SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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 Quarterly Period ended September 30, 1998
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to ___________
Commission File Number 0-26284
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MILESTONE SCIENTIFIC INC.
-------------------------
(Exact name of Registrant as specified in its charter)
Delaware 13-3545623
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State or other jurisdiction (I.R.S. Employer
of organization) Identification No.)
220 South Orange Avenue, Livingston, New Jersey 07039
-----------------------------------------------------
(Address of principal executive office) (Zip Code)
(973) 535-2717
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
As of November 5, 1998 the Registrant had a total of 8,817,882 shares of Common
Stock, $.001 par value, outstanding.
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Forward looking statements
When used in this Quarterly Report on Form 10-Q, the words "may", "will",
"should", "expect", "believe", "anticipate", "continue", "estimate", "project",
"intend" and similar expressions are intended to identify forward-looking
statements within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act regarding events, conditions and financial trends that
may affect the Company's future plans of operations, business strategy, results
of operations and financial condition. The Company wishes to ensure that such
statements are accompanied by meaningful cautionary statements pursuant to the
safe harbor established in the Private Securities Litigation Reform Act of 1995.
Prospective investors are cautioned that any forward-looking statements are not
guarantees of future performance and are subject to risks and uncertainties and
that actual results may differ materially from those included within the
forward-looking statements as a result of various factors. Such forward-looking
statements should, therefore, be considered in light of various important
factors, including those set forth herein and others set forth from time to time
in the Company's reports and registration statements files with the Securities
and Exchange Commission (the "Commission"). The Company disclaims any intent or
obligation to update such forward-looking statements.
2
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INDEX
PART I. FINANCIAL INFORMATION Page
ITEM 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets at September 30,
1998 (unaudited) and December 31, 1997 4
Condensed Consolidated Statements of Operations
(unaudited) for the nine and three months
ended September 30, 1998 and 1997 5
Condensed Consolidated Statements of Cash Flows
(unaudited) for the nine months ended
September 30, 1998 and 1997 6
Notes to Condensed Consolidated Financial Statements 7
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 15
ITEM 4. Submission of Matters to Vote of Security Holders 17
ITEM 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
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Part 1. Financial Information
ITEM 1. Condensed Consolidated Financial Statements
Milestone Scientific Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30 December 31
1998 1997
(unaudited) *
------------ ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,167,877 $ 9,775,019
Investments - treasury bills 3,786,396 5,778,369
Accounts receivable 530,019 318,147
Inventories 2,793,241 1,249,628
Prepaid expenses 245,204 97,779
------------ ------------
Total current assets 9,522,737 17,218,942
PROPERTY AND EQUIPMENT, NET 4,091,024 762,882
PATENTS 1,797,414 1,980,834
OTHER ASSETS 30,603 33,406
------------ ------------
$ 15,441,778 $ 19,996,064
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Line of credit - bank $ 200,000 $ 175,000
Accounts payable 1,193,522 1,053,955
Accrued expenses 439,987 247,433
------------ ------------
Total current liabilities 1,833,509 1,476,388
------------ ------------
STOCKHOLDERS' EQUITY
Common stock, par value $.001; authorized,
25,000,000 shares; issued and outstanding,
8,817,882 and 8,661,866 shares, respectively 8,818 8,662
Additional paid-in capital 30,111,734 28,685,483
Treasury stock (911,516) --
Accumulated deficit (15,600,767) (10,174,469)
------------ ------------
Total stockholders' equity 13,608,269 18,519,676
------------ ------------
Total liabilities and stockholders' equity $ 15,441,778 $ 19,996,064
============ ============
* Derived from audited financial statements at December 31, 1997
See notes to condensed consolidated financial statements
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Milestone Scientific Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the nine and three months ended September 30,
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30 September 30
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ 7,621,046 $ 2,305,460 $ 506,744 $ 670,896
Cost of sales 5,615,244 1,461,252 622,618 463,389
----------- ----------- ----------- -----------
Gross profit (loss) 2,005,802 844,208 (115,874) 207,507
----------- ----------- ----------- -----------
Selling, general and
