SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________________
Form 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission file number:
October 31, 1997 1-11032
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PROFESSIONAL DENTAL TECHNOLOGIES, INC.
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(Exact name of registrant as specified in its charter)
Nevada 71-0644350
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
633 Lawrence Street, Batesville, Arkansas 72501
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (870) 698-2300
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Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.01 Par Value
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(Title of class)
Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been the subject of
such filing requirements for the past 90 days. YES __X__ NO_________
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation SB is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X ]
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The aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon the closing price of the registrant's Common Stock as
reported on the American Stock Exchange on January 12, 1998, was $3.1 million.
The registrant's revenue for fiscal 1997 was $23.8 million.
As of January 16, 1998, the latest practicable date for which such
information is available, there were issued and outstanding 14,100,000 shares of
the Registrant's Common Stock.
Documents Incorporated By Reference
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The following documents are incorporated by reference herein:
None.
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PART I
ITEM 1. BUSINESS
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GENERAL
Professional Dental Technologies, Inc. ("Pro-Dentec" or "Company") is
principally engaged in the business of designing, manufacturing and marketing
products to dental professionals relating to the diagnosis, treatment and
prevention of periodontal and other dental diseases. The Company uses extensive
educational and other support systems to help the dentist practice to today's
standard of care. These activities are based upon current concepts in the
diagnosis, treatment and prevention of dental diseases. By promoting a team
approach, which integrates and coordinates the efforts of general dentists,
periodontists and other dental specialists, hygienists and patients themselves,
the Company has positioned itself to take advantage of an enlarging market by
acting as a resource for change. The Company's products, including proprietary
software, hardware and instruments, are designed to facilitate the dental
office's shift toward an earlier diagnosis and treatment of periodontal and
other dental diseases.
The Company was incorporated on July 12, 1900, under the laws of the State
of California under the name of The Banner Mine Development Company ("Banner
Mine"). From 1906 until 1986 Banner Mine was inactive and conducted no material
business operations. In December 1986, the authority of the Company to conduct
business was reinstated and the domicile of the Company was changed to the State
of Nevada through the merger of the Company into a newly formed Nevada
corporation. Subsequently, on February 26, 1987, the Company amended its
articles of incorporation to, among other things, change the name of the
corporation to its current name, Professional Dental Technologies, Inc. In May
1991, the Company's Registration Statement on Form 10 filed under the Securities
Exchange Act of 1934, as amended, became effective, and the Company thereby
became a "reporting company" subject to the periodic reporting and other
requirements of the Act. The Company's shares of Common Stock were listed on the
American Stock Exchange Emerging Company Marketplace on March 18, 1992.
The Company's executive offices are located at 633 Lawrence Street,
Batesville, Arkansas 72501. The telephone number is (870) 698-2300.
PRODUCTS
ROTA-DENT[REGISTERED TRADEMARK]
The Company's principal product is the Rota-dent, a proprietary, patented,
rotary-action, plaque removal and teeth cleaning device dispensed by dental
professionals to patients for use at home between dental office visits. The
Rota-dent is a rechargeable, power assisted instrument that is designed using a
Lexan[TRADEMARK] water-resistant power handle that accepts interchangeable heads
and uniquely designed, patented brush tips. The product utilizes a cleaning
action similar to that of the rotary instruments used by dentists and hygienists
to professionally clean teeth in the dental office. Each Rota-dent instrument is
supplied with two interchangeable heads so that different persons can
economically and hygienically use the same power handle. Replacement
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interchangeable heads and brush tips are available through dental offices and
from the Company's Customer Service department by telephone.
Each of the patented interchangeable brush tips is comprised of
approximately 4,600 filaments made from a combination of three and four mil
fibers that, when compared to conventional toothbrush bristles, are less
abrasive to tooth enamel and gingival tissue (gums). The tips are soft, safe and
durable. The small size of the filaments and brush tips enables the user to
reach areas of the mouth that conventional toothbrushes generally cannot reach
effectively.
The Rota-dent's effectiveness results from its ability to remove dental
plaque. Plaque is a thin filmy substance that continually forms in the mouth due
to bacterial activity and, if allowed to remain, hardens on teeth as calculus or
tartar. Unless removed daily, plaque deposits can cause inflammation and
gingivitis and can ultimately lead to more severe periodontal disease, now a
leading cause of tooth loss in the United States. Numerous clinical trials
conducted at major university dental schools have shown the Rota-dent product to
be more effective than manual toothbrushing for removing plaque and controlling
gingivitis. Two one-year clinical trials published in a leading refereed
periodontal research journal, have shown that the Rota-dent is as effective in
removing plaque, controlling gingivitis and reducing the bacteria that cause
periodontal disease as using a combination of dental floss, an interspace brush,
toothpicks and a conventional toothbrush.
The Rota-dent instrument has been engineered to be especially effective
for plaque removal from the area at or just below the gum line and
interproximally (between teeth), the most critical areas for cleaning to prevent
periodontal disease. Many dentists and hygienists recommend the use of the
Rota-dent instrument for applying anti-microbials and other medications to tooth
surfaces and gums. A study at the Harvard School of Dental Medicine, jointly
sponsored with Procter and Gamble, concluded that the effect of their leading
anti-microbial, Peridex[TRADEMARK], is significantly enhanced when applied with
the Rota-dent.
Traditionally, a regimen of manual toothbrushing and flossing has been
recommended by dentists and hygienists as part of a sound program for oral
hygiene. Nevertheless, it is generally accepted that 90% of the general
population do not floss on a regular basis because it is too time consuming and
difficult. The Rota-dent product is routinely dispensed to simplify plaque
control for the general population, as well as for orthodontic, handicapped,
arthritic, and geriatric patients, as well as those who have received dental
implants.
The Company relies upon numerous university clinical trials, some
sponsored by Company grants and others sponsored by major dental product
companies, to demonstrate to the dental profession that the Rota-dent product is
an effective plaque removal instrument. Based on these studies, the Rota-dent
product was awarded the American Dental Association's Council on Dental
Materials, Instruments and Equipment Seal of Acceptance as an effective cleaning
instrument, which significantly reduces both plaque and gingivitis when used as
part of a program for good oral hygiene and regular professional care. In 1996,
the Company voluntarily relinquished the ADA Seal for the Rota-dent. This action
was taken as a result of the overly restrictive and burdensome administrative
requirements which the ADA sought to impose upon the Company's advertising and
promotion of the Rota-dent product, compliance with which would have been a
condition of retaining the ADA Seal.
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Prior to commercial introduction, the Rota-dent product was test-marketed
to over five thousand consumers and hundreds of dentists in the United States.
Early clinical trials at the Ohio State University School of Dentistry showed
that the Rota-dent could be most beneficial with a well defined period of
clinical instruction. At the urging of many clinicians, the Company committed to
keep the product exclusively in dental offices, as opposed to using retail
channels of distribution, to be dispensed from the office, as part of the
dentist's armamentarium against dental disease. This provided an additional
service for the dental practice to offer, as well as an incidental revenue
source.
The Company has engineered and owns computer-driven, automated, and
patented brush machines, semi-automatic and automatic brush cutters, tooling for
manufacturing high precision metal parts, injection molding machines and
multi-cavity injection molds for the product's plastic parts, as well as other
manufacturing and assembly equipment. All plastic parts used to manufacture the
Rota-dent, with one exception, are molded in-house by the Company. There are
alternate sources of supply for all components and materials used in the
manufacturing process, and the Company is not dependent upon a single supplier
for any component or type of material for this product.
The marketplace for home use oral hygiene devices is highly competitive.
The Company competes with many different manufacturers of manual and
electrically powered tooth cleaning devices, including electric toothbrushes
such as the Interplak (by Conair), the Braun Oral B (by Gillette), and the
Sonicare (by Optiva Corporation). These competitors are larger and use a wider
variety of distribution methods than does the Company. The Company has
successfully competed with these companies on the basis of favorable long-term
clinical studies, product design, product quality and responsive service to both
professionals and consumers. While most of the Company's competitors rely on
traditional retail distribution methods, the Company believes that a
professional distribution system is more effective in the long-term. Thus, the
Company has invested in clinical trials and in efforts to demonstrate to
dentists and hygienists the advantages of dispensing the Rota-dent product from
their dental offices as part of their plaque control programs and the other
professional services they offer, including implant maintenance, orthodontic
appliances, the maintenance of cosmetic restorations, post-surgical maintenance
of periodontal cases and general preventive oral hygiene. The Company holds
several design and utility patents relating to the Rota-dent, and has vigorously
enforced its patent rights and advantages against infringing parties. To date,
all patent litigation has been resolved in the Company's favor. In fiscal 1997,
sales of the Rota-dent and associated accessory products represented
approximately 71% of the Company's total revenues for the period.
PRO-SELECT-3[TRADEMARK] ULTRASONIC SCALER
During fiscal 1997, the Company introduced the Pro-Select-3 scaler system,
with heated irrigation. Prior to that time, the Company sold the PDT
Sensor[TRADEMARK] Sc/RP Scaler. Both of these devices are ultrasonic instruments
used by dentists and dental hygienists for the therapeutic removal of hardened
deposits from both the exposed and root surfaces of the tooth.
The PDT Sensor Sc/RP was previously distributed by the Company pursuant to
the terms of joint venture and license agreements between the Company's
wholly-owned subsidiary, PDT Production Corporation ("PDT Production"), and
Lyco, Inc. ("Lyco"), an Arkansas Company. The Company's distribution rights
covered North and South America. The Company entered into the joint venture to
manufacture, market and distribute the scaler based on representations by its
partner that led the Company to believe that the scaler had a competitive edge
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over other ultrasonic scalers in the U.S. market. Subsequently, it was
determined that the scaler had to be substantially redesigned. Sales activity
was temporarily curtailed while the Company completed redesign efforts. Shipment
of the redesigned product began in January, 1993. Nevertheless, for this and
other reasons, the scaler did not achieve satisfactory market acceptance, and
the Company experienced declining sales throughout 1995 and 1996. On September
30, 1996, PDT Production purchased its partner's interest in the joint venture.
On October 23, 1996, the assets of PDT Production were assigned for the benefit
of creditors. At the time of the assignment, the only creditors of PDT
Production were the Company and its former partner. The assignment terminated
the license with the former partner. On April 24, 1997, the Company and PDT
Production were served with a complaint by Lysta Production A/S ("Lysta"), the
parent of Lyco. (See ITEM 3. LEGAL PROCEEDINGS).
Because of the lack of market success with the PDT Sensor Sc/RP, and the
demands of the market for additional features, the Company's product development
group was commissioned to design a new scaler from the ground up. The new
product commenced shipment in February 1997. The Pro-Select-3 is a
state-of-the-art scaler that combines computerized piezo-ultrasonic technology
with a closed, multi-fluid, heated irrigation system that effectively delivers
purified water, antimicrobials, disinfectants and desensitizing solutions to the
teeth and gums during and after scaling or root planing procedures.
The Company competes with several other companies that manufacture,
market, and sell electronically powered dental scaling equipment. The Company
seeks to compete with other manufacturers based on direct distribution to its
established network of dental practitioners, and through the product's increased
effectiveness and comfort for both the patient and clinician. During the 1997
fiscal year, sales of scalers and scaler accessories accounted for approximately
12% of the Company's revenue.
DENTAL PHARMACEUTICAL PRODUCTS
Pro-Dentec manufactures and markets a full line of topically applied
dental fluoride products, including rinses and gels. The line consists of
products applied in the office by dental professionals as well as products
utilized at home by patients between office visits. This product line was
introduced to the market in 1993. The dental pharmaceutical product line has
been expanded each year since being introduced, and the Company believes it is
now the broadest-based and most complete fluoride product line available in
dentistry.
The effectiveness of fluoride for fighting tooth decay is widely
recognized. Fluoride is also extensively used by dental professionals to destroy
the bacteria associated with periodontal disease, as well as to reduce the
sensitivity of exposed roots from soft tissue loss due to periodontal disease
and/or periodontal surgery.
