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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, 1998, 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)
18860 West Ten Mile Road Southfield, Michigan 48075
(Address of principal executive offices)(Zip Code)
(248) 395-3900
(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 $13,600,000 of March 15,
1999, 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 7,428,339 shares of the registrant's Common
Stock issued and outstanding on March 15, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrants' Proxy Statement for its 1999 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"), pulsed dental lasers, primarily the
PulseMaster models, and intra oral cameras ("Ultracam") 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.
During 1998, American Dental acquired The Dental Probe and Dental Vision
Direct. The acquisitions are described in more detail under "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Business Acquisitions" and in Note 2 to the Notes to Consolidated
Financial Statements.
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 and PAC represented approximately 65%, 76% and 67%
of American Dental's total revenues in 1998, 1997 and 1996, respectively.
Laser Products
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 introduced a diode laser, "Diolase", in October 1998. The
diode laser delivers a continuous wave or gated continuous wave through a
flexible fiber optic delivery system that can reach difficult recesses of the
mouth. The Diolase delivers 10 watts of energy at 50 pulses per second. The
Diolase is compact and portable in size, weighs approximately 11 pounds and
plugs into a standard electrical outlet.
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American Dental's dental lasers, components and accessories are sold
primarily in certain Asian and Pacific markets, Europe and North America. Lasers
represented approximately 17%, 15% and 26% of American Dental's total revenues
during 1998, 1997 and 1996, 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 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."
Intra Oral Camera Products
The Ultracam is a sophisticated camera system that allows the dentist
to take pictures of a patient's teeth during an examination. The pictures can be
projected on a video monitor in the examination room for immediate viewing by
the dentist and the patient, printed or stored on a computer disk. The Ultracam
systems offered vary in size from the basic cart system, which is a portable
camera and printer housed in a mobile cart, to a networked system that can be
untilized in several examination rooms. The networked systems combine the cart
system with central printing stations, digital docking stations and examination
room monitors.
The Ultracam is utilized in the dental practice for presentation,
education and as a means of communicating their services through multi-media.
The recently introduced Digital Docking Station greatly enhances the value of an
intra oral camera by allowing the storage of up to 40 images on a 3 1/2"
computer floppy disk.
Ultracam products are sold primarily in North America and Europe. Since
its acquisition in August 1998, the Ultracam products represented approximately
11% of American Dental's total revenue in 1998.
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 1998, 1997, 1996, respectively.
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,
Meer Dental and Sullivan Schein, Inc. Sales to Patterson Dental Company, a major
domestic distributor of the Company's kinetic cavity preparation units, were
approximately 30%, 34% and 28% of total revenues in 1998, 1997 and 1996,
respectively. Distributors use their distribution networks to provide sales
leads, shipping, installation and technical service support for the Company's
products. American Dental and its distributors work cooperatively to develop
prospects and close sales.
American Dental's products are exclusively marketed in Japan by Denics
Co. Ltd. ("Denics") or its affiliates and as of January 1999 has purchase
commitments of approximately $5,850,000 through March 2000.
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Sales to Denics for certain Asian and Pacific markets, primarily Japan, were
approximately 12%, 10% and 25% of total revenues in 1998, 1997 and 1996,
respectively.
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.
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 five 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 a KCP, PAC, camera or lasers 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 nine companies which presently sell competing dental air abrasive
products. American Dental believes there are approximately eight companies which
presently sell competing intra oral camera systems. American Dental believes
there are approximately eight competing companies which presently offer Nd:YAG,
diode, 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 provide 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 1998.
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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 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.
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 became 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. Management has identified
alternate suppliers and believes any delays would be minimal. 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 which is capable of
producing new product prototypes. 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 1998, 1997
and 1996 were $947,202, $641,984 and $668,796, 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 Administration ("FDA") and comparable 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
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granted soft tissue clearance in September 1997. The Company has
pending applications to market the PulseMaster for hard tissue application and
reduction of periodontal bacteria. 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
clearances, if obtained, may take from three 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. 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 required 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.
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, 1999, American Dental had 111 full-time employees and 7
part-time employees. Of these employees, 35 were engaged in direct sales and
marketing activities and 63 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.
Name Age Position
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Ben J. Gallant 65 President, Chief Executive Officer and Director
Diane M. Miller 37 Chief Financial Officer
John E. Vickers 52 Executive Vice President, Secretary and Director
William S. Parker 53 Senior Vice President - Dental
William E. