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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 1997, or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to .
Commission File No. 0-19195
AMERICAN DENTAL TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 38-2905258
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
28411 Northwestern Highway, Suite 1100, Southfield, Michigan 48034
(Address of principal executive offices)(Zip Code)
(248) 353-5300
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of Each Class Name of Exchange on which registered
None Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.04 par value per share
(Title of Class)
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the registrant's Common Stock held by
non-affiliates of the registrant was approximately $14,600,000 as of
March 10, 1998, based upon the last sales price reported on The Nasdaq National
Market on that date. For purposes of this calculation only, all directors,
executive officers and owners of more than five percent of registrant's common
stock are assumed to be affiliates. There were 6,956,636 shares of the
registrant's Common Stock issued and outstanding on March 10, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrants' Proxy Statement for its 1998 Annual Meeting of
Stockholders are incorporated by reference into Part III of this report on
Form 10-K
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
INTRODUCTION
American Dental Technologies, Inc. ("American Dental" or "Company")
develops, manufactures and markets high technology dental products designed for
general dentistry. American Dental's primary products are air abrasive kinetic
cavity preparation systems ("KCP") and pulsed dental lasers, primarily the
PulseMaster models, which are developed and manufactured at its manufacturing
facility in Corpus Christi, Texas. American Dental also develops, manufactures
and markets precision air abrasive jet machining ("AJM") systems for industrial
applications. American Dental, incorporated in Delaware in November 1989,
completed its initial public offering in June 1991.
In March 1997, stockholders approved a one-for-four reverse common stock split.
The reverse stock split was effective on March 17, 1997 and appropriate
adjustments were made to the number and price of outstanding warrants and
options. Additionally, prior year financial statements have been appropriately
adjusted.
PRODUCTS
KCP Cavity Preparation Systems
American Dental currently offers several KCP models which vary in size,
power and features from the KCP 5, which is a counter top model, to the deluxe
KCP 1000PAC model. American Dental's KCP products remove tooth decay and tooth
structure, including enamel, by means of a narrow stream of minute particles of
alpha alumina propelled at high velocity by compressed air and delivered to the
tooth via a lightweight handpiece. The KCP shapes restoration sites, removes old
composites and modifies underlying hard tissue, often helping to increase bond
strength. It is also used for sealant preparations, stain removal and intraoral
porcelain removal and repair. The KCP can often be used in place of a drill and
may be used in many cases without anesthesia. The dentist controls the cutting
speed by selecting particle size (27 or 50 micron) and air pressure (40 psi to
160 psi) with touch pads on a control panel. The air abrasive stream is
activated by a foot pedal. The KCP floor models (KCP 100 and KCP 1000) are
contained in a movable cabinet the size of a medium suitcase and plug into a
standard electrical outlet.
The KCP is best used in conjunction with modern tooth-colored composite
restoration materials. It is not recommended for removing large amalgam
fillings. The precision of the KCP and the manner in which it prepares surfaces
for restorations allow for earlier treatment of decay and less destruction of
the tooth while restoring it. In many cases, the KCP may be used without
anesthesia, allowing a dentist to treat teeth in different quadrants of the
mouth during a single visit. This is generally not possible when conventional
instruments and anesthesia are used.
American Dental also markets a Plasma Arc Curing System ("PAC") as an
accessory to its KCP and as a stand alone unit. The PAC utilizes a high
intensity light source to rapidly cure composite fillings. Curing occurs in five
to ten seconds, or at least twice as fast as most conventional curing lights.
The KCP1000 PAC combines an air abrasive cavity preparation system together with
a composite curing light in a single instrument. This allows dentists to
efficiently switch from cavity preparation to curing.
The KCP is sold primarily in North America, certain Asian and Pacific
markets and Europe. The KCP represented approximately 76%, 67% and 49% of
American Dental's total revenues in 1997, 1996 and 1995, respectively.
Nd:YAG Dental Lasers
The PulseMaster is American Dental's primary laser product line.
PulseMasters are neodymium yttrium-aluminum-garnet (Nd:YAG) lasers that deliver
pulses of laser energy through a flexible fiber optic delivery system that can
reach into difficult recesses of the mouth. Depending upon the model,
PulseMasters can deliver a 100-microsecond energy pulse at rates varying from 10
to 200 times per second. Various models deliver a maximum of up to three, six
and ten watts of average power. Each PulseMaster is contained in a movable
cabinet the size of a medium suitcase, weighs approximately 85 pounds and plugs
into a standard electrical outlet.
American Dental's dental lasers, components and accessories are sold
primarily in certain Asian and Pacific markets, Europe and North America. Lasers
represented approximately 15%, 26% and 47% of American Dental's total revenues
during 1997, 1996 and 1995, respectively.
American Dental believes one important feature of its Nd:YAG dental laser
is its ability to help reduce the pain associated with the procedures for which
they are used. Additionally, because the laser is more precise than standard
dental instruments, its use results in less cellular destruction. The laser
minimizes bleeding during soft
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tissue surgery, creating a cleaner field in which to operate by eliminating
time-consuming removal of blood from the operative site. The laser also reduces
the risk of post-operative infection.
American Dental's dental lasers are used for both soft tissue and hard
tissue applications. Soft tissue procedures include removing excess or diseased
gum tissue, contouring gums, performing biopsies, preparing gums for crown and
bridge impressions, trimming the gums to fit crowns and bridges, treating gum
disease and for hemostasis (control of bleeding). Hard tissue applications
include removing early decay from teeth, etching, removing stains, increasing
hardness of dentin, and desensitizing and anesthetizing teeth. American Dental
has not received clearance from the U.S. Food & Drug Administration ("FDA") to
market dental lasers in the United States for any hard tissue application, but
does market these instruments in certain other countries for such purposes. See
"Governmental Regulation."
Industrial Products
American Dental also develops, manufactures and markets precision air
abrasive jet machining ("AJM") systems for industrial applications. AJM has a
wide range of applications, including drilling, cutting, abrading, deburring,
dressing, beveling, etching, shaping and polishing. Its principal advantage over
conventional machining is that the AJM process, which accomplishes its work
through kinetic particle displacement (an erosion process), produces no heat,
shock or vibration. This enables precise work to be done on fragile materials
without deburring or further processing. Generally, the same is not true of
drills, saws, laser or other types of conventional machining equipment because
all of these systems rely on heat and/or friction to perform the work. These
machining techniques generally require further processing and in many instances
do not provide the precision available with AJM, particularly with fragile
materials. AJM systems are often used to remove the slag, burrs and flash
resulting from conventional machining processes. Some examples include deburring
needles, beveling silicon wafers and cutting fiber optics.
Industrial products accounted for less than 5% of American Dental's total
revenues in 1997 and 1996 and 0% in 1995.
MARKETING, SALES AND TRAINING
General
American Dental markets its dental products through independent
distributors to general dental practitioners and certain other dental
specialists in North America, certain Asian and Pacific markets and Europe.
American Dental's products are marketed in North America through several large
national and regional dental distributors, primarily Patterson Dental Company,
H. Meer Dental and Henry Schein, Inc. Distributors use their distribution
networks to provide sales leads, shipping, installation and technical service
support for the KCP and, beginning in 1997, the PulseMaster. American Dental and
its distributors work cooperatively to develop prospects and close sales.
Until recently, American Dental's products have been marketed in Japan
and certain other Asian and Pacific markets by Denics Co. Ltd. ("Denics") or its
affiliates. In mid-1997, American Dental purchased Denics' right to manufacture,
market, distribute and sell the Company's products in the Pacific Rim and has
begun establishing relationships with new dental distributors in certain Pacific
Rim countries. Denics continues to exclusively market American Dental's products
in Japan and as of December 31, 1997 has purchase commitments of approximately
$2,625,000 through March 1999.
American Dental's products are marketed in Europe through dental
distribution groups in various countries. In Germany, the Company's primary
European market, American Dental utilizes two major distribution groups, Dental
Liga GmbH ("Dental Liga") and Orbis High Tech Dental GmbH ("OHT").
Marketing activities, such as dental exhibitions and meetings, are
typically lower in the summer months, which results in decreased revenues during
the third quarter of the year.
The loss of American Dental's relationship with any of its dental product
distributors or their failure to meet purchase commitments could have a material
adverse effect on American Dental's business.
American Dental presently has several industrial product distributors.
Such distributors have been and are anticipated to be the primary source of
sales for American Dental's industrial products in the future. Industrial
product distributors are supported by American Dental primarily through
advertising in the Thomas Register and trade journals, and participation in
trade shows.
American Dental also sells some industrial products directly to customers
through advertisements or customer referrals and through original equipment
manufacturers of grinding equipment who purchase AJM systems to incorporate into
their equipment.
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INSTALLATION, TRAINING AND SERVICE
Because American Dental's dental products represent new approaches to
dentistry, installation and training are considered to be significant aspects of
its marketing efforts. Shortly after any purchase, American Dental or the
selling distributor install the product, verify that it is in proper working
order and provide training. American Dental also encourages each purchaser to
participate in ongoing continuing education regarding the use of American
Dental's dental products and endeavors to share new developments as soon as
reliable scientific support has been established.
American Dental or its distributors generally provide warranty service
for American Dental's products in the United States. To service its dental
products, American Dental has two full-time service employees in the United
States and has service arrangements with independent distributors and equipment
repair companies for products in other markets. If such arrangements are
unavailable, certain of American Dental's sales personnel are trained to make
minor service repairs. To date, American Dental has not experienced significant
service problems. Generally, the warranty for lasers is one year on the dental
laser system and 60 days on the optic fiber. Generally, the warranty for a KCP
or a PAC is one year. American Dental provides a limited five year warranty that
a PAC will deliver full curing energy in the calibrated time of ten seconds or
less.
SUPPORT OF EDUCATIONAL ACTIVITIES
Because American Dental's dental products represent new
approaches to dentistry, American Dental believes a substantial effort is
required to educate dentists regarding the advantages of its technology.
American Dental actively supports educational activities relating to the use of
its products.
Dr. Terry Myers, American Dental's Vice President - Research and Clinical
Education, is the executive director of The Institute for Advanced Dental
Technologies, formerly The Institute for Laser Dentistry (the "Institute").
Under the auspices of the Institute, Dr. Myers lectures at dental meetings and
institutions throughout the world and publishes professional papers and
articles. The Institute also supervises the training of clinical instructors,
provides clinical instructors to lead educational programs, evaluates
developments in dental technology and organizes clinical training programs.
American Dental supports these programs by providing financial support to the
Institute, soliciting enrollments and assisting in the preparation of course
materials. Following the completion of a program, an American Dental sales
representative is typically available to answer questions concerning American
Dental's products.
COMPETITION
In general, American Dental's products are subject to intense
competition, both from other advanced dental technology companies and from
makers of conventional dental equipment. American Dental believes there are
approximately five companies which presently sell competing dental air abrasive
products and several other companies have announced plans to market dental air
abrasive systems. American Dental believes there are approximately eight
competing companies which presently offer Nd:YAG, argon, erbium, holmium or CO2
lasers for use in dentistry. American Dental has patents in the basic
technologies, both in air abrasion and lasers which the Company believes
provides a competitive advantage. To the best of the Company's knowledge,
American Dental's dental air abrasive and dental laser revenues exceeded those
of each of these competitors for 1997.
American Dental's KCP, PAC and PulseMaster products must also compete
with conventional treatment methods using dental instruments or equipment which
are generally less expensive and with which dentists are more familiar.
Many of these competing companies, particularly those which manufacture
traditional dental equipment, may have been in business longer, have greater
resources and/or have a larger distribution network than American Dental.
American Dental's competitive position is dependent upon its pricing and
marketing practices, its ability to make ongoing improvements in its existing
products, to develop new products, and to successfully promote the capabilities
and treatment benefits of its products. While American Dental believes its
products are competitive in terms of capabilities, quality and price,
competition has, and may in the future, adversely affect American Dental's
business.
PATENTS
American Dental believes its patents provide a competitive advantage in
those countries where they have been issued. American Dental believes its air
abrasive technology patents and other patent rights provide a proprietary means
to utilize that technology in dentistry. In the United States, American Dental
has patents related to dental air abrasive systems and methods for using an air
abrasive stream for dentistry that do not begin expiring until 2011, technology
patents for air abrasive cavity preparation systems that do not begin expiring
until 2004, dental laser method and technology patents that have expiration
dates ranging from 2002 to 2016, and industrial air abrasive patents that have
expiration dates ranging from 2004 to 2016. American Dental also holds several
industrial air abrasive patents in various other countries.
