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 June 30, 1999
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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.
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(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
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(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 August 11, 1999 the Registrant had a total of 8,717,882 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.
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INDEX
PART I. FINANCIAL INFORMATION Page
ITEM 1. Condensed Consolidated Financial Statements (unaudited) 4
Condensed Consolidated Balance Sheets at June 30,
1999 and December 31, 1998 4
Condensed Consolidated Statements of Operations
for the six and three months ended June 30, 1999 and 1998 5
Condensed Consolidated Statements of Cash Flows
for the six months ended June 30, 1999 and 1998 6
Notes to Condensed Consolidated Financial Statements 7
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to Vote of Security Holders 18
ITEM 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
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Part 1. Financial Information
ITEM 1. Condensed Consolidated Financial Statements
Milestone Scientific Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
June 30 December 31
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 776,650 $ 316,706
Investments - treasury bills 1,675,424 3,267,940
Accounts receivable 284,977 430,907
Inventories 1,635,652 1,255,262
Prepaid expenses 295,554 127,263
------------ ------------
Total current assets 4,668,257 5,398,078
PROPERTY AND EQUIPMENT, NET 1,874,772 2,031,870
PATENTS, NET 1,614,002 1,736,275
OTHER ASSETS 10,317 29,997
------------ ------------
$ 8,167,348 $ 9,196,220
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Line of credit - bank $ 50,000 $ 150,000
Accounts payable 433,848 544,705
Accrued expenses 243,670 165,302
------------ ------------
Total current liabilities 727,518 860,007
------------ ------------
SENIOR CONVERTIBLE NOTES 2,250,000
------------ ------------
STOCKHOLDERS' EQUITY
Common stock, par value $.001; authorized,
25,000,000 shares; 8,817,822 issued as of June
30,1999 and December 31, 1998 8,818 8,818
Additional paid-in capital 30,111,734 30,111,734
Accumulated deficit (24,019,206) (20,872,823)
Treasury stock, at cost, 100,000 shares (911,516) (911,516)
------------ ------------
Total stockholders' equity 5,189,830 8,336,213
------------ ------------
Total liabilities and stockholders' equity $ 8,167,348 $ 9,196,220
============ ============
</TABLE>
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 six and three months ended June 30,
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30 June 30
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales $ 1,534,154 $ 7,114,302 $ 865,984 $ 1,854,153
Cost of sales 816,771 4,992,626 317,457 2,310,735
----------- ----------- ----------- -----------
Gross profit (loss) 717,383 2,121,676 548,527 (456,582)
----------- ----------- ----------- -----------
Selling, general and
Administrative expenses 3,704,619 4,996,661 2,016,155 2,737,170
Research and development expenses 109,456 245,541 40,610 115,374
----------- ----------- ----------- -----------
3,814,075 5,242,202 2,056,765 2,852,544
----------- ----------- ----------- -----------
Loss from operations (3,096,692) (3,120,526) (1,508,238) (3,309,126)
Loss from termination of
Wisdom product line (76,345) -- (76,345) --
Interest income, net 26,654 281,291 7,022 111,812
----------- ----------- ----------- -----------
Net loss $(3,146,383) $(2,839,235) $(1,577,561) $(3,197,314)
=========== =========== =========== ===========
Loss per share -- basic and diluted $ (.36) $ (.32) $ (.18) $ (.36)
=========== =========== =========== ===========
Weighted average shares outstanding 8,717,882 8,755,501 8,717,882 8,777,385
=========== =========== =========== ===========
</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 six months ended June 30,
(unaudited)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities
Net loss $(3,146,383) $(2,839,235)
Adjustments to reconcile net loss
to net cash used in operating activities
Amortization 141,672 122,277
Depreciation 227,276 203,522
Compensation expense -- 221,452
Changes in operating assets and liabilities
Accounts receivable 145,930 (1,181,403)
Inventories (380,390) (1,315,230)
Prepaid expenses (168,291) (229,202)
Other assets 281 932
Accounts payable (110,857) 1,892,999
Accrued expenses 78,368 212,257
----------- -----------
Net cash used in operating activities (3,212,394) (2,911,631)
----------- -----------
Cash flows from investing activities
Capital expenditures (70,178) (3,896,642)
Sale and (purchase) of treasury bills, net 1,592,516 (153,831)
----------- -----------
Net cash provided by (used in) investing activities 1,522,338 (4,050,473)
----------- -----------
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 under line of credit (100,000) (75,000)
Treasury Stock Purchase -- (911,516)
----------- -----------
Net cash provided by financing activities 2,150,000 218,439
----------- -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 459,944 (6,743,665)
Cash and cash equivalents at beginning of period 316,706 9,775,019
----------- -----------
Cash and cash equivalents at end of period $ 776,650 $ 3,031,354
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 6,458 $ 8,071
=========== ===========
</TABLE>
The accompanying notes are any integral part of these statements.
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Milestone Scientific Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 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 June 30,
1999 and the results of operations for the three month and six month
periods ended June 30, 1999 and June 30, 1998 and cash flows for the six
month periods ended June 30, 1999 and 1998, respectively.
