U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-QSB
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 1997
---------------------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT
For the transition period from _______________ to ______________________
Commission file number: _____1-11032____________________________
PROFESSIONAL DENTAL TECHNOLOGIES, INC.
--------------------------------------
(Exact name of small business issuer as
specified in its charter)
Nevada 71-0644350
- -------------------------------- -------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
633 LAWRENCE STREET, BATESVILLE, ARKANSAS 72501
-----------------------------------------------
(Address of Principal Executive Offices)
(870) 698-2300
--------------
(Issuer's telephone number)
__________________________________________________________________________
Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to
be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution
of securities under a plan confirmed by court. Yes _______ No_______.
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes
of common equity, as of August 29, 1997:______14,100,000___________
<PAGE>
PROFESSIONAL DENTAL TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEET
JULY 31 OCTOBER 31
1997 1996
(Unaudited)
----------- ----------
ASSETS
Current Assets:
Cash and Cash Equivalents $ 687,537 $ 727,825
Certificates of Deposit --- 400,000
Accounts Receivable:
Trade - net of allowance for
doubtful accounts of $47,286 1,825,062 1,572,449
Affiliates 154,468 160,150
Inventory 2,585,334 2,212,987
Other Current Assets 787,411 450,041
----------- ----------
Total Current Assets 6,039,812 5,523,452
Property and Equipment - Net 2,385,109 1,980,103
Other Assets - net of accumulated
amortization 120,149 149,074
Investments - at equity (Note 1) 49,040 324,393
----------- -----------
Total Assets $ 8,594,110 $ 7,977,022
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Line of Credit $ 400,569 $ 726,503
Accounts Payable - Trade 1,171,996 982,342
Other Accrued Liabilities 1,172,098 982,553
Long-term debt - current portion 216,755 216,756
----------- -----------
Total Current Liabilities 2,961,418 2,908,154
Long-term debt 1,240,715 983,060
Total Liabilities 4,202,133 3,891,214
---------- -----------
Stockholders' Equity:
Common Stock $0.01 par value: 30,000,000 shares
authorized; 14,100,000 shares issued
and outstanding 141,000 141,000
Additional Paid-in Capital 282,417 263,667
Retained Earnings 3,968,786 3,681,367
Equity Adjustment from Foreign
Currency Translation ( 226) ( 226)
---------- ----------
Total Stockholders' Equity 4,391,977 4,085,808
----------- ---------
Total Liabilities and Stockholders' Equity $8,594,110 $7,977,022
=========== ==========
See Notes to Financial Statements
2
<PAGE>
PROFESSIONAL DENTAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
FOR THE THREE AND NINE MONTH PERIODS ENDED JULY 31, 1997 AND 1996
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JULY 31 JULY 31
------------------- -------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales $ 6,276,101 $ 5,143,922 $ 17,012,949 $16,205,902
Cost of Goods Sold 2,568,893 2,202,827 7,046,717 7,065,257
------------ ----------- ------------ ---------
Gross Profit 3,707,208 2,941,095 9,966,232 9,140,645
Operating Expenses 3,543,945 2,783,680 9,163,037 8,495,245
------------ ----------- ------------ ---------
Income from Operations 163,263 157,415 803,195 645,400
Other Income (Expenses) ( 36,086) ( 146,626) (338,151) ( 378,020)
------------ ----------- ------------ ---------
Net Income before Taxes 127,177 10,789 465,044 267,380
Provision for
Income Taxes ( 48,105) ( 1,108) ( 177,475) ( 98,510)
------------ ----------- ------------ ---------
Net Income $ 79,072 $ 9,681 $ 287,569 $ 168,870
------------ ----------- ------------ ---------
Net Income per Share $ .01 $ .00 .02 .01
============ ============ ============ =========
Weighted average
number of shares
outstanding 14,103,737 14,476,298 14,103,737 14,476,298
========== ========== ========== ==========
</TABLE>
See Notes to Financial Statements
3
<PAGE>
PROFESSIONAL DENTAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOW
(UNAUDITED)
FOR THE NINE MONTH PERIODS ENDED JULY 31, 1997 AND 1996
1997 1996
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 287,569 $ 168,871