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MANUFACTURING AND SUPPLIERS
American Dental manufactures, assembles and services its products at its
ISO 9001-certified facility in Corpus Christi, Texas. Certification under the
ISO 9001 standard represents the highest level of facility certification
attainable, and places the Company in a unique position among high tech dental
product manufacturers. Manufacturing certification becomes a requirement for all
medical products distributed or sold in Europe as of July 1, 1998.
American Dental's products are manufactured from parts, components and
subassemblies obtained from a number of unaffiliated suppliers and/or fabricated
internally at its manufacturing facility. American Dental has modern machining
capability allowing it to control the production of certain non-standard parts.
American Dental uses numerous suppliers for standard parts and for fabrication
of certain parts. Although most of the parts and components used in its products
are available from multiple sources, American Dental presently obtains several
parts and components from single sources. Lack of availability of certain parts
and components could result in production delays. While the loss of American
Dental's relationship with a particular supplier might result in some production
delays, such a loss is not expected to materially affect American Dental's
business.
RESEARCH AND DEVELOPMENT
Most research and development, prototype production, and testing
activities take place at the Texas facility, although some research and
development work is performed for American Dental by consultants. The Texas
facility has an engineering and CAD/CAM drafting staff and is expected to
manufacture American Dental's prototype requirements. Although American Dental
expects to continue to conduct most of its own research and development
activities, American Dental will continue to work with various domestic and
international dental schools, consultants and researchers to analyze dental
applications and to develop product enhancements and complementary products.
American Dental's research and development expenditures for 1997, 1996
and 1995 were $641,984, $668,796 and $784,319, respectively. American Dental's
current research and development efforts are focused on new and expanded
applications for the laser and KCP in dentistry, enhanced laser technology and
complementary products for the dental market.
GOVERNMENTAL REGULATION
American Dental's dental products are subject to significant governmental
regulation in the United States and certain other countries. In order to conduct
clinical tests and to market products for therapeutic use, American Dental must
comply with procedures and standards established by the United States Food and
Drug Administratin ("FDA") and comparable state and foreign regulatory agencies.
Changes in existing regulations or adoption of additional regulations may
adversely affect American Dental's ability to market its existing products or to
market enhanced or new dental products.
United States Regulatory Requirements
The FDA granted clearance to market the KCP for hard-tissue applications
and the PulseMaster dental lasers for soft-tissue procedures in late 1992.
Clearance to market the PAC was granted by the FDA in mid-1995. The PulseMaster
received FDA clearance to market for laser curettage in March 1997 and a diode
laser was granted soft tissue clearance in September 1997. Additionally, the
Company has a pending application to market the PulseMaster for hard tissue
applications. The receipt of FDA clearance requires proof of the product's
safety and efficacy or that the product is substantially equivalent to products
which have already received FDA clearance. Such clearance may take from six
months to several years to receive.
Foreign Regulatory Requirements
The KCP and PulseMasters have been granted Germany's TuV and MedGv
approvals, which are recognized by most European countries, and may be sold in
Germany and many other European markets. In the latter part of 1996, approval to
market the KCP in Japan was obtained. American Dental's dental lasers comply
with government regulations in most major countries in Europe, Asia, the Pacific
Rim, and North and South America and are marketed for both hard and soft tissue
applications, except in Japan, where (as in the United States) they have not
been cleared for hard-tissue procedures. Additional foreign authorizations to
market its dental products are being sought where needed. In some of American
Dental's markets, approvals are not difficult to obtain and in others, no
approval is required. Regulation of medical devices in other countries varies
between countries such as Japan, which has standards similar to the FDA, to
countries which have no regulations. Regulation of medical devices in other
countries is also subject to change and there can be no assurance American
Dental will continue to be able to comply with such requirements.
European regulations will require ISO 9001 certification as of July 1998
for all medical products distributed or sold in Europe. American Dental's
manufacturing facility received ISO 9001 certification in 1997.
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PRODUCT LIABILITY EXPOSURE
American Dental's business involves the inherent risk of product
liability claims. If such claims arise, they could have an adverse effect on
American Dental. American Dental currently maintains product liability insurance
on a "claims made" basis with coverage per occurrence and in the aggregate
annually of $2,000,000. There is no assurance that such coverage will be
sufficient to protect American Dental from all risks to which it may be subject
or that product liability insurance will be available at a reasonable cost, if
at all, in the future.
FOREIGN OPERATIONS -
See "American Dental Technologies, Inc. Notes to Financial Statements,
Note 8." Employees
On March 1, 1998, American Dental had 86 full-time employees and 6
part-time employees. Of these employees, 22 were engaged in direct sales and
marketing activities and 52 in manufacturing activities. The remaining employees
are in finance, administration, customer service, and research and development.
American Dental has no collective bargaining agreements with any unions and
believes that its overall relations with its employees are good.
EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth information concerning each of the
current executive officers of American Dental who are elected to serve at the
discretion of the Board of Directors.
<TABLE>
<CAPTION>
Name Age Position
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<S> <C> <C>
Ben J. Gallant 64 President, Chief Executive Officer and Director
Diane M. Miller 36 Chief Financial Officer
John E. Vickers 51 Sr. Vice President - Operations and Director
Terry D. Myers 50 Vice President - Research & Clinical
William S. Parker 52 Vice President - Marketing & Sales
William D. Myers 56 Chairman of the Board of Directors
</TABLE>
Ben J. Gallant - Mr. Gallant was appointed President of American Dental in
September 1996 and Chief Executive Officer in November 1996. He became a
director in July 1996. Mr. Gallant was a founder of Texas Airsonics, Inc.
("Texas Air"), which was acquired by American Dental on July 31, 1996, served as
a director and chairman of the board since that company's inception in 1982, and
became its president and chief executive officer in 1991.
Diane M. Miller -- Ms. Miller is a certified public accountant and was appointed
Chief Financial Officer in December 1993. She had been the Controller of
American Dental since March 1992. Prior to joining American Dental, Ms. Miller
spent eight years with the accounting firm of Ernst & Young, most recently as an
audit manager.
John E. Vickers III - Mr. Vickers was appointed Senior Vice President -
Operations in November 1996 and became a director in July 1996. Mr. Vickers had
served as Texas Air's chief financial officer and legal counsel since June 1993
and had various operating responsibilities with Texas Air. From December 1991
until September 1994, Mr. Vickers was of counsel to the law firm of Novak,
Vickers and Burt. Mr. Vickers had been engaged in the practice of law for 25
years.
Terry D. Myers, D.D.S. -- Dr. Myers became Vice President - Research and
Clinical in January 1998. Dr. Myers has been a dentist for more than 20 years.
He is one of the founders of American Dental and a co-inventor of the Company's
first dental laser. Dr. Myers had been Senior Vice President - Dental Division
since November 1996 and from November 1993 until November 1996, Dr. Myers was
Director of Education and Training. He has been the executive director of The
Institute for Advanced Dental Technologies since it was founded in 1990. He is
the brother of William D. Myers, American Dental's Chairman of the Board.
William S. Parker - Mr. Parker was appointed Vice President - Marketing and
Sales in November 1996. Mr. Parker had been New Product Manager for American
Dental since joining the Company in June 1991.
William D. Myers, M.D. - Dr. Myers is one of the founders of American Dental and
a co-inventor of the Company's first dental laser. He has been Chairman of the
Board of American Dental since January 1990. Dr. Myers has been a practicing
ophthalmologist for more than 20 years and is the founder and director of the
Michigan Eyecare Institute. Dr. William Myers and Dr. Terry Myers are brothers.
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ITEM 2. DESCRIPTION OF PROPERTIES
American Dental currently leases approximately 5,000 square feet for its
principal executive offices located at 28411 Northwestern Highway, Suite 1100,
Southfield, Michigan 48034. In April 1998, the Company will be relocating to its
recently acquired 12,000 square foot office building at 18860 W. Ten Mile Rd.,
Southfield, Michigan 48075.
American Dental owns an approximately 25,000 square foot manufacturing
facility located at 5555 Bear Lane, Corpus Christi, Texas 78405.
ITEM 3. LEGAL PROCEEDINGS
On December 20, 1996, American Dental filed a lawsuit against Kreativ,
Inc. ("Kreativ") and two individuals in the United States District Court for the
Eastern District of Michigan, Southern Division. American Dental is seeking
injunctive relief and money damages because of the wrongful activities of
Kreativ and those individuals, including without limitation: for disparagement
of American Dental's business reputation and KCP products; false advertising;
unfair and deceptive business practices and trade defamation. In January 1997,
the federal court awarded American Dental a preliminary injunction ordering
Kreativ and the two individuals to stop making certain patently false statements
which misrepresent the ability of American Dental's KCP to perform several
classes of cavity preparation. The court also ordered Kreativ to print a
retraction. American Dental intends to vigorously pursue this litigation.
Discovery is incomplete and American Dental is unable to estimate the amount of
potential gain that may result, if any.
On July 7, 1997, the Company filed a second lawsuit against Kreativ in
the United States District Court for the Southern District of Texas. The Company
is seeking injunctive relief and money damages for infringement of certain of
the Company's patents, including treble damages for certain willful
infringements, due to Kreativ's making, using, selling and offering for sale
systems which come within the scope of the patents.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS
American Dental's common stock is traded on The Nasdaq National Market
(Symbol: ADLI). The following table sets forth certain information as to the
high and low sales prices per share of American Dental common stock as reported
by Nasdaq for each quarterly period during the last two fiscal years.
<TABLE>
<CAPTION>
Closing Price
High Low
--------------------------
<S> <C> <C>
1996
First Quarter $ 8.25 $5.50
Second Quarter 10.25 5.50
Third Quarter 14.75 7.00
Fourth Quarter 9.00 5.50
1997
First Quarter $12.000 $4.750
Second Quarter 7.750 4.625
Third Quarter 10.375 4.5625
Fourth Quarter 8.375 4.500
</TABLE>
The records of the transfer agent reflect that as of March 23, 1998,
there were approximately 300 registered beneficial and record holders of
American Dental common stock.
The American Dental Board of Directors presently intends to retain all
earnings to finance operations and does not expect to authorize cash dividends
in the foreseeable future. Any payment of cash dividends in the future will
depend upon earnings, capital requirements and other factors considered relevant
by the Board of Directors.
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ITEM 6. SELECTED FINANCIAL INFORMATION
The following selected financial data, as of and for each of the five
years ended December 31, is derived from the audited financial statements of
American Dental. Operating results for prior years are not necessarily
indicative of the results that may be expected for any other periods. The data
should be read in conjunction with the financial statements and related notes
included in this report and with Item 7 "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
(in thousands, except per share amounts)
1997 1996 1995 1994 1993
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating Data:
Net sales $ 21,447 $ 20,474 $ 13,325 $ 11,163 $ 10,681
Net income (loss) 3,621 5,628(1) (1,274) (4,181) (6,802)(2)
Net income (loss)
per common share
assuming dilution $ .47 $ .90 $ (.34) $ (1.28) $ (3.29)
Weighted average number
of common shares 7,640(6) 6,284(6) 3,836(7) 3,291(8) 2,067
Balance Sheet Data:
Total assets $ 22,530 $ 21,280(3) $ 12,984 $ 11,137
Long-term obligations 135 577 3,664 4,030 3,413
Stockholders' equity (5) 20,257 16,809(6) 1,832(7) 2,190(8) 3,661(9)
Working capital (deficit) 8,290 5,153 (1,437)(10) 12 (320)
</TABLE>
- -----------------
(1) Includes $2,700,000 related party royalty income and a $560,000
restructuring expense.
(2) Includes $2,000,000 litigation settlement expense.
(3) Includes goodwill of $6,124,999 and other assets of $2,447,330
recorded in connection with the acquisition of Texas Airsonics, Inc.
on July 31, 1996.
(4) Includes goodwill of $4,224,461 and other assets of $628,720 recorded
in connection with the acquisition of Incisive Technologies, Inc. on
December 30, 1993.
(5) No dividends were paid on the common stock during the periods
presented. However, $41,453 in accrued dividends on Series A
convertible preferred stock has been recorded.
(6) Includes 2,857,443 shares of common stock issued in connection with
the acquisition of Texas Airsonics, Inc.
(7) Includes 222,222 shares of restricted common stock issued in a private
placement.
(8) Includes 749,750 shares of restricted common stock issued in a private
placement.
(9) Includes 383,748 shares of common stock issued in connection with the
acquisition of Incisive Technologies, Inc., the sale of $2,000,000 of
Series A preferred stock, and the conversion of $1,117,179 of notes
payable to related parties into 359,220 shares of common stock.
