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, 1999
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
MILESTONE SCIENTIFIC INC.
-------------------------
(Exact name of Registrant as specified in its charter)
Delaware 13-3545623
- --------------------------------------------------------------------------------
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
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(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 12, 1999 the Registrant had a total of 8,764,898 shares of Common
Stock, $.001 par value, outstanding.
<PAGE>
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 (unaudited) 4
Condensed Consolidated Balance Sheets at September 30,
1999 and December 31, 1998 4
Condensed Consolidated Statements of Operations
for the nine and three months ended September 30, 1999
and 1998 5
Condensed Consolidated Statements of Cash Flows
for the nine months ended September 30, 1999 and 1998 6
Notes to Condensed Consolidated Financial Statements 8
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to Vote of Security Holders 20
ITEM 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
3
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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
1999 1998
(unaudited) *
------------ ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 866,399 $ 316,706
Investments - treasury bills 509,766 3,267,940
Accounts receivable 151,498 430,907
Inventories 1,857,127 1,255,262
Prepaid expenses 192,175 127,263
------------ ------------
Total current assets 3,576,965 5,398,078
PROPERTY AND EQUIPMENT, NET 1,749,662 2,031,870
PATENTS, NET 1,552,863 1,736,275
OTHER ASSETS 10,318 29,997
------------ ------------
$ 6,889,808 $ 9,196,220
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Line of credit - bank -- $ 150,000
Accounts payable 710,169 544,705
Accrued expenses 227,792 165,302
------------ ------------
Total current liabilities 937,961 860,007
------------ ------------
SENIOR CONVERTIBLE NOTES 2,250,000 --
------------ ------------
STOCKHOLDERS' EQUITY
Common stock, par value $.001; authorized,
25,000,000 shares; 8,864,898 issued as of
September 30, 1999 and 8,817,822 issued
as of December 31, 1998 8,865 8,818
Additional paid-in capital 30,146,125 30,111,734
Accumulated deficit (25,541,627) (20,872,823)
Treasury stock, at cost, 100,000 shares (911,516) (911,516)
------------ ------------
Total stockholders' equity 3,701,847 8,336,213
------------ ------------
Total liabilities and stockholders' equity $ 6,889,808 $ 9,196,220
============ ============
*Derived from audited financial statements at December 31, 1998
The accompanying notes are an integral part of these 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
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales $ 2,045,210 $ 7,621,046 $ 511,056 $ 506,744
Cost of sales 1,044,489 5,615,244 227,718 622,618
----------- ----------- ----------- -----------
Gross profit (loss) 1,000,721 2,005,802 283,338 (115,874)
----------- ----------- ----------- -----------
Selling, general and
Administrative expenses 5,217,767 7,446,066 1,513,148 2,449,405
Research and development expenses 398,180 353,258 288,724 107,717
----------- ----------- ----------- -----------
5,615,947 7,799,324 1,801,872 2,557,122
----------- ----------- ----------- -----------
Loss from operations (4,615,226) (5,793,522) (1,518,534) (2,672,996)
Loss from termination of
Wisdom product line (76,345) -- -- --
Interest income (expense), net 22,767 367,224 (3,887) 85,933
----------- ----------- ----------- -----------
Net loss $(4,668,804) $(5,426,298) $(1,522,421) $(2,587,063)
=========== =========== =========== ===========
Loss per share - basic and diluted $ (.54) $ (.62) $(. 18) $ (.30)
=========== =========== =========== ===========
Weighted average shares outstanding 8,718,054 8,742,823 8,718,393 8,717,882
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these 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>
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities
Net loss $(4,668,804) $(5,426,298)
Adjustments to reconcile net loss
to net cash used in operating activities
Amortization 202,811 183,412
Depreciation 352,389 336,010
Compensation expense -- 221,452
Changes in operating assets and liabilities
Accounts receivable 279,409 (211,872)
Inventories (601,865) (1,543,613)
Prepaid expenses (64,912) (147,425)
Other assets 280 2,803
Accounts payable 165,464 139,567
Accrued expenses 98,928 192,554
----------- -----------
Net cash used in operating activities (4,236,300) (6,253,410)
----------- -----------
Cash flows from investing activities
Capital expenditures (70,181) (3,664,144)
Sale and (purchase) of treasury bills, net 2,758,174 1,991,973
----------- -----------
Net cash provided by (used in) investing activities 2,687,993 (1,672,171)
----------- -----------