Adjustments to reconcile net income
to net cash from operations:
Depreciation and amortization 456,184 255,578
Deferred compensation expense 18,750 18,750
Decrease (increase) in:
Accounts Receivable:
Trade - Net (252,613) (498,639)
Due from Affiliate 5,682 50,694
Inventory (372,347) 254,097
Other Current Assets (337,370) 190,697
Other Deferred Items: 8,620 ---
Increase (decrease) in:
Accounts Payable - Trade 189,654 (468,430)
Other Accrued Liabilities 189,545 284,094
--------- ---------
Net Cash Provided by Operations 193,674 255,712
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Property and Equipment (854,160) (702,947)
Loss on Disposal of Equipment 9,290 ---
Liquidation of Fixed Assets 3,835 ---
Certificates of Deposit 400,000 ---
Increase (Decrease) in Other Assets --- ( 151)
Investment in Joint Ventures 275,353 163,202
---------- -----------
Net Cash (used) for Investing
Activities (165,682) (539,896)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (Decrease) in Notes Payable (325,934) (201,489)
Issuance of long-term debt 497,244 478,155
Payment of long-term debt (239,590) (137,389)
---------- ----------
Net Cash (used) for
Financing Activities ( 68,280) 139,277
---------- ----------
Increase (decrease) in Cash ( 40,288) (144,907)
Cash and Cash Equivalents -
Beginning of Period 727,825 898,641
------------ -----------
End of period $ 687,537 $ 753,734
============ ===========
See Notes to Financial Statements
4
<PAGE>
PROFESSIONAL DENTAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTH PERIODS ENDED JULY 31, 1997 AND 1996
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Organization:
Professional Dental Technologies, Inc. (the Company) is engaged
primarily in the business of designing, manufacturing, and marketing
innovative products and services for dental professionals, to be
used in the diagnosis, treatment, and prevention of periodontal and
other dental diseases in the general dental practice. The Company
extends credit to its customers in the normal course of business.
Customers of the Company are dentists located throughout the world
with the primary customer base in the United States.
Principles of Consolidation:
The consolidated financial statements include the results of
operations, account balances and changes in cash flows of the
Company and its wholly-owned subsidiaries: Professional Dental
Marketing, Inc., Professional Dental Hygienists, Inc., Professional
Dental Technologies Therapeutics, Inc., Pro-Dentec FSC, Inc., PDT
Image, Inc., PDT Byte, Inc., Professional Dental Manufacturing,
Inc., (F.K.A. PDP, Inc.), Professional Dental Printing, Inc. and
Professional Dental Probes, Inc. All significant intercompany
accounts and transactions have been eliminated.
In October, 1996, the Company initiated the liquidation of PDT
Production Corporation. The final settlement of all assets and
liabilities of this company, as a result of the liquidation is
currently the subject of litigation (See LEGAL PROCEEDINGS).
Professional Dental Printing, Inc. and Professional Dental
Marketing, Inc., commenced operations on January 1, 1997.
Professional Dental Probes, Inc., has had no activity or account
balances during the year to date.
Cash Equivalents:
For purposes of the statement of cash flows, the Company considers
all highly liquid debt instruments and time deposits with an
original maturity of three months or less, in addition to all
checking, savings and money market accounts, to be cash and
equivalents.
Certificates of Deposit:
Certificates of deposit consist of time deposits in financial
institutions with maturities at date of purchase of six months. Such
instruments are carried at cost which approximates market value.
5
<PAGE>
PROFESSIONAL DENTAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTH PERIODS ENDED JULY 31, 1997 AND 1996
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Inventory:
Inventory is recorded at the lower of cost (determined on a
first-in, first-out basis) or market.
Property and Equipment:
Property and equipment is stated at cost. Depreciation is calculated
using straight-line and accelerated methods and is expensed based on
the estimated useful lives of the assets.
Expenditures for additions and improvements are capitalized, while
repairs and maintenance are expensed as incurred.
