<PAGE> 1
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: JUNE 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
(Exact name of small business issuer as specified in its charter)
<TABLE>
<CAPTION>
California 84-1104386
<S> <C>
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer ID No.)
</TABLE>
11291 Sunrise Park, Rancho Cordova, CA 95742
(Address of principal executive offices)
(916) 638-8020
(Issuer's telephone number, incl area code)
(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
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Number of shares outstanding of issuer's common stock: 6,427,134 shares
as of July 31, 1996.
Number of shares outstanding of issuer's preferred stock: None as of
July 31, 1996.
================================================================================
This Form 10-Q, including exhibits, consists of __________pages.
Exhibit Index appears on page__________.
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
The following financial statements are attached hereto:
- Consolidated balance sheet as of June 30, 1996 and March 31, 1996
- Consolidated statements of operations for the three months ended June 30,
1996 and 1995
- Consolidated statements of cash flows for the three months ended June 30,
1996 and 1995.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
Results of Operations - Quarter Ended June 30, 1996
For the quarter ended June 30, 1996, the Company produced net revenues
of $8,446,401, which compared to revenues of $8,420,383 for the quarter
ended June 30, 1995. Royalty revenues from Denticator International,
Inc. ("DII"), the Company's former manufacturing subsidiary, decreased
from $440,175 in the same quarter of last year to $378,842 for the
quarter ended June 30, 1996. This reduction came mainly as a result of
lower levels of profitability at DII, which had a resulting effect on
royalties payable to the Company. It is believed that the lower
profitability levels were due mainly to increased competition in the
marketplace, an expanded marketing budget, more favorable employee
benefit programs, and increased legal expenses.
On July 22, 1996, the Company disposed of its rights to resolve future
royalty payments from DII. The Company received approximately $7.5
million in cash in lieu of future royalties. In addition, any 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 product credit is expected to be approximately $960,000. As part
of the transaction, Young Innovations, Inc. acquired substantially all
of the assets and certain liabilities of DII.
Total product sales increased approximately 1.1 percent for the quarter
ended June 30, 1996, compared to the quarter ended June 30, 1995.
Revenues of the Company's Ryker Dental of Kentucky, Inc. subsidiary
("Ryker"), which markets consumable dental merchandise and supplies via
catalog sales and telemarketing under the trade name The Supply House
("TSH"), increased 8.8 percent over the same quarter in 1995. Revenues
of the Company's other subsidiary, Integrated Dental Technologies, Inc.
("IDT"), which markets high technology dental products to dentists,
decreased 25 percent over the same quarter in 1995.
The increase in revenues for TSH resulted partly from price increases
which went into effect upon the release in late April 1996 of TSH's
newest catalog. The Company continues to pursue arrangements with
managed dental care insurance
2
<PAGE> 3
companies wherein such insurance companies will endorse the services of
TSH and IDT to their member dentists. Under the terms of these
arrangements, TSH and IDT are offering preferred pricing to dentists
associated with these insurance companies. Through the endorsements and
the attractive pricing offers, the Company hopes to expand its sales
to participating dentists. Managed care sales are expected to provide
slightly lower gross margins but the sales volume increase from these
contracts should improve the net income of The Supply House.
The decline in IDT revenues resulted mainly from IDT's restructured
operations whereby the product offering of a virtually "paperless"
dental office was discontinued during the quarter ended March 31, 1996.
In December 1995, the Company announced that it was discontinuing its
"paperless" dental office offering and returning to its
previously-successful strategy of selling only intra-oral cameras and
dental practice management software packages. As a result of those
decisions, fewer products were available for sale during the quarter
ended June 30, 1996 compared to the quarter ended June 30, 1995.
Despite the significant reduction in revenues, IDT was able to produce
improved bottom-line performance through improved operating margins and
lower costs. While it is too early to determine the long-term success
of the IDT restructuring, the results of this first quarter of fiscal
1997 reflect a significant improvement over prior quarters of fiscal
1996.
The Company believes that the intra-oral cameras and dental practice
management software packages 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 the highest gross margins and lowest service costs compared to
the discontinued products IDT no longer markets.
The Company's cost of products sold decreased from 73 percent of net
revenues for the quarter ended June 30, 1995 to 67 percent for the
quarter ended June 30, 1996. Cost of products sold for TSH decreased
primarily as a result of price increases implemented during the quarter
ended June 30, 1996. Product mix changes within IDT have also reduced
its cost of products sold as a percentage of sales. Increased software
sales, which have a higher margin than hardware items, were a major
factor in the reduction in IDT's cost of goods sold.
