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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: SEPTEMBER 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No.: 0-19293
BIO-DENTAL TECHNOLOGIES CORPORATION
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(Exact name of small business issuer as specified in its charter)
California 84-1104386
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(State or other jurisdiction of (I.R.S. Employer ID No.)
incorporation or organization)
11291 Sunrise Park, Rancho Cordova, CA 95742
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(Address of principal executive offices)
(916) 638-8020
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(Issuer's telephone number, incl area code)
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(Former name, former address and former fiscal year)
If changed since last report
Check whether the issuer (l) 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
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APPLICABLE ONLY TO CORPORATE ISSUERS:
Number of shares outstanding of issuer's common stock: 6,444,986 shares
as of October 31, 1996.
Number of shares outstanding of issuer's preferred stock: None as of
October 31, 1996.
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This Form 10-Q, including exhibits, consists of __________pages.
Exhibit Index appears on page__________.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
The following financial statements are attached hereto:
- Consolidated balance sheets as of September 30, 1996 and March 31, 1996
- Consolidated statements of operations for the three months ended
September 30, 1996 and 1995
- Consolidated statements of operations for the six months ended
September 30, 1996 and 1995
- Consolidated statements of cash flows for the six months ended September
30, 1996 and 1995.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Results of Operations - Quarter Ended September 30, 1996
For the quarter ended September 30, 1996, the Company produced net
revenues of $6,953,196, a 21 percent decrease as compared with net
revenues of $8,805,718 during the same period last year. This decline
in product sales is due to the Company's restructuring of its
Integrated Dental Technologies, Inc. ("IDT") subsidiary and certain
discontinued product lines associated with the restructuring. In
December 1995, the Company announced that it was going to cease the
sale of its filmless x-ray and computer hardware product lines, in
order to focus on its core technology products - dental practice
management software systems and intra-oral cameras - where the Company
believed it could enjoy a strong competitive advantage. As a result of
this restructuring, revenues within IDT are expected be lower in fiscal
1997 than they were in fiscal 1996. In addition, royalty revenues for
the quarter were eliminated, following the early buy-out of the
Company's License Agreement and associated assets with Denticator
International, Inc. ("DII") in July 1996. Royalty revenues totaled
$349,015 for the quarter ended September 30, 1995.
The Company's cost of products sold increased from 68.5 percent of
product sales for the quarter ended September 30, 1995 to 72.6
percent of product sales for the quarter ended September 30, 1996.
This increase in the cost of goods sold percentage is a result of
lower sales of the Company's proprietary technology products sold
through its IDT subsidiary, which generally have higher gross margins
than the products sold through The Supply House ("TSH") subsidiary.
These higher margin products were a larger percentage of the product
sales for the same quarter a year ago. Royalty revenues have no
associated cost of goods sold.
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Selling, general and administrative expenses for the quarter ended
September 30, 1996 were $2,714,029, down 17 percent from $3,265,049
during the same period last year. Included in selling, general and
administrative expenses for the quarter ended September 30, 1996 are
$176,000 of costs associated with the Company's pending merger with
Zila, Inc. Excluding these non-recurring merger- related expenses,
selling, general and administrative expenses for the quarter ended
September 30, 1996 would have been $2,538,029, or 37 percent of
product sales, down 22 percent from $3,265,049, or 39 percent of
product sales, during the same period last year.
Depreciation and amortization for the quarter totaled $106,135, down
from $128,133 during the same quarter last year, as several leasehold
improvements and computer components were fully depreciated prior to
the quarter ended September 30, 1996.
Total operating costs for the quarter totaled $7,863,051, down from
$9,188,735 during the same quarter last year. Decreased product
sales, and corresponding cost of goods sold, was the primary reason
for the reduction in operating expenses. However, selling, general
and administrative expenses were also lower in IDT as a result of
IDT's more focused marketing approach.
Interest expense increased to $205,261 during the quarter ended
September 30, 1996, up from $66,141 for the same period last year. This
increase came primarily as a result of the write off of unamortized
note discounts and related issuance costs associated with the Term
Notes issued by the Company April 1, 1996 (see Debt Financing in Part I
of this document). For the quarter ended September 30, 1996, these
costs included in interest expense totaled approximately $176,000.
Interest and other income for the quarter was $43,560 as compared to
$29,608 during the same period last year. This increased interest
income was earned by the Company after July 22, 1996, when the Company
received a total of approximately $7.5 million in cash in connection
with the early buy-out of its Licensing Agreement and certain licensed
assets with DII. This lump-sum payment allowed the Company to retire
all of its outstanding long-term debt and provided additional cash
which the Company invested in interest bearing instruments.
Also, in the quarter ended September 30, 1996, the Company accrued a
contingent loss liability of $545,000 which the Company estimated it
would incur in the event that the outcome of the Wildwood litigation
is unfavorable to the Company (see Legal Proceedings in Part II of
this document).
Operating income was $6,533,547, compared to an operating loss of
($383,017) during the same quarter last year. The primary reason for
the increased performance was due to the lump-sum royalty payment
received during the quarter. The non-recurring merger expenses noted
above had a negative effect on operating income.
Net income before taxes was $5,826,846, up from a loss of ($419,550)
during the quarter ended September 30, 1995. Included in these results
is the $7.4 million gain realized in relation to the early buy-out of
the Company's License Agreement and associated assets with DII. Net
income after taxes was $3,201,646, or $0.47 per share, compared to a
loss of ($419,773) or ($0.07) per share last year.
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Results of Operations - Six months ended September 30, 1996
For the six months ended September 30, 1996 the Company had total
revenues of $15,399,597 down 11 percent from $17,255,361 for the same
quarter in 1995. This decline in revenues comes primarily as a
result of lower royalty revenues as well as lower sales within the
Company's IDT subsidiary. This decline in IDT sales came largely as a
result of the restructuring of the operations in the fourth quarter of
fiscal 1996 whereby management discontinued certain product lines and
began focusing on products management believes have the greatest
market potential. These core products are specifically the Company's
proprietary dental practice management software system and intra-oral
camera system.
The Company believes that these products represent the greatest market
opportunity for IDT for a number of reasons. Among these are: 1)
these markets are believed to be the most developed markets in the
dental technology field at this time, 2) the Company believes that
IDT's products are well positioned to compete in these markets, and 3)
these products offer higher gross margins and lower service costs
compared to the discontinued product lines which IDT no longer
markets.
Cost of products sold during the six months ended September 30, 1996
were $10,698,146, down 8 percent from $11,675,347 during the same
period last year. The reduction in cost of products sold is due
primarily to the 9 percent decline in product sales this year. Cost
of products sold represented 71 percent of product sales for the six
months ended September 1996, virtually unchanged from the same period
last year.
Selling, general and administrative expenses for the six month ended
September 30, 1996 totaled $5,210,080, or 35 percent of product sales,
down from $6,192,526, or 38 percent of product sales, during the same
period last year. The reductions in selling, general, and
administrative expenses came as a result of the restructuring of IDT
and the more focused marketing program resulting therefrom. It was
also affected by the lower product sales for the six months ended
September 30, 1996, as compared to the same period a year ago.