The Company currently manufactures all its fluoride rinses and gels in an
FDA-approved facility in Batesville, Arkansas. The Company does not anticipate
significant difficulties in obtaining the materials necessary to manufacture
these products. The Company competes with several other companies that
manufacture, market, and distribute fluoride products to dentists. The market
for dental pharmaceuticals is fragmented, with no one company controlling or
dominating. The Company competes in this market by selling directly through its
professional representatives, on the basis of quality, breadth of offering and
the price of its products. The ability to purchase fluorides, prophy paste,
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manual and powered toothbrushes and dental floss becomes a convenience for the
dental office, and to the extent the Company offers a complete line of such
products, reduces the number of suppliers with which each office must deal. The
Company believes this gives it a competitive advantage. During the 1997 fiscal
year, dental pharmaceutical products accounted for approximately 9% of the
Company's revenue.
VICTOR[REGISTERED TRADEMARK] DENTAL OFFICE SOFTWARE
Victor Dental Office is an integrated software suite, under which name the
Company markets three software packages--Victor Chart, a voice activated,
periodontal and restorative charting system; Victor Manage, a full-featured
dental practice management system; and Victor Image, an image archiving and
cosmetic imaging system. The programs may be purchased individually, in any
combination, or as a full suite.
The Victor Chart voice activated charting software is used by dentists and
hygienists to assist them in the efficient recording, organization, maintenance,
retrieval and comparison of diagnostic and restorative data obtained during
dental examinations. It therefore enables dentists to communicate more
effectively with their patients and insurance carriers and reduces their
exposure to malpractice claims resulting from incomplete or imprecise
record-keeping. The use of Victor Chart assists dentists in meeting the American
Dental Association's guidelines which recommend that a periodontal evaluation
for every patient be done at least annually, but preferably biannually, to
reduce tooth loss and prevent or reduce malpractice claims.
Victor Chart was the first voice operated comprehensive dental
examination, diagnosis and presentation aid introduced to the dental profession.
It is easily networked within the dental office to allow it to serve multiple
examination and consultation areas. The current Windows 95 version of the
software includes highly sophisticated speech recognition technology, allowing
the practitioner to speak continuously, rather than having to pause between each
word spoken, as in the original version. This permits faster, more complete and
more accurate data input. Using Victor Chart, dental professionals can perform a
complete dental examination unassisted and hands free, while permitting the
clinician to maintain sterility. Also, it frees up the time of a hygienist or
assistant who would otherwise be required to record data. The periodontal
examination process, which generally consists of recording up to eight hundred
separate items, has traditionally been difficult for dentists because it is
complicated and time-consuming. The easy-to-read computer screen and multi-color
charts generated by Victor Chart reduce the time involved by assisting the
dental professional in making a diagnosis, and presenting a record of the timing
and scope of the examination.
The failure to diagnose, adequately treat or appropriately refer the
periodontal patient is the greatest source of malpractice lawsuits against
dentists. The completed charts printed by Victor Chart can be used to provide
dental specialists and third parties, such as insurance companies, with
accurate, detailed information. The system can store virtually unlimited numbers
of reports and examinations for future reference, periodic updating, and
comparative analysis. Victor Chart's ability to compare current data against
previous examinations is crucial, as it automatically and clearly alerts
clinicians and patients to worsening conditions as well as clinical improvement.
Through graphic illustration, the system enables the patient to better
understand the diagnosis and more readily accept the need for treatment.
Furthermore, the system facilitates increased communication between the doctor
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and patient regarding the nature of the diagnosis and the recommended treatment
course, and enables both of them to better monitor the effects of treatment over
time. Patient motivation is heightened through the easily understood graphic
presentation of treatment results.
Victor Manage software provides scheduling, treatment planning, management
reporting, insurance tracking and electronic claims filing capability to the
dental office. In 1993, the Company's wholly-owned subsidiary, PDT Byte, Inc.,
entered into partnership with PerfectByte, Inc., which had been marketing a
proprietary computerized management system called PerfectByte(R) to dental
offices for several years. The partnership subsequently completed the
development of a new practice management program which utilizes Microsoft
Windows 95 and significantly expands the functionality of the original
PerfectByte program.
Victor Manage is an efficient, flexible management tool that provides the
ease of use, organizational structure and analytical capability essential for
the success of today's dental practice. Among the advanced features included in
the system are "peel and stick" appointments, which makes changing of
appointment times and lengths intuitive and fast. "Speed Notes" permits the
insertion of routine notes in 15 available comment fields. "In Touch" generates
routine patient correspondence. Insurance tracking is automatic and complete,
and is combined with electronic filing, which speeds processing and payment of
claims, improving cash flow to the practice. Victor Manage also includes more
than 95 reports and listings, including highlight reporting of vital management
statistics. Complementing pre-formatted reports is a report generator that may
be used to create custom reports and data listings or to modify pre-formatted
reports.
The third element of Victor Dental Office, Victor Image, is currently the
subject of litigation with the Company's former partners in Pro-Dentec Canada,
and with a third-party programmer retained by the former partners. (See ITEM 3.
LEGAL PROCEEDINGS). For this reason, and pending final resolution of the
litigation, Victor Image is no longer being promoted by the Company, and is sold
only upon the specific request of a customer.
The Company has determined that distribution of its software products
through independent resellers represents the most efficient and economic way of
marketing Victor Dental Office. These Value Added Resellers (VARs) install
hardware if the sale involves a turnkey system, provide on-site training of the
customer in the proper system operation, and other services as requested by the
customer. The Company retains responsibility for technical support of the
software. This support is typically provided through annual technical support
agreements with the customer, which also provide for upgrades and enhancements
to the software. VARs typically purchase and resell their own hardware. In those
instances where the Company purchases the hardware portion of the system, it is
from well established vendors, normally Hewlett Packard; however, such equipment
is available from numerous computer suppliers, and the Company has not
experienced any difficulties in obtaining adequate supplies of any components or
materials.
OTHER PRODUCTS
PERIODONTAL PROBES
The Perio-Probe[TRADEMARK] and the patented PDT Sensor[TRADEMARK] Probe
are disposable diagnostic dental instruments, used in the dental office to
examine patients for indicators of periodontal disease. The PDT Sensor Probe
differs from the Perio Probe in that it has a sensing mechanism built into it
which allows the user to control the amount of pressure used during periodontal
exams for more accurate results. This is the first time dental professionals
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have had an instrument that can provide a pre-determined amount of force without
utilizing complicated and expensive electronic instruments.
The probes are flexible dental instruments designed to be used with the
Company's other periodontal exam products to provide easier, less painful and
more accurate measurement of subgingival conditions. The probes are designed to
be disposable, but may be autoclaved (sterilized) for multiple uses. The Perio
Probes and the PDT Sensor Probes are molded for the Company by a local vendor
who uses tooling owned by the Company. The probes are made from readily
available materials. Precision markings are applied by the Company at its
manufacturing facilities in Arkansas. The Company has not experienced any
difficulties in obtaining materials for the probes, and does not anticipate any
such difficulty in the future.
ROTA-POINTS[TRADEMARK]
The Rota-point a flexible, non-splintering interdental cleaner and
stimulator. Rota-points are used interproximally to remove both debris and
dental plaque from the surfaces of teeth. This area (between the teeth) is the
most difficult area to clean properly. The mild surface texture and physical
design of the Rota-points make them an ideal product to use with Rota-dent to
help maintain a healthy mouth. Wooden toothpicks can damage gum tissue because
of their awkward shape and the possibility of breaking and splintering.
Since bleeding gums are not healthy, patients can be instructed to watch
for signs of bleeding on the white surface of the Rota-point. If this occurs,
the bleeding area may need more attention. Rota-points are convenient, require
less manual dexterity than floss, clean larger interproximal areas than many
interdental type cleaners, and effectively massage and stimulate the gums. Each
Rota-dent kit contains a package of Rota-points, which are sold individually.
PERIOCHECK[REGISTERED TRADEMARK]
The Periocheck Periodontal Monitoring System provides the dental
professional with an accurate and economic chairside test for use in monitoring
the outcome of periodontal therapy. The test measures the activity level of
patient's neutral protease enzymes in gingival crevicular fluid. This family of
enzymes, which include collagenase and elastase, accounts for most of the tissue
degradation observed in periodontal disease. Up to seven gingival sites may be
tested with a single patient test packet. The easy-to-read results are available
in minutes during the patient's office visit eliminating any need to send
samples to an outside laboratory for analysis. Positive and negative controls
are included with each test kit to increase confidence that the results are
valid.
Periocheck is the first test approved by the U.S. Food & Drug
Administration for use in monitoring the periodontal disease process.
Eye-readable test results are intended to assist in the treatment
decision-making process by indicating whether a patient is responding to the
selected therapy.
DEVELOPMENT COSTS
The Company incurred $490,000 of product development expense in 1997 as
compared to $705,000 in 1996. The decrease was primarily as a result of
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completing the development of the Pro-Select-3 scaler early in 1997. The Company
from time to time considers the development and introduction, whether alone or
with others, of other professional and consumer dental products. The Company has
applied for, and currently has pending, several additional applications for
patents on additional products or product improvements. The Company cannot
predict whether any additional products will be developed or introduced, or
patents issued, as a result of these efforts.
SALES AND MARKETING
The Company believes that the market for dental instruments and products
intended for home use for oral hygiene maintenance is an expanding market. This
is partially attributable to a shift in focus by the general dentist from the
treatment of tooth decay to placing greater emphasis on the prevention and
treatment of gingivitis (early stages of periodontal disease). The Company's
products specifically address the diagnosis, treatment and prevention of
periodontal disease. These products are marketed exclusively through dental
offices. In addition, the underlying market for dental services is a growing
one. The United States Healthcare Financing Administration estimates that the
aggregate annual domestic market for dental services was approximately $45.9
billion in 1995, and that this market has increased in size at a compound annual
growth rate of 8.6% from 1980 to 1995. This agency projects that size of the
dental services market will further increase to $79.1 billion by the year 2005.
These trends, coupled with the increasing awareness of the impact of
periodontal disease among consumers and dental professionals alike, as well as
the wide and varied extent of the disease (which industry figures suggest
affects approximately of 75% of the American adult population), should lead to
an expanding marketplace for the Company's products. With this increasing
professional and consumer focus on "soft tissue" (gums) and periodontal disease,
the Company believes that it is in an advantageous position to supply dental
professionals with the high quality and effective specialty instruments and
equipment necessary to provide more specialized services to patients.
The Company expects to continue the expansion of its field sales force
through 1998. The focus of this expansion is to provide greater territorial
coverage, which management believes is the most effective way to increase the
penetration of the Company's products in dental offices across the nation.
Customers in geographic areas not covered by a field sales representative are
served by experienced account executives over the telephone. No single dental
practice accounted for more than 1% of the Company's total sales revenues in
fiscal 1997.
The Company maintains a full-service printing facility and audio-video
production studio to design and produce a variety of educational, promotional
and marketing materials about the Company's products for use by the dentist and
his patients. In addition to printing for its own needs, the Company has
historically provided printing services to its affiliate Life Plus (See Item 12.
Certain Relationships and Related Transactions). Beginning in 1996, and
aggressively so in 1997, the Company has also sought commercial printing
business, and now runs the printing company as a profit center.
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FOREIGN SALES
The Company began exporting its products in 1991. Sales to foreign
distributors represented approximately 7% of the Company's total sales in 1997.