The results reported for the three and six month periods ended June 30,
1999 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 had 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
six-month period ended June 30, 1999.
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 disposable handpiece usage. These steps include a) expanding the
market overseas,
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b) obtaining feedback and providing further support to current Wand users,
c) increasing the number of dental schools which include The Wand(TM) in
their curriculum, d) distributing The Wand(TM) technique videos and
technical bulletins to its current users, e) conducting direct to patient
advertising with specialized sales effort in test markets and f)
maintaining a well trained service staff.
As of June 30, 1999, the Company had approximately $2.5 million in
aggregate cash, cash equivalents and treasury bills. Management believes
that through the proper utilization of these existing funds, revenues
generated through international distributors 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 six months ended June 30, 1999 and 1998, 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 83,000 shares of common
stock at $3 per share and to purchase 5,000 at $2.00 per share, were
issued in aggregate to one officer and certain key personnel during the
six months ended June 30, 1999 but were not included in the computation of
diluted loss per share because effect would have been anti-dilutive.
Options and warrants, in aggregate, to purchase 252,000 shares of common
stock at prices ranging from $15.82 to $23.69 per share were issued during
the six months ended June 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 six months ended June 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.
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
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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 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
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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. If the motions for summary judgment are not
granted, the Court will hold a trial on any remaining issues in late 1999.
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 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 late 1999. 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
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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 intends to file a reply. The
Motion is scheduled to be submitted to the Court in September 1999. 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.
Derivative Action Lawsuit
In February 1999, a purported owner of Milestone stock, had 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
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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. In addition, 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.
That action is in its early stages and no response to the Complaint has
yet been filed.
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
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.
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 six months ended June 30, 1999. For the six months
ended June 30, 1998, these products generated $911,834 in net sales and
operating income of $89,195. In terminating the product line the Company
incurred $76,345
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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.
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 June 30, 1999 compared to three months ended June 30,
1998
Statement of Operations
Net sales for the three months ended June 30, 1999 and June 30, 1998 were
$865,984 and $1,854,153 respectively. The $988,169 or 53% decrease
reflects a sharp decline in Wand sales volume (including disposable
handpieces) partially offset by a decrease in returns and a lower return
reserve. The Wisdom product line had generated approximately $510,000 in
net sales for the three months ended June 30, 1998. For the quarter ended
June 30, 1999, approximately $583,000 in revenue was generated through
sales to international distributors. Also, domestic handpieces sales
increased 15% as compared to the first quarter of 1999, generating
$198,000 in revenue.
Cost of sales for the three months ended June 30, 1999 as compared to the
three months ended June 30, 1998 declined from $2,310,735 to $317,457, a
$1,993,278 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 $305,000 for the three months
ended June 30, 1998.
For the three month June 30, 1999, the Company generated a gross profit of
$548,527 as compared to a gross loss of $456,582 for the three month June
30, 1998.
Selling, general and administrative expenses for the three month ended
June 30, 1999 and June 30, 1998 were $2,016,155 and $2,737,170
respectively. The $721,015 or 26% decrease is primarily attributable to
approximately $538,000 aggregate decrease in selling and marketing
expenses associated with The Wand(TM), a $129,000 reduction in corporate
salaries,
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<PAGE>
a $126,647 decrease in compensation expense related to 1998 option grants,
and a $228,000 reduction in selling and marketing expenses associated with
the Wisdom product line. These expenses were offset by $167,000 increase
in legal expenses.
Research and development expenses for the three months ended June 30, 1999
and June 30, 1998 were $40,610 and $115,374, respectively. The $74,764
decrease is primarily attributable to the cost incurred in developing "The
Wand(TM)" during 1998.
Loss from operations for the three months ended June 30, 1999 and 1998
were $1,508,238 and $3,309,126, 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 three months ended June 30, 1999 and June 30,
1998 was $7,022 and $111,812 respectively. The $104,790 decrease is
primarily attributable to lower aggregate investing and the additional
interest expenses associated with the senior convertible notes.
The net loss for the three months ended June 30, 1999 was $1,577,561 and
as compared to net loss of $3,197,314 for the three months ended June 30,
1999. The decrease reflects sharp declines in product returns and in
selling general and administrative expenses, and a decrease in the average
product cost.
Six months ended June 30, 1999 compared to six months ended June 30, 1998
Statement of Operations
Net sales for the six months ended June 30, 1999 and June 30, 1998 were
$1,534,154 and $7,114,302 respectively. The $5,580,148 or 78% 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 $174,086 for the six months ended June 30,
1999 as compared to $911,834 for the six months ended June 30, 1998.
Approximately, $686,000 in revenue was generated through sales to
international distributors for the six months ended June 30, 1999.
Cost of sales for the six months ended June 30, 1999 as compared to the
six months ended June 30, 1998 declined from $4,992,626 to $816,771, a
$4,175,855 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 six month June 30, 1999, the Company generated a gross profit of
$717,383 as compared to a gross profit of $2,121,676 for the six month
June 30, 1998.