However, certain non-recurring expenses incurred in the six months
ended September 30, 1996 relating to: 1) the buy-out of the Company's
Licensing Agreement with DII, and 2) the Company's pending merger with
Zila, Inc. have caused selling, general and administrative expenses to
be higher than usual.
Depreciation and amortization costs decreased from $220,348 for the
first six months last year to $210,631 this year, as certain assets
were fully depreciated prior to the end of the six months ended
September 30, 1996.
Total operating costs for the six months ended September 30, 1996 were
$16,118,857, or 107 percent of product sales and 105 percent of total
revenues, down from $18,088,221, or 110 percent of product sales and
105 percent of total revenues for the same period last year. Again,
the primary reason for this reduction in expenses results from lower
product sales from the Company's IDT subsidiary. Selling, general and
administrative expenses in IDT
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were also lower this year.
Operating income for the first six months ended September 30, 1996 was
$6,724,142, compared to a loss of ($832,860) for the same period last
year.
During the period, the Company recorded a $7,443,402 gain on the sale
of future royalty and certain licensed assets. This gain resulted from
a transaction whereby the Company's licensee, DII, was purchased by
Young Innovations, Inc., of Earth city, MO ("Young"). As a part of the
acquisition, Young paid the Company approximately $7.5 million, an
amount equal to the present value of all future royalties which the
Company estimates to be equal to the approximate present value of all
future paymants which the Company would have been entitled to receive
from DII under the terms of the License Agreement.
Interest expense for the six months ended September 30, 1996 increased
to $356,193, up from $135,407 last year. On April 1, 1996, the Company
borrowed $1.25 million by issuing Term Notes to provide working
capital. Amortization of issuance costs and note discounts (associated
with warrants issued to Lenders totaled $235,000, and are included in
interest expense). These costs represent the majority of the increase
in interest expense for the period.
Net income after taxes for the six months ended September 30, 1996 was
$3,231,058, or $0.47 per share, compared to a net loss of ($899,214),
or ($0.14) per share for the same period last year. The increase in
profitability is due primarily to the early buy out of the DII License
Agreement, although both IDT and The Supply House also produced
improved operating results this year.
Liquidity and Capital Resources
As of September 30, 1996, the Company held total assets of
$12,058,824. Of these, $9,863,405 (81.8%) consisted of cash, accounts
receivable, inventories, other current assets and deferred taxes. As
of this same date, the Company had total liabilities of $4,819,258,
all being current liabilities. The Company's current ratio was 2.05
at September 30, 1996, compared to 1.20 at March 31, 1996. The debt
to equity ratio was .67 at September 30, 1996, compared to 1.87 at
March 31, 1996.
Cash and cash equivalents were $2,423,481 at September 30, 1996,
compared to $612,911 at March 31, 1996. The increase in cash and cash
equivalents resulted primarily from proceeds received from the early
buy-out of the Denticator Licensing agreement and associated assets on
July 22, 1996. Accounts receivable decreased from $1,973,943 at
March 31, 1996 to $1,787,663 at September 30, 1996. This decline
results primarily from a reduction of IDT sales and from increased
utilization of credit cards by customers as a payment method, which has
helped to reduce accounts receivable.
Other receivables increased from $425,896 at March 31, 1996 to
$560,597 at September 30, 1996. This increase resulted from
reclassification of certain asset accounts. Effective July 22, 1996,
the closing date for the Denticator transaction, accrued royalties,
note payable and accrued interest owed to the Company by Denticator
were converted to a "product credit"
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upon which the Company and its affiliates can draw free product from
Young Innovations, Inc. ("Young") and its affiliates. Young purchased
the Company's rights to receive future royalty payments from
Denticator as part of a transaction in which Young purchased
substantially all of the assets and assumed certain liabilities of
Denticator. The product credit can be used at a specified rate until
depleted, estimated at approximately 18 to 24 months. The majority of
other receivables relates to the product credit, which totaled
$554,149 as of September 30, 1996. The product credit was recorded
net of a present value discount. An imputed interest rate was used
to determine the unamortized discount on the product credit and is
classified as part of other receivables, both current and non current.
Inventory increased from $3,667,161 at March 31, 1996 to $4,179,206 at
September 30, 1996. The increase in inventory during the six months
ended September 30, 1996 was necessary to maintain the Company's
historically high order fulfillment rate to TSH customers. Inventory
levels had declined during the fourth quarter ended March 31, 1996
due to certain inventory write downs associated with the IDT
restructuring and the Company's low working capital position.
Deferred taxes decreased from $1,614,500 at March 31, 1996 to $698,165
at September 30, 1996. This decrease resulted from the utilization of
the deferred tax assets in lieu of cash payments for income taxes
payable.
Other assets increased from $44,616 at March 31, 1996 to $413,359 at
September 30, 1996 which includes the non-current portion of the
product credit, as described earlier. The portion of the product credit
totaled $249,540 as of September 30, 1996, net of the unamortized
discount. Additionally, a certificate of deposit account, which
totaled $101,593 at September 30, 1996, is classified as an other
asset.
Accounts payable and accrued expenses decreased from $4,851,628 at
March 31, 1996 to $4,060,340 at September 30, 1996. This decrease
resulted from payments made to vendors in order to maintain a more
current payable status with the Company's suppliers.
Deferred revenues were $209,055 at September 30, 1996, compared to
$204,669 at March 31, 1996. Deferred revenues represent customer
support fees for software support, prepaid seminar fees from customers
and customer deposits or pre-payments on sales orders not yet
delivered or completed.
Income taxes payable were $549,863 at September 30, 1996, compared to
$0.00 at March 31, 1996. This increase results directly from the net
income for the six months ended September 30, 1996.
At September 30, 1996, total borrowings from the Bank of California and
the Term Notes from two institutional lenders ("Lenders") had been
repaid. During the six months ended September 30, 1996, the Company
increased its total borrowings as a result of funding from the issuance
of the Term Notes representing a total principal amount of $1,250,000.
The Term Notes were funded on April 1, 1996. These funds were
necessary to continue the product
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development for a restructured IDT and to meet operating requirements.
The Company received a cash payment of approximately $7.5 million on
July 22, 1996 as a result of its disposition of its rights to receive
royalty payments from Denticator and associated assets. A portion of
these proceeds were used to repay the entire outstanding principal and
all accrued and unpaid interest on the Bank of California borrowings
and the Term Notes.
Capital contributed in excess of par increased $177,493 during the six
months ended September 30, 1996. The increase results from recording
the note discount of $135,000 on the Term Notes, common stock issued
to the lecturing dentists pursuant to the Oral Vision agreement and a
contribution to the Company's Employee Stock Ownership Plan. As
discussed more fully in "Debt Financing", the note discount represents
the approximate value of the warrants which were issued in conjunction
with the Term Notes.