A significant part of this total represented sales to the Company's Canadian
sales subsidiary, Pro-Dentec Canada. Prior to May 1997, Pro-Dentec Canada was a
50%-owned partnership, and its revenues therefore were not consolidated with
those of the Company. As a result of successful litigation with the former
partner, the Pro-Dentec Canada partnership was rescinded, and commencing in May,
1997, Canadian sales revenues were consolidated. (See ITEM 3. LEGAL PROCEEDINGS)
Foreign sales for 1997 were therefore higher by approximately $0.4 million than
they would have been had Canadian sales continued to be reported on a
partnership basis. Most of the balance of foreign sales went to independent
distributors in Western Europe. Management believes there is significant
potential for increased sales in the export marketplace, and is searching for
new distributors in countries in which the Company's products are not currently
sold.
"YEAR 2000" COMPUTER ISSUE
The Company has completed an examination of all software used in its
internal management and accounting systems, as well as of the software which it
sells to its customers, and has determined that there are no material risks and
uncertainties related to the "Year 2000" computer issue. In assessing its
reliance on external computer systems, primarily those of its customers and
vendors, the Company also believes that it has no material exposure to risk or
uncertainty. (The Company makes no significant sales to any governmental agency,
foreign or domestic.)
REGULATION
Several of the dental products manufactured and marketed by the Company,
the Rota-dent product, the Pro-Select-3 ultrasonic scaler, fluoride products and
Periocheck are subject to regulation by the Food and Drug Administration ("FDA")
and, in some instances, by foreign governments. Under the 1976 Amendments (the
"1976 Amendments") to the Federal Food, Drug and Cosmetic Act, as amended (the
"Act"), and the regulations promulgated thereunder, the manufacturers of
"devices," as such term is defined in Section 201(h) of the Act, must comply
with certain controls that regulate the testing, manufacturing, packaging and
marketing of devices. Under the Act, devices are subject to different levels of
approval requirements, the most comprehensive of which requires that a clinical
evaluation program be conducted before a device receives pre-market approval by
the FDA for commercial distribution. The Company's products are "Class II"
products under this classification system and did not require such clinical
evaluation. The Company has complied with the FDA's applicable qualification
procedures for all such products. The Rota-dent also bears the CE Mark,
permitting it to be sold within the European Union. The Company anticipates that
other products will be certified for the CE Mark in the future.
As a manufacturer of products which are classified as medical devices, the
Company is also subject to certain other FDA regulations, and its manufacturing
processes and facilities are subject to continuing review by the FDA to insure
compliance with Good Manufacturing Practice. The Company believes that its
manufacturing and quality control procedures substantially conform to the
requirements of FDA regulations.
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WORKING CAPITAL ITEMS
Most components and materials required for the manufacturing process for
the Company's products are readily available on an ongoing basis. The Company
typically maintains a 60-day supply of components and material for its products,
available for either assembly or shipment upon order. Larger supplies of
components having a longer lead time are kept on hand.
BACKLOG
The Company manufactures/purchases all products on the basis of committed
and/or projected orders. The Company normally ships non-personalized Rota-dent
products in one day and personalized products within two to three days of order
receipt. The Company ships other products as requested. The Company typically
has no material order backlog and has never experienced any significant delay in
shipping orders. The Company does not anticipate any significant delay in
meeting foreseeable product requests.
PROPRIETARY RIGHTS
The Company currently holds the following United States patents on the
Rota-dent(R) and other products as indicated:
a. Design patent Registration Number D278,764 issued May 14, 1985, for a term
of 14 years covering the ornamental design for a battery-operated
toothbrush.
b. Design patent Registration Number D295,801 issued May 24, 1988, for a term
of 14 years covering the ornamental design for a set of brush heads.
c. Utility patent Registration Number 4,869,277 issued September 26, 1989,
for a term of 17 years covering a brush head and a method and apparatus
for producing the brush head.
d. Design patent Registration Number D306,236 issued February 27, 1990, for a
term of 14 years covering the ornamental design for the long pointed brush
tip.
e. Design Patent Registration Number D309,062 issued July 10, 1990, for
expiration on February 27, 2004, covering the ornamental design for the
short pointed brush tip.
f. Utility patent Registration Number 4,884,849 issued December 5, 1989, for
a term of 17 years covering an apparatus and method of manufacture of a
brush head.
g. Utility patent Registration Number 4827552 issued May 9, 1989, for a term
of 17 years covering a rotary electric toothbrush.
h. Utility patent Registration Number 5,052,419 issued October 1, 1991, for
expiration on September 26, 2006, covering a brush head, and a method and
apparatus for producing the brush head.
i. Utility patent Registration Number 5,072,482 issued December 17, 1991, for
a term of 17 years covering a brush head, apparatus and method for
producing the brush head.
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j. Utility patent Registration Number 5,078,158 issued January 7, 1992, for a
term of 17 years covering a brush head with a shaped bottom plate.
k. Utility patent Registration Number 5,090,902 issued February 25, 1992, for
a term of 17 years covering a multi-measurement periodontal probe.
l. Utility patent Registration Number 5,109,563 issued May 5, 1992, for a
term of 17 years covering a soft brush gum stimulator.
m. Utility patent Registration Number 5,112,226 issued May 12, 1992, for a
term of 17 years covering a constant pressure periodontal probe.
n. Utility patent Registration Number 5,146,643 issued September 15, 1992,
for a term of 17 years covering an end brush, and apparatus and method for
producing the end brush.
o. Utility patent Registration Number 5,148,568 issued September 22, 1992,
for a term of 17 years covering an apparatus and method for making an end
brush.
p. Design patent Registration Number D334,842 issued April 20, 1993 for a
term of 14 years covering the ornamental design for a triple head
toothbrush.
q. Utility patent Registration Number 5,205,302 issued April 27, 1993, for a
term of 17 years covering a gum stimulator which has a removable brush
composed of a high-density of soft thin fibers.
r. Utility patent Registration Number 5,234,009 issued August 10, 1993, for a
term of 17 years covering a toothpick having opposite ends adapted to
clean the interstitial spaces and tooth surfaces between adjacent teeth.
s. Utility patent Registration Number 5,276,935 issued January 11, 1994, for
a term of 17 years covering dental brushes impregnated with a medicament
for slow release during brushing.
The Company has also obtained patents or trademarks or has applied for
patents or trademarks under the laws of 28 foreign countries. The Company
believes that the patents issued to it are material to its business and seeks
vigorously to protect its rights against infringement.
The Company owns, or has licensed the rights to, a number of registered
trademarks. Those owned include Rota-dent, Pro-Dentec, Pro-Dentx, PDT Sensor,
STM, Beyond STM, Soft Tissue Management, Professional Relationship Program,
Victor, Pro-Cam and Mobius. Those licensed include PerfectByte, Periocheck and
Biocheck. In addition, the Company has registrations pending on certain other
trade names, and has trademarked the names of all of its other products.
EMPLOYEES
As of December 31, 1997, the Company employed 332 persons full-time, of
whom 161 worked in manufacturing, 126 in sales and marketing, with the balance
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in administration, product development and management. None of the Company's
employees are represented by a labor organization, and the Company has never
experienced a work stoppage or interruption due to a labor dispute. Management
believes that relations with its employees are good.
ITEM 2. PROPERTIES
- ------ ----------
The Company owns three buildings in Batesville, Arkansas containing a
total of 49,000 square feet of administration, warehouse and production space.
The building on Harrison Street houses the Company's production facilities for
the Rota-dent product and other products, spaces devoted to product development,
purchasing and an audiovisual production studio. The Company also owns ten acres
of land and a masonry building which has been modified for use as a printing
facility and for the production of its dental pharmaceutical products. An
addition to this facility was completed in 1996. The building housing the
Company's executive offices as well as its marketing, professional consulting,
accounting and administrative staffs was purchased in 1994. The building had
been leased and used for the same purpose prior to the purchase. The Company has
outstanding mortgages on the buildings totaling $493,000. The Company believes
that the facilities are adequate for its current production needs and that
additional space, if needed, can be constructed or purchased without materially
affecting operations.
The Company leases space in three other buildings in Batesville, Arkansas,
for a monthly rental of $4,700. One building houses the Company's warehouse and
its shipping and receiving facilities. It is leased on a year-to-year basis,
with three renewal terms remaining. Another building is used as a woodworking
facility for construction of computer system and intraoral camera carts, and is
on a month-to-month lease. The third building is used as a training facility,
which is leased on a year-to-year basis. The Company believes that these
facilities are adequate for its current needs.
ITEM 3. 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 in the Chancery Court of Independence County, Arkansas,
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 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.
All briefs regarding the appeal have been filed, and the parties are awaiting
the decision of the appellate court. SDI did not post an appeal bond so PDT
Image is proceeding with efforts to have the judgment enforced in Canada. In
order to enforce its judgment, the Company brought suit against SDI and its
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principals on June 2, 1997, in the Supreme Court of British Columbia to require
payment on the Arkansas judgment and to enforce the restraining order. This suit
is pending.
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. The complaint alleges copyright infringement, unfair competition,
breach of contract and civil conspiracy. A motion was also filed for the grant
of a preliminary injunction barring continuing copyright infringement. The order
granting this preliminary injunction was signed by the Court on December 22,
1997. On January 16, 1998, an amended complaint was filed, joining certain U.S.
and Canadian companies (who are engaged in the distribution of the infringing
software) into the lawsuit.
While the Company intends to vigorously assert its rights, there can be no
assurance that PDT Image will be able to collect any or all of the judgment
amount from SDI and/or its principal officers, or that there will be a positive
outcome to the litigation involving Chasanoff and Raster Builders.
On April 24, 1997, the Company and it's subsidiary PDT Production
Corporation ("PDT Production") were served with a complaint by Lysta Production
A/S ("Lysta") in the U. S. District Court, Eastern District of Arkansas. Lysta
is a sister company of Lyco, Inc. ("Lyco"), PDT Production's former partner in
Prolyco Production Company ("Prolyco"). Prolyco manufactured the PDT Sensor
Sc/RP ultrasonic dental scaler previously sold by the Company.
Lysta's complaint concerns PDT Production's purchase of Lyco's interest in
Prolyco on September 20, 1996, PDT Production's subsequent assignment of its
assets for the benefit of creditors and its obligation for royalties under a
license agreement between Lysta and Prolyco which were allegedly guaranteed by
the Company. The Company and PDT Production executed a promissory note for
approximately $45,000 as consideration for royalties purportedly due under a
license agreement between Lysta and Prolyco.
Lysta claims it is entitled to the face amount of the promissory note,
minimum royalties it claims under the license agreement prior to PDT
Production's assignment of its assets for the benefit of creditors in the
approximate amount of $50,000, additional minimum royalties allegedly due under
the license agreement in the amount of $8.8 million, alleged damages in the
approximate amount of $112,000 related to purported wrongful detention of and
damage to equipment used to manufacture ultrasonic dental scalers, plus punitive
damages. In addition, Lysta seeks an injunction based on a non-compete agreement
that allegedly prohibits the Company from producing ultrasonic dental scalers
similar to Lysta's.
The Company and PDT Production maintain they have no obligation to pay
royalties, including those payable pursuant to the promissory note, because no
consideration was given under the license agreement and because the license
agreement is void as an unreasonable restraint of trade. Likewise, they maintain
no injunction should issue to prohibit their current manufacture of ultrasonic
dental scalers. In addition, the Company and PDT Production deny they detained
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or damaged equipment used to manufacture ultrasonic dental scalers and therefore
deny Lysta is entitled to damages for alleged detention and damage to that
equipment. Finally, the Company and PDT Production maintain that any obligation
for royalties terminated on the date PDT Production purchased Lyco's partnership
interest and that no royalties were payable after that date under the terms of
the license agreement.
The Company and PDT Production believe the claims of Lysta are without
merit and will vigorously defend the suit. The parties have filed motions for
partial summary judgment concerning various issues involved in the case which
are currently pending. The case is currently set for trial on April 6, 1998 in
the United States District Court for the Eastern District of Arkansas.