Selling, general and administrative expenses for the quarter totaled
$2,526,051 or 29.9 percent of net revenues, as compared to $2,623,687
or 31.2 percent of net revenues, in the same quarter last year.
The decrease in selling, general and administrative expenses can be
attributed mainly to reduced seminar expenses and other marketing
expenses which are used to market IDT products. TSH selling, general
and administrative expenses for the quarter ended June 30,
1996, were also slightly lower than the same quarter last year.
Depreciation and amortization costs totaled $104,496 for the three
months ended June 30,
3
<PAGE> 4
1996 compared to $96,723 for the three months ended June 30, 1995. The
increase results primarily from a full three months' depreciation of
capital assets acquired since June 30, 1995.
Operating costs and expenses for the quarter totaled $8,285,806, or
98.1 percent of net revenues, as compared to $8,870,003, or 105.3
percent of net revenues, in the same quarter last year. As a result,
the Company's first quarter operating income totaled $160,595, as
compared to an operating loss of $(449,620) for the first quarter of
fiscal 1996.
Interest expense increased from $69,267 for the quarter ended June 30,
1995 to $150,932 for the quarter ended June 30, 1996. The increase is
due primarily to increased borrowings resulting from the Term Notes
pursuant to an agreement to borrow $1,250,000 from two institutional
investors ("Lenders"). The Company received the proceeds from the
Term Notes on April 1, 1996. Amortization of issuance costs and note
discounts (associated with warrants issued to the Lenders) totaled
$53,750 during the quarter ended June 30, 1996 and are included in
interest expense. The Term Notes had a 12 percent interest rate and
were paid off in July 1986.
The operating income of $160,595, plus interest expense, interest and
other income and provision for income taxes combined for a net
earnings of $29,412 for the quarter ended June 30, 1996. For the same
quarter in 1995, the operating loss of $(449,620), plus interest
expense, interest and other income and provision for income taxes,
combined for a net loss of $(479,441). The increase in profitability
is due mainly to the factors discussed above. Total net earnings per
share for the quarter ended June 30, 1996 was $0.00, as compared to
$(0.07) loss per share for the same quarter a year ago.
Liquidity and Capital Resources
As of June 30, 1996, the Company held total assets of $12,397,202. Of
these, $10,069,796 (81.2%) consisted of cash, accounts receivable,
inventories, and other current assets. As of this same date, the
Company had total liabilities of $8,401,954, all being current
liabilities. The Company's current ratio was 1.20 at June 30, 1996,
compared to 1.20 at March 31, 1996. The debt to equity ratio was 2.11
at June 30, 1996, compared to 1.87 at March 31, 1996.
Cash and cash equivalents were $1,054,784 at June 30, 1996 compared to
$612,911 at March 31, 1996. The increase in cash and cash equivalents
resulted primarily from loan proceeds received from the Term Notes
pursuant to the agreement to borrow $1,250,000 from the Lenders. The
proceeds of these Term Notes were used for working capital purposes.
The accounts receivable increased slightly from $1,973,943 at March
31, 1996 to $2,139,589 at June 30, 1996. Other receivables increased
from $485,486 at March 31, 1996 to $751,220 at June 30, 1996. This
increase resulted from slower payments from DII on royalty amounts
owed to the Company, pending the sale of future royalties to DII.
Inventory increased from $3,667,161 at March 31, 1996 to $4,225,873 at
June 30, 1996. The increase in inventory during the first quarter ended
June 30, 1996 was necessary to maintain the Company's historically high
order fulfillment rate to TSH customers. Inventory levels had
4
<PAGE> 5
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.
Accounts payable and accrued expenses increased from $4,851,628 at
March 31, 1996 to $5,130,369 at June 30, 1996. Of the $278,741
increase, approximately $95,000 resulted from an increase in customer
rebates which accrue during the year and are payable at the end of
January, 1997. The remaining increase is mostly attributed to the
buildup of inventory to maintain our high order fulfillment rate.
Deferred revenues were $167,907 at June 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. The reduction is mainly attributed to delivery of products
and services for which the Company had previously held deposits or
prepayments.
