Distribution Agreement. 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 and 2000, and that the BMC Distribution
Agreement has been terminated as a result. Boston Marketing has refused to
accept subsequently placed orders. We are investigating the claims made by
Boston Marketing in their complaint. We intend to defend this matter vigorously
and believe we have meritorious defenses to this suit. We have now obtained
other CCD chips, CCU processors and frame grabbers from third-party suppliers.
Management believes that no disruption in the supply of these products occurred.
However, we may not be able to market the units incorporating those CCD chips,
CCU processors and frame grabbers under the "TeliCam" trademark which could
materially adversely affect our operating results.
At this time, our expenses significantly exceed our revenues from
operations. We anticipate that our new product, the Apollo e, a cordless,
heatless, programmable, light instrument used for the curing of composite and
whitening materials, will provide additional revenue on a relatively high margin
product. We expect to have the Apollo e product available to ship beginning at
the end of August. Additionally, we will begin the national advertising campaign
for our new home tooth whitening system, Forever WhiteTM, in the middle of
August. We expect the revenue and cash flow impact from both Apollo e and
Forever WhiteTM to begin in the last month of our third quarter, and to impact
our liquidity more positively in the last quarter of the year. Of course, we
have not commenced significant sales of Apollo e or Forever WhiteTM and we can
give no assurances as to the success of these products. Therefore, although we
have cash on hand, we believe that we will need to raise additional capital in
order to finance our operations as well as research and development of new
products during the next twelve months. Based on our current revenues and
expenses and without the impact of sales of Apollo e and Forever WhiteTM, we
will need additional capital in the fall of this year. We are working to raise
additional capital by means of a private placement. However, 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 and
marketing of new products which could have a material adverse effect on our
business, operating results and financial condition.
FLUCTUATIONS IN QUARTERLY RESULTS
Our business is subject to certain quarterly influences. Net sales and
operating profit are generally higher in the fourth quarter due to the
purchasing patterns of dentists in the United States and are generally lower in
the first quarter due primarily to the effect upon demand or increased purchases
in the prior quarter. We also expect that our business will experience lower
sales in the summer months as a consequence of holiday vacations and a lesser
number of trade shows.
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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 ApolloTM since
March 1998. Therefore, we have a limited relevant operating history upon which
to evaluate the likelihood of our success. In addition, we anticipate additional
revenues from our two new products, Apollo e and Forever WhiteTM. We expect
Apollo e will be available for shipment at the end of August, and our national
advertising campaign for Forever WhiteTM will begin in August. However, we have
not yet commenced sales of Apollo e and Forever WhiteTM and we can give no
assurances as to the likelihood of success of these products. 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
six months ended June 30, 2000, we had a net loss of $6,145,734. At June 30,
2000, our accumulated deficit was $18,222,865. 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 our market for the Telicam intraoral cameras, 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 our Telicam 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 ApolloTM 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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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.
WE MAY HAVE A NEED FOR ADDITIONAL CAPITAL.
At June 30, 2000, we had cash and cash equivalents of $1,252,955. After taking
into account our cash and cash equivalents, projected revenues and receipt of
funds from other sources, we may need to raise additional funding through debt
or equity financing during the next twelve months to satisfy our requirements
for research and product development, marketing, and general and administrative
expenses. Our cash requirements, however, may vary materially from those now
planned because of changes in our operations or market conditions. In addition,
at June 30, 2000, we were not in compliance with financial covenants of our
Imperial Bank credit agreement. As of August 21, 2000, we obtained a forbearance
agreement stating that so long as we remain current in our payments of principal
and interest, and so long as we reduce our overdraft balance to zero by August
29, 2000, Imperial Bank will not exercise any remedies it may have resulting
from such lack of compliance until September 21, 2000. If we are not able to
meet all of these conditions by such dates, Imperial Bank can declare the loans
in default and require us to pay the balance of the loan, which is currently
approximately $6.1 million. In such event, we would seek to obtain alternative
financing. There can be no assurance that alternative financing, whether from
equity or debt financing agreements, will be available, if at all, on favorable
terms to us or our stockholders. If we need capital and cannot raise additional
funds, 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 assure compliance with
it's regulations. The Company has applications pending for a hand held cordless
curing lamp and a
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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 ApolloTM. The ApolloTM 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
ApolloTM 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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<PAGE>
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 August 1,
2000, the high and low prices of our common stock were $0.94 and $0.94,
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 of Number of Shares of
Common Stock into Common Stock into Percentage of
which 2,000 shares which 2,250 shares Outstanding
Average Trading of Series A of Series B Shares of Common
Price of Common Preferred Stock May Preferred Stock Stock After
Stock be Exchanged May be Exchanged Exchange
------------ ---------------- --------
<S> <C> <C> <C>
1.75 1,142,857 1,285,714 27.2%
----------------- ---------------------- --------------------- -----------------
1.50 1,333,333 1,500,000 30.4%
----------------- ---------------------- --------------------- -----------------
1.25 1,600,000 1,800,000 34.4%
----------------- ---------------------- --------------------- -----------------
1.00 2,000,000 2,250,000 39.5%
----------------- ---------------------- --------------------- -----------------
.75 2,666,667 3,000,000 46.6%
----------------- ---------------------- --------------------- -----------------
</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 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
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<PAGE>
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 REMAINS 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 August 9, 2000 was $0.94 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 remains 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 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.
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<PAGE>
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 Units are key components of our intraoral digital
cameras. The initial term of the BMC Distribution Agreement, as amended, was due
to expire December 31, 2000, and was 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 and 2000, and that
the BMC Distribution Agreement has been terminated as a result. Boston Marketing
has refused to accept subsequently placed orders. The lawsuit also claims that
we failed to pay certain commissions to Boston Marketing.
We are investigating the claims made by Boston Marketing in their complaint. We
intend to defend this matter vigorously and believe we have meritorious defenses
to this suit. However, if the BMC Distribution Agreement is cancelled because of
failure to meet minimum purchase requirements, we would need to obtain an
alternative source of supply. We have now obtained other CCD chips, CCU
processors and frame grabbers from third-party suppliers. Management believes
that no disruption in the supply of these products occurred. However, we may not
be able to market the units incorporating those CCD chips, CCU processors and
frame grabbers under the "TeliCam" trademark which could materially adversely
affect our operating results.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
On April 7, 2000, Boston Marketing filed suit in Los Angeles Superior Court
alleging breach of contract and seeking unspecified damages. The lawsuit makes
numerous claims including the allegation that we failed to make the minimum
purchases for calendar year 1999 and 2000, and that the BMC Distribution
Agreement has been terminated as a result. Boston Marketing has refused to
accept subsequently placed orders. The lawsuit also claims that we failed to pay
certain commissions to Boston Marketing. The Company is still investigating the
allegations and intends to defend the action vigorously and believes that it has
meritorious defenses to the suit. However, 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 $207,520. 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 $2.7188 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. In addition we granted warrants to purchase 64,725 shares of
our common stock as a finders fee for our preferred stock investment.
In July 2000, the Company completed a $1,550,000 private placement, selling an
aggregate of 1,396,396 shares of common stock at $1.11 a share, and warrants to
purchase 465,465 shares of common stock.
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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
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 AUGUST 21, 2000 By: /S/ ROBERT H. GUREVITCH
----------------------- --------------------------
Robert H. Gurevitch
Chairman and Chief Executive Officer
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