On May 29, 1997, the Company was served with a lawsuit by a former
employee, alleging discrimination on the basis of her sex. The suit was filed in
the United States District Court for the Eastern District of Arkansas. The
Company and its attorneys believe the claims of the former employee are without
merit, and will vigorously defend the suit. At the present time, the suit is in
the discovery stage.
The Company is not aware of any other material litigation involving the
Company or any of its officers or directors.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------ ---------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
- ------ ----------------------------------------------------------------------
As of December 31, 1997, the Company had 293 holders of record of its
Common Stock. The Company's Common Stock is traded on the American Stock
Exchange Emerging Company Marketplace.
The following are the high and low prices of the Company's Common Stock as
published by the American Stock Exchange Emerging Company Marketplace:
Quarter Ended High Close Low Close
------------- ---------- ---------
January 31, 1996 1 1/8 13/16
April 30, 1996 1 1/4 7/8
July 31, 1996 1 1/4 13/16
October 31, 1996 7/8 3/4
January 31, 1997 1 9/16
April 30, 1997 2 1
July 31, 1997 1 7/16 15/16
October 31, 1997 1 3/16 3/4
In May 1991, the Company's Registration Statement on Form 10 filed under
the Securities Exchange Act of 1934, as amended, became effective and the
Company thereby became a "reporting Company" subject to the periodic reporting
and other requirements of such Act. In March of 1992, the Company listed its
shares of Common Stock on the American Stock Exchange Emerging Company
Marketplace.
The Company historically has not paid cash dividends on its Common Stock.
While the Company does not currently intend to pay regular cash dividends, this
policy will be reviewed periodically by the Board of Directors, taking into
account, among other things, the Company's earnings and financial position.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ------ CONDITION AND RESULTS OF OPERATIONS.
-------------------------------------------------
FISCAL YEARS 1997 AND 1996
RESULTS OF OPERATIONS
For fiscal year 1997, net sales totaled $23.8 million, a 9% increase
compared to net sales of $21.8 million in 1996. The increase can be attributed
to higher sales of the Rota-dent and accessories, the scaler, and dental
pharmaceuticals, and a 6% price increase on the Rota-dent, in effect throughout
fiscal 1997. Approximately $0.4 million of the increase can be attributed to the
net impact of consolidating Canadian sales revenue with that of the Company for
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the final six months of 1997, due to the recission of the Pro-Dentec Canada
partnership. These increases were partially offset by a decrease in sales of
computer systems and software.
The Company's revenues for both 1997 and 1996 were substantially
attributable to sales of Rota-dents and associated accessory products. In fiscal
years 1997 and 1996, revenue from the sale of Rota-dents and accessories
amounted to approximately $17.1 million and $16.7 million, respectively. Sales
revenues from equipment (scalers, computer systems and software) amounted to
$3.6 million for 1997 and $3.0 million in 1996. Sales of pharmaceuticals and
other products and services were $3.1 million in 1997 and $2.1 million in 1996.
The cost of goods sold in fiscal 1997 was $9.4 million, and in fiscal
1996, $9.2 million. As a percentage of sales, cost of goods sold was 39.6% in
1997 compared to 42.4% in 1996. The decrease in cost of goods sold as a
percentage of sales revenue was primarily due to improved operating efficiencies
in the production of the Rota-dent, and a price increase of the Rota-dent unit,
which was effective for all of 1997, compared to only two months of 1996.
Included in 1997 cost of goods sold is a writeoff of approximately $208,000 of
obsolete intraoral camera inventory. There was a $213,000 writeoff of such
inventory in 1996. After the 1997 writeoff, no inventory associated with the
intraoral camera remains on the balance sheet.
Operating expense (selling, general & administrative, product development
and royalties) was $13.2 million in 1997 compared to $11.2 million in fiscal
1996. The increase in operating expense is attributable to increased selling,
general and administrative (G&A) expenses in 1997, partially offset by lower
product development costs. Selling expenses increased as a result of an
approximate 30% increase in the size of the field sales force and higher
advertising and sales promotional costs. G&A expense increased primarily as a
result of higher professional services costs. Product development expense
decreased as a result of the completion of the development of the Pro-Select-3
scaler early in the year.
Other income and expense netted to an expense of $485,000 in fiscal 1997
compared to a net expense of $931,000 in fiscal 1996. This category of expense
is primarily composed of the Company's pro-rata share of the operating profit
and loss of its non-consolidated equity affiliates and interest income/expense.
The 1997 amount reflects lower joint venture losses partially offset by higher
interest expense than that incurred in 1996.
The Company had ownership interests for several years in the Pro-Dentec
Canada Partnership, which distributed the Company's products in Canada. During
1997, the partnership was rescinded following litigation by the partners. (See
ITEM 3. LEGAL PROCEEDINGS.) Losses in 1997 to the date of the partnership's
recission were $89,000; the Company also then wrote off the balance of its
investment, totaling $59,000. For all of 1996, the Company's allocation of
partnership losses was $190,000. After recission, net sales in Canada, which are
included in the consolidated statement of income, totaled $439,000.
The Company's net income in fiscal 1997 was $463,000, which represents a
79% increase from net income of $258,000 in fiscal 1996. The improvement in net
income resulted primarily from higher gross profit margins on products sold and
lower operating losses in the joint venture affiliates, as detailed above.
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CAPITAL RESOURCES AND LIQUIDITY
As of fiscal year end 1997, the Company had total assets of $9.0 million
compared to $8.0 million in 1996. Total liabilities were $4.4 million in 1997
compared to $3.9 million in 1996. The increase in assets primarily reflects
additional investment in fixed assets during 1997, and higher trade receivables
and inventory resulting from increased 1997 sales levels. At October 31, 1997,
stockholders' equity had improved to $4.6 million from $4.1 million at the end
of the previous year. The current ratio increased slightly from 1.9 in 1996 to
2.0 in 1997.
Total short term indebtedness (draws on line of credit plus current
portion of long term debt and capital leases) was $0.8 million at the end of
1997 compared to $0.9 million in 1996. Long term debt was $1.3 million at 1997
year-end, compared to $1.0 million in 1996. The Company believes that it will be
able to retire this debt from future cash flows from operations.
During fiscal years 1997 and 1996, net cash provided from operations of
$1.1 million and $1.4 million, was primarily used to increase investment in
capital items, including manufacturing space and manufacturing and computer
equipment, to retire debt, and in 1997, to increase the Company's net cash
position.
The Company currently pays a royalty to a foreign company of $3.00 for
each Rota-dent unit sold as part of the cost of obtaining the world-wide rights
to manufacture and distribute the product, under an agreement entered into in
December 1988. Under the terms of this agreement, the per unit royalty decreases
to $1.50 after an aggregate of $5 million of royalties have been paid. This
royalty reduction is expected to occur in March or April of 1998.
In October 1994, the Company signed an agreement to enter into a business
relationship with Aztec Developments Ltd., a British company. During 1995, 1996
and 1997, Aztec and the Company worked to develop an automated periodontal
probe. The Company expects to bring this product to market in 1998. During the
24 month period commencing with the date of the first commercial sale of the
product, the Company is committed to incur marketing expenditures of not less
than $300,000 in connection with the sale of this product, in return for 50% of
the profits of the venture. The Company does not believe that these expenditures
will adversely impact its liquidity.
The Company has established reserves for potential warranty claims on its
products, and such claims have historically been within management's
expectations.
The Company defines liquidity as the ability of the Company to generate
adequate amounts of cash to meet the Company's operating needs. The Company has
historically relied on cash provided from operations to meet a majority of its
financial 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 is used to
finance the working capital requirements of the Company. The Company also has
other sources of credit with which it can finance the purchase of fixed assets.
The Company believes these sources of credit combined with cash flow from
operations will be sufficient to meet its foreseeable cash requirements.
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The Company has completed an examination of all software used in its
internal management and accounting systems, as well as of the software which it
sells to its customers, and has determined that there are no material risks and
uncertainties related to the "Year 2000" computer issue. In assessing its
reliance on external computer systems, primarily those of its customers and
vendors, the Company also believes that it has no material exposure to risk or
uncertainty. (The Company makes no significant sales to any governmental agency,
foreign or domestic.)
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
- ------ --------------------------------------------
The required financial statements and supplementary data are included in a
separate section following the signature page as an addendum to this Form
10-KSB.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
- ------ ACCOUNTING AND FINANCIAL DISCLOSURE
-------------------------------------------------
On June 5, 1997, 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 preceding 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 preceding the
replacement of SOTK.
On June 20, 1997, the Company engaged Deloitte & Touche LLP as its
independent auditor. During the Company's two most recent fiscal years and the
subsequent interim period preceding the engagement of Deloitte & Touche, neither
the Company nor anyone on its behalf consulted Deloitte & 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.
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PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS
- ------ --------------------------------
The directors and executive officers of the Company are as follows:
AGE AT TERM EXPIRES
NAME 1/1/98 AS DIRECTOR POSITION
---- ------ ----------- --------
William T. Evans 55 1998 Director, President and
Chief Executive Officer
Robert E. Christian 36 1998 Director, Executive Vice
President, Secretary and
Treasurer
Frank H. Newton, III 57 Chief Operating Officer
Richard L. Land 52 Vice President, Controller
J. Robert Lemon 55 1998 Director
Timothy A. Nolan 44 1998 Director
J. Philip Boesel 65 1998 Director
Michael S. Black 46 1998 Director
William T. Evans became President and Chief Executive Officer of the
Company in February 1996. Previously, he was the Executive Vice President and
Secretary, and has been a Director since 1987. Mr. Evans was an officer of
Dynavest Partnership, the original licensee for the Rota-dent product, from 1981
until its dissolution in December of 1992. He has been an officer of Multiway
Associates, a specialty nutrition company, since 1982. Mr. Evans is a cousin of
Timothy A. Nolan, a director of the Company.
Robert E. Christian became Executive Vice President, Secretary and
Treasurer of the Company in February 1996. Previously, he was the Senior Vice
President and Treasurer, and has been a director since 1988. Mr. Christian has
been Vice President of Data Control and Computer Services for Multiway
Associates, a specialty nutrition company, since 1982.
Frank H. Newton, III has been Chief Operating Officer of the Company since
February 1993. Prior to joining the Company, Mr. Newton was President and Chief
Operating Officer of Scott Instruments Corporation, Denton, Texas, since 1988,
and prior to that, President and Chief Executive Officer of AVM Systems, Inc.,
Fort Worth, Texas, for six years.
Richard L. Land has been the Controller of the Company since June 1996. He
was elected Vice President in March 1997. Prior to that time, he served as
Controller of Darling Special Products, Inc., Caruthersville, Missouri, since
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1990, and as General Accounting Manager of the Columbus Division of General Tire
and Rubber, Columbus, Mississippi, for four years. Mr. Land was awarded the CPA
Certificate by the state of Missouri in 1990.
J. Robert Lemon has been a director of the Company since 1987, and served
as its President from 1987 to 1996, when he resigned to devote full time to
other business interests. He continues to work with the Company as a consultant.
Mr. Lemon was an officer of Dynavest Partnership, the original licensee for the
Rota-dent product, from 1981 until its dissolution in December, 1992; and has
been an officer of Multiway Associates, a specialty nutrition company, since
1982.
Timothy A. Nolan has been a director of the Company since 1988. Mr. Nolan
has been Managing Director of Multiway Associates, a specialty nutrition
company, since 1987, and an officer and director of V. M. Nutri, Inc., a
specialty nutrition company, since 1989. He has been employed by V. M. Nutri
since 1982. Mr. Nolan is the cousin of William T. Evans.
J. Philip Boesel, Jr. has been a director of the Company since 1995. He
has been the First Vice President, Investment Banking of Kirkpatrick, Pettis,
Smith, Polian, Inc. since 1991. Kirkpatrick Pettis is a subsidiary of Mutual of
Omaha. Prior to this Mr. Boesel was the President of Robert G. Dickinson & Co.,
a regional investment banking firm, from 1971 through 1990, when the company was
sold. Mr. Boesel is a former Governor of the National Association of Securities
Dealers, and is currently a director of Dealers Lumber Company and Continental
Travel Associates. He holds a B.B.A. degree from the University of Wisconsin,
and a Masters degree in Business from Michigan State University.