Cash flows from financing activities
Net proceeds from issuance of senior convertible notes 2,250,000 --
Net proceeds from issuance of common stock -- 1,204,955
(Repayment)/borrowing under line of credit (150,000) 25,000
Costs associated with registering shares (2,000) --
Treasury Stock Purchase -- (911,516)
----------- -----------
Net cash provided by financing activities 2,098,000 318,439
----------- -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 549,693 (7,607,142)
Cash and cash equivalents at beginning of period 316,706 9,775,019
----------- -----------
Cash and cash equivalents at end of period 866,399 $ 2,167,877
----------- -----------
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 316 $ 10,739
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
6
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Milestone Scientific Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended September 30,
(unaudited)
Supplemental schedule of noncash financing activities:
In September 1999, in making the first semi annual interest payment on the
Senior Convertible Notes and in accordance with the terms of the note
agreements, the Company elected to issue 47,016 shares of Milestone Common Stock
in lieu of cash of $38,438.
The accompanying notes are an integral part of these statements.
7
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Milestone Scientific Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
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,
1998 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, 1998 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, 1999 and the results of operations for the three month and
nine month periods ended September 30, 1999 and September 30, 1998 and
cash flows for the nine month periods ended September 30, 1999 and 1998,
respectively.
The results reported for the three and nine month periods ended September
30, 1999 are not necessarily indicative of the results of operations which
may be expected for a full year.
NOTE 2 - LIQUIDITY 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, subsequent to its
first fiscal quarter in 1998, the Company has incurred substantial losses
from operations. In addition, the Company has used, rather than provided,
cash in its operations during the nine month period ended September 30,
1999. These factors, among others, raise substantial doubt about the
Company's ability to continue as a going concern.
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
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continues to take steps 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) expanding the market overseas; b) visiting, obtaining feedback
and providing further support to current Wand users; c) providing
assistance to dental schools which include The Wand(TM) in their
curriculum; d) distributing The Wand(TM) technique videos and technical
bulletins to its current users; and e) maintaining a well trained service
staff. Furthermore, on October 1, 1999, the Company began a new sales
initiative, permitting dentists in the United States to order the Wand(TM)
directly through Milestone and to avail themselves of certain quantity
discounts when purchasing disposable handpieces. The Company believes the
direct sale will allow Milestone to better educate dentists as to the
benefits from use of "The Wand(TM)".
As of September 30, 1999, the Company had approximately $1.4 million in
aggregate cash, cash equivalents and treasury bills. Management believes
that through the proper utilization of these existing funds, revenues
generated from international distributors and from continued increases in
domestic disposable handpiece sales, and the expense reductions achieved
through cost containment programs, it will have sufficient cash to meet
its needs over the next twelve months.
NOTE 3 - LOSS 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, 1999 and 1998, basic and
diluted loss per share is based on the weighted average common shares
outstanding without adjustment for shares underlying options and warrants
since such adjustment would be anti-dilutive.
Options and warrants, in aggregate, to purchase 152,000 shares of common
stock at prices ranging from $1 to $3 per share, were issued in aggregate
to three officers and certain key personnel during the nine months ended
September 30, 1999 but were not included in the computation of diluted
loss per share because their exercise price was greater than the average
market price of the common shares.
Options and warrants, in aggregate, to purchase 272,000 shares of common
stock at prices ranging from $1.56 to $23 per share were issued during the
nine months ended September 30, 1998 but were not included in the
computation of diluted earnings per share because their exercise price was
greater than the average market price of the common shares.