(10) Includes $1,500,000 current note payable, proceeds of which were
utilized for a $1,410,000 non-current deposit related to litigation.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Business Combination
On July 31, 1996, the Company acquired 100% of the outstanding stock of
Texas Airsonics, Inc. ("Texas Air") in exchange for 2,857,443 shares of common
stock and warrants to purchase 1,749,228 additional shares of common stock at
$5.6416 per share for a period commencing August 1, 1997 and ending July 31,
1999. The acquisition has been accounted for as a purchase, and accordingly, the
total value of common stock and warrants issued ($8,572,329) has been allocated
to the acquired identifiable assets and assumed liabilities based on their
estimated fair values as of the acquisition date. The excess consideration of
$6,124,999 has been accounted for as goodwill and will be amortized over a
fifteen year period.
Results of Operations
For the year ended December 31, 1997, the Company earned $3,621,770
compared to net income of $5,628,786 for 1996. The decrease in net income is
primarily due to the recognition of non-recurring royalty income of $2,700,000
in 1996. Income from operations for 1997 was $3,095,094 compared to $3,004,096
in 1996. The increase in income from operations is primarily due to increased
gross profit, resulting from the acquisition of Texas Airsonics, Inc. ("Texas
Air") in July 1996. The increased gross profit was offset by increased selling,
general and administrative expenses, primarily due to research and development,
legal, and marketing expenses of $1,220,000 shared with Texas Air prior to its
acquisition in 1996.
For the year ended December 31, 1996, the Company earned $5,628,786
compared to a loss of $1,274,166 for the same period in 1995. The increase in
net income in 1996 was primarily due to increased sales and recognition of
non-recurring royalty income of $2,700,000.
For the year ended December 31, 1997, the Company's net sales
increased 5% compared to 1996. Net sales in 1996 increased 54% compared to
1995.
Net sales in North America, primarily KCPs, during 1997 increased 49%,
primarily due to a 63% increase in the volume of KCPs sold, compared to 1996.
Increased sales in North America during 1997 were offset by significantly
reduced purchases by the Company's dealers in Japan and Europe, related to
inventory adjustments and poor economic conditions, compared to 1996. The
Company's laser product sales volumes for 1997 decreased 32% in 1997 compared to
1996. The decrease in laser volume is due to significantly reduced purchases by
the Company's dealers in Japan and Europe as those dealers reduced existing
inventories. Laser sales in North America have increased in 1997 due to
increased new laser marketing and educational programs resulting from additional
FDA clearances received in April 1997.
The sales increase in 1996 compared to 1995 is due primarily to an
increase of approximately 89% in the volume of KCPs sold, including a 298%
increase in North America, due to increased market acceptance. This increase was
partially offset by lower sales in Germany, due primarily to unfavorable changes
in the German health care reimbursement system and dealers reducing inventory
levels. The Company's laser product sales volumes for 1996 were approximately
the same as in 1995. The effects of the increased KCP volume on net sales in
1996 were partially offset by a 9% decrease in the average price of lasers sold.
Management believes that the sales growth and profitability anticipated
from its laser product line will require broader market acceptance of laser
products in general, increased market share, additional regulatory approvals and
additional cost reductions. The Company is continuing its efforts to obtain
additional regulatory approvals in the United States and Japan and to increase
the Company's market share to improve laser sales growth and to achieve
profitability in the laser product line.
Management anticipates that sales will continue to improve in 1998
compared to 1997, primarily from sales of KCPs in North America.
Internationally, the Company anticipates improved sales in 1998 in Europe and
Japan. Further, the Company recently established a direct sales force in Germany
and has a purchase contract from Denics Co., Ltd. for lasers aggregating
$3,200,000 through March 1999 for distribution in Japan. The foregoing
statements are "forward looking statements" within the meaning of the Securities
Exchange Act of 1934, as amended, and are subject to uncertainties. Such
uncertainties include, without limitation, the potential lack of product
acceptance, the potential failure of distributors to meet purchase commitments,
the potential loss of distributor relationships, the potential failure to
receive or maintain necessary regulatory approvals, and the extent to which
competition may negatively affect prices and sales volumes.
Gross profit as a percentage of net sales was 56% for the year ended
December 31, 1997, compared to 49% in 1996 and 47% in 1995. The increases are
attributable to the July 1996 acquisition of Texas Air, the manufacturer of the
Company's KCP product line. This acquisition increased the gross margins on KCP
products due to the addition of the manufacturing margin after the acquisition
date.
9
<PAGE> 10
Selling, general and administrative expenses were $8,338,921 in 1997,
$5,786,296 in 1996 and $6,957,844 in 1995. The increase in 1997 is attributable
to the Company's manufacturing agreement with Texas Air, prior to its
acquisition, to share research and development, legal, and marketing expenses of
$1,220,000. Additionally, the 1997 expense levels reflect increased commissions
on sales in North America, the addition of Texas Air's selling and
administrative expenses, and the amortization of goodwill resulting from the
acquisition of Texas Air. The 17% decline in 1996 compared to 1995 is due to the
cost sharing with Texas Air of $1,220,000, previously discussed, and the
reduction of legal expenses and the reversal of a contingency reserve of
approximately $1,300,000, primarily due to settlement of litigation.
As part of its efforts to consolidate management and manufacturing
operations after the acquisition of Texas Air in July 1996, the Company incurred
$560,000 in restructuring expenses related to the employment termination of the
Company's previous chief executive officer and the severance of approximately
ten employees resulting from the relocation of the California laser
manufacturing operations to the Texas facility. Approximately $100,000 and
$250,000 of the restructuring costs were paid in 1996 and 1997, respectively.
The Company expects the remainder to be paid in 1998.
Research and development expenses were $641,984 in 1997, $668,796 in
1996 and $784,319 in 1995. The decrease in research and development in 1997 is
primarily due to reduced personnel costs and the completion of clinical trials
related to governmental approval for laser applications in 1996. Additionally,
the decrease in 1996 compared to 1995 primarily relates to a sharing of these
expenses with Texas Air prior to the acquisition of Texas Air in July 1996. The
Company continues to support clinical research and training in various areas of
laser and air abrasive dentistry.
In June 1997, the Company agreed to the transfer of the licenses for
the sales of dental lasers and air abrasive instruments from Sunrise
Technologies, Inc. ("Sunrise") to Lares Co. ("Lares") in connection with the
sale of Sunrise's dental business to Lares. The Company received in
consideration for this transfer a payment of $275,000 and a note receivable for
$100,000, due in June 2000 in consideration for this transfer. The Company will
also continue to receive royalties on air abrasive and dental lasers from Lares.
On June 10, 1993, the Company had agreed with Denics to form a joint
venture to distribute dental products in certain Asian and Pacific markets. The
agreement, as amended, also granted Denics territorial manufacturing rights for
all dental laser and air abrasive products owned by the Company, in Japan. In
consideration, Denics provided the Company a $3,000,000 non-refundable prepaid
royalty deposit for future air abrasive products manufactured in Japan.
Formation of the joint venture was delayed and a revised joint venture agreement
was signed in the fourth quarter of 1996. Denics acknowledged that the Company
had fully performed all its obligations under the original agreements and that
the Company had earned the prepaid royalty. Accordingly, as of December 31,
1996, the Company recognized $2,700,000, net of foreign taxes, of related party
royalty income.
Denics manufactured dental lasers in 1995, and pursuant to agreements,
the Company earned royalties on those units sold in Japan and certain Asian and
Pacific markets. Related party royalty income was $261,000 for 1995. There was
no similar related party royalty income in 1996 or 1997 because Denics purchased
products directly from the Company rather than manufacturing them. Management
expects that during 1998 Denics will continue to purchase products directly from
the Company for Japan rather than manufacturing them and there will be no
related party royalty income.
Liquidity and Capital Resources
The Company's operating activities provided $1,699,367 in cash
resources in 1997 compared to $203,709 provided in 1996. The cash provided by
operations in 1997 was due to income of $3,621,770 resulting primarily from
higher United States KCP sales and $1,112,177 related to non-cash depreciation
and amortization expense. Cash provided by operations was reduced primarily by
changes in operating assets and liabilities, including an increase in inventory
of $905,068, an increase in notes receivable of $600,000, a decrease in accounts
payable of $754,470, a decrease in taxes other than income of $405,598 and a
decrease in other accrued liabilities of $289,152.
The Company's investing activities used $1,214,357 in cash resources in
1997 as compared to $863,180 provided by cash resources in 1996. The cash used
by operations in 1997 was due to an increase in intangible assets of $1,087,639.
The increase in intangible assets primarily related to the purchase of Denics'
right to manufacture, market, distribute and sell the Company's products in the
Pacific Rim other than Japan.
The Company has working capital of $8,789,695 at December 31, 1997
compared to working capital of $5,109,776 at December 31, 1996. The increase in
working capital is primarily a result of net income of $3,621,770.
10
<PAGE> 11
In October 1997, the Company replaced its $2,500,000 line of credit with
a $1,500,000 one year revolving line of credit from a bank, with interest at
prime (8.50% at December 31, 1997). The Company's borrowing base is 80% of
eligible accounts receivable and 50% of inventory. The line of credit is secured
by a pledge of the Company's accounts receivable, inventory and fixed assets. As
of December 31, 1997, $250,000 was outstanding under the line of credit and
$1,250,000 remained available under the borrowing base.
At December 31, 1997, the Company had a deferred tax asset of $6,828,000,
including $5,792,000 of net operating loss carryforwards ("NOLs") and a
valuation allowance of $6,738,000. The NOLs expire in various amounts in 2006
through 2010. The NOLs and temporary differences are both available to offset
future taxable income.
The Company believes, based upon its current business plan, that current
cash, available financing resources and cash generated through operations should
be sufficient to meet the Company's anticipated short term and long term
liquidity needs for the foreseeable future.
Year 2000 Issue
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. The Company has
determined that it will be required to upgrade or replace its software so its
computer systems will properly utilize dates beyond December 31, 1999. The
Company presently believes that with upgrades of existing software or
conversions to new software, the Year 2000 Issue will be mitigated.
The Company plans to complete the Year 2000 modifications in 1998. The
costs associated with the modifications or replacements of software are expected
to be immaterial and will be funded through operating cash flow. The Company has
initiated communications with significant suppliers and customers to determine
their plans to address the Year 2000 issue and believes it would not have a
material adverse effect on the Company. Additionally, the Company has determined
it has no exposure to contingencies related to the Year 2000 Issue for the
products it has sold.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
11
<PAGE> 12
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements
Report of Independent Auditors
Stockholders and Board of Directors
American Dental Technologies, Inc.
We have audited the accompanying consolidated balance sheets of American Dental
Technologies, Inc. as of December 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1997. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits 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 audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
American Dental Technologies, Inc. at December 31, 1997 and 1996, and the
consolidated results of its operations and its cash flows for each of three
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects the
information set forth therein.
Ernst & Young LLP
Detroit, Michigan
February 28, 1998
12
<PAGE> 13
American Dental Technologies, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year Ended December 31
1997 1996 1995
------------------------------------------------
<S> <C> <C> <C>
Net sales
Trade $ 19,386,836 $15,375,663 $ 9,653,536
Related party (Note 3) 2,060,505 5,099,313 3,672,000
------------ ----------- -----------
21,447,341 20,474,976 13,325,536
Cost of sales:
Trade 9,371,342 9,329,352 3,686,930
Related party (Note 2) 1,126,436 3,352,000
------------ ----------- -----------
9,371,342 10,455,788 7,038,930
------------ ----------- -----------
Gross profit 12,075,999 10,019,188 6,286,606
Selling, general and administrative 8,338,921 5,786,296 6,957,844
Restructuring expense (Note 2) --- 560,000 ---
Research and development 641,984 668,796 784,319
------------ ----------- -----------
Income (loss) from operations 3,095,094 3,004,096 (1,455,557)
Other income (expense)
License transfer fee (Note 6) 375,000 --- ---
Royalty income:
Related party (Note 3) --- 2,700,000 261,000
Other 204,533 35,246 30,806
Interest expense (52,857) (110,556) (110,415)
------------ ----------- -----------
Net income (loss) $ 3,621,770 $ 5,628,786 $(1,274,166)
============ =========== ===========
Net income (loss) per share $ 0.52 $ 1.08 $ (0.34)
======= ======= ========
Net income (loss) per share
assuming dilution $ 0.47 $ 0.90 $ (0.34)
======= ======= ========
</TABLE>
See accompanying notes.