Michael S. Black has been a director of the Company since 1996. He has
been a partner in the firm of Smith & Black, CPA's and Consultants, since 1988.
He specializes in the areas of corporate information systems and corporate
income tax. Mr. Black holds a B.B.A degrees in Accounting and Finance from the
University of Wisconsin at Whitewater, and is a Certified Public Accountant.
ITEM 10. EXECUTIVE COMPENSATION
- ------- ----------------------
The following table sets forth the compensation paid to William T. Evans,
Pro-Dentec's President, and other executive officers whose cash and non-cash
compensation exceeded $100,000 during the fiscal year ended October 31, 1997.
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NAME & BONUS
PRINCIPAL (YEAR OPTIONS/ ALL OTHER
POSITION YEAR SALARY EARNED) SARS (#) COMPENSATION(1)
- -------- ---- ------ ------- -------- ---------------
William T. Evans 1997 $140,000 -0- -0- -0-
President 1996 140,000 -0- -0- -0-
1995 140,000 -0- -0- -0-
Frank H. Newton, III 1997 $125,000 -0- -0- -0-
Chief Operating Officer 1996 125,000 -0- -0- -0-
1995 125,000 -0- -0- -0-
OPTION/SAR GRANTS IN LAST FISCAL YEAR
(Individual Grants)
PERCENT OF
TOTAL
OPTIONS/SARS EXERCISE OR
OPTIONS/SARS EMPLOYEES BASE PRICE EXPIRATION
NAME GRANTED (#) IN FISCAL YEAR ($/SH.) DATE
---- ----------- -------------- ----------- ----------
William T. Evans -0- -0- -0- -0-
President
Robert E. Christian -0- -0- -0- -0-
Executive Vice President
Frank H. Newton, III -0- -0- -0- -0-
Chief Operating Officer
Richard L. Land 25,000 3.8% $0.5625 12/29/06
Vice President, Controller
___________________________
1 The Company also provides certain of its senior executive officers with
certain personal benefits. The Company believes that the individual and
aggregate amount of such benefits does not exceed, in the case of any named
individual, the lesser of $50,000 or 10% of the reported cash compensation for
such individual.
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AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FY-END OPTION/SAR VALUES
VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS OPTIONS/SARS
AT FISCAL AT FISCAL
YEAR-END (#) YEAR-END ($)
SHARES VALUE ------------ ------------
ACQUIRED ON REALIZED EXERCISABLE/ EXERCISABLE/
NAME EXERCISE (#) ($) UNEXERCISABLE UNEXERCISABLE
---- ------------ -------- ------------- -------------
William T. Evans -0- -0- -0- -0-
Robert E. Christian -0- -0- -0- -0-
Frank H. Newton, III -0- -0- -0-/100,000 -0-/-0-
Richard L. Land -0- -0- -0-/ 25,000 -0-/$7,812
Mr. Newton was granted stock options totaling 100,000 shares vesting in
lots of 25,000 shares per year with exercise dates beginning on June 13, 1998
and ending on June 13, 2001. The options expire on June 13, 2004. Mr. Land was
granted stock options totaling 25,000 shares vesting on December 2, 2001. The
options expire on December 2, 2006.
Based solely upon a review of Forms 3, 4 and 5 furnished to the Company
during or with respect to fiscal 1997, the Company is not aware of any director,
officer or ten percent shareholder that failed to file on a timely basis, as
disclosed in the above referenced Forms, reports required by Section 16 (a)
under the Securities Exchange Act of 1934 during fiscal 1997 or a prior year.
Outside directors (Mr. Boesel and Mr Black) are compensated on a per
meeting basis, at the rate of $1,000 per board meeting and $500 per committee
meeting. Other directors, who are all officers either of the Company or its
affiliate, Life Plus, receive no additional compensation for their services.
OPTION PLAN
In 1989, the Company adopted the Pro-Dentec Incentive Stock Option Plan
("Plan") pursuant to which stock options ("Options") may be granted to key
employees and other individuals providing services to the Company. Five million
(5,000,000) shares have been reserved for issuance under the Plan, subject to a
limitation that options covering shares in excess of 10% of the outstanding
shares may not be granted during any one year. The Plan is administered by a
committee comprised of three members of the Board of Directors of the Company.
Options must be granted at the fair market value of the covered shares as of the
date of grant. The Plan has been approved by the shareholders. Options may be
granted for a term of up to ten years, but may be terminated upon termination of
employment. In 1997, 133,000 option shares expired or were terminated. As of
October 31, 1997, options relating to a total of 1,271,000 shares had been
granted to employees and others, of which 655,500 were granted in fiscal 1997.
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ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
- ------- AND MANAGEMENT
-----------------------------------------------
The following table sets forth as of January 1, 1998, the beneficial
ownership of the Company's Common Stock, $.01 par value, by all persons known by
the Company to own, beneficially or of record, more than five percent of the
Company's Common Stock, by each director of the Company, and by all officers and
directors as a group:
Name And Address Of Amount And Nature Of Percent Of
Beneficial Owner Beneficial Ownership Class
---------------- -------------------- ----------
William T. Evans 5,078,178(2) 36.0%
P. O. Box 4129
Batesville, AR 72503
J. Robert Lemon 4,904,242(3) 34.8%
P. O. Box 4129
Batesville, AR 72503
Robert E. Christian 310,400 2.2%
P. O. Box 4129
Batesville, AR 72503
Timothy A. Nolan 5,603,760(4) 39.7%
P. O. Box 4129
Batesville, AR 72503
Directors and Officers as
a group (8 persons) 10,605,220 75.2%
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- ------- ----------------------------------------------
The Company performs commercial printing services for Life Plus, a
partnership ("Partnership") engaged in the distribution of specialty nutrition
and other health-related products. Messrs. Evans, Christian, Lemon and Nolan,
all of whom are officers and/or directors of the Company, are beneficiaries of
trusts which are partners in the Partnership. Messrs. Lemon and Nolan are
__________________________
2 Includes 4,211,360 shares held by a trust principally for the benefit of Mr.
Evans. Also includes 717,000 shares held in trust for the benefit of Mr. Evans'
nephew for which he disclaims beneficial ownership.
3 Includes 4,093,360 shares held by a trust principally for the benefit of Mr.
Lemon. Also includes 671,000 shares held in trust for the benefit of nephews and
nieces of Mr. Lemon for which he disclaims beneficial ownership.
4 Includes 310,400 shares held by a trust for the benefit of Mr. Nolan. Also
includes 5,293,360 shares held as trustee, for which Mr. Nolan disclaims
beneficial ownership.
-23-
<PAGE>
employed by and are officers of the Partnership. During 1997, the Company billed
Life Plus $572,000 for printing services. Commercial market rates are charged
for these printing services, based on arms-length negotiation between the
parties. Payment terms are standard for the trade. As of October 31, 1997, Life
Plus' payment status is current with regard to receivables owed the Company.
As of October 31, 1997, the Company had made loans to Mr. Christian
totaling $44,500. Payments are current.
PART IV
ITEM 13. FINANCIAL STATEMENTS AND SCHEDULES AND REPORTS
- ------- ON FORM 8-K
----------------------------------------------
1. All Consolidated Financial Statements
(a) Consolidated Balance Sheets at October 31, 1997 and 1996.
(b) Consolidated Statements of Operations for Each of the Years in the
Two-Year Periods Ended October 31, 1997 and 1996.
(c) Consolidated Statements of Stockholder's Equity for Each of the
Years in the Two-Year Periods Ended October 31, 1997 and 1996.
(d) Consolidated Statements of Cash Flows for Each of the Years in the
Two-Year Periods Ended October 31, 1997 and 1996.
(e) Notes to Consolidated Financial Statements.
2. Report of Independent Certified Public Accountants.
3. Reports on Form 8-K.
4. Exhibits:
-24-
<PAGE>
EXHIBIT 3(A) - Articles of Incorporation
Incorporated herein by reference to Exhibit 3.1 to the Registration
Statement on Form 10 filed in March 1991 ("1991 Registration Statement")
EXHIBIT 3(B) - Bylaws
Incorporated herein by reference to Exhibit 3.2 to the 1991 Registration
Statement. Amendments to Bylaws dated December 20, 1995 incorporated
herein by reference to Exhibit 3(b) of Annual Report on Form 10KSB dated
October 31, 1996.
EXHIBIT 4 - Material Contracts
(i) Stock Incentive Plan. Incorporated herein by reference to Exhibit
10.1 of the 1991 Registration Statement.
(ii) Secured Credit Agreement with NBD Bank and supporting documents.
Incorporated by reference to Exhibit 4 of Annual Report on Form
10KSB dated October 31, 1996.
(iii) Capital Equipment leases with The CIT Group (6), incorporated
herein by reference to Exhibit 4 of Annual Report on Form 10KSB
dated October 31, 1996.
EXHIBIT 21 - Subsidiaries of the Registrant, incorporated herein by
reference to Exhibit 21 of Annual Report on Form 10KSB dated October 31,
1996.
EXHIBIT 27 - Financial Data Schedule
-25-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PROFESSIONAL DENTAL TECHNOLOGIES, INC.
Date: January 27, 1998 By: /s/ William T. Evans
--------------------------
William T. Evans
Principal Executive Officer
Date: January 27, 1998 By: /s/ Richard L. Land
-------------------------------
Richard L. Land
Principal Accounting Officer
Pursuant to the requirements of Section 13 of 15(d) of the Securities
Exchange Act of 1934, this report has been signed by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
By: /s/ J. Robert Lemon By: /s/ Robert E. Christian
---------------------- ---------------------------
J. Robert Lemon Robert E. Christian
Director Director
Date: January 27, 1998 Date: January 27, 1998
By: /s/ William T. Evans By: /s/ J. Philip Boesel
---------------------- ---------------------------
William T. Evans J. Philip Boesel, Jr.
Director Director
Date: January 27, 1998 Date: January 27, 1998
By: /s/ Timothy A. Nolan By: /s/ Michael S. Black
---------------------- ---------------------------
Timothy A. Nolan Michael S. Black
Director Director
Date: January 27, 1998 Date: January 27, 1998
-26-
<PAGE>
PROFESSIONAL DENTAL TECHNOLOGIES, INC.
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
OCTOBER, 31, 1997 AND 1996
<PAGE>
PROFESSIONAL DENTAL TECHNOLOGIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended October 31, 1997 And 1996
Independent Auditors' Reports F-1
Consolidated Balance Sheet F-3
Consolidated Statement of Income F-4
Consolidated Statement of Stockholders' Equity F-5
Consolidated Statement of Cash Flows F-6
Notes to Consolidated Financial Statements F-7
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Professional Dental Technologies, Inc.
Batesville, Arkansas
We have audited the accompanying consolidated balance sheet of Professional
Dental Technologies, Inc. and Subsidiaries (the "Company") as of October 31,
1997, and the related consolidated statements of income, stockholders' equity
and cash flows for the year then ended. These financial statements are the
responsibility of the management of the Company. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Professional Dental Technologies,
Inc. and Subsidiaries as of October 31, 1997, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
/s/ Deloitte & Touche LLP
- -----------------------------------
Deloitte & Touche LLP
Little Rock, Arkansas
December 19, 1997
F-1
<PAGE>
SILVERMAN
OLSON
THORVILSON &
KAUFMANN LTD
Certified Public Accountants
1550 Kinnard Financial Center
920 Second Avenue South
Minneapolis, Minnesota 55102
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Professional Dental Technologies, Inc.