During the nine months ended September 30, 1998 options and 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
Spinello Lawsuits
On March 26, 1997, Milestone and Spintech commenced legal action in the
United States District Court of New Jersey against Ronald Spinello, DDS,
former Chairman and Director of Research of Spintech. In the complaint,
plaintiffs seek recovery of compensatory and punitive damages for
extortion and tortuous interference with existing and prospective contract
and business relationships, a declaratory judgment that Dr. Spinello has
no personal rights to certain technology developed while he was employed
as Director of Research of Spintech relating to the design and production
of ancillary components of its computer controlled local anesthetic
delivery system, a declaratory judgment that plaintiffs have not breached
Dr. Spinello's employment agreement or the agreement for the initial
purchase by Milestone of a 65% equity interest in Spintech and injunctive
relief. On May 21, 1997, Dr. Spinello filed an answer and counterclaim
which denies the material allegations of the complaint and seeks recovery
for breach of the defendant's employment agreement, initiates a derivative
action against Milestone with respect to various expenditures and actions
for which Defendant, on behalf of Spintech, seeks an amount in excess of
$75,000, alleges civil conspiracy against Milestone with respect to
certain of those matters and the entry into the employment agreement with
Defendant and seeks indemnification for expenses, including attorneys
fees, in the pending action. On May 25, 1997, the Company filed a reply to
counterclaims which denied all of the material allegations of the
counterclaims. On December 30, 1997, Dr. Spinello made a motion for leave
to join as an additional Defendant on Counterclaim the Company's Chairman,
Leonard Osser, and to file an amended Answer and Counterclaim against the
Company. Both the Company and Mr. Osser opposed the motion and in
addition, the Company made a Cross-Motion to dismiss certain claims
asserted in the initial Answer and Counterclaim. The additional claims
which Dr. Spinello sought to assert against the Company include a fraud in
the inducement claim based upon the alleged failure of the Plaintiffs to
advise Dr. Spinello of the legal effects of his employment agreement; and
a civil conspiracy claim. Dr. Spinello also sought to add a jury demand
through his amended pleading. The Company's Cross-Motion sought to dismiss
all of Dr. Spinello's claims, except his claim for unpaid salary, on the
basis that his derivative claim is fatally defective because he did not
make any demand upon Spintech, the entity on whose behalf he purports to
bring suit, and his indemnification claim is fatally defective because the
claims against him do not arise by reason of the fact that Dr. Spinello
was an officer or director of Spintech.
On May 5, 1998, 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 Chairman 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
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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. 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, which was not accepted by the
Company, 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.
On March 5, 1999, the parties completed discovery. On April 15, 1999, the
parties made various dispositive motions for summary judgment on almost
all of the issues remaining in the case. The motions were submitted to the
Court on June 14, 1999. On August 20, 1999, the United States District
Judge issued a Memorandum Opinion finding that there were disputed
questions of fact requiring a trial with respect to Milestone's motion
concerning Plaintiffs' entitlement to the patent rights to the disputed
technologies. The Court also denied Spinello's Motion for Summary
Judgment, finding that there were disputed questions of fact requiring a
trial concerning, among other things, the intent and meaning of the
contracts between the parties, except that the court dismissed Milestone's
claim for damages as a result of Spinello's "extortionate conduct" since
such conduct does not state a separate claim for civil liability and the
conduct alleged already is encompassed by Plaintiffs' claims against
Spinello for tortious interference with contracts and tortious
interference with prospective economic advantage. In light of the denial
of the respective Motions for Summary Judgment, the Court has set a trial
date for January 2000. The Company believes that it has meritorious
defenses to Dr. Spinello's claims and meritorious claims against Dr.
Spinello. Moreover, Milestone has been advised by its patent counsel that
all technology developed by Dr. Spinello while employed by Spintech is
owned by Spintech. The Company believes that ownership of the technology
relating to these ancillary components which are the subject of this
litigation in no way prevents the manufacture and sale of its anesthetic
delivery system at economically viable prices.
On May 20, 1997, Glenn R. Spinello filed a Complaint in the Court of
Common Pleas, York County, Pennsylvania seeking damages as a result of the
alleged breach of his Employment Agreement. On June 20, 1997, the Company
and Spintech filed a notice of Removal which
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transferred venue of Glenn Spinello's lawsuit to the United States
District Court for the Middle District of Pennsylvania. On June 27, 1997,
the Company and Spintech filed an Answer to Glenn Spinello's Complaint
which denied the material allegations of the Complaint and asserted
counterclaims based upon Glenn Spinello's breach of his Employment
Agreement. On July 27, 1997, Glenn Spinello filed a reply to the
counterclaims by the Company and Spintech, denying the material
allegations of the counterclaims. On March 16, 1999, the parties completed
discovery. On April 16, 1999, Glenn Spinello made a motion for summary
judgment on his claims against the Company, and on May 3, 1999 the Company
filed its opposition thereto. The motion has been submitted to the Court
for decision. If the motion is denied, the case should be scheduled for
trial in early 2000. The Company believes it has meritorious defenses to
Glenn Spinello's claims and meritorious counterclaims against Glenn
Spinello.
Class Action Lawsuit
In 1998, several class action lawsuits were 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 to 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. On March 28, 1999, the District Judge
appointed lead counsel to represent the class. On April 28, 1999, the
class filed a Consolidated and Amended Class Action Complaint, naming as
defendants the Company and three present and former executive officer and
director. The Consolidated Complaint alleges that the Company issued false
and misleading statements concerning, among other things, certain studies
and reports on the Company's products, the Company's backlog and the
amount of reserve taken for returns. Milestone believes that the material
allegations of the Consolidated Complaint does not state a cause of action
under the Federal Securities Law and on May 21, 1999 served a motion to
dismiss the Consolidated Complaint for failure to state a claim. The class
has responded to the motion and the Company filed a reply. The Motion was
submitted to the Court in September 1999, but no decision has yet been
rendered by the Court. To the extent that the Court does not dismiss the
Consolidated Complaint at this early stage, Milestone intends to
vigorously defend against the Class Action. Specifically, Milestone
believes that its financial statements presented fairly its results of
operations, that the information which it has publicly disclosed did 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.
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Derivative Action Lawsuit
In February 1999, a purported owner of Milestone stock, commenced a
derivative action on behalf of the Company, in the Court of Chancery of
the State of Delaware in Newcastle County, against certain present and
former executive officers and directors. In the action, plaintiff alleges
that, based on the same facts as the class actions described above, the
defendants engaged in violations of the securities laws, committed fraud
and securities fraud, wasted corporate assets and damaged the Company's
reputation. As a derivative action, even if the plaintiff is successful,
any award, after deduction of plaintiff's costs and disbursements, would
be payable to the Company. Nevertheless, Milestone believes that the
material allegations of the complaint lack merit and intends to provide a
legal defense for its present and former officers and directors in
accordance with the indemnification provisions of its Certificate of
Incorporation. Because the allegations of the Derivative Complaint are so
closely tied to the allegations of the Class Complaint, the Derivative
Plaintiff's counsel has agreed with the Company that no response to the
Derivative Complaint is due until 60 days after the Court in the Class
Action decides the motion to dismiss.
Insurance Broker and Carrier
In January 1999, the Company filed a complaint against its insurance
broker (Frank Crystal Financial Services) and the two excess insurers
[American Alliance and St. Paul] in the United States District Court for
the District of New Jersey. American Alliance and St. Paul were in dispute
with the Company because they claim that the Company did not timely submit
the appropriate application. As a result, American Alliance refused to
issue a policy and St. Paul, which issued a policy, has refused to cover
the class actions described above. In April 1999, the Company reached a
settlement of this action, as a result of which American Alliance issued
the Excess Director's and Officer's Insurance Policy; the Company agreed
that claims arising prior to the date of the policy were not covered by
the policy and the parties reserved all of their arguments and positions
with respect to any other coverage issues including those that resulted
from the Consolidated and Amended Class Action Complaint referred to
above.