administrative expenses 7,446,066 3,634,957 2,449,405 1,384,425
Research and development expenses 353,258 418,344 107,717 144,581
----------- ----------- ----------- -----------
7,799,324 4,053,301 2,557,122 1,529,006
----------- ----------- ----------- -----------
Loss from operations (5,793,522) (3,209,093) (2,672,996) (1,321,499)
----------- ----------- ----------- -----------
Other income and expense
Interest income (net) 367,224 39,503 85,933 6,937
Other income (net) -- 5,067 -- 2,467
----------- ----------- ----------- -----------
367,224 44,570 85,933 9,404
----------- ----------- ----------- -----------
NET LOSS $(5,426,298) $(3,164,523) $(2,587,063) (1,312,095)
=========== =========== =========== ===========
Loss per share - basic and diluted $ (0.62) $ (0.59) $ (0.30) $ (0.23)
=========== =========== =========== ===========
Weighted average shares outstanding 8,742,823 5,406,024 8,717,882 5,797,931
=========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
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Milestone Scientific Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended September 30,
(unaudited)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities
Net loss $ (5,426,298) ($ 3,164,523)
Adjustments to reconcile net loss to
net cash used in operating activities
Amortization and depreciation 519,422 231,877
Compensation expense 221,452 450,660
Changes in assets and liabilities
Other assets 2,803 (1,313)
Accounts receivable (211,872) (71,923)
Inventories (1,543,613) (42,592)
Prepaid expenses (147,425) (89,152)
Accounts payable 139,567 332,344
Accrued expenses 192,554 (76,910)
Deferred revenue -- (38,517)
------------ ------------
Net cash used in operating activities (6,253,410) (2,470,049)
------------ ------------
Cash flows from investing activities
Capital expenditures (3,664,144) (403,054)
Acquisition costs of minority interest in Spintech -- (9,532)
Net proceeds from sale of treasury bills 1,991,973 --
------------ ------------
Net cash used in investing activities (1,672,171) (412,586)
------------ ------------
Cash flows from financing activities
Treasury stock purchase (911,516) --
Net proceeds from issuance of common stock 1,204,955 14,741,218
Borrowing under line of credit 25,000 100,000
------------ ------------
Net cash provided by financing activities $ 318,439 $ 14,841,218
------------ ------------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS $ (7,607,142) 11,958,583
Cash and cash equivalents at beginning of period 9,775,019 779,359
------------ ------------
Cash and cash equivalents at end of period $ 2,167,877 $ 12,737,942
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 10,739 $ 16,644
------------ ------------
</TABLE>
See notes to consolidated financial statements.
6
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Milestone Scientific Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES
The unaudited interim financial statements of Milestone Scientific Inc.
and Subsidiaries (the "Company") have been prepared in accordance with
generally accepted accounting principles for interim financial
information. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for
complete financial statements.
These financial statements should be read in conjunction with the
financial statements and notes thereto for the year ended December 31,
1997 included in the Company's Annual Report on Form 10-KSB. The
accounting policies used in preparing these financial statements are the
same as those described in the December 31, 1997 financial statements.
In the opinion of the Company, the accompanying unaudited financial
statements contain all adjustments (consisting of normal recurring
entries) necessary to present fairly the financial position as of
September 30, 1998 and the results of operations for the three month and
nine month periods ended September 30, 1998 and September 30, 1997 and
cash flows for the nine-month periods ended September 30, 1998 and 1997,
respectively.
The results reported for the three and nine-month periods ended September
30, 1998 are not necessarily indicative of the results of operations,
which may be expected for a full year.
NOTE 2 - REALIZATION OF ASSETS
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles, which contemplate
continuation of the company as a going concern. However, the Company has
sustained substantial losses from operations after the introduction of its
Wand(TM) product, and has experienced significant returns of this product
subsequent to its first fiscal quarter in 1998. In addition, the Company
has used, rather than provided, cash in its operations during the
nine-month period ended September 30, 1998.
In view of the matters described in the preceding paragraph,
recoverability of a major portion of the recorded asset amounts shown in
the accompanying balance sheet is dependent upon continued operations of
the Company, which in turn is dependent upon the success of the Company's
Wand(TM) product. The financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset
amounts or amounts and classification of liabilities that might be
necessary should the Company be unable to continue in existence.