Batesville, Arkansas
We have audited the accompanying consolidated balance sheet of Professional
Dental Technologies, Inc. and its subsidiaries as of October 31, 1996 the
related consolidated statements of operations, stockholders' equity, and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Professional Dental
Technologies, Inc. and its subsidiaries as of October 31, 1996 and the results
of its operations and of cash flows for the year then ended, in conformity with
generally accepted accounting principles.
/s/ Silverman Olson Thorvilson & Kaufmann Ltd.
SILVERMAN OLSON THORVILSON & KAUFMANN LTD.
CERTIFIED PUBLIC ACCOUNTANTS
Minneapolis, Minnesota
December 19, 1996
F-2
<PAGE>
PROFESSIONAL DENTAL TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
1997 1996
ASSETS (in thousands)
CURRENT ASSETS:
Cash and cash equivalents $1,267 $ 728
Certificates of deposit 400
Accounts receivable:
Trade, net of allowance for doubtful accounts
of $60,000 and 443,000 respectively (Note 6) 1,741 1,573
Affiliates (Note 2) 133 160
Inventory (Notes 3 and 6) 2,791 2,213
Advances to employees, officers and directors (Note 2) 70 83
Deferred income taxes (Note 9) 138 140
Other current assets 249 227
----- ------
Total current assets 6,389 5,524
PROPERTY AND EQUIPMENT, Net (notes 4, 7 and 8) 2,494 1,980
INVESTMENTS IN AND ADVANCES TO AFFILIATES (Notes 2 and 5) 324
DEFERRED INCOME TAXES, Net (Note 9) 79 58
OTHER ASSETS, Net 52 91
------ ------
TOTAL $9,014 $7,977
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable - line of credit (Note 6) $ 390 $ 726
Accounts payable - trade 1,135 982
Accrued payroll and payroll taxes 633 370
Accrued warranty costs 117 160
Other accrued liabilities 526 453
Current portion of long-term debt (Note 7) 206 146
Current portion of capital lease obligations (Note 8) 173 71
------- -------
Total current liabilities 3,180 2,908
LONG-TERM DEBT, Net of current portion (Note 7) 755 677
CAPITAL LEASE OBLIGATIONS, Net of current portion (Note 8) 505 306
------- -------
Total liabilities 4,440 3,891
COMMITMENTS AND CONTINGENCIES (NOTES 5 AND 10)
STOCKHOLDERS' EQUITY:
Common stock; par value $.01; 30,000,000 shares
authorized; 14,100,000 shares issued and
outstanding (Note 11) 141 141
Additional paid-in capital 289 264
Retained earnings 4,144 3,681
------- -------
Total stockholders' equity 4,574 4,086
------- -------
TOTAL $ 9,014 $ 7,977
======= =======
See notes to consolidated financial statements.
F-3
<PAGE>
PROFESSIONAL DENTAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED OCTOBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
1997 1996
(in thousands, except
per share information)
SALES (NOTES 2, 5 AND 10) $23,823 $21,789
COST OF GOODS SOLD (NOTES 3 AND 11) 9,427 9,235
------ ------
Gross profit 14,396 12,554
OPERATING EXPENSES (NOTES 2, 4, 10 AND 11) 13,155 11,228
------ ------
Income from operations 1,241 1,326
OTHER INCOME (EXPENSES):
Affiliate activity:
Equity in net losses of joint ventures (Note 5) (144) (425)
Write-down of investments in affiliates (Notes 2 and 5) (127) (293)
Interest expense (242) (156)
Miscellaneous income (expense) (Note 2) 28 (57)
------ -------
INCOME BEFORE INCOME TAXES (NOTE 9) 756 395
PROVISION FOR INCOME TAXES 293 137
------- -------
NET INCOME $ 463 $ 258
======= =======
NET INCOME PER SHARE $ 0.03 0.02
======= =======
See notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
PROFESSIONAL DENTAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED OCTOBER 31, 1997 AND 1996
- -----------------------------------------------------------------------------------------------------------------
Equity
Common Stock Adjustment
--------------- Additional from Foreign
Shares Par Paid-In Retained Currency
Issued Value Capital Earnings Translation Total
--------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT OCTOBER 31, 1995 14,100 $141 $239 $3,423 $(11) $3,792
Stock options issued for services 25 25
Adjustment from foreign currency translation 11 11
Net income 258 258
------ ---- ---- ------ ---- ------
BALANCE AT OCTOBER 31, 1996 14,100 141 264 3,681 4,086
Stock options issued for services 25 25
Net income 463 463
------ ---- ---- ----- ----- ------
BALANCE AT OCTOBER 31, 1997 14,100 $141 $289 $4,144 $ $4,574
====== ==== ==== ====== ===== ======
See notes to consolidated financial statements.
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
PROFESSIONAL DENTAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED OCTOBER 31, 1997 AND 1996 (in thousands)
- -------------------------------------------------------------------------------------------
1997 1996
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 463 $ 258
Adjustments to reconcile net income to net cash
provided by operations:
Affiliate activity:
Equity in net losses of joint ventures 144 425
Write-down of investments in affiliates 127 293
Depreciation and amortization 672 467
Loss on disposal of property and equipment 8 8
Stock options issued for nonemployee services 25 25
Deferred income taxes (19) (23)
Change in:
Accounts receivable (141) (238)
Inventory (578) 167
Advances - employees, officers and directors 13 36
Other assets (22) 147
Accounts payable - trade 153 (217)
Accrued payroll and payroll taxes 263 15
Accrued warranty costs (43) (90)
Other accrued liabilities 73 142
------ ------
Net cash provided by operations 1,138 1,415
INVESTING ACTIVITIES:
Purchase of property and equipment (739) (515)
Proceeds from the sale of property and equipment 6 14
Proceeds from (purchase of) certificates of deposit 400 (400)
Proceeds from (investment in) joint ventures 53 (419)
------- ------
Net cash used in investing activities (280) (1,320)
FINANCING ACTIVITIES:
Decrease in line of credit (336) (207)
Proceeds of long-term debt 340 170
Payment of long-term debt (202) (216)
Payment of capital lease obligations (121) (24)
------- ------
Net cash used in financing activities (319) (277)
EFFECT OF EXCHANGE RATE CHANGES ON CASH 11
------- ------
INCREASE (DECREASE) IN CASH 539 (171)
CASH AND CASH EQUIVALENTS:
Beginning of period 728 899
------ ------
End of period $1,267 $ 728
====== ======
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 231 $ 159
Income taxes 246 35
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES -
Property and equipment purchased with capital leases 422 401
- -------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
PROFESSIONAL DENTAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED OCTOBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF ORGANIZATION - Professional Dental Technologies, Inc. is a group
of companies headquartered in Batesville, Arkansas engaged primarily in the
business of designing, manufacturing and marketing products and services for
dental professionals to be used in the diagnosis, treatment and prevention
of periodontal and other dental diseases.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include
the accounts of Professional Dental Technologies, Inc. and its wholly-owned
subsidiaries: PDT Byte, Inc., Pro-Dentec FSC, Inc., Professional Dental
Hygienists, Inc., PDT Image, Inc., Professional Dental Manufacturing, Inc.,
Professional Dental Marketing, Inc., Professional Dental Printing, Inc.,
Professional Dental Probes, Inc., (inactive at October 31, 1997), and
Professional Dental Technologies Therapeutics, Inc. (collectively the
"Company"). All significant intercompany accounts and transactions have been
eliminated in consolidation.
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.
CASH AND CASH EQUIVALENTS - For the purpose of presentation in the
consolidated statements of cash flows, the Company considers all cash on
hand and on deposit with depository institutions with maturity at the time
acquired of three months or less to be cash and cash equivalents.
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 less
accumulated depreciation. Depreciation is calculated using accelerated
methods and is expensed based on the estimated useful lives of the assets.
LONG-LIVED ASSETS - The Company adopted Financial Accounting Standards Board
("FASB") Statement of Financial Accounting Standards ("SFAS") No. 121,
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS
TO BE DISPOSED OF in the year ended October 31, 1997. The Company reviews
long-lived assets and certain identifiable intangibles to be held and used
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The adoption of SFAS No.
121 had no effect on the Company's consolidated financial statements for the
year ended October 31, 1997.
INVESTMENTS IN AND ADVANCES TO AFFILIATES - The Company uses the equity
method to account for investments in affiliates, primarily joint ventures,
in which the Company has a 20% to 50% interest.
F-7
<PAGE>
NET INCOME PER SHARE - Net income per share was computed based on the
weighted average number of shares of common stock outstanding. Weighted
average number of shares outstanding for the years ended October 31, 1997
and 1996, was 14,100,000 shares. Common stock equivalents have less than a
3% dilutive effect.
REVENUE RECOGNITION - Revenue is recognized at the time that product
ownership transfers to the customer, principally at the time of shipment.
Revenue from computer software maintenance agreements is deferred and
amortized over the term of the related agreements.
ACCRUED WARRANTY COSTS - The Company provides by a current charge to income,
an amount it estimates will be needed to cover future warranty obligations
for products sold during the year.
CONCENTRATION OF CREDIT RISK - Accounts receivable arise from the sale of
dental products to dental professionals located throughout the world but
principally in the United States. The Company extends credit to its
customers in the normal course of business. 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.
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 SFAS No. 123, ACCOUNTING
FOR STOCK-BASED Compensation during the year ended October 31, 1997. SFAS
No. 123 establishes accounting and reporting standards for companies who
have stock-based compensation plans. Those plans include all arrangements by
which employees and nonemployees receive shares of stock or other equity
instruments of the company. SFAS No. 123 defines a fair value based method
of accounting for a stock option or similar equity instrument. Under the
fair value based method, compensation cost is measured at the grant date
based on the value of the award and is recognized over the service period,
which is usually the vesting period. Accounting Principles Board ("APB")
Opinion 25, requires compensation cost for stock-based employee compensation
plans to be recognized based on the difference, if any, between the quoted
market price of the stock and the amount an employee must pay to acquire the
stock. SFAS No. 123 permits an entity in determining its net income to
continue to apply the accounting provisions of APB Opinion 25 to its
stock-based employee compensation arrangements. An entity that continues to
apply APB Opinion 25 must comply with the disclosure requirements of SFAS
123. The Company has elected to continue to apply the accounting provisions
of APB Opinion No. 25 and related interpretations to its employee stock
options.
SELF INSURANCE - The Company is self-insured with respect to health
insurance and periodically estimates the liability of the Company for claims
incurred but not reported, adjusting its recorded liability as necessary.
Such estimates are based on the Company's experience giving consideration to
material changes in medical cost or usage trends of the plan and the amount
of contributions (if any) by participants.
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.
F-8
<PAGE>
2. RELATED PARTY TRANSACTIONS
During 1997 and 1996, the Company advanced funds to certain employees,
officers and directors. The advances are due on demand. The advances were as
follows at October 31:
1997 1996
---------------------------------------------------------------------
Employees $ 23,000 $ 29,000
Officers and directors 47,000 54,000
-------- --------
Total $ 70,000 $ 83,000
======== ========
---------------------------------------------------------------------
During the years ended October 31, 1997 and 1996, the Company provided
printing services with revenues aggregating approximately $572,000 and
$729,000, respectively, to its affiliates and to other companies controlled
by the majority shareholders of the Company. These amounts are included in
sales in the consolidated statements of income. As of October 31, 1997 and
1996, these affiliated companies owed the Company $133,000 and $160,000,
respectively, reflected as accounts receivable-affiliates in the balance
sheets.
During the years ended October 31, 1997 and 1996, the Company purchased
inventory from its affiliates aggregating $0 and $427,000, respectively, and
sold $340,000 and $933,000, respectively, of inventory to its affiliates.
During the years ended October 31, 1997 and 1996, the Company allocated
various operating and payroll expenses to one of its affiliates based on
related personnel costs and other factors. These allocated expenses
aggregated approximately $241,000 and $590,000, respectively.