13
<PAGE> 14
American Dental Technologies, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31
1997 1996
--------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 1,831,683 $ 1,832,192
Accounts receivable:
Trade, less allowance of $250,000
in 1997 and $280,000 in 1996 3,129,352 2,691,242
Related parties (Note 3) 223,150 782,469
----------- -----------
3,352,502 3,473,711
Inventories (Note 1) 4,128,905 3,204,806
Prepaid expenses and other current assets 614,084 537,283
Note receivables-related party (Note 3) 500,000 ---
----------- ----------
Total current assets 10,427,174 9,047,992
Property and equipment, net (Note 1) 1,199,130 1,192,454
Intangible assets, net (Notes 1,2 and 3):
Goodwill 8,712,250 9,400,452
Air abrasive technology rights 909,918 1,088,958
Other 1,181,835 217,696
----------- -----------
10,804,003 10,707,106
Other receivable (Note 6) 100,000 ---
Investment in joint venture (Note 3) --- 333,334
----------- -----------
Total assets $22,530,307 $21,280,886
=========== ===========
</TABLE>
See accompanying notes.
14
<PAGE> 15
American Dental Technologies, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31
1997 1996
--------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to related parties (Note 3) $ --- $ 200,000
Note payable (Note 4) 250,000 500,000
Accounts payable 1,316,986 2,080,895
Compensation and employee benefits 247,025 237,488
Taxes other than income 8,429 414,027
Other accrued liabilities 315,039 505,806
----------- -----------
Total current liabilities 2,137,479 3,938,216
Other non-current liabilities (Note 4) 135,392 177,175
Notes payable to related party,
less current portion (Note 3) --- 400,000
Stockholders' equity:
Preferred stock, $.01 par value, authorized
10,000,000 shares; none outstanding
Common stock, $.04 par value, authorized
12,500,000 shares; outstanding: 6,948,011
shares in 1997; and 6,936,439 shares in 1996 277,923 277,457
Additional paid-in capital 40,446,624 40,515,943
Accumulated deficit (20,362,547) (23,984,317)
Foreign currency translation (104,564) (43,588)
----------- -----------
Total stockholders' equity 20,257,436 16,765,495
----------- -----------
Total liabilities and stockholders' equity $22,530,307 $21,280,886
=========== ===========
</TABLE>
See accompanying notes.
15
<PAGE> 16
American Dental Technologies, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended December 31
1997 1996 1995
--------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $3,621,770 $5,628,786 $(1,274,166)
Adjustments to reconcile net income
(loss) to net cash provided by operating
activities:
Depreciation 121,435 542,686 411,886
Amortization 990,742 728,199 471,822
Other non-cash gains (100,000) (1,335) (11,833)
Stock issued for services --- --- 16,500
Advances from Texas Airsonics, Inc. prior
to acquisition --- 399,474 ---
Changes in operating assets and liabilities:
Accounts receivable 124,343 (1,373,980) 284,173
Inventories (905,068) (239,740) (486,081)
Prepaid expenses and other current assets (74,098) 216,276 (62,869)
Notes and other receivables (600,000) --- ---
Prepaid foreign taxes --- 225,000 (225,000)
Accounts payable (754,470) (2,128,263) 754,955
Compensation and employee benefits 11,243 (109,180) 170,796
Taxes other than income (405,598) (193,150) (194,217)
Other accrued liabilities (289,152) (636,246) 339,264
Other non-current liabilities (41,780) 145,182 (70,975)
Deferred royalty income --- (3,000,000) ---
---------- ---------- -----------
Net cash provided by operating activities 1,699,367 203,709 124,255
INVESTING ACTIVITIES
Proceeds from sale of equipment --- 1,335 31,644
Purchases of equipment (126,718) (399,123) (24,173)
Increase in intangible assets (1,087,639) (367,071) ---
Cash obtained upon merger --- 217,772 ---
Decrease (increase) in non-current deposits
(Note 2) --- 1,410,267 (1,410,267)
---------- ---------- -----------
Net cash (used in) providing by investing activities (1,214,357) 863,180 (1,402,796)
FINANCING ACTIVITIES
Payments on note payable to related party (500,000) (200,000) (200,000)
Payments on note payable (250,000) (1,290,000) ---
Proceeds from note payable --- 500,000 ---
Proceeds from notes payable to related party --- --- 1,500,000
Proceeds from sale of common stock --- --- 800,000
Proceeds from exercise of stock options 264,481 89,585 5,000
---------- ---------- -----------
Net cash (used in ) provided by financing activities (485,519) (900,415) 2,105,000
---------- ---------- -----------
(Decrease) increase in cash (509) 166,474 826,459
Cash at beginning of year 1,832,192 1,665,718 839,259
---------- ---------- -----------
Cash at end of year $1,831,683 $1,832,192 $ 1,665,718
========== ========== ===========
</TABLE>
See accompanying notes.
16
<PAGE> 17
American Dental Technologies, Inc
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Common Stock Additional Foreign
-------------------------- Paid-In Accumulated Currency
Shares Amount Capital Deficit Translation Total
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 3,605,191 $144,210 $ 30,385,565 $(28,338,937) $(24,483) $2,166,355
Net loss for 1995 (1,274,166) (1,274,166)
Issuance of common stock for
intellectual property rights 100,000 4,000 90,300 94,300
Issuance of common stock
(Note 5) 226,936 9,077 807,423 816,500
Exercise of stock options 2,500 100 4,900 5,000
---------------------------------------------------------------------------------------
Balance at December 31, 1995 3,934,627 157,387 31,288,188 (29,613,103) (24,483) 1,807,989
Net income for 1996 5,628,786 5,628,786
Foreign currency translation (19,105) (19,105)
Exercise of stock options 25,560 1,023 88,562 89,585
Issuance of common stock for
intellectual property rights 26,230 1,049 88,651 89,700
Issuance of common stock for
property (Note 3) 38,945 1,558 261,319 262,877
Issuance of common stock for
Texas Airsonics, Inc.
(Note 2) 2,857,443 114,298 8,458,031 8,572,329
Issuance of common stock for
investment in joint venture
(Note 3) 53,548 2,142 331,192 333,334
---------------------------------------------------------------------------------------
Balance at December 31, 1996 6,936,353 277,457 40,515,943 (23,984,317) (43,588) 16,765,495
Net income for 1997 3,621,770 3,621,770
Foreign currency translation (60,976) (60,976)
Exercise of stock options 65,205 2,608 261,872 264,480
Redemption of stock in
cancellation of joint venture
(Note 3) (53,547) (2,142) (331,191) (333,333)
---------------------------------------------------------------------------------------
Balance at December 31, 1997 6,948,011 $277,923 $40,446,624 $(20,362,547) $(104,564) $20,257,436
=======================================================================================
</TABLE>
See accompanying notes.
17
<PAGE> 18
Notes to Consolidated Financial Statements
December 31, 1997
1. Organization and Significant Accounting Policies
Principles of Consolidation
American Dental Technologies, Inc. (the "Company") develops, manufactures,
markets and sells high technology products for dentistry. The consolidated
financial statements include the accounts and operations of the Company and its
subsidiary. All intercompany transactions and balances have been eliminated.
Inventories
Inventories are stated at the lower of cost, determined generally by the
first-in first-out method, or market. At December 31, inventories consisted of
the following:
<TABLE>
<CAPTION>
1997 1996
-------------------------
<S> <C> <C>
Finished goods $ 920,919 $1,426,776
Work in process 10,633 75,559
Raw materials, parts and supplies 3,197,353 1,702,471
----------- ----------
$ 4,128,905 $3,204,806
=========== ==========
</TABLE>
Inventories at December 31, 1997 and 1996 are net of valuation allowances of
$715,000 and $395,000, respectively.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is computed by the straight-line method over the estimated useful
lives of the related assets, which range from three to thirty-nine years. At
December 31, property and equipment consisted of the following:
<TABLE>
<CAPTION>
1997 1996
------------------------
<S> <C> <C>
Building and improvements $ 745,266 $ 718,250
Office furniture and equipment 1,953,969 2,116,124
---------- -----------
2,699,235 2,834,374
Accumulated depreciation (1,500,105) (1,641,920)
---------- -----------
$ 1,199,130 $ 1,192,454
=========== ===========
</TABLE>
Intangible Assets
Intangible assets consist of goodwill, air abrasive technology rights, patents,
distribution rights and organization costs and are stated at cost less
accumulated amortization. The Company is amortizing goodwill over 15 years, air
abrasive technology rights over 10 years and other intangible assets over lives
ranging from 10 to 17 years. Accumulated amortization was $3,126,303 and
$2,254,871 at December 31, 1997 and 1996, respectively.
On January 1, 1996, the Company adopted Financial Accounting Standards Board
Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of. The Company periodically evaluates
intangible assets for indicators of impairment in value in accordance with FASB
No. 121. When impairment is indicated, the Company revalues the assets based on
their fair value.
Revenue Recognition
Revenue from dental product and part sales is recognized when title is
transferred to the customer, generally upon shipment. The Company recognizes
revenue on certain export sales to Denics, a Japanese company (see Note 3),
under terms which require shipment to a local independent warehouse.
Earnings Per Share
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings Per Share. Statement 128 replaced the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effects of options, warrants and convertible securities. Diluted earnings per
share is very similar to the previously reported fully diluted earnings per
share. All earnings per share amounts for all periods have been presented, and
where appropriate, restated to conform to the Statement 128 requirements.
18
<PAGE> 19
Notes to Consolidated Financial Statements
December 31, 1997
1. Organization and Significant Accounting Policies (continued)
Earnings Per Share (continued)
The following table sets forth the computation for basic and diluted earnings
per share:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Numerator:
Net income (loss) $3,621,770 $5,628,786 $(1,274,166)
---------- ---------- -----------
Numerator for basic and diluted earnings per share -
income (loss) available to common
stockholders after assumed conversions $3,621,770 $5,628,786 $(1,274,166)
Denominator:
Denominator for basic earnings per share -
weighted-average shares 6,933,740 5,193,192 3,794,638
Effect of dilutive securities:
Employee stock options 138,409 181,468 --
Warrants 568,231 909,720 --
---------- ---------- -----------
Dilutive potential common shares
Denominator for diluted earnings per
share - adjusted weighted-average
shares and assumed conversions 7,640,460 6,284,380 3,794,638
========== ========== ===========
Basic earnings per share $0.52 $1.08 $(0.34)
========== ========== ===========
Diluted earnings per share $0.47 $0.90 $(0.34)
========== ========== ===========
</TABLE>
Translation of non-U.S. currency amounts
For non-U.S. subsidiaries which operate in a local currency environment, assets
and liabilities are translated to U.S. dollars at the current exchange rates at
the balance sheet date. Income and expense items are translated at average rates
of exchange prevailing during the year. Translation adjustments are accumulated
in a separate component of stockholders' equity.
Effect of Accounting Pronouncement
In 1997, the Financial Accounting Standards Board issued Statement No. 130,
Reporting Comprehensive Income. This Statement establishes standards for the
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements. Statement 130 is effective for fiscal
years beginning after December 15, 1997. Beginning in 1998, the Company will
provide the information relating to comprehensive income to conform to the
requirements.
Stock Based Compensation
The Company grants stock options for a fixed number of shares to employees with
an exercise price no less than the fair value of the shares at the date of
grant. The Company accounts for stock option grants in accordance with APB
Opinion No. 25, Accounting for Stock Issued to Employees, and, accordingly,
recognizes no compensation expense for the stock option grants.
Advertising
The Company expenses advertising costs as incurred. Advertising expense
approximated $1,042,000, $530,000 and $338,200 in 1997, 1996 and 1995,
respectively.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principals requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from these estimates.
Fair Value of Financial Instruments
The fair value of the Company's cash, accounts receivable, note receivable,
accounts payable and note payable to the bank approximates their carrying value
due to their short term nature.
Reclassifications
Certain amounts in prior year financial statements have been reclassified to
conform with the presentation used in 1997.
2. Texas Airsonics, Inc. Acquisition
On July 31, 1996, the Company acquired 100% of the outstanding stock of Texas
Airsonics, Inc. ("Texas Air") in exchange for 2,857,443 shares of the Company's
common stock and warrants to purchase 1,749,228 additional shares of common
stock at $5.6416 per share for a period commencing August 1, 1997 and ending
July 31, 1999.
The acquisition has been accounted for as a purchase, and accordingly, the total
value of common stock and warrants issued ($8,572,329) has been allocated to the
acquired identifiable assets and assumed liabilities based on their estimated
fair values as of the acquisition date. The excess consideration of $6,124,999
has been accounted for as goodwill and will be amortized over a fifteen year
period. The results of operations for Texas Air have been included in the
consolidated statements of operations for the Company from the acquisition date.