On June 24, 1999 American Alliance filed a complaint in the United States
District Court for the Southern District of New York seeking a declaratory
judgment that it is not liable under its policy for the claim asserted in
the amended class complaint as the derivative complaint. The Company
intends to vigorously defend against the American Alliance action and
intends to move to dismiss that action. On July 9, 1999 the Company filed
its own declaratory judgment action against American Alliance and St. Paul
in the United States District Court for the District of New Jersey seeking
a declaration that the claims asserted in the Consolidated Complaint in
the Class Action and in the Derivative Action are covered by the Excess
Director's and Officer's Insurance Policies. On August 4, 1999, the
District Judge in New Jersey administratively terminated the Company's
action until the previously filed New York Action was resolved or
dismissed. Thereafter, the Company filed an answer and counterclaim in the
New York Action seeking the same relief as it sought in its complaint in
the New Jersey Action. Both American Alliance and the Company each
requested leave from the Judge in the New York Action to make a motion for
summary judgment and to dismiss the complaint, respectively. Instead,
since any decision on the scope of coverage of the excess policies will,
in large part, depend upon whether the Class Action complaint is
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dismissed, in whole or in part, the District Judge in the New York Action
decided to hold in abeyance any action on American Alliance's complaint
and Milestone's answer and counterclaim until a decision is rendered by
the District Court in New Jersey in the Class Action.
NOTE 5 - EMPLOYEE BENEFIT PLANS
In January 1999, the Company offered to all full-time employees, a Board
approved 401K plan. The plan allows eligible employees to contribute into
specified investments vehicle 2% to 15% of their before tax salaries, (up
to the IRS limit). Although the plan does not contain any mandatory
matching provision, it allows the Company to contribute a discretionary
contribution on a matching and/or profit sharing basis. The Company's
contributions, if any, vest in increments of 20%, beginning upon the
completion of 2 years of service. An employee will become fully vested
after completing 6 years of service.
NOTE 6 - PRIVATE PLACEMENT AND ISSUANCE OF COMMON STOCK
In March 1999, the Company concluded a $2 million institutional private
placement with Cumberland Partners, other investment funds managed by or
affiliated with Cumberland Associates and certain principals of Cumberland
Associates. An additional $250,000 was raised from the Chairman and Chief
Executive Officer of Milestone, on the same terms and conditions. The
investors purchased, at face value, 3% Senior Convertible Notes Due 2003,
convertible into Milestone Common Stock at prices increasing from $2.50
per share in the first year to $6.00 per share in the fourth year, subject
to antidilution protection in the event of stock dividends and certain
capital changes. Purchasers of the Notes were granted rights to
participate in certain future security offerings by Milestone.
In September, the Company issued 47,016 shares of Milestone Common Stock
in lieu of cash of $36,438 in making the first semi annual interest
payment, on the Senior Convertible Notes as permitted by the terms of the
purchase agreement.
NOTE 7 - WISDOM PRODUCT LINE
In April 1999, the Company discontinued its selling effort with regards to
the Wisdom product line excluding SplatrFree(TM) prophy angles. The
discontinued products generated net sales of $174,086 and an operating
loss of $52,911 for the nine months ended September 30, 1999. For the nine
months ended September 30, 1998, these products generated $1,350,000 in
net sales and operating income of $541,000. In terminating the product
line the Company incurred $76,345 of expenses, including $19,291 for
uncollectible receivables, $15,692 in aggregate termination compensation
and employee benefits, $5,066 for a lease buyout, $18,793 in previously
unamortized acquisition costs and $17,503 to write off inventory.
The Company had a line of credit which had originally been secured by the
assets associated with the Wisdom product line. In June 1999, the Company
obtained a thirty-day extension of its $250,000 line of credit with some
temporary modifications including a line reduction. On July 26, 1999, the
Company notified its lender that the Company would no longer be utilizing
the line and remitted the outstanding balance of $50,000.
14
<PAGE>
NOTE 8 - MEDICAL DEVICE
In September 1999, the Company received approval by the European Economic
Community for the use of The Wand(TM) in the medical applications. The
Company believes that this acceptance will pave the way for similar
acceptance in the United States and other parts of the world.