During the years ended October 31, 1997 and 1996, the Company paid expenses
of and advanced funds to its affiliates. The amounts owed from these
affiliates are included in the investments in and advances to affiliates on
the balance sheet as of October 31, 1996. Also during the years ended
October 31, 1997 and 1996, the Company wrote down its investments in
affiliates by $127,000 and $275,000, respectively, due to the probability
that these investments were not recoverable. During the year ended October
31, 1997 the Company charged no interest to any affiliate. During the year
ended October 31, 1996 the Company charged interest of $10,000 to one
affiliate.
3. INVENTORY
Inventory consisted of the following at October 31:
1997 1996
---------------------------------------------------------------------
Finished goods $ 589,000 $ 818,000
Work in process 13,000 -
Raw materials 2,189,000 1,395,000
----------- -----------
Totals $ 2,791,000 $ 2,213,000
=========== ===========
---------------------------------------------------------------------
During the years ended October 31, 1997 and 1996, the Company wrote off
approximately $208,000 and $213,000, respectively, of obsolete raw materials
and finished goods which are reflected in cost of goods sold in the
consolidated statements of income.
F-9
<PAGE>
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at October 31:
----------------------------------------------------------------------------
Estimated
Useful Lives
1997 1996 in Years
----------------------------------------------------------------------------
Land $ 116,000 $ 116,000 -
Buildings and improvements 780,000 783,000 7-39
Manufacturing equipment 2,440,000 1,712,000 3-10
Vehicles 561,000 554,000 5
Furniture and equipment 802,000 444,000 3-7
----------- -----------
Total property and equipment 4,699,000 3,609,000
Less accumulated depreciation (2,205,000) (1,629,000)
----------- -----------
Property and equipment, net $2,494,000 $ 1,980,000
=========== ===========
----------------------------------------------------------------------------
Depreciation expense was $632,000 and $427,000 during 1997 and 1996,
respectively.
5. INVESTMENT IN AND ADVANCES TO AFFILIATES
PERFECTBYTE LIMITED PARTNERSHIP - PerfectByte Limited Partnership (the
"Partnership") is owned by PDT Byte, Inc. ("Byte") and an independent
company (the "Partner") to develop and market software for dental practice
management. Partnership profit is to be allocated based on specified
percentages at certain profitability levels while losses are allocated in
proportion to capital account balances at October 31 of each year.
Consequently, during the years ended October 31, 1997 and 1996, Byte was
allocated substantially all of the losses totaling approximately $55,000 and
$185,000, respectively. Additionally during 1997 and 1996, the Company
wrote-down its net investment in the Partnership amounting to $68,000 and
$150,000, respectively.
The Partnership is obligated under the partnership agreement to make
guaranteed payments to the Partner. Payments have been and are to be made
based on total principal and interest payments due to a lender by the
Partner. The notes have a principal balance of approximately $196,000 at
October 31, 1997, and a variable interest rate based on 1.5% over lender
prime rate (10.62% at October 31, 1997). Such notes mature November 19,
1998, and are expected by management of the Company to be refinanced.
The Partner may negotiate new terms at or near maturity which could modify
the payment due dates. If such modifications occur, the timing of the
Partnership's payments of its guaranteed payment obligations could also be
changed. The Company has guaranteed Byte's obligation to the extent of
one-half of the principal and interest payments which become due under the
existing debt.
F-10
<PAGE>
The following is a summary of the condensed financial position and results
of operations for the Partnership for the years ended October 31, 1997 and
1996.
----------------------------------------------------------------------------
1997 1996
----------------------------------------------------------------------------
Current assets $ 5,000 $ 49,000
Noncurrent assets 0 12,000
---------- ----------
Total assets 5,000 61,000
========== ==========
Current and total liabilities (substantially
all to the Company) 1,335,000 1,274,000
Owners' deficit (1,330,000) (1,213,000)
----------- ----------
Total liabilities and owners' deficit $ 5,000 $ 61,000
=========== ==========
Sales $ 262,000 $ 920,000
=========== ==========
Net loss $ ($55,000) $ (186,000)
=========== ==========
----------------------------------------------------------------------------
The Company had ownership interests for several years in a general
partnership known as Pro-Dentec Canada (the "Venture") which was involved in
the distribution of the Company's products in Canada. During the year ended
October 31, 1997, the partnership was terminated following litigation
between the partners. Losses during the year ended October 31, 1997,
incurred through the Venture's termination, totaled $89,000 and the Company
wrote off the remaining balance of its investment in the Venture which
totaled $59,000. For the year ended October 31, 1996, the Company's
allocated losses totaled $190,000. Net sales were $604,000 and $1,431,000
for the period from the beginning of fiscal year 1997 to the termination of
the Venture (approximately six months) and the year ended October 31, 1996,
respectively. After the termination of the Venture, net sales in Canada were
included in the consolidated statement of income and totaled $439,000.
6. LINE OF CREDIT
At October 31, 1997 and 1996, the Company had outstanding short-term
borrowings of $390,000 and $726,000, respectively, under an available bank
line of credit aggregating $3,000,000. The unused portion of the line of
credit at October 31, 1997 was $2,610,000. Interest is charged at a variable
rate based on lender prime + 1.5% (10% at October 31, 1997). Borrowings are
collateralized by receivables and inventory and guaranteed by the Company's
subsidiaries. The line of credit is subject to certain restrictive
covenants, including maintaining tangible net worth (as defined) of at least
$2,000,000. The line of credit has a term of three years and shall be
automatically renewed unless terminated under the provisions of the
agreement. The term of this line of credit began in May 1997.
7. LONG-TERM DEBT
Long-term debt consisted of the following at October 31:
----------------------------------------------------------------------------
1997 1996
----------------------------------------------------------------------------
Mortgage payable - collateralized by land and
building with a carrying value at October 31,
1997, of $274,000; interest at 8.25%; monthly
payments of principal and interest aggregating
$2,297, with a balloon payment of $104,000 at
maturity, March 1999. $128,000 $144,000
Mortgage payable - collateralized by land and
building with a carrying value at October 31,
1997, of $231,000; interest at 8.75%; monthly
payments of principal and interest aggregating
$1,849, with a balloon payment of $165,000 at
maturity, March 1999. 175,000 182,000
----------------------------------------------------------------------------
Continued
F-11
<PAGE>
----------------------------------------------------------------------------
1997 1996
----------------------------------------------------------------------------
Mortgage payable - collateralized by land and
building with a carrying value at October 31,
1997, of $276,000; interest at 8.25%; monthly
payments of principal and interest aggregating
$2,148, with a balloon payment of $164,000 at
maturity, April 2000. $190,000 $201,000
Notes payable - collateralized by equipment with
a carrying value at October 31, 1997, of
$51,000; interest at 7.0%; monthly principal
and interest payments of $3,069 maturing
March 1999. 50,000 92,000
Notes payable - collateralized by equipment with
a carrying value at October 31, 1997, of
$315,000; interest at 8.25%; monthly principal
and interest payments of $6,935, maturing
November 1999. 288,000 -
Notes payable - collateralized by vehicles with
a carrying value at October 31, 1997, of
$203,000; interest ranging from 7.0% - 13.3%;
aggregate monthly principal and interest
payments of $5,892 and maturity dates ranging
from November 1997 to January 2001. 130,000 204,000
-------- --------
961,000 823,000
Less current portion 206,000 146,000
-------- --------
Long-term portion $755,000 $677,000
======== ========
----------------------------------------------------------------------------
The debt matures as follows during the years ending October 31:
---------------------------------------------------------------------------
1998 $206,000
1999 416,000
2000 251,000
2001 81,000
2002 7,000
--------
$961,000
========
---------------------------------------------------------------------------
8. CAPITAL LEASE OBLIGATIONS
The Company leases certain property and equipment under capital leases. Cost
and accumulated depreciation of assets under capital leases were as follows
at October 31:
----------------------------------------------------------------------------
1997 1996
----------------------------------------------------------------------------
Property and equipment $823,000 $401,000
Less accumulated depreciation 236,000 58,000
-------- --------
Property and equipment, net $587,000 $343,000
======== ========
----------------------------------------------------------------------------
F-12
<PAGE>
The future minimum lease payments under the capital leases are as follows
for the years ending October 31:
----------------------------------------------------------------------------
1998 $234,000
1999 227,000
2000 224,000
2001 119,000
2002 12,000
--------
Total minimum lease payments 816,000
Less amount representing interest 138,000
--------
Present value of net minimum lease payments 678,000
Less current portion 173,000
--------
Capital lease obligation - net of current portion $505,000
========
----------------------------------------------------------------------------
9. INCOME TAXES
The provision for income taxes for the years ended October 31, 1997 and
1996, consists of the following:
----------------------------------------------------------------------------
1997 1996
----------------------------------------------------------------------------
Current expense $312,000 $160,000
Deferred benefit (19,000) (23,000)
-------- --------
Total $293,000 $137,000
======== ========
---------------------------------------------------------------------------
A reconciliation of the federal statutory income tax rate to the Company's
effective tax rate is as follows for the years ended October 31, 1997 and
1996:
----------------------------------------------------------------------------
1997 1996
----------------- -----------------
Amount Percent Amount Percent
----------------------------------------------------------------------------
Tax expense at maximum statutory
rate $257,000 34.0% $134,000 34.0%
State tax,net of federal benefit 43,000 5.7 18,000 4.6
Other (7,000) (0.9) (15,000) (3.9)
-------- ---- -------- ----
Provision for income taxes $293,000 38.8% $137,000 34.7%
======== ==== ======== ====
----------------------------------------------------------------------------
The net deferred tax asset consisted of the following at October 31:
F-13
<PAGE>
----------------------------------------------------------------------------
1997 1996
----------------------------------------------------------------------------
Deferred tax assets:
Investment in affiliates $112,000 $ 86,000
Warranty 45,000 62,000
Intangibles 38,000 29,000
Compensation 74,000 55,000
Allowance for doubtful accounts 23,000 19,000
Other 5,000 3,000
-------- --------
297,000 254,000
Deferred tax liability:
Guaranteed payments of joint venture 80,000 56,000
-------- --------
Net deferred tax asset 217,000 198,000
Current portion 138,000 140,000
-------- --------
Net deferred tax asset - non-current $ 79,000 $ 58,000
======== ========
----------------------------------------------------------------------------
F-14
<PAGE>
10. COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS - The Company and a former wholly-owned subsidiary ("PDT
Production") are defendants in a legal action in which the plaintiff claims
that the Company and PDT Production breached their obligation to pay
royalties to the plaintiff on an ultrasonic scaler previously sold by the
Company and claims further, based on guaranteed minimum royalties through
the year 2050, approximately $9,000,000 in actual losses for past and future
royalties and damages plus unspecified punitive damages. The Company
contends its obligation ceased with the assignment for the benefit of PDT
Production creditors and the resulting termination of the product-related
licensing agreement. The case is set for trial in April of 1998. The Company
believes its has adequate legal defenses with respect to this suit and
intends to vigorously defend against the action. However, it is reasonably
possible that the case could result in an outcome unfavorable to the
Company. While the Company currently believes that the amount of the
ultimate potential loss would not be material to the Company's financial
position, the outcome of litigation is inherently difficult to predict. In
the event of an adverse outcome, the ultimate potential loss could have a
material effect on the Company's financial position or reported results of
operations.
The Company is party to other litigation matters and claims which are normal
in the course of its operations, and while the results of litigation and
claims cannot be predicted with certainty, management believes, based on
advice of counsel, the final outcome of such matters will not have a
materially adverse effect on the consolidated financial position.
OPERATING LEASES - The Company leases warehouse space and various equipment
under non-cancelable operating leases. Future minimum lease payments are as
follows:
----------------------------------------------------------------------------
Year ending October 31:
----------------------------------------------------------------------------
1998 $ 52,000
1999 48,000
2000 50,000
2001 41,000
--------
$191,000
========
---------------------------------------------------------------------------
Rent expense was $126,000 and $101,000 for the years ended October 31, 1997
and 1996, respectively.