At June 30, 1996 total borrowings from the Bank of California and the
capital Lenders were $3,094,878, compared to $2,109,459 at March 31,
1996. During the quarter, the Company increased its total borrowings as
a result of funding from the Term Notes from Lenders pursuant to the
agreement to borrow $1,250,000. The Term Notes were funded on April 1,
1996 and have a 12 percent interest rate. The Company believes the
additional funds were necessary to continue the product and market
development for a restructured IDT and to meet operating requirements.
Capital contributed in excess of par increased $135,000 during the
quarter ended June 30, 1996. The increase results from recording the
note discount on the Term Notes. 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 last quarter 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 ("Bank") increasing the line from $1.5
million to $3.0 million. In addition to the line of credit, a $1
million term loan with the Bank was secured in March 1995.
5
<PAGE> 6
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 contain various covenants
regarding working capital, net worth and total indebtedness, among
other items, which became effective January 1, 1996 and thereafter. At
June 30, 1996 and March 31, 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 below, all 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 described below, these Term Notes were repaid on July 22,
1996.
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 warrants to purchase an
additional 50,000 shares of common stock at an exercise price of $3.03
to International Capital Partners, Inc. as part payment of a loan
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 has been recorded as a note
discount and the note discount is being amortized as additional
interest expense over the life of the loan. Additionally, issuance
costs related to the Term Notes are 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.
6
<PAGE> 7
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 June 30, 1996 and March 31,
1996 was $1,394,000 and the balance on the term loan as of June 30,
1996 and March 31, 1996 was $632,128 and $715,459, respectively.
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 $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, Inc.
("DII") for a lump sum cash payment of $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
estimates that the $7.5 million payment approximates 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.
7
<PAGE> 8
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 $7.5 million. At the same time, Young purchased
substantially all of the assets and assumed certain liabilities of DII.
Additionally, approximately $960,000 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 two years.
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) to the transaction is expected to be filed
shortly with 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:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
</TABLE>
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
8
<PAGE> 9
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
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 continued 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.
9
<PAGE> 10
PART II-OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
In 1994 the Company purchased the assets and assumed certain
liabilities of Oral Vision, Inc. Oral Vision, Inc. filed a claim
against a former consultant alleging breach of contract,
misappropriation of trade secrets, and other similar causes of action.
Oral Vision, Inc. sought to secure a judgment against this consultant
and his affiliate companies. The Company has subsequently been advised
that the Consultant, and his resulting firm, have since ceased
operation. As a result, the Company, as the current owner of the Oral
Vision claim, agreed to settle the litigation in March of 1996 for
$22,000 in cash payable to the Company. To date, however, no payments
have been received toward this settlement amount.
Also, in 1993 Oral Vision, Inc. received a letter from a product
manufacturer alleging that the Oral Vision product, which was
manufactured for Oral Vision by a sub-contractor, infringed upon one or
more patents held by the complaining product manufacturer. The Company
is no longer marketing the camera upon which this original complaint
was alleged.
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, and
the Company's 10-KSB for the year ended March 31, 1996, dated June 28,
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 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
10
<PAGE> 11
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 has now filed a request for Trial De Novo,
which has the effect of vacating the arbitration award.
Because formal discovery is at an early stage in this matter, the
Company is not in a position at this time to evaluate the merits of the
various claims.
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.
11
<PAGE> 12
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
12
<PAGE> 13
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 Date 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.
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.
13
<PAGE> 14
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)
14
<PAGE> 15
BIO-DENTAL TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
June 30,1996 March 31, 1996
(Unaudited) (Audited)
----------- ---------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 1,054,784 $ 612,911
Accounts receivable, net 2,139,589 1,973,943
Other receivables 691,220 425,896
Merchandise inventories 4,225,873 3,667,161
Prepaid expenses and other current assets 282,428 272,197
Current maturities of assets transferred under
contractual arrangements 60,000 60,000
Deferred income taxes 1,615,902 1,614,500
----------- -----------
Total current assets 10,069,796 8,626,608
Property and equipment, net 687,675 717,152
Other assets
Assets of business transferred under
contractual arrangements 380,354 380,354
Intangible assets, net 1,196,074 1,227,862
Other assets 63,303 44,616
----------- -----------
Total other assets 1,639,731 1,652,832
----------- -----------
TOTAL ASSETS $12,397,202 $10,996,592
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities $ 5,130,369 $ 4,851,628
Notes payable 3,094,878 2,109,459
Deferred revenue 167,907 204,669
Income taxes payable 8,800 0
----------- -----------
Total current liabilities 8,401,954 7,165,756
Commitments and contingencies -- --
----------- -----------
TOTAL LIABILITIES 8,401,954 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; 6,427,134 issued and outstanding 64,271 64,271
Capital contributed in excess of par value 3,846,979 3,711,979
Retained earnings 83,998 54,586
----------- -----------
Total stockholders' equity 3,995,248 3,830,836
----------- -----------
TOTAL LIABILITIES & STOCKHOLDERS EQUITY $12,397,202 $10,996,592
=========== ===========
</TABLE>
See notes to consolidated financial statements.