The following unaudited pro forma summary of operations is presented as though
Texas Air was acquired at the beginning of 1996.
Year Ended
December 31, 1996
-----------------
Revenues $20,928,697
Net income 5,425,507
Net income per share
assuming dilution $.68
19
<PAGE> 20
Notes to Consolidated Financial Statements
December 31, 1997
2. Texas Airsonics, Inc. Acquisition (continued)
The Company's purchases of KCP units and related parts from Texas Air were
approximately $3,650,000 for the seven months ended July 31, 1996 and $3,663,000
for the year ended December 31, 1995. Texas Air shared research and development,
legal, and marketing costs of $1,220,000 through July 31, 1996 and $895,000 in
1995.
As part of its efforts to consolidate management and manufacturing operations
after the acquisition of Texas Air in July 1996, the Company incurred $560,000
in restructuring expenses related to the employment termination of the Company's
previous chief executive officer and the severance of approximately ten
employees resulting from the relocation of the California laser manufacturing
operations to the Texas facility. Approximately $250,000 and $100,000 of the
restructuring costs were paid in 1997 and 1996, respectively. The Company
expects to pay the remaining $210,000 of these costs in 1998.
3. Agreements with Related Parties
Denics Co., Ltd.
In June 1997, the Company entered into an agreement to cancel its joint venture
agreement with Denics Co., Ltd. ("Denics") to manufacture, market, distribute
and sell dental air abrasive and laser products in the Pacific Rim territory
(excluding Japan) and to acquire Denics' rights in the joint venture for
$1,000,000, which has been recorded as an intangible asset and amortized over a
10-year period. Upon cancellation of the joint venture agreement, Denics
returned 53,547 shares of the Company's common stock. Denics also agreed not to
compete for a period of ten years in the Pacific Rim territory. On June 10,
1993, the Company had agreed with Denics, to form a joint venture to distribute
dental products in certain Asian and Pacific markets. The agreement, as amended,
also granted Denics territorial manufacturing rights for all dental laser and
air abrasive products owned by the Company, in Japan. In consideration, Denics
provided the Company a $3,000,000 non-refundable prepaid royalty deposit for
future air abrasive products manufactured in Japan. Formation of the joint
venture was delayed and a revised joint venture agreement was signed in the
fourth quarter of 1996. Denics acknowledged that the Company had fully performed
all its obligations under the original agreements and that the Company had
earned the prepaid royalty. Accordingly, as of December 31, 1996, the Company
recognized $2,700,000, net of foreign taxes, of related party royalty income.
The Company had a $1,000,000 note payable to Denics. In June 1997, Denics agreed
to extinguish the outstanding principal balance of $600,000 and the accrued
interest for a payment of $500,000.
Denics manufactured dental lasers in 1995, and pursuant to agreements, the
Company earned royalties on those units sold in Japan and certain Asian and
Pacific markets. Related party royalty income was $261,000 for 1995. There was
no similar related party royalty income in 1996 or 1997. Sales of lasers and
KCPs to Denics were $2,060,505, $5,099,313 and $3,672,000 in 1997, 1996 and
1995, respectively.
The Company had accounts receivable of $223,150 and $782,469 from Denics at
December 31, 1997 and 1996, respectively.
In February 1998, the Company agreed to convert $500,000 of outstanding accounts
receivable from Denics to a note receivable, with interest payable at 10.5% due
in September 1998.
Other
On April 15, 1996, the Company acquired an ophthalmic excimer laser from a
principal shareholder and director. The laser was placed in a surgical center to
perform photo-refractive keratotomy (PRK). The purchase price of the laser was
approximately $525,800, which was to be paid in two installments of restricted
common stock together with a warrant to purchase an equal number of shares of
common stock at market value, exercisable until April 1999. The first $262,900
installment of 38,945 shares, together with a warrant to acquire 38,945 shares
at an exercise price of $6.75 per share was made on April 15, 1996. The second
installment was due in April 1997, however, the Company determined that this
venture would not meet its anticipated performance. The second installment of
restricted common stock and warrants was canceled and the laser was returned in
1997 pursuant to the terms of the purchase agreement. The Company recorded an
impairment expense of approximately $175,000 on the disposal of this asset
included in depreciation expense in 1996.
The Company obtained consulting and research services from related parties and
paid approximately $159,200, $190,000 and $260,800 in 1997, 1996 and 1995,
respectively, for such services.
20
<PAGE> 21
Notes to Consolidated Financial Statements
December 31, 1997
4. Line of Credit and Other Non-Current Liabilities
In October 1997, the Company obtained a $1,500,000 one year revolving line of
credit from a bank, with interest at prime (8.50% at December 31, 1997). The
Company previously had a $2,500,000 revolving line of credit from October 1996
through September 1997, with the same bank. The Company's borrowing base is 80%
of eligible accounts receivable and 50% of inventory. The line of credit is
secured by a pledge of the Company's accounts receivable, inventory and fixed
assets. As of December 31, 1997, $250,000 was outstanding under this line.
The Company leases certain equipment under capital leases. Equipment related to
these capital leases had a net book value of approximately $162,000 at December
31, 1997. Future minimum lease payments under capital and operating leases as of
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Year Operating Capital
---- Leases Leases
--------------------------
<S> <C> <C>
1998 $ 80,677 $ 49,231
1999 5,076 49,231
2000 49,231
2001 49,231
2002 and thereafter 4,102
--------- ---------
$ 85,753 201,026
=========
Less amount representing interest (27,817)
---------
$ 173,209
=========
Other non-current liabilities at December 31, 1997 consisted of the following:
Current portion $ 37,817
Non-current portion 135,392
--------
Total capital lease obligations $ 173,209
=========
</TABLE>
Rental expense, primarily office facilities, for operating leases in 1997,
1996 and 1995 approximated $154,000, $257,000 and $113,000, respectively.
The Company paid interest of approximately $63,000, $135,000 and $104,000 in
1997, 1996 and 1995, respectively.
5. Stockholders' Equity, Stock Options and Warrants
In July 1995, the Company received $800,000 when it completed a private
placement transaction with the Chairman of the Board and two principal
stockholders. The Company issued these investors 222,222 shares of common stock
together with non transferable warrants to acquire 444,444 additional shares of
stock at exercise prices ranging from $7.00 to $8.00 per share, exercisable on
or before July 7, 1998. Simultaneously, the exercise date on existing common
stock purchase warrants held by these same stockholders was extended from April
21, 1996 to April 21, 1998. In August 1995, the Company canceled existing common
stock purchase warrants held by these same stockholders at exercise prices
ranging from $7.00 to $8.00 and reissued the common stock purchase warrants at
an exercise price of $4.00 per share.
In April 1994, the Company issued 749,750 shares of common stock with warrants
to purchase an equal number of shares of common stock at $8.00 per share,
exercisable over a two year period, to private investors for $2,914,000. Several
of the private investors are principal stockholders and current or former
directors of the Company.
The Company established its Nonqualified Stock Option Plan in January 1990, and
193,750 shares of common stock were reserved for issuance to employees,
officers, directors, consultants, and other key personnel. In 1991, the plan was
amended to increase the number of shares available for issuance under the Plan
to 287,500.
The Company established its Stock Option Plan for Employees in June 1991
and 17,045 shares of common stock were reserved for issuance.
The Company established its Long-Term Incentive Plan in May 1993, and 250,000
shares of common stock were reserved for issuance to employees, officers,
directors and other key personnel. An additional 250,000 and 125,000 shares of
common stock were reserved in July 1996 and May 1994, respectively, increasing
the number of shares available for issuance to 625,000.
The Company also authorized and granted 81,392 stock options exclusive of the
above described plans, of which 48,721 options have been exercised or canceled
and 32,670 options were outstanding at December 31, 1997.
21
<PAGE> 22
Notes to Consolidated Financial Statements
December 31, 1997
5. Stockholders' Equity, Stock Options and Warrants (continued)
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related Interpretations
in accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation," requires use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB 25, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
Pro forma information regarding net income and earnings per share is required by
Statement 123 and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 1995,
1996 and 1997, respectively: risk-free interest rate of 6.5%; dividend yield of
0%; volatility factors of the expected market price of the Company's common
stock of .8, .5 and 1.1 and a weighted-average expected life of the option of
five years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the option is
amortized to expense over the options' vesting period. The Company's pro forma
information follows :
<TABLE>
<CAPTION>
1997 1996 1995
--------- ---------- ----------
<S> <C> <C> <C>
Proforma net income (loss) $3,213,783 $5,197,430 $(1,496,085)
Proforma net income (loss) per share $0.46 $1.00 $(0.39)
Proforma net income (loss) per share
assuming dilution $0.42 $0.83 $(0.39)
</TABLE>
Stock option activity is summarized as follows:
<TABLE>
<CAPTION>
Number Weighted-Average
of Shares Exercise Price
---------------------------------------
<S> <C> <C>
Outstanding at January 1, 1995 595,198 $10.68
========
Exercisable at January 1, 1995 372,086 12.04
========
Options granted 319,700 3.64
Options exercised (2,500) 2.00
Options canceled (311,053) 9.36
--------
Outstanding at December 31, 1995 601,345 7.64
========
Exercisable at December 31, 1995 455,430 8.56
========
Options granted 191,145 6.76
Options exercised (25,560) 3.48
Options canceled (190,773) 13.72
--------
Outstanding at December 31, 1996 576,158 5.52
========
Exercisable at December 31, 1996 576,158 5.52
========
Options granted 251,872 5.44
Options exercised (65,205) 3.66
Options canceled (18,185) 9.29
--------
Outstanding at December 31, 1997 744,619 5.57
========
Exercisable at December 31, 1997 541,811 $5.64
========
</TABLE>
22
<PAGE> 23
Notes to Consolidated Financial Statements
December 31, 1997
5. Stockholders' Equity, Stock Options and Warrants (continued)
The weighted-average fair value of options granted during the year was $4.51,
$3.48 and $1.20 in 1997, 1996 and 1995, respectively. Exercise prices for
options outstanding as of December 31, 1997 ranged from $2.00 to $50.00. The
weighted-average remaining contractual life of those options is 5.6 years.
Warrant activity is summarized as follows:
<TABLE>
<CAPTION>
Weighted-Average
Shares Exercise Price
------ ----------------
<S> <C> <C>
Outstanding at January 1, 1995 999,750 $8.00
=========
Exercisable at January 1, 1995 999,750 8.00
=========
Warrants issued 1,779,888 4.76
Warrants canceled (960,444) 7.60
---------
Outstanding at December 31, 1995 1,819,194 5.08
=========
Exercisable at December 31, 1995 1,819,194 5.08
=========
Warrants issued 1,886,422 5.56
Warrants canceled (858,750) 6.24
---------
Outstanding at December 31, 1996 2,846,868 5.04
=========
Exercisable at December 31, 1996 1,097,639 4.08
=========
Warrants issued --- ---
Warrants canceled --- ---
---------
Outstanding at December 31, 1997 2,846,868 5.04
=========
Exercisable at December 31, 1997 2,846,868 $5.04
=========
</TABLE>
The weighted-average fair value of warrants granted during the year was $2.24 in
1996 and 1995. Exercise prices for warrants outstanding as of December 31, 1997
ranged from $4.00 to $6.75. The weighted-average remaining contractual life of
those warrants is 1.5 years.
In March 1997, stockholders approved a one-for-four reverse common stock split.
The reverse stock split was effective on March 17, 1997 and appropriate
adjustments were made to the number and price of outstanding warrants and
options. Additionally, prior year financial statements have been appropriately
adjusted.
6. Transfer of License
In June 1997, the Company agreed to the transfer of the licenses for the sales
of dental lasers and air abrasive instruments from Sunrise Technologies, Inc.
("Sunrise") to Lares Co. ("Lares") in connection with the sale of Sunrise's
dental business to Lares. The Company received a payment of $275,000 and a note
receivable for $100,000, due in June 2000. The Company will also continue to
receive royalties on air abrasive and dental lasers from Lares.
7. Income Taxes
At December 31, 1997, the Company had a $16,535,925 net operating loss
carryforward for federal income tax purposes, which expire in various amounts in
the years 2006 through 2010.