Long-Lived Assets:
The Company has adopted Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" (SFAS 121) in fiscal 1997. SFAS
121 is effective for years beginning after December 15, 1995 and
requires the Company to review long lived assets and certain
identifiable intangibles for impairment, by estimating the future
cash flows expected to result from the use and disposal of the asset
in comparison with the carrying value of the asset. The Company has
not yet determined what effect, if any, adoption of SFAS 121 will
have on the 1997 financial statements.
Investments in and Advances to Affiliates:
The equity method of accounting is used to account for investments
made when the Company has the ability to exercise significant
influence over the operating and financial polices of an investee,
generally involving a 20% to 50% interest in those investees.
Under the equity method, original investments are recorded at cost,
increased for subsequent investments in and advances to the
investee, and adjusted for the Company's share of undistributed
earnings or losses of the investee.
6
<PAGE>
PROFESSIONAL DENTAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTH PERIODS ENDED JULY 31, 1997 AND 1996
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Accrued Warranty Costs:
Accrued warranty costs consist of the estimated replacement cost of
product returned to the Company pursuant to the terms of their
product warranties and is computed based upon historical
information.
Net Income Per Share:
Net income per share was computed based on the weighted average
number of shares actually outstanding plus the shares that would be
outstanding assuming exercise of options which are considered to be
common stock equivalents, less the shares assumed to be acquired by
the Company using the proceeds from the assumed exercise of options
assuming this acquisition was based on the average market price per
share.
Revenue Recognition:
Revenue is recognized at the time that ownership transfers to the
customer, principally at the time of shipment.
Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Concentration of Credit Risk:
Financial instruments that potentially subject the Company to
concentration of credit risk consist principally of cash and
accounts receivable. The Company maintains cash in bank deposit
accounts and certificates of deposit which, at times, may exceed
federally insured limits. The Company believes it has its cash
deposits at high quality financial institutions. The Company
believes no significant credit risk exists with respect to these
deposits.
Accounts receivable arise from the sale of dental products to dental
professionals located throughout the world but principally in the
United States. The Company performs ongoing credit evaluations of
its customers' financial condition, and generally requires no
collateral from its customers. The Company's credit losses are
subject to general economic conditions of the dental industry.
7
<PAGE>
PROFESSIONAL DENTAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTH PERIODS ENDED JULY 31, 1997 AND 1996
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income Taxes:
Income taxes are provided for the tax effects of transactions
reported in the financial statements and consist of taxes currently
due plus deferred taxes, if any. Deferred taxes represent the net
tax effects of temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes.
Stock-Based Compensation:
The Company has adopted Statement of Financial Accounting SFAS No.
123, "Accounting for Stock-Based Compensation" (SFAS 123) in fiscal
1997. SFAS 123 is effective for years beginning after December 15,
1995 and prescribes accounting and reporting standards for all
stock-based compensation plans. The Company intends to elect
continued recognition of certain stock-based compensation using the
intrinsic value method prescribed under Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued To Employees; the
Company has not yet determined what effect, if any, adoption of SFAS
123 will have on the 1997 financial statements.
Foreign Currency Translation:
The functional currency of PDT Image, Inc., is the Canadian dollar.
The adjustment resulting from the translation of the Canadian
financial statement is reflected as a separate component of
stockholders' equity.
Reclassifications:
Certain reclassifications have been made to the 1996 financial
statements in order to conform with 1997 financial statement
presentation. These reclassifications had no effect on stockholders'
equity or net income, as previously reported.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE NINE MONTH PERIODS ENDED JULY 31, 1997 AND 1996
-------------------------------------------------------
RESULTS OF OPERATIONS. For the nine month period ended July 31, 1997,
net sales were $17.0 million, an increase of about 5%, compared to $16.2
million for the same period in 1996. This result is attributable to
increases in the sale of the Company's ultrasonic scaler and
pharmaceutical product lines, partially offset by a decline in sales of
computer-based and intra-oral camera products. Sales of scaler products
reflect the successful introduction of the newly-designed Pro-Select
3[TRADEMARK] product; expansion of pharmaceutical product sales
represents a continuation of a long term trend in the Company's business.