<PAGE> 16
BIO-DENTAL TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
------------------
June 30, June 30,
1996 1995
---- ----
<S> <C> <C>
Revenue from product sales $8,067,559 $7,980,208
Royalty revenue 378,842 440,175
---------- ----------
Net revenues 8,446,401 8,420,383
Operating costs and expenses:
Cost of products sold 5,655,259 6,149,593
Selling, general and administrative 2,526,051 2,623,687
Depreciation and amortization 104,496 96,723
---------- ----------
8,285,806 8,870,003
---------- ----------
Operating income (loss) 160,595 (449,620)
Interest and other income 28,549 39,446
Interest expense (150,932) (69,267)
---------- ----------
Earnings (loss) before provision for income taxes 38,212 (479,441)
Provision for income taxes 8,800 0
---------- ----------
Net earnings (loss) 29,412 (479,441)
Retained earnings, beginning of period 54,586 2,320,563
---------- ----------
Retained earnings, end of period $ 83,998 $1,841,122
========== ==========
Earnings (loss) per common share and common share equivalents $ 0.00 $ (0.07)
========== ==========
Weighted average common shares and common share
equivalents outstanding 6,900,002 6,451,603
========== ==========
</TABLE>
See notes to consolidated financial statements.
<PAGE> 17
Bio Dental Technologies Corporation
Statement of Cash Flows
Three Months Ended June 30,
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Cash Flow from operating activities: $ 29,412 ($479,441)
Net earnings (loss)
Adjustments to reconcile net earnings
(loss) to net cash (used in) provided by
operating activities:
Depreciation & amortization 104,496 96,723
Amortization of note discount and related issuance costs 53,750 0
Changes in operating assets & liabilities:
(Increase) decrease in:
Accounts receivable (165,646) (10)
Other receivables (265,324) (109,198)
Inventories (586,295) (293,032)
Prepaid expenses and other current assets (10,231) (15,894)
Deferred income taxes (1,402) 0
Other assets (18,687) 30,252
Increase (decrease) in:
Accounts payable and accrued expenses 278,741 323,420
Deferred revenue (36,762) (49,200)
Income taxes receivable/payable 8,800 0
---------- ---------
Net cash provided (used) in operating activities (609,148) (496,380)
---------- ---------
Cash flows from investing activities:
Additions to office furniture, equipment and leaseholds (15,648) (15,071)
Increase in intangible assets 0 0
Collection of note receivable 0 0
---------- ---------
Net cash provided (used) in investing activities (15,648) (15,071)
---------- ---------
Cash flows from financing activities:
Net draws on bank note payable 0 520,922
Net proceeds from notes payable 1,150,000 0
Payments on leases payable and notes payable (83,331) 0
---------- ---------
Net cash provided (used) by financing activities 1,066,669 520,922
---------- ---------
Net increase (decrease) in cash 441,873 9,471
Cash and cash equivalents at March 31 612,911 322,848
---------- ---------
Cash and cash equivalents at June 30 $1,054,784 $ 332,319
========== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
1. During the quarter ended June 30, 1996,
the Company transferred approximately
$28,000 of inventory to property and
equipment.
2. Cash paid during the period for:
Interest $ 55,359 $ 53,877
Income taxes $ 8,800 $ 0
</TABLE>
See notes to consolidated financial statements.
<PAGE> 18
BIO-DENTAL TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. CONSOLIDATED FINANCIAL STATEMENTS
The consolidated balance sheet as of June 30, 1996 and March 31, 1996
(audited), the consolidated statements of operations for the three
months ended June 30, 1996 and 1995 and the consolidated statements of
cash flows for the three months ended June 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 June 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 June 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> 19
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
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.
Reclassifications
Certain reclassifications were made to the 1995 consolidated financial
statements in order to be in conformity with the 1996 presentation.