Based on management's belief that The Wand(TM), is a major advance in
dentistry and may ultimately become the accepted method for delivering
local dental anesthesia, the Company is taking steps that are aimed at
growing and strengthening the end user base thereby gaining greater
acceptance of The Wand(TM) and translating to increased revenue through
higher
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disposable handpiece usage. These steps include a) obtaining feedback and
providing further support to current Wand users, b) increasing the number
of dental schools which include The Wand(TM) in their curriculum, c)
distributing new The Wand(TM) technique video and technical bulletins, d)
conducting direct to patient advertising with specialized sales effort in
test markets and e) maintaining a well trained service staff.
As of September 30, 1998, the Company had approximately $6,000,000 in
aggregate cash, cash equivalents and treasury bills. Management believes
that through the proper utilization of these existing funds and the
expense reductions achieved through cost containment programs, it will
have sufficient cash to meet its needs over the next twelve months.
The Company intends to submit a new application for a technologically
similar device to The Wand(TM), specifically designed to address the need
to deliver widely varying volumes of anesthetic and other medicaments for
various medical disciplines. Milestone has already developed a working
prototype device for delivery of multi-volume anesthetic and other
medicaments. Also, the Company will continue to pursue CE Mark (European
Agency approval) certification for international marketing purposes and to
develop product enhancements and improvements. The raising of additional
capital will continually be evaluated by management.
NOTE 3 - LOSS PER SHARE
The Company applies Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings Per Share." SFAS No. 128 requires the presentation of
basic earnings per share and, for companies with complex capital
structures or potentially dilutive securities, such as convertible debt,
options, and warrants, diluted earnings per share.
Basic loss per common share is computed using the weighted average number
of common shares outstanding. Diluted loss per common share is computed
using the weighted average common shares outstanding after giving effect
to potential common stock from stock options based on the treasury stock
method, plus any other potentially dilutive securities outstanding, unless
the effect is anti-dilutive.
For the three and nine months ended September 30, 1998 and 1997, the
assumed exercise of certain dilutive options and warrants were
anti-dilutive. Accordingly, basic and diluted loss per share is based on
the weighted average common shares outstanding.
Options and warrants, in aggregate, to purchase 257,000 shares of common
stock at prices ranging from $1.56 to $23.69 per share were issued during
nine months ended September 30, 1998 but were not included in the
computation of diluted loss per share because effect would have been
anti-dilutive.
During the nine months ended September 30, 1998 warrants to purchase
156,016 shares of common stock were exercised at prices ranging from $4.72
to $9 for which the company realized proceeds of $1,204,955.
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NOTE 4 - LITIGATION
Class Actions
Several class action lawsuits have been commenced against the Company,
certain present and former executive officers, one outside director and
consultants in the United States District Court for the District of New
Jersey. The District Judge before whom the cases are pending has entered
an order consolidating all of the class actions into one consolidated
action. The Complaints contain generally overlapping and similar
allegations of violations of the Securities Exchange Act of 1934,
including allegations that the Company and certain of the other defendants
violated the Act by issuing false and misleading financial statements and
disseminating misleading statements about, among other things, the demand
for the Company's principal product, its expected sales growth, the
acceptance of that product by dental professionals, shipments during
certain time periods and misrepresentations as the third-party evaluations
of the efficacy of the product through failure to disclose the issuance of
stock options to certain consultants. On October 22, 1998, the District
Judge entered an order appointing lead plaintiff to represent the
interests of all class members.
Milestone believes that material allegations of the complaints lack merit
and intends to vigorously defend the above actions. Specifically,
Milestone believes that its financial statements fairly present its
results of operations, that the information which it has publicly
disclosed does not contain any material misstatements or
misrepresentations and that stock options issued to persons who published
research reports were issued for other services for the Company,
principally service as spokespersons and demonstrators of the Company's
product. Further, the Company continues to believe that The Wand(TM)
embodies superior technology, is a major advance in dentistry and may
ultimately become the accepted method for delivering local dental
anesthesia.