Sales of the intra-oral camera decreased as a direct result of
management's decision to hold the line on the price of the Company's
product in the face of severe price competition in the market. Computer
system revenues were also down, primarily as a result of the Company's
decision to transition sales responsibility to independent value-added
resellers (VARs), who typically supply the hardware portion of the
system, which was previously sold by the Company. Due to a successful
result in the litigation regarding the Pro-Dentec Canada partnership (see
LEGAL PROCEEDINGS), that partnership was terminated as part of the decree
of the Court. As a consequence, the Company began to report Canadian
revenues (PDT Image, Inc.) on a consolidated basis as of May 1, 1997. Net
additional revenues resulting from this consolidation accounted for
approximately $0.3 million of the 1997 nine month total.
The Company's sales revenues during the nine months ended July 31, 1997
and 1996 have been substantially attributable to sales of the Rota-dent
and accessories. During the first nine months of both 1997 and 1996,
revenue from such sales, including foreign sales, amounted to $12.1
million. Revenue generated during the first nine months of 1997 from the
sale of pharmaceutical and scaler products totaled $3.2 million compared
to $2.1 million in the 1996 period. Other product revenue included the
Company's sales of the Prism camera, Victor and other computer-based
products, which amounted to $0.8 million for the first nine months of 1997
and $1.6 million in the nine month period ended July 31, 1996. The balance
of the Company's revenue in both years resulted from seminar fees and sale
of printed literature.
The cost of goods sold for the nine months ended July 31, 1997, was
$7.0 million, compared to $7.1 million for the period ended July 31, 1996.
Gross profit percentage improved to 58.6% in the 1997 period from 56.4% in
1996. This improvement is largely attributable to increased manufacturing
effectiveness, resulting from investments the Company made in 1996 in
plastic injection molding machinery with which to produce Rota-dent parts
previously purchased from outside vendors, and to the Rota-dent price
increase.
Operating expenses were $9.2 million during the first nine months of
1997 ($9.0 million excluding PDT Image, Inc., the expenses of which became
consolidated on May 1, 1997), compared to $8.5 million during the first
nine months of 1996. Selling expense increased in the 1997 period as a
result of hiring to increase the size of the outside sales force, and
increased promotional expenditures for the Rota-dent and scaler products.
General and administrative expense also increased, primarily as a result
of litigation expense. (See LEGAL PROCEEDINGS). Reductions in product
development expense, resulting from the completion of the scaler
development project, partially offset these increases.
9
<PAGE>
Other income and expense, consisting primarily of the profit or loss
from non-consolidated affiliates, and interest income/expense, netted an
expense of $0.3 million for the first nine months of 1997, compared with
an expense of $0.4 milion for the same period in 1996. The decrease is
primarily a result of lower joint venture losses, partially offset by
higher interest expense in 1997, resulting from debt incurred in the
acquisition of fixed assets.
As a result of the changes noted above, net income for the nine month
period ended July 31, 1997 was $288,000, an increase of 70%, compared to
$169,000 for the same period in 1996.
CAPITAL RESOURCES AND LIQUIDITY. On July 31, 1997 the Company's total
assets were $8.6 million, compared to $8.0 million at October 31, 1997,
resulting from increases in inventory, trade receivables and fixed assets,
partially offset by a reduction in investment in joint ventures. Total
liabilities were $4.2 million, an increase of $0.3 million compared to
year-end liabilities of $3.9 million, resulting from long term debt
incurred to acquire the additional fixed assets. Stockholders' Equity
increased by $0.3 million, to $4.4 million, as a result of earnings during
the period.
For the nine month period ended July 31, 1997, net cash provided from
operations was $194,000 compared to $256,000 in the 1996 period. Cash from
operations was adversely affected in the 1997 period by an increase in
accounts receivable and inventory, resulting from increased sales in the
third quarter, and an increase in other current assets, resulting from an
increase of prepaid literature and prepaid state and federal income taxes.
These uses of cash were partially offset by an increase in accounts
payable.