LICENSING AGREEMENT - The Company has a licensing agreement with a foreign
company which owns the manufacturing and distribution rights to a rotary
hygiene device, known as Rota-dent. The agreement contains the following
major provisions:
1) The Company holds the worldwide rights to manufacture and distribute
the Rota-dent in perpetuity except for the right to distribute the
Rota-dent in Sweden which was granted back to the foreign company
(subject to cancellation by either party on 90 days notice).
2) The Company was assigned all patents and trademarks of the Rota-dent.
3) The Company is to pay a royalty of $3.00 to the foreign company for
each Rota-dent sold until an aggregate of $5,000,000 in royalties has
been paid. At that time, royalty payments will change to $1.50 per
unit until an additional $3,000,000 in royalties have been paid at
which time the royalties will cease. During the years ended October
31, 1997 and 1996, the Company paid royalties of $602,000 and
$629,000, respectively, and up through October 31, 1997, has paid
aggregate royalties of approximately $4,743,000.
In addition, the Company has certain other licensing agreements related to
its distribution of various other dental products. During the years ended
October 31, 1997 and 1996, the Company incurred royalties under these
licensing agreements totaling $115,000 and $82,000, respectively.
F-15
<PAGE>
BUSINESS VENTURE AGREEMENTS - The Company has a business venture agreement
with Advanced Clinical Technologies, Inc. ("ACTech"), a third-party
developer of certain dental products produced by the Company's wholly-owned
subsidiary, Professional Dental Technologies Therapeutics, Inc. ("PDTT").
Pursuant to the agreement, ACTech was paid $96,000 during the years ended
October 31, 1997 and 1996, for consulting services provided. In addition,
ACTech earned and was paid profit allocation equivalent to 25% of PDTT's net
profit, as defined, aggregating $180,000 and $102,000 for the years ended
October 31, 1997 and 1996, respectively. During the year ended October 31,
1997, ACTech repaid $41,000 that the Company had advanced to ACTech against
future profits.
The Company has also entered into a rolling five year term agreement
commencing on December 5, 1995, with Aztec Developments, Ltd. ("Aztec"), an
independent company, to manufacture and distribute certain proprietary
periodontal dental products. In addition to contributing their manufacturing
and sales experience, the Company has committed to invest in the final
development of the products and required tooling, and to invest at least
$300,000 in the marketing and selling of the products over a two year term.
As of October 31, 1997, the Company has invested $60,000 in equipment costs
related to this agreement, which are included in property and equipment in
the consolidated balance sheets. Aztec has agreed to contribute the
completed design of the products and a license to manufacture the products
under the patents now in force. Aztec has the right to terminate the
agreement if the business volume does not exceed an agreed-upon minimum
during the initial two years.
The agreement stipulates fixed amounts payable to the Company and Aztec for
items sold, after which, all profits, as defined in the agreement, are to be
allocated equally between the Company and Aztec. As of October 31, 1997, no
sales of the related proprietary periodontal dental products have occurred.
PURCHASE COMMITMENTS - As of October 31, 1997, the Company had total
purchase commitments outstanding aggregating approximately $2,549,000.
SIGNIFICANT VENDORS - During the year ended October 31, 1997, the Company
made purchases from one supplier which aggregated $535,000.
PRODUCT SALES CONCENTRATION - Sales of the Company's Rota-dent and accessory
products represented approximately 71% of total revenues for the year ended
October 31, 1997.
11. EMPLOYEE BENEFIT PLANS
401(K) RETIREMENT SAVINGS PLAN - The Company has a 401(k) plan available to
all employees meeting certain service requirements. Eligible employees may
contribute up to 15% of their annual salary to the plan, subject to certain
limitations. The Company may provide profit-sharing contributions at the
discretion of its board of directors. Employees become fully vested in the
Company contributions after five years of service. There were no Company
contributions for the years ended October 31, 1997 or 1996.
INCENTIVE STOCK OPTION PLAN - The Company has an incentive stock option plan
for the benefit of its key personnel. The maximum number of shares of common
stock reserved for issuance under the Plan is 5,000,000 shares, provided
that in no event shall more than 10% of the Company's then outstanding stock
be optioned under the Plan in any single year.
The Board of Directors may grant options to key individuals at any time. The
purchase price for stock under the plan shall be 100% of the fair market
value of the stock at the time the option is granted, but in no event less
than par value of the stock. Options granted expire 10 years from the date
they are granted. As of October 31, 1997 and 1996, options to purchase an
aggregate of 1,271,000 and 748,500 shares of stock, respectively, were
outstanding at prices ranging from $0.5625 to $3.00. The options are
generally subject to the option holder's continued employment or services to
the Company.
F-16
<PAGE>
A summary of the status of the Company's stock option plan as of October 31,
1997 and 1996, and changes during the years ending on those dates is as
follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
Weighted
Number Option Average
of Price Option Price
Shares Per Share Per Share
<S> <C> <C> <C>
--------------------------------------------------------------------------------------
Options outstanding at November 1, 1995 1,528,500 $1.00 - $2.75 $ 1.42
Granted 25,000 $0.8125 $ 0.81
Expired (720,500) $1.00 - $1.50 $ 1.01
Forfeited (84,500) $1.00 - $2.00 $ 1.90
---------
Options outstanding at October 31, 1996 748,500 $0.8125 - $2.75 $ 1.71
Granted 655,500 $0.5625 - $3.00 $ 0.61
Forfeited (133,000) $1.50 - $2.75 $ 2.31
---------
Options outstanding at October 31, 1997 1,271,000 $0.5625 - $3.00 $ 1.12
=========
Options exercisable at October 31, 1997 563,000 $0.5625 - $2.375 $ 1.38
=========
Options available for grant at
October 31, 1997 3,729,000
=========
--------------------------------------------------------------------------------------
The following table summarizes information about stock options at October 31, 1997:
- ------------------------------------------------------------------------------------------------
Weighted Weighted
Weighted Average Average
Average Exercise Exercise
Number Remaining Price of Number Price of
Range of Outstanding at Contractual Outstanding Exercisable at Exercisable
Exercise Prices October 31, 1997 Life Options October 31, 1997 Options
- ------------------------------------------------------------------------------------------------
$1.25 100,000 2 1.25 100,000 1.25
$1.00 - $1.75 36,000 3 1.47 36,000 1.47
$1.50 200,000 5 1.50 200,000 1.50
$2.375 60,000 6 2.38 60,000 2.38
$2.00 - $2.50 167,500 7 2.01 37,500 2.00
$1.5625 - $2.00 27,000 8 1.76 - -
$0.8125 25,000 9 0.81 25,000 0.81
$0.5625 643,500 10 0.56 104,500 0.56
$3.00 12,000 10 3.00 - -
- -------------------------------------------------------------------------------------------------
</TABLE>
The Company applies APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES, in accounting for its stock option and award plans. Under the
terms of the plans, the exercise price for each option is equal to the
market price of the Company's stock on the date of the grant. Accordingly,
no compensation expense has been recognized under these plans. Net income
and earnings per share on a proforma basis as if the Company had utilized
the accounting methodology prescribed by SFAS No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, would have been as follows (in thousands, except
per share data):
F-17
<PAGE>
----------------------------------------------------------------------------
Years ended October 31,
-----------------------
1997 1996
----------------------------------------------------------------------------
Net income:
As reported $ 463 $ 258
Pro forma 431 251
Earnings per share:
As reported $0.03 $0.02
Pro forma 0.03 0.02
---------------------------------------------------------------------------
The estimated fair value of options granted during 1997 and 1996 was $.3480
and $.5120 per share, respectively. For purposes of determining fair value
of each option, the Company used the Black-Scholes model with the following
assumptions:
----------------------------------------------------------------------------
Risk-free interest rate 5.84%
Expected life 10 years
Expected volatility 42%
----------------------------------------------------------------------------
NON-QUALIFIED OPTIONS - The Company has issued options to a consultant to
purchase 100,000 shares of common stock at $1.00 per share. The options are
exercisable immediately and expire on December 31, 1998. As of October 31,
1997, these options have not been exercised. In conjunction with these
options, the Company has recognized $25,000 of compensation expense for the
years ended October 31, 1997 and 1996, respectively.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS. The estimated fair
value amounts have been determined by the Company using available market
information and appropriate valuation methodologies and are as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
1997 1996
------------------------ ----------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
<S> <C> <C> <C> <C>
--------------------------------------------------------------------------------------------
ASSETS:
Cash and cash equivalents $1,267,000 $1,267,000 $ 728,000 $ 728,000
Certificates of deposit - - 400,000 400,000
Accounts receivable:
Trade 1,741,000 1,741,000 1,573,000 1,573,000
Affiliates 133,000 133,000 160,000 160,000
LIABILITIES:
Notes payable - line of credit 390,000 390,000 726,000 726,000
Accounts payable - trade 1,135,000 1,135,000 982,000 982,000
Long-term debt 961,000 938,000 823,000 794,000
Commitments - - - -
---------------------------------------------------------------------------------------------
</TABLE>
F-18
<PAGE>
The following methods and assumptions were used by the Company to estimate
the fair value of each class of financial instruments:
The carrying amounts of cash and cash equivalents, certificates of
deposit, accounts receivable, and accounts payable approximate fair
value due to the short maturity of these items. The carrying amount of
the notes payable - line of credit approximates fair value because the
interest rate on this instrument changes with market interest rates. The
fair value of the Company's long-term debt (including current
maturities) is estimated based on interest rates available to the
Company for issuance of similar debt with similar terms and remaining
maturities.
13. RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the FASB issued Statement No. 128, EARNINGS PER SHARE
("SFAS 128"). SFAS 128 established standards for computing and presenting
earnings per share ("EPS"), simplifying the standards previously found in
APB Opinion No. 15, EARNINGS PER SHARE. The current presentation of primary
EPS is replaced with a presentation of basic EPS. Dual presentation of basic
and diluted EPS will be required on the face of the income statement as well
as a reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS computation.
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS is computed similarly to fully
diluted EPS pursuant to APB Opinion No. 15.
In June 1997, the FASB issued Statement No. 130, REPORTING COMPREHENSIVE
INCOME ("SFAS 130"). SFAS 130 establishes standards for reporting and
display of comprehensive income and its components. SFAS 130 requires that
all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that
is displayed with the same prominence as other financial statements. The
Company will be required to classify items of other comprehensive income by
their nature in a financial statement and display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of the balance sheet.
Also in June 1997, the FASB issued Statement No. 131, DISCLOSURES ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, establishing standards
for the way public enterprises report information about operating segments
in annual financial statements and in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers.
SFAS 130 and 131 are effective for fiscal years beginning after December 15,
1997, with reclassification of earlier periods. SFAS 128 and 129 are
effective for financial statements issued for periods ending after December
15, 1997, including interim periods. The adoption of SFAS 128, 129, 130 and
131 is not expected to have a material effect on the Company's consolidated
financial statements.
* * * * * *
F-19
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-END> OCT-31-1997
<CASH> 1,267
<SECURITIES> 0
<RECEIVABLES> 1,874
<ALLOWANCES> 60
<INVENTORY> 2,791
<CURRENT-ASSETS> 6,389
<PP&E> 4,699
<DEPRECIATION> 2,205
<TOTAL-ASSETS> 9,014
<CURRENT-LIABILITIES> 3,180
<BONDS> 0
0
0
<COMMON> 141
<OTHER-SE> 4,433
<TOTAL-LIABILITY-AND-EQUITY> 9,014
<SALES> 23,823
<TOTAL-REVENUES> 23,823
<CGS> 9,427
<TOTAL-COSTS> 13,155
<OTHER-EXPENSES> 243
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 242
<INCOME-PRETAX> 756
<INCOME-TAX> 293
<INCOME-CONTINUING> 463
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 463
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
</TABLE>