No other material capital expenditures have been committed to during
the six months ended September 30, 1996 which have not either been
paid for or otherwise disclosed herein.
Debt Financing
In August 1994 the Company obtained an increase in its line of credit
from the Bank of California. In addition to the line of credit, a
$1 million term loan with the Bank was secured in March 1995.
Since the Company's eligible inventory and accounts receivable had
never been sufficient to take full advantage of the $3 million credit
line, the maximum borrowing base on the line of credit was reduced to
$2.5 million as of October 31, 1995, an amount more consistent with
the Company's eligible asset base.
The Company's debt agreements with the Bank contained various
covenants regarding working capital, net worth and total indebtedness,
among other items, which became effective January 1, 1996 and
thereafter. At March 31, 1996 and prior to the repayment of the
indebtedness on July 22, 1996, the Company was not in compliance with
the covenant regarding the maintenance of current assets in an amount
not less than $2,500,000 in excess of current liabilities. The
Company's failure to comply with these covenants constituted technical
defaults under its credit arrangements and the Bank could have
theoretically exercised certain creditor rights with the Company. As
described earlier and below, all of the Bank debt was repaid on July
22, 1996.
As noted earlier, on April 1, 1996, the Company secured additional
funding pursuant to an agreement to borrow $1,250,000 from two
institutional investors (the "Lenders"). The Term Notes, which
evidenced the borrowing, accrued interest at the rate of 12% per annum
and accrued interest was due and payable on September 30, 1996 and
March 29, 1997.
As additional consideration for the Term Notes, the Company issued to
the Lenders warrants to purchase 250,000 shares of the Company's
common stock at an exercise price of $3.03 and issued to International
Capital Partners, Inc. warrants to purchase an additional 50,000 shares
of common stock at an exercise price of $3.03 as part payment of a loan
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placement fee. Under the terms of the agreement, the Company was
required to repay the outstanding principal of the Term Notes and
accrued and unpaid interest before July 31, 1996, in order to avoid
the issuance of additional warrants, but in no event was the repayment
to occur later than March 29, 1997. The Term Notes were repaid in
full on July 22, 1996. The value of the warrants was recorded as a
note discount and the note discount was being amortized as additional
interest expense over the life of the loan. Additionally, issuance
costs related to the Term Notes were being amortized over the life of
the loan. On June 7, 1996, the Company filed a current report on Form
8-K (which is incorporated herein by this reference) describing the
details of these subordinated loans.
The Company used its line of credit for working capital to finance it
operations, specifically in information systems and in IDT. The term
loan with the bank was used primarily to fund the retirement of
existing debt associated with the acquisition of Ryker. The balance
outstanding on the line of credit as of March 31, 1996 was $1,394,000
and the balance on the term loan as of March 31, 1996 was $715,459.
Because the subordinated Term Notes were not funded until April 1,
1996, there was no balance on these notes outstanding as of March 31,
1996.
On July 22, 1996, the Company transferred and conveyed to Denticator
International, Inc. all of its future royalty rights and interests in
patents, trademarks, trade names and other assets related to the
Denticator International, Inc. operation for a lump sum payment of
approximately $7.5 million. Approximately $1.3 million of the
proceeds received as a result of this transaction were used to prepay
all the outstanding principal and accrued and unpaid interest on the
Term Notes owed by the Company to the Lenders. Approximately $2
million of the proceeds were used to prepay all of the outstanding
principal and accrued and unpaid interest on the line of credit and
the term loan owed by the Company to The Bank of California.
Effect of Inflation and Price Increases on the Company's Operation
The Supply House estimates that price increases for products it sells
will average approximately 4 percent in fiscal 1997. The Supply House
believes that new pricing strategies adopted during the first quarter
of fiscal 1997 will address these anticipated cost increases and
should enable The Supply House to prevent a decrease in gross margins
for its non-managed care sales. Managed care sales are expected to
provide slightly lower gross margins but the sales volume increased
from these contracts should improve the net income of The Supply
House.
The current rate of inflation is not believed to have any material
effect on the operations of the Company's IDT subsidiary.
Proposed Mergers, Acquisitions or Divestitures
Denticator International, Inc. On May 10, 1996, the Company signed a
letter of intent with Young Innovations, Inc. ("Young") which
contemplated that Young would buy out the Company's rights to receive
royalties through March 1999 from Denticator International,
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Inc. ("DII") and associated assets, for a lump sum cash payment of
approximately $7.5 million. DII, a former subsidiary of Bio-Dental,
was sold in 1991, and since that time Bio-Dental has been receiving
royalties from DII. The Company estimated that the $7.5 million payment
approximated the net present value of the Company's projected future
royalties, including a scheduled lump-sum payment that would have been
due in April 1999.
On July 22, 1996, the Company transferred and conveyed to Denticator
all of its future royalty rights and interests in patents, trademarks,
trade names and other assets related to the Denticator operation for a
lump sum payment of approximately $7.5 million. At the same time,
Young purchased substantially all of the assets and assumed certain
liabilities of DII. Additionally, approximately $955,000 owed to the
Company by Denticator at the time of closing for accrued royalties,
notes payable and accrued interest was converted to a product credit
upon which the Company and its affiliates can draw free product from
Young and its affiliates at a specified rate until depleted, estimated
at approximately 18 to 24 months. This product credit was recorded net
of a discount using an imputed interest rate.
Zila, Inc. On August 8, 1996, the Company signed a Merger Agreement
with Zila, Inc. ("Zila"). The execution of the Merger Agreement was
pursuant to a letter of intent the Company signed on May 31, 1996 to
merge the Company into Zila. The transaction will involve the
exchange of Zila stock for all of the Company's outstanding stock.
Zila's acquisition of the Company is subject to a number of
conditions, including the ability to account for the transaction as a
pooling-of-interests, and the approval of the Company's shareholders.
A Form S-4 Registration Statement (including Zila's prospectus and the
Company's proxy statement) relating to the transaction was filed on
August 13, 1996 with the Securities and Exchange Commission.
The terms of the Merger Agreement call for Zila to exchange between
0.75 and 0.825 shares of its stock for each of the Company's
approximately 6.4 million outstanding shares, with the actual rate to
be based upon the average closing bid prices of Zila's stock during
the ten (10)- day "calculation period" ending on the trading day that
is five trading days prior to the closing date of the merger. In no
event, however, will Zila issue less than $4.95 worth of its stock for
each share of the Company's stock, as determined during the
"calculation" period.