Deferred tax assets represent the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and amounts used for income tax purposes. Significant
components of the Company's deferred tax assets are as follows:
<TABLE>
<CAPTION>
December 31
1997 1996
--------------------------
<S> <C> <C>
Allowance for doubtful accounts $ 85,000 $ 108,000
Inventory valuation reserves 243,000 134,000
Depreciation 300,000 354,000
Compensation and employee benefits 103,000 174,000
Other 305,000 457,000
Net operating loss carryforwards 5,792,000 6,976,000
--------- ---------
Deferred tax asset $6,828,000 $8,203,000
Valuation allowance (6,738,000) (8,158,000)
---------- ----------
Net deferred tax asset $ 90,000 $ 45,000
========== ==========
</TABLE>
23
<PAGE> 24
Notes to Consolidated Financial Statements
December 31, 1997
7. Income Taxes (continued)
The Company's income tax provision included the following:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current $ 45,000 $ 45,000 $ ---
Deferred (45,000) (45,000) $ ---
------ - -----------
$ --- $ --- $ ---
========== =========== ==========
Income taxes (benefit) at
US statutory rate $1,231,000 $ 1,914,000 $ (443,000)
Non-deductible amortization 247,000 164,000 95,000
Deferred tax asset valuation
allowance adjustment (1,478,000) (2,078,000) 348,000
---------- ---------- ----------
$ --- $ --- $ ---
========== =========== ==========
</TABLE>
8. Operations by Geographic Area and Significant Customers
The Company develops, manufactures, markets and sells high technology products
for dentistry. Its operations constitute a single business segment. The Company
has operations in various foreign countries which market the Company's dental
products in their respective geographic areas. The Company does not typically
require collateral from its customers.
Sales to Patterson Dental Company, the major domestic distributor of the
Company's kinetic cavity preparation units, were approximately 34%, 28% and 10%
of consolidated sales in 1997, 1996 and 1995, respectively. Sales into Germany,
through two regional distribution groups, Dental Liga GmbH and Orbis High Tech
Dental GmbH, were approximately 6%, 13%, and 40% of consolidated sales in 1997,
1996 and 1995. Sales to Denics for certain Asian and Pacific markets, primarily
Japan, were approximately 10%, 25% and 28% of consolidated sales in 1997, 1996
and 1995, respectively.
Financial information, summarized by geographic area, is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------------------------
<S> <C> <C> <C>
Net sales:
North America $17,074,965 $11,446,862 $ 2,980,292
Europe 2,072,156 3,692,606 6,532,237
Other international 2,300,220 5,335,508 3,813,007
----------- ----------- -----------
$21,447,341 $20,474,976 $13,325,536
=========== =========== ===========
Gross profit:
North America $ 9,698,032 $ 5,537,487 $ 1,133,772
Europe 1,108,580 1,995,814 3,310,644
Other international 1,269,387 2,485,887 1,842,190
----------- ----------- -----------
$12,075,999 $10,019,188 $ 6,286,606
=========== =========== ===========
Accounts receivable:
North America $ 2,417,309 $ 2,485,529 $ 711,335
Europe 226,025 157,959 548,640
Other international 709,168 830,223 684,318
----------- ----------- -----------
$ 3,352,502 $ 3,473,711 $ 1,944,293
=========== =========== ===========
Other identifiable assets:
North America $17,785,274 $16,860,080 $ 9,513,529
Europe 442,531 599,547 1,252,974
Other international 950,000 347,548 273,900
----------- ----------- -----------
$19,177,805 $17,807,175 $11,040,403
=========== =========== ===========
</TABLE>
24
<PAGE> 25
Notes to Consolidated Financial Statements
December 31, 1997
9. Subsequent Events
In February 1998, the Company acquired 100% of the outstanding stock of The
Dental Probe, Inc. ("TDP") in exchange for $250,000 and 61,500 shares of common
stock. The acquisition will be accounted for as a purchase.
10. Selected Quarterly Financial Data (unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31 June 30 September 30 December 31
1997 1997 1997 1997
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $5,513,864 $5,350,641 $4,045,298 $6,537,538
Gross profit 3,082,802 3,181,433 2,126,472 3,685,292
Net earnings 886,274 1,403,773 157,014 1,174,709
Net earnings per share
assuming dilution(5) $.11 $.18 $.02 $.15
<CAPTION>
Three Months Ended
March 31 June 30 September 30 December 31
1996 1996 1996 1996
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $5,254,047 $4,919,955 $4,046,803 $6,254,171
Gross profit 2,398,621 1,854,977 1,806,840 3,958,750
Net earnings 448,310 689,941(1) 748,999(1) 3,741,536(2)(3)
Net earnings per share
assuming dilution (5) $.10 $.13 $.10 $.48
</TABLE>
(1) Pursuant to its agreement, Texas Air shared research and development,
legal, and marketing expenses of approximately $1,220,000 through July
31, 1996.
(2) Includes $2,700,000 related party royalty income in December 1996 (Note
3).
(3) Includes $560,000 of restructuring expenses for the consolidation of
management and manufacturing operations in 1996 (Note 2).
(4) During 1995, the Company incurred expenses of approximately $700,000
related to selling and marketing incentive programs for the introduction
of the new products. Pursuant to its agreement, Texas Air shared research
and development, legal, and marketing expenses of approximately $895,000
in 1995.
(5) The 1996 and the first three quarters of 1997 earnings per share amounts
have been restated to comply with Statement of Accounting Standards No.
128, Earnings Per Share.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
25
<PAGE> 26
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information included in the Company's definitive Proxy Statement to
be distributed in connection with its Annual Meeting of Stockholders to be held
May 29, 1998 (the "1998 Proxy Statement"), under the headings, "Election of
Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information included in the 1998 Proxy Statement under the heading
"Executive Compensation" is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The information is included in the 1998 Proxy Statement under the
headings "Security Ownership of Management" and "Principal Stockholders of the
Company" is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information included in the 1998 Proxy Statement of the Company under
the heading "Certain Transactions" is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements: The following financial statements of
American Dental Technologies, Inc. are included in Item 8, "Financial
Statements and Supplementary Data":
Report of Independent Auditors
Consolidated Statements of Operations for the Years Ended December 31, 1997,
1996, and 1995
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statements of Stockholders' Equity for the Years Ended December 31,
1997, 1996 and 1995
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996, and 1995
Notes to Consolidated Financial Statements
2. Financial Statement Schedules: The following financial statement
schedule is attached to this report.
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable, not required,
or the information is included in the financial statements or the notes thereto.
3. Exhibits: Certain of the following Exhibits have been previously
filed with the Securities and Exchange Commission pursuant to the requirements
of the Securities Act of 1933 and the Securities Exchange Act of 1934. Such
exhibits are identified by the parenthetical references following the listing of
each such exhibit and are incorporated herein by reference.
<TABLE>
<CAPTION>
Exhibit Number Description of Document
- -------------- -----------------------
<S> <C>
3.1 Amended and Restated Certificate of Incorporation of American
Dental Technologies, Inc. filed on August 7, 1997 with the
Delaware Secretary of State (Form 10-Q for the quarter ended June
30, 1997, Exhibit 3.5)
3.2 Restated By-Laws of American Dental Laser, Inc. as amended
on May 20, 1991 (Registration No. 33-40140, Exhibit 3.3)
3.3 Amendments to the Restated By-Laws of the Company, dated December
15, 1993 (Form 10-K for the year ended December 31, 1993, Exhibit
3.4)
</TABLE>
26
<PAGE> 27
<TABLE>
<S> <C>
4.1 Form of Common Stock Purchase Warrant, April 1994 (Form 10-Q for the quarter ended June 30, 1994,
Exhibit 4.1)
4.2 Form of revised April 1994 Common Stock Purchase Warrants, August 1995 (Form 10-K for the year
ended December 31, 1995, Exhibit 4.5)
4.3 Form of revised July 1995 Common Stock Purchase Warrants, August 1995 (Form 10-K for the year ended
December 31, 1995, Exhibit 4.6)
4.4 Form of Merger Warrant (Registration No. 333-6663, Exhibit 4.7)
4.5 Revolving Credit Agreement with The International Bank dated October 17, 1996 (Form 10-K for the
year ended December 31, 1996, Exhibit 4.5)
4.6 Revolving Credit Promissory Note to The International Bank dated October 17, 1996 (Form 10-K for
the year ended December 31, 1996, Exhibit 4.6)
4.7 Deed of Trust to The International Bank dated October 17, 1996 (Form 10-K for the year ended
December 31, 1996, Exhibit 4.7)
4.8 Security Agreement to The International Bank dated October 17, 1996 (Form 10-K for year ended December 31,
1996, Exhibit 4.8)
4.9 First Amendment to Revolving Credit Agreement with The International Bank dated October 15, 1997
4.10 Allonge and Amendment No. One to Revolving Credit Promissory Note with The International Bank dated October
15, 1997
4.11 Extension of Liens to the Deed of Trust to The International Bank dated October 15, 1997
10.1* American Dental Laser, Inc. Amended and Restated Nonqualified Stock Option Plan. (Registration No.
33-40140, Exhibit No. 10.16)
10.2* American Dental Laser, Inc. Stock Option Plan for Employees. (Registration No. 33-40140, Exhibit No. 10.18)
10.14 Settlement Agreement dated February 4, 1993 between American Dental Laser, Inc. and Sunrise
Technologies, Inc. (Form 8-K dated February 15, 1993, Exhibit 28.1)
10.16* Amended and Restated Long-Term Incentive Plan (Form 10-Q for the quarter ended September 30, 1996, Exhibit 4.1)
10.18 Memorandum Agreement dated June 10, 1993 between the Company and Dental Innovate Corporation (Form 10-Q for the
quarter ended June 30, 1993, Exhibit 10.1)
10.21 Supplemental Agreement dated July 27, 1993 between the Company and Dental Innovate Corporation (Form 10-Q for the
quarter ended June 30, 1993, Exhibit 10.2)
10.23 Amendment Agreement dated August 16, 1993 between American Dental Technologies, Inc. and Dental
Innovate Corporation (Form 10-Q for the quarter ended September 30, 1993, Exhibit 10.1)
10.27 Letter agreement between the Company and Denics Co., Ltd., dated February 1994 (Form 10-K for the
year ended December 31, 1993, Exhibit 10.81)
10.36 Second Memorandum Agreement dated February 24, 1995 between the Company and Dental Innovate Corporation (Form 10-K
for the year ended December 31, 1995, Exhibit 10.46)
10.37 Lease Agreement, 28411 Northwestern Highway, Suite 1100, Southfield, Michigan, dated April 7, 1995
(Form 10-K for the year ended December 31, 1995, Exhibit 10.47)
10.40 Third Memorandum Agreement dated February 23, 1996 between the Company and Denics Co., Ltd. (Form
10-K for the year ended December 31, 1995, Exhibit 10.52)
10.43 Voting Agreement between William D. Myers and Ben J. Gallant (Registration No. 333-6663, Exhibit
9.1)
10.44* Ben J. Gallant Employment Agreement (Form 10-K for the year ended December 31, 1996, Exhibit 10.44)
</TABLE>
27
<PAGE> 28
<TABLE>
<S> <C>
10.45 License Agreement between Texas Airsonics, Inc., a wholly owned subsidiary of American Dental
Technologies, Inc. and Texas Airsonics, L.P. (Form 10-K for the year ended December 31, 1996,
Exhibit 10.45)
10.46 Settlement Agreement between American Dental Technologies, Inc. and Sunrise Technologies
International, Inc., dated July 30, 1996 (Form 10-Q for the quarter ended June 30, 1996, Exhibit
10.3)
10.47 Fourth Memorandum Agreement dated October 31, 1996, between the Company and Denics Co., Ltd. (Form 10-K
for the year ended December 31, 1996, Exhibit 10.47)
10.50 Settlement Agreement between the Company and Sunrise Technologies International, Inc., dated July 30, 1996
(Form 10-K for the year ended December 31, 1996, Exhibit 10.50)
10.51 Fifth Memorandum Agreement dated as of June 12, 1997 between the Company and Denics Co., Ltd. (Form 10-Q for
the quarter ended June 30, 1997, Exhibit 10.51)
10.52 Sixth Memorandum Agreement dated as of June 23, 1997 between the Company and Denics Co., Ltd. (Form 10-Q for
the quarter ended June 30, 1997, Exhibit 10.52)
10.53** Patent License Agreement dated October 18, 1997 between Danville Engineering, Inc. and the Company (Form 10-Q
for the quarter ended September 30, 1997, Exhibit 10.53)
10.54 Assignment from Sunrise Technologies International, Inc. to Lares Research dated June 24, 1997
10.55 Promissory Note between the Company and Denics Co Ltd. dated September 15, 1997
21.1 Subsidiaries of the Registrant
23.1 Consent of Independent Auditors
27.1 Financial Data Schedule
</TABLE>
- ---------------
*Identifies current management contracts or compensatory plans or arrangements.