Spinello Lawsuits
In May 1998, the Company received a favorable decision on motions filed by
plaintiffs and defendant in the action brought in the United States
District Court of the District of New Jersey by Milestone Scientific, Inc.
and its subsidiary, Spintech Inc. against Ronald P. Spinello, Spintech's
former Chairman and Director of Research. The United States Magistrate
Judge issued a Report recommending that the Court grant Milestone's
motions to dismiss the counterclaims brought by defendant Spinello for a
shareholder's derivative action and civil conspiracy, finding that
defendant Spinello had failed "to state a claim upon which relief may be
granted." The Report also recommended that the Court dismiss defendant
Spinello's counterclaim for indemnification against Milestone and a
portion of the indemnification claim against Spintech. In a second
decision, the Magistrate Judge denied defendant Spinello's motion to join
Milestone's Chief Executive Officer as an additional party and to file an
amended answer asserting revised and additional counterclaims against
Milestone and Spintech. The Magistrate Judge determined that defendant
Spinello's proposed amended counterclaims "are futile and could not
withstand a motion to dismiss under federal rule of civil procedure
12(b)(6)". Defendant Spinello timely filed an appeal from the May 5, 1998
Order and objections to the Report. On August 24, 1998, a United States
District Judge for
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the District of New Jersey issued a memorandum opinion and signed an Order
denying Dr. Spinello's appeal of the May 5, 1998 Order and affirming the
May 5, 1998 Order in its entirety. The Judge further denied in its
entirety Dr. Spinello's objections to the Report and granted the Company's
motion to dismiss counts one, two, three and four of Dr. Spinello's
initial Counterclaim.
As a result of the affirmance of the May 1998 Order and the adoption of
the Report granting the Company's motion to dismiss, the only claims
remaining in the litigation with Dr. Spinello are Milestone's claims
against Dr. Spinello and Dr. Spinello's counterclaim for unpaid salary for
the period subsequent to his alleged wrongful termination, and a portion
of his indemnification claim against Spintech.
In October 1998, the Company received a settlement demand from Counsel for
Dr. Spinello and Glenn Spinello which stated that, notwithstanding the
United States District Judge's decision, substantial claims remain to be
litigated and that there are substantial risks to Milestone from this
litigation. The settlement demand letter does not describe the nature of
any claims that Dr. Spinello could assert against the Company, but it does
allude to potential litigation in other forums and the possibility of
future litigation brought by minority stockholders of the Company. If Dr.
Spinello does seek to assert additional claims, or if minority
stockholders should assert claims, against the Company, the Company
intends to vigorously defend such claims and believes that it has
meritorious defenses thereto.
NOTE 5 - TREASURY STOCK
Pursuant to its stock purchase program covering the purchase of up to
500,000 shares of Common Stock, the Company purchased 100,000 shares of
its Common Stock during June 1998 at an aggregate price, including
commission and fees of $911,515.
NOTE 6 - STOCK OPTION PLAN
On June 30, 1998 at the annual meeting of stockholders, approval was given
to an amendment to the Company's Stock Option Plan increasing the number
of shares of Company's Common Stock which may be issued thereunder from
500,000 to 1,000,000 shares.
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ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation
Coinciding with the initial launch of The Wand(TM), (a computer controlled
"painless" injection system) during the first quarter and through the next
month and a half of the second quarter, the Company maintained high levels
of production and committed capital to increase production capacity. The
product's early success was then tempered by significant returns and
declining sales through the remainder of the second quarter and the third
quarter. In combination with the filing of class action lawsuits, these
conditions have resulted in higher levels of inventory and production
capacity that exceed current demand. Therefore, the Company, as explained
below, has provided reserves against sales sufficient to cover possible
product returns and has reduced the carrying value of its inventory to
reflect their value under the current market conditions.
Three Months Ended September 30, 1998 as compared to the Three Months
Ended September 30, 1997.
Statement of Operations
Net sales for the three months ended September 30, 1998 and September 30,
1997 were $506,744 and $670,896, respectively. The $164,152 or 24%
decrease is attributable to a $214,000 decline in net sales from the
Company's Wisdom product line offset by $50,000 in net sales for The
Wand(TM), (a computer controlled "painless" injection system) including
disposable handpieces.
Cost of sales for the three months ended September 30, 1998 and September
30, 1997 were $622,618 and $463,389 respectively. The $159,229 or 34%
increase is mainly attributable to the cost of sales for The Wand(TM),
offset by a $155,000 decrease in the cost of sales from the Company's
Wisdom product line. The increase includes inventory reserves adjustments
totaling $363,000. The adjustments relate to The Wand(TM) units and
disposable handpieces deemed slow moving.
For the three months ended September 30, 1998, the Company recorded a
gross loss of $115,874. The $323,381 decrease when compared to the
$207,507 gross profit for the three months ended September 30, 1997, is
primarily attributable to the aforementioned inventory reserve.
In conjunction with the launch of The Wand(TM) during the first quarter of
1998, the Company established a $528,000 reserve against sales. This
reserve was established to cover expected returns attributable to first
quarter sales. For the second and third quarter, actual returns
attributable to those quarters were recorded upon receipt. Additional
reserves were established to cover expected returns attributable to prior
quarter sales. On September 30, 1998, the reserve was $70,000.
Selling, general and administrative expenses for the three months ended
September 30, 1998 and September 30, 1997 were $2,449,405 and $1,384,425
respectively. The $1,064,980
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increase is primarily attributable to approximately $1,377,000 aggregate
increase in selling and marketing expenses associated with The Wand(TM),
an increase in legal and professional fees of $225,000. This was partially
offset by a $192,000 decrease in expenses associated with the Wisdom
product line and a decrease of $321,000 in compensation expense related to
option grants issued during the third quarter of 1997.
Research and development costs for the three months ended September 30,
1998 and September 30, 1997 were $107,117 and $144,581, respectively.
Net interest income for the three months ended September 30, 1998 and
September 30, 1997 were $85,933 and $6,937, respectively. The $78,996
increase was mainly attributable to investment income from the net
proceeds of two private placements in 1997.
The net loss of $2,587,063 for the quarter ended September 30, 1998 was
primarily the result of increased SG&A expenses and the inventory reserve.
The loss represents a $1,274,968 increase when compared to the net loss of
$1,312,095 for the third quarter of 1997.
Nine Months Ended September 30, 1998 as compared to the Nine Months Ended
September 30, 1997.
Statement of Operations
Net sales for the nine months ended September 30, 1998 and September 30,
1997 were $7,621,046 and $2,305,460 respectively. The $5,315,586 or 231%
increase is mainly attributable to approximately $6,225,000 in net sales
for The Wand(TM), including disposable handpieces, offset by a decrease in
net sales from the company's Wisdom product line of approximately
$909,000.
Cost of sales for the nine months ended September 30, 1998 and September
30, 1997 were $5,615,244 and $1,461,252, respectively. The $4,153,922
increase is mainly attributable to the cost of sales for The Wand(TM),
offset by a $535,000 decrease in the cost of sales from the Company's
Wisdom product line. It includes an inventory reserve of $1,392,000 which
relates to The Wand(TM) units and disposable handpieces deemed slow moving
because of new improved products.
Gross profit for the nine months ended September 30, 1998 and September
30, 1997 were $2,005,802 and $844,208, respectively. The 1,161,594 or 138%
increase is primarily attributable to The Wand(TM) sales, partially offset
by the aforementioned inventory reserve and a decrease in Wisdom sales.
In conjunction with the launch of The Wand(TM) during the first quarter of
1998, the Company established a $528,000 reserve against sales. This
reserve was established to cover expected returns attributable to first
quarter sales. For the second and third quarter, actual returns
attributable to those quarters were recorded upon receipt. Additional
reserves were established to cover expected returns attributable to prior
quarter sales. On September 30, 1998, the reserve was $70,000.
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Selling, general and administrative expenses for the nine months ended
September 30, 1998 and September 30, 1997 were $7,446,066 and $3,634,957
respectively. The $3,811,109 or 105% increase is primarily attributable to
approximately $3,938,000 aggregate increase in selling and marketing
expenses associated with The Wand(TM), an increase in legal and
professional fees of approximately $405,000, and a $174,000 increase in
corporate salaries. This was partially offset by a $775,000 decrease in
expenses associated with the Wisdom product line and a decrease of
$229,208 in compensation expense related to option grants.
Research and development costs for the nine months ended September 30,
1998 and September 30, 1997 were $353,258 and $418,344, respectively.