Additionally, in August of this year, the Company submitted an application
to the FDA for approval to distribute a medical device, it has developed,
that addresses the need of physician to deliver widely varying volumes of
anesthetic and other medicaments for numerous medical disciplines.
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation
The Company launched The Wand(TM) (a computer controlled system that
enables virtually "painless" injections) during the first quarter of 1998.
The product's early success was then tempered by significant returns and
declining sales during the last seven and a half months of 1998. Based on
further research and development and user feedback, several product
improvements were made. This has resulted in a significant decline in
returns. Furthermore, in January 1999, the Company received approval to
apply the CE mark to "The Wand" for European distribution. The Company
began shipping "The Wand" to its international partners during the last
week of March 1999.
Three months ended September 30, 1999 compared to three months ended September
30, 1998
Statement of Operations
Net sales for the three months ended September 30, 1999 and September 30,
1998 were $511,056 and $506,744 respectively. The $4,312 increase reflects
a sharp decrease in returns and a lower return reserve partially offset by
a decline in Wand sales volume (including disposable handpieces). The
Wisdom product line which was terminated in April 1999, had generated
approximately $494,000 in net sales for the three months ended September
30, 1998. Domestic handpieces sales increased 26% as compared to the
second quarter of 1999, generating approximately $250,000 in revenue.
During the three months ended September 30, 1999, only $70,000 in revenue
was generated from sales to international distributors, since these
distributors, for the most part, utilized inventory purchased during the
preceding quarter to initially penetrate their foreign markets.
Cost of sales for the three months ended September 30, 1999 as compared to
the three months ended September 30, 1998 declined from $622,618 to
$227,718, a $394,900 reduction. The reduction is primarily attributable to
lower sales volume and to lower returns for the Wand (including disposable
handpieces). It also reflects a decrease in average product costs due to
prior period inventory writedowns. Also, costs of sales attributable to
the Wisdom product line were approximately $310,000 for the three months
ended September 30, 1998.
For the three months ended September 30, 1999, the Company generated a
gross profit of $283,338 as compared to a gross loss of $115,874 for the
three months ended September 30, 1998.
Selling, general and administrative expenses for the three months ended
September 30, 1999 and September 30, 1998 were $1,513,148 and $2,449,405
respectively. The $936,257 or 38% decrease is primarily attributable to
approximately $778,000 aggregate decrease in
15
<PAGE>
selling and marketing expenses associated with The Wand(TM), a $51,000
reduction in corporate salaries, a $53,000 decrease in legal expenses, and
a $138,000 reduction in selling and marketing expenses associated with the
Wisdom product line. These expenses were offset by $101,000 increase in
consulting fees.
Research and development expenses for the three months ended September 30,
1999 and September 30, 1998 were $288,724 and $107,717, respectively. The
$181,007 increase is primarily attributable to the cost incurred in
developing product improvements and a medical version of "The Wand(TM)".
Loss from operations for the three months ended September 30, 1999 and
1998 were $1,518,534 and $2,672,996, respectively.
Net interest expense for the three months ended September 30, 1999 was
$3,887. Net interest income for the three months ended September 30, 1998
was $85,933. The $89,820 difference is primarily attributable to lower
aggregate funds available for investing and the additional interest
expenses associated with the senior convertible notes.
The net loss for the three months ended September 30, 1999 was $1,522,421
as compared to net loss of $2,587,063 for the three months ended September
30, 1998. The decrease reflects sharp declines in product returns and in
selling general and administrative expenses, and a decrease in the average
product cost partially offset by a decline in Wand(TM) sales volume.
Nine months ended September 30, 1999 compared to nine months ended
September 30, 1998
Statement of Operations
Net sales for the nine months ended September 30, 1999 and September 30,
1998 were $2,045,210 and $7,621,046 respectively. The $5,575,836 or 73%
decrease reflects a sharp decline in Wand sales volume (including
disposable handpieces) partially offset by a decrease in returns and a
lower return reserve. Furthermore, net sales from the Wisdom product line
which was terminated in April, 1999 were $174,000 for the nine months
ended September 30, 1999 as compared to $1,350,000 for the nine months
ended September 30, 1998. Approximately, $756,000 in revenue was generated
through sales to international distributors for the nine months ended
September 30, 1999.