**Portion of this agreement were filed separately with the Commission pursuant
to Rule 24b-a of the Securities Act of 1934 governing requests for confidential
treatment of information.
(b) Reports on Form 8-K: No reports on Form 8-K were filed during the quarter
ended December 31, 1997.
28
<PAGE> 29
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this annual report to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Southfield, State of Michigan, on the 14th day of March, 1997.
AMERICAN DENTAL TECHNOLOGIES, INC.
/s/ Ben J. Gallant
---------------------------------
Ben J. Gallant, President and CEO
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 14, 1997.
<TABLE>
<S> <C>
/s/ Ben J. Gallant
- -------------------------------
Ben J. Gallant President, CEO and Director
(Principal Executive Officer)
/s/ Diane M. Miller
- -------------------------------
Diane M. Miller Chief Financial Officer, Principal
Financial Officer and Principal Accounting
Officer
/s/ William D. Myers
- -------------------------------
William D. Myers Chairman of the Board
and Director
/s/ Wayne A. Johnson II
- -------------------------------
Wayne A. Johnson II Director
/s/ J. Bernard Machen
- -------------------------------
J. Bernard Machen Director
/s/ William D. Maroney
- -------------------------------
William D. Maroney Director
/s/ Charles A. Nichols
- -------------------------------
Charles A. Nichols Director
/s/ John E. Vickers III
- -------------------------------
John E. Vickers III Director
/s/ Bertrand R. Williams, Sr.
- -------------------------------
Bertrand R. Williams, Sr. Director
</TABLE>
29
<PAGE> 30
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
American Dental Technologies, Inc.
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ------------------------------------------------ ---------- ------------- ------------- -------------
ADDITIONS
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND DEDUCTIONS AT END
DESCRIPTION OF PERIOD EXPENSES DESCRIBE OF PERIOD
- ------------------------------------------------ ------------ ------------- ------------- --------------
<S> <C> <C> <C> <C>
Year Ended December 31, 1995
Valuation allowance for accounts receivable $ 420,000 $ 40,438 $ 110,438(3) $ 350,000
Valuation for allowance for inventories 750,000 230,000 45,000(2) 935,000
Valuation allowances for deferred taxes 9,530,000 544,000 10,074,000
Year Ended December 31, 1996
Valuation allowance for accounts receivable 350,000 30,000 100,000(1) 280,000
Valuation for allowance for inventories 935,000 175,000 715,000(2) 395,000
Valuation allowances for deferred taxes $10,074,000 1,916,000(4) 8,158,000
Year Ended December 31, 1997
Valuation allowance for accounts receivable 280,000 -- 30,000(3) 250,000
Valuation allowance for inventories 395,000 320,000 -- 715,000
Valuation allowances for deferred taxes 8,158,000 -- 1,420,000(4) 6,738,000
(1) Uncollectible accounts charged off net of recoveries.
(2) Inventory valuation write-offs.
(3) Reduction in valuation allowance.
(4) Utilization of NOL on current year income.
</TABLE>
<PAGE> 1
EXHIBIT 4.9
FIRST AMENDMENT TO REVOLVING CREDIT AGREEMENT
This is an Amendment to that Revolving Credit Agreement (the
"Agreement") dated October 17, 1996, among THE INTERNATIONAL BANK, as Lender,
and TEXAS AIRSONICS, INC., and AMERICAN DENTAL TECHNOLOGIES, INC., as
Borrowers, and BENJAMIN J. GALLANT, as Guarantor.
1. Merger of Borrowers. TEXAS AIRSONICS, INC., has been merged
into AMERICAN DENTAL TECHNOLOGIES, INC., and pursuant to the merger all assets
of TEXAS AIRSONICS, INC., became owned by and the property of AMERICAN DENTAL
TECHNOLOGIES, INC., and AMERICAN DENTAL TECHNOLOGIES, INC., assumed liabilities
of TEXAS AIRSONICS, INC. Hereafter all references in the Agreement to
"Borrowers" shall mean and refer to only AMERICAN DENTAL TECHNOLOGIES, INC.
2. Reduction and Extension of Line of Credit. The amount of the
line of credit shall be reduced from $2,500,000.00 to $1,500,000.00, and
hereafter AMERICAN DENTAL TECHNOLOGIES, INC., shall not be entitled to any
advance if the advance would cause the principal balance on the line of credit
to exceed $1,500,000.00. Maturity of the line of credit is extended to
October 15, 1998, and all references in Sections 1.01 and 1.02 of the
Agreement, or otherwise, to "October 15, 1997", are amended to refer to
"October 15, 1998". AMERICAN DENTAL TECHNOLOGIES, INC., shall execute an
Allonge to the Revolving Credit Promissory Note in order to evidence the
extension of maturity and the reduction of the available credit.
3. Collateral. The line of credit, as hereby reduced and
extended, shall continue to be secured by all collateral pledged by TEXAS
AIRSONICS, INC., and AMERICAN DENTAL TECHNOLOGIES, INC. (and which is now owned
by AMERICAN DENTAL TECHNOLOGIES, INC.), and shall continue to be guaranteed by
BENJAMIN J. GALLANT. AMERICAN DENTAL TECHNOLOGIES, INC., ratifies and confirms
that the Security Agreement dated October 17, 1996, executed by it continues in
full force and effect, and the collateral covered thereby includes that
acquired from TEXAS AIRSONICS, INC., in the merger. AMERICAN DENTAL
TECHNOLOGIES, INC., has also pursuant to the merger become the owner of Lot 1,
Block 2, INDUSTRIAL TECHNOLOGY PARK UNIT 1, Corpus Christi, Texas, formerly
owned by TEXAS AIRSONICS, INC., and covered by a Deed of Trust dated October
17, 1996; and such Deed of Trust shall remain in force and effect and shall
continue to secure the line of credit as hereby reduced and extended. BENJAMIN
J. GALLANT confirms that the Guaranty Agreement dated October 17, 1996,
executed by him continues in force and effect.
4. Ratification. Except as so amended, the Agreement shall remain
in force and effect and is hereby ratified and confirmed.
THIS WRITTEN LOAN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE
PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR
SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL
AGREEMENTS BETWEEN THE PARTIES.
DATED effective October 15, 1997.
BORROWER: LENDER:
AMERICAN DENTAL TECHNOLOGIES, INC. THE INTERNATIONAL BANK
By:/s/ Benjamin J. Gallant By:/s/ Scott Heitkamp
------------------------------ --------------------------
BENJAMIN J. GALLANT SCOTT HEITKAMP
President Executive Vice President
GUARANTOR:
<PAGE> 1
EXHIBIT 4.10
ALLONGE AND AMENDMENT NO. ONE
TO REVOLVING CREDIT PROMISSORY NOTE
ORIGINAL MAKER: TEXAS AIRSONICS, INC. and
AMERICAN DENTAL TECHNOLOGIES, INC.
PRINCIPAL SUM: $2,500,000.00
DATE OF NOTE: October 17, 1996
PAYEE: THE INTERNATIONAL BANK
This is an amendment and allonge to the Revolving Credit Promissory
Note (the "Note") described above. The said Note is hereby amended as follows:
(1) Maturity is extended to October 15, 1998, pursuant to a First
Amendment to Revolving Credit Agreement of even date herewith.
(2) The amount of credit available on the Note has been reduced to
$1,500,000.00 pursuant to such First Amendment.
(3) TEXAS AIRSONICS, INC., has been merged into AMERICAN DENTAL
TECHNOLOGIES, INC., and the latter corporation is now the sole
Maker on such Note.
Except as so amended, said Note shall remain in full force and effect.
EXECUTED effective the 15th day of October, 1997.
HOLDER: MAKER:
THE INTERNATIONAL BANK AMERICAN DENTAL TECHNOLOGIES INC.
By:/s/ Scott Heitkamp By:/s/ Benjamin J. Gallant
---------------------------- -------------------------------
SCOTT HEITKAMP BENJAMIN J. GALLANT
Executive Vice President President
<PAGE> 1
EXHIBIT 4.11
EXTENSION OF LIENS
STATE OF TEXAS ss
ss
COUNTY OF NUECES ss
--------
WHEREAS, TEXAS AIRSONICS, INC., whose successor by merger is AMERICAN
DENTAL TECHNOLOGIES, INC., a Delaware corporation (herein called "Mortgagor",
whether one or more), did execute and deliver a certain Deed of Trust dated
October 17, 1996, recorded in the Office of the County Clerk of Nueces County,
Texas, at Doc. No. 1996041318, Official Public Records of Nueces County,
Texas, in favor of THE INTERNATIONAL BANK (herein called the "Lender"), whose
mailing address is P.O. Box 4956, Corpus Christi, Texas 78469, in order to
secure the indebtedness evidenced by a Revolving Credit Promissory Note of even
date therewith in the principal amount of $2,500,000.00 executed by TEXAS
AIRSONICS, INC., and AMERICAN DENTAL TECHNOLOGIES, INC., payable to the order
of said Lender, which said Deed of Trust covered the following property in
Nueces County, Texas, to-wit:
Lot One (1), Block Two (2), INDUSTRIAL TECHNOLOGY PARK
UNIT 1, a Subdivision of the City of Corpus Christi, Nueces
County, Texas, as shown by the map or plat thereof recorded in
Volume 46, Pages 105-107, Map Records, Nueces County, Texas.
WHEREAS, by an Allonge and Amendment of even date herewith AMERICAN
DENTAL TECHNOLOGIES, INC., and Lender have rearranged the payment of the
indebtedness evidenced by said Note and have extended the maturity thereof to
October 15, 1998;
WHEREAS, the said Lender and AMERICAN DENTAL TECHNOLOGIES, INC.,
desire to extend the liens of the said Deed of Trust;
NOW, THEREFORE, the said Lender, as the holder of said indebtedness,
and AMERICAN DENTAL TECHNOLOGIES, INC., hereby agree that the said Deed of
Trust, and the liens thereof, shall be extended in accordance with the
extensions of the said indebtedness pursuant to said Allonge and Amendment of
even date herewith.
Except as so amended and extended, the said Deed of Trust shall remain
in full force and effect, and is hereby ratified and confirmed.
DATED effective the 15th day of October 1997.
THE INTERNATIONAL BANK AMERICAN DENTAL TECHNOLOGIES, INC.
By:/s/ Scott Heitkamp By:/s/ Benjamin J. Gallant
--------------------------- ---------------------------------
SCOTT HEITKAMP BENJAMIN J. GALLANT
Executive Vice President President
STATE OF TEXAS ss
ss
COUNTY OF NUECES ss
This instrument was acknowledged before me on the 21st day of November
1997, by SCOTT HEITKAMP, the Executive Vice President of THE INTERNATIONAL
BANK, a Texas banking association, on behalf of said association.
[SEAL]
ANGIE L. CUEVAS
Notary Public
STATE OF TEXAS /s/ Angie L. Cuevas
My Comm. Exp. March 9, 2001 -----------------------------
Notary Public, State of Texas
<PAGE> 1
EXHIBIT 10.54
ASSIGNMENT
FOR VALUE RECEIVED, receipt of which is hereby acknowledged, Sunrise
Technologies International, Inc. a Delaware corporation ("Sunrise"), with its
principal place of business located at 47257 Fremont Blvd., Fremont,
California 94538, hereby assigns and transfers all of its right, title and
interest in the Settlement Agreement (the "Agreement") dated July 30, 1996,
with American Dental Technologies, Inc., a Delaware corporation, ("ADT") a copy
of which is attached as Exhibit A and incorporated herein by reference, to
Lares Research, a California corporation ("Lares"), with its principal place of
business located at 295 Lockheed Avenue, Chico, California 95973.
In connection with this assignment, in addition to the warranties
contained in the Asset Purchase Agreement dated March 25, 1997 between Sunrise
and Lares, Sunrise warrants that:
1. Sunrise is the duly authorized licensee under the Agreement, having
received the rights by merger, with Sunrise Technologies, Inc., its
predecessor. The Agreement is valid, binding and enforceable against
Sunrise in accordance with its terms. Sunrise has the right to assign
this Agreement free of any encumbrance, lien, or any interest of third
parties other than interests of third parties set forth in the
Agreement. The Agreement will continue in full force and effect to the
benefit of Lares with no change to its terms, except as might otherwise
be separately agreed to by Lares and ADT, and Sunrise shall have no
further rights as licensee of the patents under the Agreement, except
with respect to such rights as Sunrise may have pursuant to the
Security Agreement.