If Zila's stock averages between $6 and $7.75 during the calculation
period, then the exchange rate will be 0.825:1. If Zila's stock
averages over $8.52, then the exchange rate shall be 0.75:1. If
Zila's stock averages between $7.75 and $8.25 during the calculation
period, then Zila will issue that fractional number of shares
necessary to provide each Company share with $6.39 worth of Zila
stock. If Zila's stock averages below $6.00 during the calculation
period, then Zila shall issue that number of shares necessary to
provide $4.95 per share of value for each Company share . The table
below illustrates the above information:
1. ZILA SHARE PRICE $5.00 $6.00 $7.00 $7.75 $8.00 $8.25 $8.52
$9.00 $10.00 $11.00 $12.00
2. # SHARES ZILA FOR BDTC 0.99 0.825 0.825 0.825 .8 0.77 0.75 0.75
0.75 0.75 0.75
3. BDTC SHAREHOLDER GETS $4.95 $4.95 $5.78 $6.39 $6.39 $6.39 $6.39 6.75
$7.50 $8.25 $9.00
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Note
1. If Zila share price during valuation period averages these amounts.
2. BDTC shareholders receive these # shares of Zila for each BDTC share owned.
3. Equates to this dollar value for each BDTC share exchanged.
Zila, headquartered in Phoenix, Arizona, markets a rapidly growing
line of non-prescription oral health care products, and is introducing
what the Company believes to be the first oral cancer diagnostic,
OraTest(TM). FDA approval to market OraTest in the U.S. is pending.
OraTest is a patented, inexpensive, highly accurate diagnostic adjunct
presently used in Canada, England and Australia to examine patients at
high risk of oral cancer -- those 40 and over who use tobacco or drink
heavily. According to Zila, clinical studies have shown OraTest to be
highly sensitive for detecting squamous cell carcinoma. It is also
used to delineate sites for biopsy and surgery, and is believed to be
an effective smoking cessation counseling tool.
The Company will become the exclusive distributor of OraTest in the
U.S. when regulatory approval is granted. As the exclusive
distributor of OraTest, the Company anticipates that it will have the
opportunity to expand its market share by cross-selling other dental
supplies to new OraTest customers.
Oral cancer is reportedly the eighth most common form of cancer in the
U.S. and Europe, with approximately 30,000 new cases diagnosed each
year, accounting for approximately 8,000 deaths.
OraTest is a simple solution that the patient gargles with, causing
any cancerous lesions to be stained an almost-florescent blue color
so they can be easily identified.
It is currently contemplated that management for both companies will
remain in place, and the Company does not believe that any material
personnel changes will occur as a result of this merger. Zila will
continue to run their existing operations out of Phoenix and the
Company will continue to run its operations out of its existing
facilities.
It is anticipated that the merger will be consummated during the third
quarter of the current fiscal year, subject to approval of the
proposed merger by the Company's shareholders and certain other
conditions.
Forward Looking Statements
The material set forth in this Form 10-Q and its accompanying exhibits
includes forward-looking statements and references to anticipated
future events and developments that are based on management's beliefs
and expectations. There is no assurance that such statements and
references will prove to be correct. Such statements and references
are set forth herein in reliance upon numerous assumptions that may or
may not prove to be accurate or correct. The major assumptions upon
which these forward-looking statements and references are based
include the following: (1) the consummation of the merger transaction
between the
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Company and Zila; (2) the successful restructuring of the operations
of the Company's IDT operating subsidiary and the redirection of IDT's
marketing focus away from hardware-based comprehensive computer
solutions and towards the sale of practice management software systems
and intra-oral cameras; (3) the growing market demand for IDT's
technology products; (4) the improvements of operating margins on
products sold by the Company's dental products distribution unit, The
Supply House; (5) the growth in sales and market share of The Supply
House; (6) the success of The Supply House in obtaining additional
contracts with managed dental care insurance companies and in
increasing its sales as a result of such contracts; (7) the obtaining
of FDA approval of Zila, Inc.'s oral cancer diagnostic product,
OraTest; (8) the successful realization of the anticipated market
benefits of combining the market appeal of the OraTest product with the
strength of the Company's existing product distribution network; (9)
the adequacy of available debt and equity capital to fund inventories,
receivables, product introduction and marketing; (10) the Company's
ability to settle the Wildwood litigation (discussed below) on terms
favorable to the Company; and (11) the retention of key management
personnel following consummation of the Company's merger with Zila.
PART II-OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
As reported earlier in the Company's Form 10-QSB for the quarter ended
September 30, 1995, dated November 13, 1995, the Company's Form 10-QSB
for the quarter ended December 31, 1995, dated February 13, 1996, the
Company's 10-KSB for the year ended March 31, 1996, dated June 28,
1996, and the Company's 10-Q for the quarter ended June 30, 1996, dated
August 14, 1996, the Company was served with a lawsuit (the "Wildwood
litigation") which was filed on July 6, 1995, in the California
Superior Court, County of Sacramento, against the Company, its
transfer agent, OTR, Inc., and Mr. G. Michael Montross, a shareholder
of the Company (Wildwood Limited Partnership Oversight Committee, et
al, v. Bio-Dental Technologies Corporation, et al; Sacramento Superior
Court No. 95A503733).
The Wildwood litigation alleges that in 1992, G. Michael Montross
pledged 200,000 shares of the Company's common stock owned by Mr.
Montross to an agent for the plaintiffs, to secure debts allegedly
owing by Mr. Montross to the plaintiffs. The lawsuit further alleges
that Mr. Montross subsequently executed a fraudulent affidavit of loss
claiming that the certificates for the 200,000 shares had been lost or
destroyed. Mr. Montross thereby achieved a reissuance of such shares
through the Company's transfer agent, OTR, Inc. The plaintiffs allege
that Mr. Montross subsequently defaulted on his debts to the
plaintiffs and that plaintiffs foreclosed on the Company's shares that
their agent held as security for Mr. Montross' debts. The Wildwood
litigation seeks the recovery of general and special damages from the
defendants, or in the alternative, that the 200,000 shares in dispute
be reissued in their names. Plaintiffs claim that they have lost
security for more than $320,000 in debts owed by Mr. Montross, and
have suffered damages in the amount of the highest fair market value
that the 200,000 shares have obtained since October 16, 1992,
estimated by the
11
<PAGE> 12
plaintiffs at $1,250,000.
The Company has referred this matter to outside counsel with the
directions that counsel vigorously defend against the claims set forth
in the Wildwood litigation. The Company has filed an Answer, which
denies all of the material allegations of the Wildwood litigation and
asserts various affirmative defenses. The Company and OTR have
tendered the defense of this lawsuit to each other. Both tenders have
been denied.
The Company has also filed a Cross-Complaint for Indemnity,
Negligence, Fraudulent Misrepresentation, Conversion, Imposition of a
Constructive Trust and Conspiracy against Mr. Montross, OTR, Inc. and
the Plaintiffs. Specifically, the Company alleges that its transfer
agent, OTR, was negligent for not securing a surety bond from Mr.
Montross at the time Mr. Montross filed an affidavit of loss claiming
the certificates for the 200,000 shares had been lost or destroyed.
OTR has filed a Cross-Complaint against Mr. Montross and the Company
for Implied Indemnity, Contractual Indemnity, Negligence, Fraudulent
Misrepresentation, Conversion and Imposition of Constructive Trust.