Cost of sales for the nine months ended September 30, 1999 as compared to
the nine months ended September 30, 1998 declined from $5,615,244 to
$1,044,489, a $4,570,755 reduction. The reduction is primarily
attributable to lower sales volume, a sharp decline in returns and a
decrease in average product costs due to prior period inventory
writedowns.
For the nine months ended September 30, 1999, the Company generated a
gross profit of $1,000,721 as compared to a gross profit of $2,005,802 for
the nine months ended September 30, 1998.
Selling, general and administrative expenses for the six months ended
September 30, 1999 and September 30, 1998 were $5,217,767 and $7,446,066
respectively. The $2,228,299 or 30% decrease is primarily attributable to
approximately $1,563,000 aggregate decrease in selling
16
<PAGE>
and marketing expenses associated with The Wand(TM), a $234,000 reduction
in corporate salaries, a $221,000 decrease in compensation expense related
to 1998 option grants, and a $366,000 reduction in selling and marketing
expenses associated with the Wisdom product line. These expenses were
offset by $221,000 increase in legal expenses and $101,000 increase in
consulting fees.
Research and development expenses for the nine months ended September 30,
1999 and September 30, 1998 were $398,180 and $353,258, respectively. The
$44,922 increase is primarily attributable to the cost incurred in
developing product improvements and a medical version of "The Wand(TM)".
Loss from operations for the nine months ended September 30, 1999 and 1998
were $4,615,226 and $5,793,522, respectively.
In April 1999, the Company discontinued its selling effort with regards to
the Wisdom product line excluding Splatrfree(TM) prophy angles. $76,345 in
aggregate costs were incurred in terminating the product line. They
included $19,291 for uncollectible receivables, $15,692 in aggregate
termination compensation and employee benefits, $5,066 for a lease buyout,
$18,793 in previously unamortized acquisition costs and $17,503 to write
off inventory currently earmarked for distribution to charities and trade
associations.
Net interest income for the nine months ended September 30, 1999 and
September 30, 1998 was $22,767 and $367,224 respectively. The $344,457
decrease is primarily attributable to lower aggregate funds available for
investing and the additional interest expenses associated with the senior
convertible notes.
The net loss for the nine months ended September 30, 1999 was $4,668,804
as compared to net loss of $5,426,298 for the nine months ended September
30, 1998. The decrease reflects sharp declines in product returns and in
selling general and administrative expenses, and a decrease in the average
product cost partially offset by a decline in Wand(TM) sales volume.
Liquidity and Capital Resources
At September 30, 1999, the Company's working capital was $2,639,004. It
consisted primarily of inventories, investment in treasury bills and cash
and cash equivalent.
For the nine months ended September 30, 1999, the Company increased cash
and cash equivalents by $549,693, providing $2,687,993 from investing
activities and $2,098,000 from financing activities.
For the nine months ended September 30, 1999, the Company's net cash used
in operating activities was $4,236,300. This was primarily attributable to
a net loss of $4,668,804 adjusted for non cash items of $202,811 for
amortization and $352,389 for depreciation, a $279,409 decrease in
accounts receivable, a $601,865 increase in inventory, a $64,912 increase
in prepaid expenses, an increase in accrued expenses of $98,928 and a
$165,464 increase in accounts payable.
17
<PAGE>
The $2,687,993 provided by investing activities for the nine months ended
September 30, 1999 was attributable to the maturing of $2,758,174 in
treasury bills, offset by $70,181 in capital expenditures. These
expenditures covered retooling cost for product modifications.
Financing activities provided $2,098,000 for the period. The Company, as
described below, raised $2,000,000 from an institutional private placement
and $250,000 from the sale of similar securities to its Chairman and CEO.
Also, $150,000 was repaid under the Company's line of credit.