FOR THE THREE MONTH PERIODS ENDED JULY 31, 1997 AND 1996
RESULTS OF OPERATIONS. For the three month period ended July 31, 1997,
net sales increased 22% to $6.3 million, compared to $5.1 million in the
1996 period. This result is primarily attributable to increases in the
sale of the Company's Rota-dent, scaler and pharmaceutical product lines,
partially offset by a decline in sales of computer and intra-oral camera
equipment. Revenues from the sale of Rota-dent units were up during the
quarter, largely as a result of the price increase implemented on
September 1, 1996. The pharmaceutical product line continues to grow,
resulting from increased market penetration and an expanding product line.
Revenues from the sale of ultrasonic scalers increased as a result of the
introduction of the Pro-Select 3, a newly designed scaler-irrigator
product, which commenced shipping at the beginning of the 1997 second
quarter. Computer system revenues were down compared to the 1996 second
quarter as a result of the Company's decision to transition sales
responsibility to independent value-added resellers (VARs), who typically
supply the hardware portion of the system previously sold by the Company.
Due to a successful result in the litigation regarding the Pro-Dentec
Canada partnership (see LEGAL PROCEEDINGS), that partnership was
terminated as part of the decree of the Court. As a consequence, the
Company began to report Canadian revenues (PDT Image, Inc.) on a
consolidated basis as of May 1, 1997. Net additional revenues resulting
from this consolidation accounted for approximately $0.3 million of the
1997 third quarter total.
10
<PAGE>
The Company's sales revenues during the three months ended July 31,
1997 and 1996 were principally attributable to the Rota-dent. Sales of
this product, including accessories and foreign sales, were $4.3 million
in the 1997 third quarter, compared to $3.9 million in the 1996 period.
Other clinical products, (the scaler and pharmaceutical product lines)
generated revenues of $1.4 million in the third quarter of 1997, compared
to $0.7 million in the 1996 period. Revenue from the sale of
computer-based products amounted to $0.3 million in the 1997 quarter
compared to $0.5 million in the second quarter of 1996. Revenues from
seminar fees and the sale of printed literature also increased in the 1997
third quarter, and accounted for the balance of the Company's revenue in
both years.
Cost of goods sold for the three months ended July 31, 1997 was $2.6
million, compared to $2.2 million in 1996. Gross profit margin improved to
59.1% in the 1997 period, compared to 57.2% in the 1996 third quarter.
This is attributable to increased manufacturing efficiency, resulting from
investments the Company made in 1996 in plastic injection molding
machinery with which to manufacture Rota-dent parts previously purchased
from outside vendors.
Operating expense was $3.5 million in the third quarter of 1997 ($3.3
million excluding PDT Image, Inc., the expenses of which became
consolidated on May 1, 1997) compared to $2.8 million in the 1996 period.
This increase slightly exceeds the year-to-year increase in revenues, and
is attributable to increased selling expenses, as a result of hiring to
increase the size of the outside sales force and increased promotional
expenditures for the Rota-dent and scaler products; general and
administrative expense also increased, primarily as a result of litigation
expense. (See LEGAL PROCEEDINGS). Reductions in product development
expense, resulting from the completion of the scaler development project,
partially offset these increases. Other income and expense, which consists
primarily of the profit/loss of non-consolidated affiliates and net
interest expense, netted to an expense of $36,000 in the 1997 third
quarter, compared to an expense of $147,000 in the 1996 period. The
decrease in expense resulted primarily from lower joint venture losses,
partially due to the consolidation of the results of PDT Image, Inc.,
previously reported as a non-consolidated subsidiary.
As a result of the changes noted above, net income for the three month
period ended July 31, 1997, was $79,000 compared to $10,000 in the 1996
period.
CAPITAL RESOURCES AND LIQUIDITY. On July 31, 1997 the Company's total
assets were $8.6 million, compared to $8.0 million at October 31, 1997,
resulting from increases in inventory, trade receivables and fixed assets,
partially offset by a reduction in investment in joint ventures. Total
liabilities were $4.2 million, an increase of $0.3 million compared to
year-end liabilities of $3.9 million, resulting from long term debt
incurred to acquire the additional fixed assets. Stockholders' Equity
increased by $0.3 million, to $4.4 million, as a result of earnings during
the period.