The Company has filed an Answer which denies all of the material
allegations of the Cross-Complaint.
The Company has tendered the defense of this lawsuit to its insurance
carriers. The insurance carriers have denied coverage by claiming
that one or more policy exclusions apply. While the Company disagrees
with the insurance carriers' position, it does not appear likely that
the insurance carriers will become involved voluntarily in this
litigation.
The Wildwood litigation was referred by the Court to non-binding
arbitration. After a brief hearing, the court-appointed arbitrator on
June 6, 1996 rendered a decision unfavorable to the Company. In his
ruling, the arbitrator found that the Company was liable to the
plaintiffs for either 200,000 shares of the Company's stock or
$1,250,000. The Company filed a request for a Trial De Novo. This
request was granted, effectively vacating the arbitration award.
The Company has filed a Motion for Summary Judgement seeking to have
the Complaint dismissed. OTR has also filed a Motion for Summary
Judgement seeking dismissal of the Complaint as to it and also seeking
a judgment on its indemnity claim against the Company. These motions
are set for hearing on November 14, 1996.
This matter has now been set for trial on December 4, 1996. A
mandatory settlement conference has been set for November 13, 1996.
Because of the inherent uncertainties of litigation and the fact that
discovery has not been completed, the Company is not able to predict
whether the outcome of this litigation will be favorable or
unfavorable. However, the Company has accrued a contingent loss
liability including legal costs of $545,000 during the quarter ended
September 30, 1996. This amount is the Company's best estimate of the
loss in the event that the outcome of the litigation is unfavorable to
the Company.
12
<PAGE> 13
On April 5, 1996, an action was filed whereby Ryker Dental of
Kentucky, Inc. d.b.a. The Supply House, and Curtis Rocca, along with
Dr. Woody Oakes, Dr. Travis McFee, and Excellence in Dentistry, Inc.,
were alleged to have written and/or published libelous statements
about a dental management consulting group, the "Practice Builder".
This allegedly libelous letter was written by Mr. Rocca as a "Letter
to the Editor" to the dental newsletter published by Doctors Oakes and
McFee.
This letter was written in response to the Practice Builder's
introduction of a multi-level marketing program designed to sell
dental supplies to dentists. Under this program, the Practice Builder
made certain claims about how much money a dentist would save on his
supplies, along with how much money he could make through downstream
"commissions".
Mr. Rocca and the Company continue to believe that the statements made
in Mr. Rocca's letter are true, and the Company plans to defend this
action vigorously. In addition, the Company has been notified that,
subject to a reservation of rights, the defense of this action will be
covered under the Company's general liability insurance policy.
ITEM 2. CHANGES IN SECURITIES.
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The following document is attached to this Form 10-Q as an exhibit:
27.2 Financial Data Schedule
a) All other required exhibits are incorporated by reference into
this Item 6 by reference to Item 13 of the Company's Form 10-
KSB for the year ended March 31, 1996, filed by the Registrant
on June 28, 1996; to Item 7 of the Company's current report on
Form 8-K filed June 7, 1996; and to Item 7 of the Company's
current report on Form 8-K filed August 6, 1996.
13
<PAGE> 14
b) A Current Report on Form 8-K describing the Notes and Warrants
Purchase Agreement between Registrant and The State of Oregon
ZCG/PERS and the City of Stamford Fireman's Pension Fund, was
filed June 7, 1996.
A Current Report on Form 8-K describing the Asset Purchase
Agreement by and among Registrant, Denticator International,
Inc., Jose L. Mendoza and Young Innovations, Inc., and the
Assignment and Release Agreement by and among Registrant,
Denticator International, Inc., and Young Innovations, Inc.,
was filed August 6, 1996.
14
<PAGE> 15
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Bio-Dental Technologies Corporation
(Registrant)
Date: /s/ Terry E. Bane
--------------------------------------
Terry E. Bane,
Chief Financial Officer
(principal financial officer and
principal accounting officer)
15
<PAGE> 16
BIO-DENTAL TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, 1996 March 31, 1996
(Unaudited) (Audited)
------------------ --------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $2,423,481 $612,911
Accounts receivable, net 1,787,663 1,973,943
Other receivables 560,597 425,896
Merchandise inventories 4,179,206 3,667,161
Prepaid expenses and other current assets 214,293 272,197
Current maturities of assets transferred under
contractual arrangements 0 60,000
Deferred income taxes 698,165 1,614,500
----------- -----------
Total current assets 9,863,405 8,626,608
Property and equipment, net 617,776 717,152
Other assets
Assets of business transferred under
contractual arrangements 0 380,354
Intangible assets, net 1,164,284 1,227,862
Other assets 413,359 44,616
----------- -----------
Total other assets 1,577,643 1,652,832
----------- -----------
TOTAL ASSETS $12,058,824 $10,996,592
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities $4,060,340 $4,851,628
Notes payable 0 2,109,459
Deferred revenue 209,055 204,669
Income taxes payable 549,863 0
----------- -----------
Total current liabilities 4,819,258 7,165,756
Committments and contingencies -- --
----------- -----------
TOTAL LIABILITIES 4,819,258 7,165,756
Stockholders' equity
Preferred stock, $.01 par value; authorized 1,000,000
shares: none issued and outstanding -- --
Common stock, $.01 par value; authorized 50,000,000
shares; 6,444,986 issued and outstanding 64,450 64,271
Capital contributed in excess of par value 3,889,472 3,711,979
Retained earnings 3,285,644 54,586
----------- -----------
Total stockholders' equity 7,239,566 3,830,836
----------- -----------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $12,058,824 $10,996,592
=========== ===========
</TABLE>
See notes to consolidated financial statements.
<PAGE> 17
BIO-DENTAL TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------
September 30, September 30,
1996 1995
------------- -------------
<S> <C> <C>
Revenue from product sales $6,953,196 $8,456,703
Royalty revenue 0 349,015
---------- ----------
Net revenues 6,953,196 8,805,718
Operating costs and expenses:
Cost of products sold 5,042,887 5,795,553
Selling, general and administrative 2,714,029 3,265,049
Depreciation and amortization 106,135 128,133
---------- ----------
7,863,501 9,188,735
Gain on sale of license agreement 7,443,402 0
---------- ----------
Operating income (loss) 6,533,547 (383,017)
Legal and settlement expense (545,000) 0
Interest and other income 43,560 29,608
Interest expense (205,261) (66,141)
---------- ----------
Earnings (loss) before provision for income taxes 5,832,526 (419,550)
Provision for income taxes 2,625,200 223
---------- ----------
Net earnings (loss) $3,201,646 ($419,773)
========== ==========
Retained earnings, beginning of period 83,998 1,841,122
---------- ----------
Retained earnings, end of period $3,285,644 $1,421,349
========== ==========
Earnings (loss) per common share and common share equivalents $0.47 ($0.07)
========== ==========
Weighted average common shares and common share
equivalents outstanding 6,872,500 6,406,800
========== ==========
</TABLE>
See notes to consolidated financial statements.