14
<PAGE>
Selling, general and administrative expenses for the six month ended June
30, 1999 and June 30, 1998 were $3,704,619 and $4,996,661 respectively.
The $1,292,042 or 25% decrease is primarily attributable to approximately
$785,000 aggregate decrease in selling and marketing expenses associated
with The Wand(TM), a $183,000 reduction in corporate salaries, a $221,452
decrease in compensation expense related to 1998 option grants, and a
$228,000 reduction in selling and marketing expenses associated with the
Wisdom product line. These expenses were offset by $274,000 increase in
legal expenses.
Research and development expenses for the six months ended June 30, 1999
and June 30, 1998 were $109,456 and $245,541, respectively. The $136,085
decrease is primarily attributable to the cost incurred in developing "The
Wand(TM)" during 1998.
Loss from operations for the six months ended June 30, 1999 and 1998 were
$3,096,692 and $3,120,526, 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 six months ended June 30, 1999 and June 30,
1998 was $26,654 and $281,291 respectively. The $254,637 decrease is
primarily attributable to lower aggregate investing and the additional
interest expenses associated with the senior convertible notes.
The net loss for the six months ended June 30, 1999 was $3,146,383 and as
compared to net loss of $2,839,235 for the six months ended June 30, 1998.
The increase reflects a sharp decline in Wand(TM) sales volume partially
offset a decrease in returns and lower selling and administrative expense.
Liquidity and Capital Resources
At June 30, 1999, the Company's working capital was $3,940,739. It
consisted primarily of inventories, investment in treasury bills and cash
and cash equivalent.
For the six months ended June 30, 1999, the Company increased cash and
cash equivalents by $459,944, providing $1,522,338 from investing
activities and $2,150,000 from financing activities.
For the six months ended June 30, 1999, the Company's net cash used in
operating activities was $3,212,394. This was primarily attributable to a
net loss of $3,146,383 adjusted for non cash items of $141,672 for
amortization and $227,276 for depreciation, a $145,930 decrease in
accounts receivable, a $380,390 increase in inventory, a $168,291 increase
in prepaid expenses, a increase in accrued expenses of $78,368 and a
$110,857 decrease in accounts payable.
15
<PAGE>
The $1,522,338 provided by investing activities for the six month ended
June 30, 1999 was attributable to the maturing of $1,592,516 in treasury
bills, offset by $70,178 in capital expenditures. These expenditures
covered retooling cost for product modifications.
Financing activities provided $2,150,000 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, $100,000 was repaid under the Company's line of credit.
As of June 30, 1999, the Company had approximately $2.5 million in
aggregate cash, cash equivalents and treasury bills. Management believes
that through the proper utilization of these existing funds, revenue
generated through international distributors, 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 has taken 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) expanding its market overseas, b)
obtaining feedback and providing further support to current Wand users, c)
increasing the number of dental schools which include The Wand(TM) in
their curriculum, d) distributing Wand(TM) technique videos and technical
bulletins to its current users, e) conducting direct to patient
advertising with specialized sales effort in test markets and f)
maintaining a well trained service staff.
To date, the Company has achieved two major objectives in its
international marketing effort. 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 authorizes 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 the Dent-X dental division of AFP
Imaging Corporation ("AFP"), through the international distribution
network previously established by AFP for its dental and medical products.
Milestone began shipments to AFP during the last week of March 1999.
The Company intends to submit a new application to the FDA 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. A working prototype device
for delivery of multi-volume anesthetic and other medicaments has been
developed. 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 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
16
<PAGE>
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.
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 not
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
the Company believes will not entail significant costs related to these
upgrades. Also, the Company has reviewed its own equipment and determined
that the equipment is either Year 2000 compliant or not affected by the
Year 2000 issues.
The Company is in the process of contacting its vendors, on whom it
relies, to assure that their systems are or will be Year 2000 compliant.
Responses are evaluated so as to ensure that critical vendors are Year
2000 compliant. Also, the Company is developing contingency plans to
address the most likely worst case scenarios from potential Year 2000
disruptions.
Although the Year 2000 compliance plan is nearly complete. The Company
will continue to develop the plan as new information becomes available.
17
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
The Company held its 1999 Annual Meeting of Stockholders on July 6, 1999. At the
meeting, stockholders reelected all existing board members.
Appointment of Grant Thornton LLP as auditors for 1999
For 5,709,642 Against 117,683 Broker Non Vote 10,420
--------- ------- ------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
NONE
(b) Reports on Form 8-K:
NONE
18
<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/ Leonard Osser
----------------------------------
Leonard Osser
Chairman and Chief Executive Officer
/s/ Thomas M. Stuckey
----------------------------------
Thomas M. Stuckey
Vice President and Chief Financial Officer
Dated: August 11, 1999
19
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 776,650
<SECURITIES> 1,675,424
<RECEIVABLES> 284,977
<ALLOWANCES> 0
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<CURRENT-ASSETS> 4,668,257
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<SALES> 1,534,154
<TOTAL-REVENUES> 1,534,154
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