Net interest income for the nine months ended September 30, 1998 and
September 30, 1997 were $367,224 and $39,503, respectively. The $327,721
increase was mainly attributable to investment income from the net
proceeds of two private placements in 1997 and aggregate lower borrowings
under the Company's line of credit.
The net loss of $5,426,298 for the nine months ended September 30, 1998
was primarily the result of increased SG&A expenses and the inventory
reserve partially offset by sales of The Wand(TM). The loss represents a
$2,261,775 increase as compared to the net loss of $3,164,523 for the nine
months ended September 30, 1997.
Liquidity and Capital Resources
At September 30, 1998, the Company's working capital was $7,689,228. It
consisted primarily of cash generated from two private placements in 1997
and from exercised warrants.
For the nine months ended September 30, 1998, the Company decreased cash
and cash equivalents by $7,607,142 using $6,253,410 in operating
activities and $3,664,144 in capital expenditures.
For the nine months ended September 30, 1998 the Company's net cash used
in operating activities was $6,253,410. This was primarily attributable to
a net loss of $5,426,298 (adjusted for non cash items of $519,422 for
amortization and depreciation and $221,452 for compensation expense), a
$211,872 increase in accounts receivable, a $1,543,613 increase in
inventory and a $147,425 increase in prepaid expenses. This was primarily
offset by increases in accounts payable and accrued expenses of $139,567
and $192,554, respectively.
The $1,672,171 used in investing activities for the nine months ended
September 30, 1998 was attributable to $3,664,144 in capital expenditures,
offset by the maturing of $1,991,973 in treasury bills. Also, the company
negotiated and received over $230,000 in aggregate cash and credit from
prior equipment purchases.
Financing activities provided $318,439 for the period. The Company
received $1,204,955 as 156,016 warrants were exercised. The Company used
$911,516 to repurchase 100,000 shares
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<PAGE>
of its stock. The Company's Wisdom subsidiary increased its borrowing
under its line of credit by $25,000.
As of September 30, 1998, the Company had approximately $6 million in
aggregate cash, cash equivalents and treasury bills. Management believes
that through the proper utilization of these existing funds and the
expense reductions achieved through cost containment programs, the Company
will have sufficient cash to meet its needs for the next twelve months.
Also, the Company is taking steps that are aimed at growing and
strengthening the end user base thereby gaining greater acceptance of The
Wand(TM) and translating to increased revenue through higher disposable
handpiece usage. These steps include a) obtaining feedback and providing
further support to current Wand users, b) increasing the number of dental
schools which include The Wand(TM) in their curriculum, c) distributing a
new Wand(TM) technique video and technical bulletins, d) conducting direct
to patient advertising with specialized sales effort in test markets and
e) maintaining a well trained service staff.
The Company intends to submit a new application for a technologically
similar device to The Wand(TM), specifically designed to address the need
to deliver widely varying volumes of anesthetic and other medicaments for
various medical disciplines. Milestone has already developed a working
prototype device for delivery of multi-volume anesthetic and other
medicaments. Also, the Company will continue to pursue CE Mark (European
Agency approval) certification for international marketing purposes and to
develop product enhancements and improvements. The raising of additional
capital will continually be evaluated by management.
The implementation of changes in the Company's selling and marketing of
The Wand(TM) has continued. During the third quarter, the company added
additional dealers, added part time commission sales people, initiated new
product based promotions, increased its presence in dental schools and
forwarded technical bulletins to its known end users. Also, the Company
began a campaign to gain a better understanding of its end user base, to
obtain feedback regarding The Wand(TM), to better gauge disposable
handpiece usage and to offer additional support when necessary.
14
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Several class action lawsuits have been commenced against the Company,
certain present and former executive officers, one outside director and
consultants in the United States District Court for the District of New
Jersey. The District Judge before whom the cases are pending has entered
an order consolidating all of the class actions into one consolidated
action. The Complaints contain generally overlapping and similar
allegations of violations of the Securities Exchange Act of 1934,
including allegations that the Company and certain of the other defendants
violated the Act by issuing false and misleading financial statements and
disseminating misleading statements about, among other things, the demand
for the Company's principal product, its expected sales growth, the
acceptance of that product by dental professionals, shipments during
certain time periods and misrepresentations as the third-party evaluations
of the efficacy of the product through failure to disclose the issuance of
stock options to certain consultants. On October 22, 1998, the District
Judge entered an order appointing lead plaintiff to represent interests of
all class members.