<PAGE> 18
BIO-DENTAL TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
----------------------------------
September 30, September 30,
1996 1995
------------- -------------
<S> <C> <C>
Revenue from product sales $15,020,754 $16,466,171
Royalty revenue 378,843 789,190
----------- -----------
Net revenues 15,399,597 17,255,361
Operating costs and expenses:
Cost of products sold 10,698,146 11,675,347
Selling, general and administrative 5,210,080 6,192,526
Depreciation and amortization 210,631 220,348
----------- -----------
16,118,857 18,088,221
Gain on sale of license agreement 7,443,402 0
----------- -----------
Operating income (loss) 6,724,142 (832,860)
Legal and settlement expense (575,000) 0
Interest and other income 72,109 69,276
Interest expense (356,193) (135,407)
----------- -----------
Earnings (loss) before provision for income taxes 5,870,738 (898,991)
Provision for income taxes 2,634,000 223
----------- -----------
Net earnings (loss) $3,231,058 ($899,214)
=========== ===========
Retained earnings, beginning of period 54,586 2,320,563
----------- -----------
Retained earnings, end of period $3,285,644 $1,421,539
=========== ===========
Earnings (loss) per common share and common share equivalents $0.47 ($0.14)
=========== ===========
Weighted average common shares and common share
equivalents outstanding 6,858,800 6,430,600
=========== ===========
</TABLE>
See notes to consolidated financial statements.
<PAGE> 19
Bio-Dental Technologies Corporation
Statement of Cash Flows
Six Months Ended September 30,
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
---------- --------
<S> <C> <C>
Cash Flow from operating activities:
Net earnings (loss) $3,231,058 ($899,214)
Adjustments to reconcile net earnings
(loss) to net cash (used in) provided by
operating activities:
Depreciation & amortization 210,631 220,348
ESOP contribution in stock 23,177 18,200
Services paid in stock 19,494 0
Amortization of note discount and related issuance costs 243,200 0
Gain on sale of licensing agreement (7,443,402) 0
Changes in operating assets & liabilities:
(Increase) decrease in:
Accounts receivable 186,280 (63,382)
Other receivables 126,895 (101,423)
Inventories (564,243) 189,556
Prepaid expenses and other current assets 57,904 56,524
Income taxes receivable 400,400
Deferred income taxes 916,335 0
Other assets (368,743) 11,665
Increase (decrease) in:
Accounts payable and accrued expenses (791,287) (267,294)
Deferred revenue 4,386 24,155
Income taxes payable 549,863 0
---------- --------
Net cash provided (used) in operating activities (3,606,653) (410,465)
---------- --------
Cash flows from investing activities:
Additions to office furniture, equipment and leaseholds (22,405) (77,365)
Proceeds from sale of licensing agreement 7,549,087 0
Collection of note receivable 0 60,239
---------- --------
Net cash provided (used) in investing activities 7,526,682 (17,126)
---------- --------
Cash flows from financing activities:
Net draws on bank note payable 0 554,554
Net proceeds from notes payable 1,150,000 0
Payments on notes payable and leases payable (3,259,459) (211,216)
---------- --------
Net cash provided (used) by financing activities (2,109,459) 343,338
---------- --------
Net increase (decrease) in cash 1,810,570 (84,253)
Cash and cash equivalents at March 31 612,911 322,848
---------- --------
Cash and cash equivalents at September 30 $2,423,481 $238,595
========== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
1. During the six months ended September 30, 1996, the Company transferred
approximately $52,000 of inventory to property and equipment.
2. Cash paid during the period for:
Interest $115,468 $120,895
Income taxes $1,166,400 $223
</TABLE>
See notes to consolidated financial statements.
<PAGE> 20
BIO-DENTAL TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. CONSOLIDATED FINANCIAL STATEMENTS
The consolidated balance sheet as of September 30, 1996 and March 31,
1996 (audited), the consolidated statements of operations for the
three month and six month periods ended September 30, 1996 and 1995
and the consolidated statements of cash flows for the six months ended
September 30, 1996 and 1995, have been prepared by the Company without
audit. In the opinion of management, all adjustments (which include
only normal recurring adjustments) necessary to present fairly the
financial position, results of operations and cash flows at September
30, 1996 and for all periods presented, have been made.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. It is suggested
that these consolidated financial statements be read in conjunction
with the financial statements and notes thereto included in the
Company's March 31, 1996 Form 10-KSB. The results of operations for
the periods ended September 30, 1996 and 1995 are not necessarily
indicative of the operating results for the full year.
2. ORGANIZATION AND NATURE OF BUSINESS
Bio-Dental Technologies Corporation (The Company) was incorporated
April 5, 1988. The Company is a dental products marketing
organization which sells professional dental products through the
operations of two wholly-owned subsidiaries. Ryker Dental of
Kentucky, Inc. markets consumable dental merchandise and supplies via
telemarketing and catalog sales under the trade name "The Supply
House". The Company's other subsidiary, Integrated Dental
Technologies, Inc., markets high-technology dental products such as
intra-oral cameras and practice software to dentists.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries, Ryker Dental of Kentucky,
Inc. (Ryker) and Integrated Dental Technologies, Inc. ("IDT"). All
significant intercompany balances and transactions have been
eliminated.
Cash and cash equivalents
For purposes of the statements of cash flows, the Company considers
all highly liquid debt instruments purchased with a maturity of three
months or less to be cash equivalents.
<PAGE> 21
Inventories
All Company inventories are valued at the lower of cost or market.
Prior to April 1, 1994, Ryker Dental determined cost using the
first-in, first-out (FIFO) method for certain inventory and moving
average for other items. The moving average method approximates the
FIFO method. Necessitated by the installation of new computer
software for operations and accounting, Ryker Dental changed its
method of determining cost for all inventory items to the moving
average method. There was no cumulative effect adjustment as a result
of the change to moving average. Integrated Dental Technologies
utilizes the moving average method to determine cost.
Property and equipment
Property and equipment are stated at cost. Depreciation is computed
using the straight line method over the estimated useful lives of the
assets ranging from 3 to 10 years. Leasehold improvements are
amortized over the lease term or the estimated useful life, whichever
is shorter.
Intangible assets
Intangible assets consist of goodwill, software rights, organization
costs, and covenants not to compete. All intangible assets are
amortized on a straight line basis. Organizational costs and goodwill
are being amortized over 20-40 years and covenants are amortized over
the term of the agreement. Software rights are being amortized on a
straight line basis over five years.
Income taxes
The Company utilizes an asset and liability approach in accounting for
income taxes. This approach requires the recognition of the deferred
tax liabilities and assets for the expected future tax consequences of
temporary differences between the financial statement carrying amounts
and tax basis of assets and liabilities. Deferred tax assets and
liabilities are reflected at currently enacted income tax rates
applicable to the period in which the deferred tax assets or
liabilities are expected to be realized or settled. As changes in tax
laws or rates are enacted, deferred tax assets and liabilities are
adjusted through the provision for income taxes.