For the three month period ended July 31, 1997, net cash provided from
operations was $147,000. Cash from operations resulted from earnings in
the quarter plus depreciation, partially offset by cash consumed by other
operating accounts.
11
<PAGE>
The Company has established reserves for potential warranty claims on
its primary products, and such claims have historically been within
management's expectation.
The Company defines liquidity as the ability to generate adequate
amounts of cash to meet its needs. The Company has historically relied on
cash provided from operations to meet its working capital needs, and
anticipates this will continue in the near term. However, the Company
currently has a revolving line of credit with NBD Bank under which it can
draw up to $3 million, subject to the availability of collateral. This
line of credit is primarily secured by receivables and inventory, and may
be used to finance the additional working capital requirements of the
Company. The Company also has other sources of credit with which it can
finance the purchase of fixed assets, and anticipates that these or other
credit sources will be utilized for most future fixed asset additions. The
Company believes these sources of credit combined with cash flow from
operations will be sufficient to meet its foreseeable cash requirements.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On June 26, 1995, PDT Image, Inc., a wholly owned subsidiary of
Professional Dental Technologies, Inc., filed a Petition for Declaratory
Decree and Restraining Order against Source-1 Dental Image, Inc., ("SDI")
and its two principal officers. SDI and PDT Image were partners in the
partnership known as Pro-Dentec Canada. In its decree dated April 22,
1997, the Court issued its ruling in the matter. SDI and its two principal
officers were found to have breached their fiduciary responsibility,
committed actual and constructive fraud and engaged in civil conspiracy.
They were also found to be in contempt of the Temporary Restraining Order.
The Court has ruled that the partnership agreement be rescinded, that
SDI's license rights in software developed be awarded to PDT Image, and
that SDI and its principals are to make restitution to PDT Image in the
amount of approximately $909,000. The SDI principals are personally and
individually responsible for the payment of the restitution. The Temporary
Restraining Order has been made permanent.
On May 5, 1997, SDI and its two principal officers filed Notice of
Appeal. They have not posted an appeal bond. PDT Image is therefore
proceeding with efforts to have the judgment enforced. As part of this
enforcement action, on June 2, 1997, the Company brought suit against SDI
and its principals in the Supreme Court of British Columbia to require
payment on the Arkansas judgment and to enforce the restraining order.
Also on June 2, 1997, a complaint was filed in the Federal District
Court in Oakland, California, against Eric Chasanoff, a software
programmer, and his company, Raster Builders, Inc. Chasanoff was not a
party to the Arkansas litigation, however, in the decree, he and his
company were found to have conspired in the fraud. The complaint alleges
unfair competition, untrue and misleading advertising, breach of contract
and civil conspiracy; it is currently being amended to add a copyright
infringement claim. This suit seeks a preliminary injunction against the
continuing unfair competition and copyright infringement, as well as
unspecified monetary damages.
12
<PAGE>
The Company cautions that the value of the license rights assigned to
PDT Image is in question due to the existance in the market of the
competing Chasanoff software. Also, there can be no assurance that PDT
Image will be able to collect any or all of the amount of the ordered
restitution.
On April 24, 1997, the Company and its subsidiary PDT Production
Corporation ("PDT Production") were served with a complaint by Lysta
Production A/S ("Lysta"), the parent of the Company's former partner in
the Prolyco Production Company ("Prolyco"), which manufactured the PDT
Sc/RP ultrasonic scaler, previously sold by the Company.
On June 18, 1996, PDT Production offered to buy Lysta's interest in
Prolyco for $20,000. Under the terms of the partnership agreement, Lysta
had the option to accept the offer, or in the alternative, to purchase the
Company's interest for the same amount. By letter dated August 22, 1996,
Lysta elected to sell its partnership interest rather than buy the
interest owned by the Company. The sale was closed on September 20, 1996.
This transaction terminated the Prolyco partnership, and PDT Production
became the successor in interest. In conjunction with the closing, PDT
Production and the Company signed a promissory note for approximately
$45,000, representing the balance of the amount owed under the minimum
guaranteed royalty provision of the license agreement then in effect
between Lysta and Prolyco ("License") for the previous year.