As of September 30, 1999, the Company had approximately $1.4 million in
aggregate cash, cash equivalents and treasury bills. Management believes
that through the proper utilization of these existing funds, revenues
generated from international distributors continued increases in domestic
disposable handpiece sales, 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 continues to take steps 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) expanding its market overseas; b)
visiting, obtaining feedback, and providing further support to current
Wand users; c) providing assistance to dental schools which include The
Wand(TM) in their curriculum; d) distributing Wand(TM) technique videos
and technical bulletins to its current users; and e) maintaining a well
trained service staff. Furthermore, on October 1, 1999 the Company began a
new sales initiative permitting dentists in the United States to order The
Wand(TM) directly through Milestone and to avail themselves to certain
quantity discounts on disposable handpiece purchases.
The Company's international marketing effort is ongoing. In January 1999,
"The Wand(TM)" was approved under the Medical Device Directive 93/42/EEC,
a requirement for all dental and medical devices distributed throughout
the European Union. This authorized the Company to apply the CE mark to
the product. In February 1999, the Company entered into an agreement for
the international distribution of "The Wand(TM)" by AFP Imaging
Corporation ("AFP") through AFP's international division, Dent-X. In
September 1999, the Company received approval by the European Economic
Community for the use of The Wand(TM) in the medical applications.
Additionally, in August of this year, the Company submitted an application
to the FDA for approval to distribute a medical device, it has developed,
that addresses the need of physician to deliver widely varying volumes of
anesthetic and other medicaments for numerous medical disciplines. Also,
the Company will continue to develop product enhancements and
improvements. The raising of additional capital to fund these efforts will
continually be evaluated by management.
Private Placement
In March 1999, the Company received $2 million from an institutional
private placement with Cumberland Partners, other investment funds managed
by or affiliated with Cumberland
18
<PAGE>
Partners, other investment funds managed by or affiliated with Cumberland
Associates and certain principals of Cumberland Associates. An additional
$250,000 was raised from Leonard Osser, Chairman and Chief Executive
Officer of Milestone, under the same terms and conditions. The investors
purchased, at face value, 3% Senior Convertible Notes Due 2003,
convertible into Milestone Common Stock at prices increasing from $2.50
per share in the first year to $6.00 per share in the fourth year, subject
to anti-dilution protection in the event of stock dividends and certain
capital changes. The shares underlying the Notes have been registered by
Milestone and the purchasers of the Notes have been granted rights to
participate in certain future security offerings by Milestone.
In September, in accordance with the terms of the purchase agreement, the
Company elected and issued 47,016 shares of Milestone Common Stock in lieu
of cash of $36,438 in making the first semi annual interest payment.
Line of Credit
In June 1999, the Company obtained a thirty day extension of its $250,000
line of credit with some temporary modifications. This line had originally
been secured by the assets associated with the Wisdom product line. On
July 26, 1999, the Company notified its lender that the Company would no
longer be utilizing the line and remitted the outstanding balance of
$50,000.
Year 2000 Compliance
The Company has developed a plan to insure its operating systems are
compliant with the requirements to process transactions in the year 2000.
This plan includes the upgrade of its internal information systems which
was completed and cost approximately $3,000. Also, the Company reviewed
its own equipment and determined that the equipment is either Year 2000
compliant or not affected by the Year 2000 issues.
Vendors have been contacted to assure that their systems are or will be
Year 2000 compliant. Critical vendors are Year 2000 compliant. Also, the
Company has developed contingency plans to address the most likely worst
case scenarios from potential Year 2000 disruptions.
The Year 2000 compliance effort is ongoing and will continue to develop,
as new information becomes available.
19
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
NONE
(b) Reports on Form 8-K:
NONE
20
<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
MILESTONE SCIENTIFIC INC.
Registrant
/s/ Mitchell G. Kuhn
------------------------------------------
Mitchell G. Kuhn
President and Chief Operating Officer
/s/Thomas M. Stuckey
------------------------------------------
Thomas M. Stuckey
Vice President and Chief Financial Officer
Dated: November 12, 1999
21
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