Milestone believes that material allegations of the Complaints lack merit
and intends to vigorously defend the above actions. Specifically,
Milestone believes that its financial statements fairly present its
results of operations, that the information which it has publicly
disclosed does not contain any material misstatements or
misrepresentations and that stock options issued to persons who published
research reports were issued for other services for the Company,
principally service as spokespersons and demonstrators of the Company's
product. Further, the Company continues to believe that The Wand(TM)
embodies superior technology, is a major advance in dentistry and may
ultimately become the accepted method for delivering local dental
anesthesia.
In May 1998, the Company received a favorable decision on motions filed by
plaintiffs and defendant in the actions brought in the United States
District Court of the District of New Jersey by Milestone Scientific, Inc.
and its subsidiary, Spintech Inc. against Ronald P. Spinello, Spintech's
former Chairman and Director of Research. The United States Magistrate
Judge issued a Report recommending that the Court grant Milestone's
motions to dismiss the counterclaims brought by defendant Spinello for a
shareholder's derivative action and civil conspiracy, finding that
defendant Spinello had failed "to state a claim upon which relief may be
granted." The Report also recommended that the Court dismiss defendant
Spinello's counterclaim for indemnification against Milestone and a
portion of the indemnification claim against Spintech. In a second
decision, the Magistrate Judge denied defendant Spinello's motion to join
Milestone's Chief Executive Officer as an additional party and to file an
amended answer asserting revised and additional counterclaims against
Milestone and Spintech. The Magistrate Judge determined that defendant
Spinello's proposed amended counterclaims "are futile and could not
withstand a motion to dismiss under federal rule of civil procedure
12(b)(6)". Defendant Spinello timely filed an appeal from the May 5, 1998
Order and objections to the Report. On August 24, 1998, a United States
District Judge for the District of New Jersey issued a memorandum opinion
and signed an Order denying Dr.
15
<PAGE>
Spinello's appeal of the May 5, 1998 Order and affirming the May 5, 1998
Order in its entirety. The Judge further denied in its entirety Dr.
Spinello's objections to the Report and granted the Company's motion to
dismiss counts one, two, three and four of Dr. Spinello's initial
Counterclaim.
As a result of the affirmance of the May 1998 Order and the adoption of
the Report granting the Company's motion to dismiss, the only claims
remaining in the litigation with Dr. Spinello are Milestone's claims
against Dr. Spinello and Dr. Spinello's counterclaim for unpaid salary for
the period subsequent to his alleged wrongful termination, and a portion
of his indemnification claim against Spintech.
In October 1998, the Company received a settlement demand from Counsel for
Dr. Spinello and Glenn Spinello which stated that, notwithstanding the
United States District Judge's decision, substantial claims remain to be
litigated and that there are substantial risks to Milestone from this
litigation. The settlement demand letter does not describe the nature of
any claims that Dr. Spinello could assert against the Company, but it does
allude to potential litigation in other forums and the possibility of
future litigation brought by minority stockholders of the Company. If Dr.
Spinello does seek to assert additional claims, or if minority
stockholders should assert claims, against the Company, the Company
intends to vigorously defend such claims and believes that it has
meritorious defenses thereto.
16
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
NONE
ITEM 5. OTHER
During the quarter ended September 30, 1998, the Company received and
accepted the resignations of Gregory Volok as Executive Vice-President and
Chief Operating Officer-Dental Division and Michael McGeehan as Executive
Vice-President. Pursuant to its program to reduce corporate overhead, the
Company has no immediate plans to fill these vacancies. Msssrs. Volok and
Montoncello also resigned as directors.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
NONE
(b) Reports on Form 8-K:
NONE
17
<PAGE>
Signatures
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned
/s/ Leonard Osser
-----------------------------------------
Leonard Osser, Chairman and
Chief Executive Officer
/s/ Thomas M. Stuckey
-----------------------------------------
Thomas M. Stuckey, Vice President and
Chief Financial Officer
Dated: November 5, 1998
18
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