On October 23, 1996, PDT Production executed an Assignment for the
Benefit of Creditors ("Assignment"). The effect of the Assignment was to
terminate the License by its terms. The termination of the License caused
the termination of the partnership agreement by its terms. With the
termination of the License, the Company's obligation to make annual
minimum guaranteed royalty payments was terminated. As of the date of the
Assignment, the only creditors of PDT Production were Lysta and the
Company. The Assignee subsequently caused the assets of PDT Production to
be liquidated, and the cash proceeds from the liquidation are currently in
his possession.
The complaint filed by Lysta alleges that absent termination of the
License, the Company would have been obligated to pay guaranteed minimum
royalties through the year 2050. Lysta thereby claims $8.8 million in
actual losses plus unspecified punitive damages. The Company believes this
claim is without merit. The complaint also alleges additional damages
totalling approximately $112,000 relating to purported wrongful detention
of, and damage to, equipment belonging to Lysta. The Company believes this
assertion is without merit. The complaint also alleges that the Company is
utilizing confidential and proprietary know-how owned by Lysta to
manufacture its new dental scaler, and seeks a preliminary injunction to
prevent the Company from manufacturing or selling dental scalers. The
Company believes this claim is without merit.
The complaint also asks that the note for $45,000 plus accrued
interest, as well as certain actual and guaranteed royalties, amounting to
approximately $50,000, which became due prior to the Assignment, be paid.
Management believes these claims may be invalid.
13
<PAGE>
On July 14, 1997, the Company filed a motion for partial summary
judgment, to dismiss the claim that it be required to pay $8.8 milion of
royalties allegedly due over the next 53 years. On July 18, 1997,
Plaintiff filed a motion for partial summary judgment with respect to
payment of the $45,000 note and certain actual and guaranteed royalties
amounting to approximately $50,000. The Company will oppose this motion by
Plaintiff.
On May 29, 1997, the Company was served with a lawsuit by a former
employee, alleging discrimination on the basis of her sex. The Company and
its attorneys believe the claims of the former employee are without merit,
and will vigorously defend the suit.
The Company knows of no other material litigation involving the
Company or any officer or director of the Company.
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
On June 5, 1997, the Company filed a Form 8-K regarding changes in its
certifying accountant. On that date, the Audit Committee and the full Board of
Directors of the Company unanimously agreed to replace Silverman Olson
Thorvilson & Kaufmann LTD ("SOTK") as the Company's independent auditor.
None of the reports of SOTK on the financial statements of the Company for
either of the past two fiscal years contained an adverse opinion or a disclaimer
of opinion, or was qualified or modified as to uncertainty, audit scope or
accounting principles. During the Company's two most recent fiscal years and the
subsequent interim period preceeding the replacement of SOTK, there were no
disagreement(s) with SOTK on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedures, which
disagreement(s), if not resolved to the satisfaction of SOTK, would have caused
it to make reference to the subject matter of the disagreement(s) in connection
with its report. None of the reportable events listed in Item 304 (a) (1) (v) of
Regulation S-K occurred with respect to the Company during the Company's two
most recent fiscal years and the subsequent interim period preceeding the
replacement of SOTK.
14
<PAGE>
On June 20, 1997, the Company engaged Deloitte & Touche LLP as its
independent auditors. During the Company's two most recent fiscal years and the
subsequent interim period preceeding the engagement of Deloitte & Touche,
neither the Company nor anyone on its behalf consulted Deliotte & Touche
regarding the application of accounting principles to a specific completed or
contemplated transaction, or the type of audit opinion that might be rendered on
the Company's financial statements, and no written or oral advice concerning
same was provided to the Company that was an important factor considered by the
Company in reaching a decision as to any accounting, auditing or financial
reporting issues.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
PROFESSIONAL DENTAL
TECHNOLOGIES, INC.
-----------------------------------
(Company)
9/10/97 /s/ William T. Evans
- ------------------------ -----------------------------------
Date William T. Evans
President & CEO
9/10/97 /s/ Richard L. Land
- ------------------------ -----------------------------------
Date Richard L. Land
Vice President & Controller
16
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