Stockholders' equity
Earnings per share are based upon the weighted average number of
common and common equivalent shares outstanding. Common stock
equivalents consist of stock options and warrants.
<PAGE> 22
Reclassifications
Certain reclassifications were made to the 1995 consolidated financial
statements in order to be in conformity with the 1996 presentation.
4. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following at September 30 and March
31, 1996:
<TABLE>
<CAPTION>
September 30, 1996 March 31, 1996
------------------ --------------
<S> <C> <C>
Trade receivables $ 1,986,259 $ 2,112,487
Less: allowance for doubtful accounts (198,586) (138,544)
----------- -----------
Accounts receivable, net $ 1,787,663 $ 1,973,943
=========== ===========
</TABLE>
Financial instruments which potentially subject the Company to credit
risk consist principally of trade receivables. The Company provides
credit, in the normal course of business, to customers. The Company
performs ongoing credit evaluations of its customers and maintains an
allowance for potential credit losses.
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at September 30 and
March 31, 1996:
<TABLE>
<CAPTION>
September 30, 1996 March 31, 1996
------------------ --------------
<S> <C> <C>
Office furniture and equipment $1,463,380 $1,398,161
Molds and dies 19,500 590,000
Leasehold improvements 93,492 90,145
Production and warehouse equipment 92,376 89,336
---------- ----------
1,671,748 2,167,937
Less: accumulated depreciation (1,053,972) (1,451,390)
---------- ----------
Property and equipment, net $ 617,776 $ 717,152
========== ==========
</TABLE>
<PAGE> 23
6. INTANGIBLE ASSETS
Intangible assets consist of the following at September 30 and March
31, 1996:
<TABLE>
<CAPTION>
September 30, 1996 March 31, 1996
------------------ ---------------
<S> <C> <C>
Goodwill $ 969,637 $ 969,637
Software rights 287,985 287,985
Organizational costs 113,626 113,626
Covenants not to compete 120,000 120,000
---------- ----------
1,491,248 1,491,248
Less: accumulated amortization (326,964) (263,386)
---------- ----------
Intangible assets, net $1,164,284 $1,227,862
========== ==========
</TABLE>
7. BANK AND OTHER NOTES
At March 31, 1996, the Company had available a line of credit and a
term note with a bank. The line of credit and the note were
collateralized by inventory, accounts receivable and equipment of the
Company. The Company also executed Term Notes with two institutional
investors ("Lenders") on April 1, 1996 for a total principal amount of
$1.15 million. The Term Notes were subordinated.
The line of credit was to expire and the note with the bank was due on
September 30, 1996. The Term Notes were due March 29, 1997. The line
of credit and note with the bank and the Term Notes including accrued
and unpaid interest were repaid on July 22, 1996. The outstanding
principal amounts are shown below at September 30, 1996 and March 31,
1996:
<TABLE>
<CAPTION>
September 30, 1996 March 31, 1996
------------------ --------------
<S> <C> <C>
Line of credit with bank, variable rate of interest $ 0 $1,394,000
at prime plus 2.5 percent
Note due bank, variable rate of interest 0 715,459
at prime plus 2.5 percent
Notes due Lenders, rate of interest at 12% $1,250,000 0 0
-------------- ----------
$ 0 $2,109,459
============== ==========
</TABLE>
<PAGE> 24
As part of the Notes due lenders, the Company issued warrants to the
Lenders to purchase 250,000 shares of the Company's common stock at an
exercise price of $3.03 per share. The Company also paid
International Capital Partners, Inc. a placement fee of $100,000 and
issued warrants to purchase 50,000 shares of the Company's common
stock at an exercise price of $3.03 per share. The warrants expire on
the earlier of March 29, 2001 or the closing of a consolidation or
merger of the Company with or into another corporation or a sale of
all or substantially all of the assets of the Company under certain
circumstances. Mr. Douglas L. Ayer, who serves on the Company's
Board of Directors, is the President of International Capital
Partners, Inc.
8. STOCKHOLDERS' EQUITY
During the six months ended September 30, 1996 the Company issued
7,619 shares of restricted common stock as a contribution to the
Employee Stock Ownership Plan for the year ended March 31, 1996.
Additionally, the Company issued 5,852 shares of restricted common
stock to four lecturing dentists as compensation for their services on
behalf of IDT. An additional 4,381 shares of restricted common stock
were issued pursuant to the exercise of certain stock options.
As a result of issuance of the Term Notes pursuant to the agreement to
borrow $1,250,000 which occurred on April 1, 1996, the Company
recorded a note discount and increased Capital Paid in Excess of Par
equal to the value of the detachable warrants issued in conjunction
with the Term Notes. The value of the warrants was determined using
the "Black Scholes" option pricing model. The note discount is being
amortized over the life of the Term Notes.
9. ASSETS OF BUSINESS TRANSFERRED UNDER CONTRACTUAL ARRANGEMENTS
(OTHER RECEIVABLES)
In March 1991, the Company incorporated a wholly owned subsidiary,
Denticator International, Inc. (DII) and transferred the Company's
manufacturing operations into DII in exchange for the issuance of a
note receivable to the Company with monthly principal payments of
$10,005 plus interest at 150% of the Company's cost of funds from
April 1, 1994 through March 31, 1999. Principal payments on the note
receivable were deferred by the Company from October 1, 1995 through
September 30, 1996, but interest payments continue each month.
Interest only payments were made from March 1991 through March 31,
1994. Effective with the date of incorporation, the Company entered
into a licensing agreement with DII for the manufacture and sale of
certain dental products owned by the Company. Under this agreement,
DII pays the Company a minimum monthly royalty equal to the greater
of $43,000 or 17% of net sales of DII. In addition, the agreement
provides for further royalties to be paid to the Company if DII
achieves certain levels of profitability.
On March 31, 1991, the Company sold all of the outstanding capital
stock of DII to DII's
<PAGE> 25
former operations manager. The sales agreement incorporated the
licensing agreement described above.
Effective April 1, 1994, the licensing agreement was amended. The
terms included herein reflect the material impact of such amendments.
On July 22, 1996, the Company disposed of its rights to receive future
royalty payments from DII. The Company received approximately $7.5
million in lieu of future royalties the Company was entitled to
receive in connection with its Licensing Agreement with DII and
consideration to purchase certain licensed assets of the Company. In
addition, monies owing to the Company from DII at the time of the
closing were converted to a "product credit" upon which The Supply
House and other Company affiliates can draw free product at a specified
rate until depleted. This total product credit approximated $876,000,
net of the unamortized discount, on the closing date. As part of the
transaction, Young Innovations, Inc. acquired substantially all of the
assets and certain liabilities of DII.