<PAGE> 20
4. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following at June 30 and March 31,
1996:
<TABLE>
<CAPTION>
June 30,1996 March 31, 1996
------------ ----- --------
<S> <C> <C>
Trade receivables $ 2,315,336 $ 2,112,487
Less: allowance for doubtful accounts (175,747) (138,544)
----------- -----------
Accounts receivable, net $ 2,139,589 $ 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 June 30 and March
31, 1996:
<TABLE>
<CAPTION>
June 30, 1996 March 31, 1996
------------- --------------
<S> <C> <C>
Office furniture and equipment $ 1,440,706 $ 1,398,161
Molds and dies 590,900 590,000
Leasehold improvements 90,145 90,145
Production and warehouse equipment 90,021 89,336
----------- -----------
2,211,772 2,167,937
Less: accumulated depreciation (1,524,097) (1,451,390)
----------- -----------
Property and equipment, net $ 687,675 $ 717,152
=========== ===========
</TABLE>
<PAGE> 21
6. INTANGIBLE ASSETS
Intangible assets consist of the following at June 30 and March 31,
1996:
<TABLE>
<CAPTION>
June 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 (295,174) (263,386)
----------- -----------
Intangible assets, net $ 1,196,074 $ 1,227,862
=========== ===========
</TABLE>
7. BANK AND OTHER NOTES
At June 30, 1996 and 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
are collateralized by inventory, accounts receivable and equipment of
the Company. The Company also had Term Notes with two institutional
investors ("Lenders") at June 30, 1996. The Term Notes are
subordinated.
The line of credit expires and the note with the bank is due on
September 30, 1996. The Term Notes are due March 29, 1997. The
outstanding principal amounts are shown below at June 30, 1996 and
March 31, 1996:
<TABLE>
<CAPTION>
June 30, 1996 March 31, 1996
------------- --------------
<S> <C> <C> <C>
Line of credit with bank, variable rate of interest $ 1,394,000 $ 1,394,000
at prime plus 2.5 percent
Note due bank, variable rate of interest 632,128 715,459
at prime plus 2.5 percent
Notes due Lenders, rate of interest at 12% $ 1,250,000
Note discount, net of amortization (101,250)
Issuance costs, net of amortization (80,000) 1,068,750 0
----------- ----------- -----------
$ 3,094,878 $ 2,109,459
=========== ===========
</TABLE>
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.
All of the above debt was repaid on July 22, 1996.
<PAGE> 22
8. STOCKHOLDERS' EQUITY
During the quarter ended June 30, 1996 the Company did not issue any
shares of stock.
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 by an
amount 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
(NOTE RECEIVABLE)
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 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 cash in lieu of future royalties. In addition, any 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 product credit is expected to be approximately $960,000. As part
of the transaction, Young Innovations, Inc. acquired substantially all
of the assets and certain liabilities of DII.
<PAGE> 23
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 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
<PAGE> 24
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 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 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.
Nonetheless, there is a reasonable possibility that the Company will
sustain a loss in this matter, estimated in a range from $320,000 to
$1,250,000, or the re-issuance of 200,000 shares of the Company's
common stock. However, because of the inherent uncertainties associated
with litigation and other factors, no accrual for a loss contingency
has been made in the financial statements as of June 30, 1996.
<PAGE> 25
EXHIBIT INDEX
Sequential
Exhibit Page
Number Exhibits Number
- ------- -------- ----------
27.2 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 1,054,784
<SECURITIES> 0
<RECEIVABLES> 2,315,336
<ALLOWANCES> 175,747
<INVENTORY> 4,225,873
<CURRENT-ASSETS> 10,069,796
<PP&E> 2,211,772
<DEPRECIATION> 1,524,097
<TOTAL-ASSETS> 12,397,202
<CURRENT-LIABILITIES> 8,401,954
<BONDS> 0
0
0
<COMMON> 64,271
<OTHER-SE> 3,930,977
<TOTAL-LIABILITY-AND-EQUITY> 12,397,202
<SALES> 8,067,559
<TOTAL-REVENUES> 8,446,401
<CGS> 5,655,259
<TOTAL-COSTS> 5,665,259
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 43,325
<INTEREST-EXPENSE> 150,932
<INCOME-PRETAX> 38,212
<INCOME-TAX> 8,800
<INCOME-CONTINUING> 29,412
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 29,412
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