2. Sunrise has duly performed all, and is not in default of any, of its
duties and obligations under the Agreement, including the payment of
royalties, and ADT has no grounds for termination of the Agreement. To
the best knowledge of Sunrise, ADT has duly performed all, and is not
in default of any, of its duties and obligations under the Agreement,
and Sunrise has no grounds for termination of the Agreement.
3. The Agreement is the entire and complete agreement between Sunrise and
ADT as to the subject matter of the Agreement as described therein,
accurately and completely reflects all the terms of agreement between
Sunrise and ADT, and no change or amendment to the terms of the
Agreement has been made.
Sunrise Technologies International, Inc.
Dated: June 24, 1997 By: /s/ David W. Light
-----------------------
David W. Light, Chief Executive
Officer
First Revision 6/20/97
-1-
<PAGE> 2
ACCEPTANCE OF ASSIGNMENT
Lares Research hereby accepts assignment from Sunrise of all of its
right, title and interest in the Settlement Agreement dated July 30, 1996, with
American Dental Technologies, Inc., a Delaware Corporation, and agrees to
perform at its own expense all the obligations of Sunrise under the Agreement
that arise after the effective date of this Assignment. Lares hereby
acknowledges and confirms the validity of the patents and patent rights
described in paragraph 6 of the Settlement Agreement dated July 30, 1996
Lares Research
Dated: 6/24/97 By: /s/ Craig J. Lares
------------- -------------------------
Craig J. Lares, President
ACKNOWLEDGEMENT OF ASSIGNMENT
American Dental Technologies, Inc., a Delaware corporation, ("ADT")
with its principal place of business at 28411 Northwestern Highway, Suite 1100,
Southfield, Michigan 48034-5541, and as owner of, and licensor to Sunrise of,
the patents and patent rights described in paragraph 6 of the License
Agreement dated July 30, 1996 (the "Patents"), hereby acknowledges and accepts
the assignment of the rights and obligations of Sunrise as licensee under the
Agreement to Lares Research, a California corporation, and agrees and warrants
as follows:
1. Upon the assignment of the Agreement from Sunrise to Lares, the
Agreement will continue in full force and effect. ADT acknowledges that
transfer of the rights of Sunrise under the Agreement to Lares does
not constitute a default under the Agreement, and agrees not to
interfere in any manner with the sale of the Sunrise Dental Division to
Lares.
2. ADT hereby reaffirms the Agreement, including the warranties contained
in paragraph 17 thereof, and agrees to recognize Lares as the duly
authorized licensee under all the terms of the Agreement, subject to
performance by Lares of the duties and obligations of licensee under
the Agreement.
3. The patents are currently valid and to the best knowledge of ADT no
part thereof is subject to any pending or threatened claims of
infringement or invalidity.
4. Lares has and shall have no obligation to ADT with respect to the
payment of the transfer fee payable by Sunrise under the Agreement;
provided that, however, without in any manner affecting the validity
and enforceability of ADT's agreements hereunder, Sunrise must make at
closing the payment of $275,000 and assignments of 10% of the
$1,000,000 promissory note from Lares as set forth in the letter dated
June 10, 1997 from Nancy L. Murray agreed to by Sunrise and ADT.
5. The undersigned is duly authorized to execute this consent on behalf of
ADT.
American Dental Technologies, Inc.
Dated: June 23, 1997 By: /s/ Ben J. Gallant
-------------------- ---------------------------------
Ben J. Gallant, President and CEO
First Revision 6/20/97
-2-
<PAGE> 3
CERTIFICATES OF ACKNOWLEDGMENT OF NOTARY PUBLIC
State of California )
)
County of Santa Clara )
--------------
On 6-24-97 before me, Delores Aida Gonzales, Notary Public, personally
appeared DAVID W. LIGHT, personally known to me (or proved to me on the basis
of satisfactory evidence) to be the person whose name is subscribed to the
within instrument and acknowledged to me that he executed the same in his
authorized capacity, and that by his signature on the instrument the person, or
the entity upon behalf of which the person acted, executed the instrument.
WITNESS my hand and official seal.
Signature
------------------------------
State of California )
)
County of Santa Clara )
On 6-24-97 before me, Delores Aida Gonzales, Notary Public, personally
appeared CRAIG J. LARES, personally known to me (or proved to me on the basis
of satisfactory evidence) to be the person whose name is subscribed to the
within instrument and acknowledged to me that he executed the same in his
authorized capacity, and that by his signature on the instrument the person, or
the entity upon behalf of which the person acted, executed the instrument.
WITNESS my hand and official seal.
[SEAL]
Signature /s/ Delores Aida Gonzales DOLORES AIDA GONZALES
------------------------------ COMM. # 1036928
Notary Public--California
State of Michigan ) Santa Clara County
My Comm. Expires Aug. 21,1998
)
County of Oakland )
On 6-23-97 before me, Nancy Gillie Barron personally appeared BEN J.
GALLANT, personally known to me (or proved to me on the basis of satisfactory
evidence) to be the person whose name is subscribed to the within
instrument and acknowledged to me that he executed the same in his authorized
capacity, and that by his signature on the instrument the person, or the entity
upon behalf of which the person acted, executed the instrument.
WITNESS my hand and official seal.
Signature /s/ Nancy Gillie Barron NANCY GILLIE GARRONS STAMP
------------------------ Notary Public, Oakland County, MI
My Commission Expires Dec.19,2000
First Revision 6/20/1997
-3-
<PAGE> 1
EXHIBIT 10.55
PROMISSORY NOTE
1. PRINCIPAL AMOUNT: $500,000.00 USD
2. INTEREST RATE: 10.5% per annum
3. DATE OF LOAN: September 15, 1997
4. MATURITY DATE: September 15, 1998
5. LENDER: American Dental Technologies, Inc.
5555 Bear Lane
Corpus Christi, TX 78405
6. BORROWER: Denics Co. Ltd
Yotsuya Y's Bldg.
7-6 Honshio-Cho
Shinjuku-ku
Tokyo 160, Japan
7. FOR VALUE RECEIVED, Borrower agrees to pay Lender the principal amount of
$500,000.00 USD plus interest at the rate of 10.5% per annum in the manner
described below:
Payment Schedule:
March 15, 1998: All Accrued Interest
June 15, 1998: All Accrued Interest
September 15, 1998: All Accrued Interest and all principal
All payments will be made to Lender at its address set forth above and in
lawful currency of the United States of America.
PREPAYMENT: This note may be prepaid in full or in part on or before its
Maturity Date.
8. COMPLIANCE WITH APPLICABLE LAW: It is Lender's Intention to comply fully
with Texas law, and federal law as applicable, regulating credit terms,
interest, fees, charges, expenses, and other amounts. For purposes of
determining Lender's compliance with such laws,the following shall apply to
the extent permitted by law: (a) any contract, charge or receipt by Lender,
whether occurring now or in the future, shall be strictly limited by this
provision; (b) the "Maximum Lawful Rate" shall mean the maximum lawful
ceiling, rate or amount that Lender could have contracted to charge or
receive under Texas law or applicable federal law, whichever permits the
highest maximum ceiling, rate or amount; (c) to the extent Texas Article
5069-1.04, as
<PAGE> 2
amended, provides the Maximum Lawful Rate, the "Indicated rate ceiling"
shall apply unless changed by the Lender in accordance with Texas law; (d)
Lender may calculate rates or amounts by aggregating amortizing, prorating,
allocating and spreading amounts contracted for charged or received over
the full term of the transaction; (e) no contract, charge or receipt shall
obligate Borrower or any obligor to pay any amount in excess of the Maximum
Lawful Rate or waive any right under Texas Article 5069; and (f) any
contract, charge or receipt that in the event of acceleration or under any
other contingency purports to require the payment or collection of any
amount in excess of the Maximum Lawful Rate shall automatically be reformed
to not obligate Borrower or any other obligor to pay any amount in excess
of the Maximum Lawful Rate. If Lender ever contracts for charges or
receives a rate or amount in excess of the Maximum Lawful Rate, the excess
(whether denominated principal, interest, or other wise) shall be
automatically subject to reallocation, cancellation, credit, application,
or refund to eliminate any amount in excess of the Maximum Lawful Rate.
9. FINANCIAL INFORMATION: Borrower will provide Lender with current financial
statements including, but not limited to, balance sheets and profit and
loss statements and other information upon request.
10. MODIFICATION AND WAIVER: The modification or waiver of any of Borrower's
obligations or Lender's rights under this Note must be contained in a
writing signed by Lender. Lender may perform any of Borrower's obligations
or delay or fail to exercise any of its rights without causing a waiver of
those obligations or rights. A waiver on one occasion will not constitute
a waiver on any other occasion. Borrower's obligations under this Note
shall not be affected if Lender amends, compromises, exchanges, fails to
exercise, impairs or releases any of the obligations belonging to any
co-borrower or guarantor or any of its rights against any co-borrower,
guarantor or collateral.
11. SEVERABILITY: If any provision of this Note violates the law or is
unenforceable, the rest of the note will remain valid.
12. NOTICE: Any notice or other communication to be provided to Borrower or
Lender under this Note shall be in writing and sent to the parties at the
addresses described in this Note or such other address as the parties may
designate in writing from time to time.
13. APPLICABLE LAW. This note shall be governed by the laws of the state of
Texas and applicable federal laws. Borrower consents to the jurisdiction
and venue of any court located in the county in which this note is signed
or in which borrower resides in the event of any legal proceeding under
this note.
<PAGE> 3
14. COLLECTION EXPENSES: If Lender hires an attorney (who is not a salaried
employee of Lender) to assist in collecting any amount due or enforcing
any right or remedy under this Note, Borrower agrees to pay Lender's
reasonable attorney's fees and collection costs subject to court award.
15. MISCELLANEOUS: This Note is being executed for commercial purposes.
Borrower and Lender agree that time is of the essence. Borrower waives
presentment, demand for payment, notice of intent to accelerate, notice of
acceleration, notice of dishonor and protest. All references to Borrower
in this Note shall include all of the parties signing this Note. If there
is more than one Borrower, their obligations will be joint and several.
This Note and any related documents represent the complete and integrated
understanding between Borrower and Lender pertaining to the terms and
conditions of those documents.
16. ADDITIONAL TERMS. Except for $7,500.00 which Borrower will pay Lender,
this note constitutes payment of invoices 21499, 25325, and 25822 owed by
Borrower to Lender.
DENICS CO. LTD
by: /s/ Kengo Iwai
--------------------
Kengo Iwai,
President
Unconditional Guarantee
I, Shohei Oguri of Tokyo, Japan hereby irrevocably and unconditionally
guarantee payment of all amounts owed or which may become owed by Borrower to
Lender as set forth in the foregoing note from Denics Co., Ltd. to AMERICAN
DENTAL TECHNOLOGIES, INC. as if I was the Borrower. This guarantee is
performable in Corpus Christi, Texas.
/s/ S. Oguri
---------------------------------
Shohei Oguri, Individually
Address:
5-7 Hocho Dori
---------------------------------
Toyohasi City, Japan
---------------------------------
<PAGE> 1
EXHIBIT 21.1
Subsidiaries of the Registrant
------------------------------
<TABLE>
<CAPTION>
JURISDICTION OF NAMES UNDER WHICH
NAME OF SUBSIDIARY INCORPORATION SUBSIDIARY DOES BUSINESS
------------------ --------------- ------------------------
<S> <C> <C>
1. American Dental Laser GmbH Germany American Dental Laser GmbH
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,831,683
<SECURITIES> 0
<RECEIVABLES> 3,379,352
<ALLOWANCES> 250,000
<INVENTORY> 4,128,905
<CURRENT-ASSETS> 10,427,174
<PP&E> 2,699,235
<DEPRECIATION> 1,500,105
<TOTAL-ASSETS> 22,530,307
<CURRENT-LIABILITIES> 2,137,479
<BONDS> 0
277,923
0
<COMMON> 0
<OTHER-SE> 20,362,000
<TOTAL-LIABILITY-AND-EQUITY> 22,530,307
<SALES> 21,447,341
<TOTAL-REVENUES> 21,447,341
<CGS> 9,371,342
<TOTAL-COSTS> 9,371,342
<OTHER-EXPENSES> 8,980,905
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 52,857
<INCOME-PRETAX> 3,621,770
<INCOME-TAX> 0
<INCOME-CONTINUING> 3,621,770
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,621,770
<EPS-PRIMARY> .52
<EPS-DILUTED> .47
</TABLE>