10. MERGER OF RYKER DENTAL OF KENTUCKY.
On January 3, 1994 (but effective after the close of business on
December 31, 1993), the Company acquired all of the outstanding
capital stock of Ryker Dental of Kentucky, Inc. ("Ryker"), pursuant to
the merger ("Merger") of the Company's wholly-owned subsidiary, San
Diego Dental Supply, Inc. ("SDDS"), with and into Ryker with Ryker
being the surviving entity. Pursuant to the Merger, the Company
issued an aggregate of 220,000 shares of its previously unissued
restricted Common Stock to the shareholders of Ryker in cancellation
of the shares of Ryker Common Stock owned by such shareholders. The
Company became the sole shareholder of Ryker through the conversion of
each outstanding share of Common Stock of SDDS into one share of
Common Stock of Ryker. As part of the transaction, the Company
retired approximately $720,000 of Ryker's debt, thereby releasing the
former shareholders of Ryker from their personal guarantees on such
debt. The Articles of Merger were filed with the Secretary of State
of Kentucky on January 3, 1994.
The transaction was accounted for as a purchase. The purchase price
was allocated to the fair value of Ryker's assets and liabilities and
the excess of $388,186 was allocated to goodwill. The goodwill is
being amortized on the straight line method over a period of twenty
years, in accordance with the Company's accounting policies. The
depreciable assets acquired will be depreciated over the remaining
useful life on a straight line basis, in accordance with the Company's
accounting policies.
11. ACQUISITION OF ORAL-VISION ASSETS AND LIABILITIES.
On July 6, 1994, the Company signed an agreement and purchased the
assets and certain liabilities of Oral Vision, Inc., a manufacturer of
an intra-oral camera product. Prior to the acquisition, the Company
has managed the business operations of Oral Vision, Inc., pursuant to
a management agreement. The acquisition was effective as of January
1, 1994, as the Company effectively maintained control of the
operations, assets and liabilities of Oral Vision, Inc. as of that
date. In connection with this purchase, the Company issued 272,727
<PAGE> 26
shares of its previously unissued restricted common stock to the sole
shareholder of Oral Vision, Inc., Dr. William Oakes. The assets
acquired consist mainly of trade inventory and accounts receivable.
As part of the transaction, on July 6, 1994, the Company retired
approximately $515,000 of the assumed liabilities, thereby releasing
certain security interests held by a vendor of Oral Vision, Inc.
The transaction was accounted for as a purchase. The purchase price
was allocated to the fair value of Oral Vision's assets and
liabilities and the excess of $215,919 was allocated to goodwill. The
goodwill is being amortized on the straight line method over a period
of twenty years, in accordance with the Company's accounting policies.
The depreciable assets acquired will be depreciated over the remaining
useful life on a straight line basis, in accordance with the Company's
accounting policies. The assets and liabilities are held in
Integrated Dental Technologies, Inc. ("IDT"), a wholly-owned
subsidiary of the Company formed for this purpose.
12. ACQUISITION OF CROWN SYSTEMS ASSETS AND LIABILITIES.
On November 14, 1994, the Company signed an agreement and purchased
the assets and certain liabilities of Crown Systems, Inc. ("Crown"),
effective November 1, 1994. Crown develops and markets dental
practice management software systems and will continue to develop
additional software for IDT. In connection with this purchase, the
Company issued 36,191 shares of its previously unissued restricted
common stock to Crown. The assets acquired consist mainly of accounts
receivable and dental practice management software rights. As part of
the transaction, the Company retired approximately $205,000 of assumed
liabilities.
The transaction was accounted for as a purchase. The software rights
which were acquired will be amortized on the straight line method over
a period of five years. The depreciable assets acquired will be
depreciated over the remaining useful life on a straight line basis,
in accordance with the Company's accounting policies. The assets and
liabilities are held in Integrated Dental Technologies, Inc. ("IDT"),
a wholly-owned subsidiary of the Company. As part of the transaction,
the principals of Crown entered into one year employment agreements
and three year non-compete agreements with IDT.
In October 1995, it was determined the original purchase price was
understated by $33,933. As a result of this determination, an
additional 11,310 shares of previously unissued restricted common
stock were issued to Crown on October 24, 1995. Adjustments to
reflect the financial impact of this transaction were recorded in
October 1995.
13. MERGER WITH ZILA, INC. (ZILA)
On August 8, 1996, the Company signed a Merger Agreement with Zila,
Inc. The execution of the Merger Agreement was pursuant to a letter
of intent the Company signed on May 31, 1996 to merge the Company with
Zila, Inc. The transaction will involve the exchange of Zila stock
for all of the Company's outstanding stock. Zila will exchange no
less than 0.75
<PAGE> 27
and no more than 0.825 shares of its common stock for each share of
the Company's common stock, with the final rate to be based upon the
price at which Zila's stock trades during the "calculation period"
preceding the close of the transaction. Zila's acquisition of the
Company is subject to a number of conditions, including the ability to
account for the transaction as a pooling-of-interests and the approval
of the Company's shareholders.
14. CONTINGENT LIABILITY
In July, 1995, the Company was named as a defendant, along with the
Company's transfer agent and a shareholder of the Company
(Shareholder), in a lawsuit. The lawsuit alleges that the Company
wrongfully failed to register 200,000 Company shares in the name of
the plaintiffs which were pledged as security by the Shareholder for a
debt owed by the Shareholder to the plaintiffs.
The Company denies all of the material allegations of the lawsuit
against it and asserts various affirmative defenses. The Company will
vigorously defend against the claims set forth in the lawsuit.
Because of the inherent uncertainties of litigation and the fact that
discovery has not been completed, the Company is not able to predict
whether the outcome of this litigation will be favorable or
unfavorable. Nonetheless, the Company accrued a liability of
$525,000 in September 1996. This amount is the Company's best estimate
of the loss in the event the outcome of the litigation is unfavorable
to the Company.
<PAGE> 28
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequential
Exhibit Page
Number Exhibits Number
- ------ -------- ------
<S> <C>
27.2 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 2,423,481
<SECURITIES> 0
<RECEIVABLES> 1,986,259
<ALLOWANCES> 198,596
<INVENTORY> 4,179,206
<CURRENT-ASSETS> 9,863,405
<PP&E> 1,671,748
<DEPRECIATION> 1,053,972
<TOTAL-ASSETS> 12,058,824
<CURRENT-LIABILITIES> 4,819,258
<BONDS> 0
0
0
<COMMON> 64,450
<OTHER-SE> 7,175,116
<TOTAL-LIABILITY-AND-EQUITY> 12,058,824
<SALES> 15,020,754
<TOTAL-REVENUES> 15,399,597
<CGS> 10,698,146
<TOTAL-COSTS> 10,698,146
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 68,697
<INTEREST-EXPENSE> 356,193
<INCOME-PRETAX> 5,865,058
<INCOME-TAX> 2,634,000
<INCOME-CONTINUING> 3,231,058
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,231,058
<EPS-PRIMARY> .47
<EPS-DILUTED> .47
</TABLE>
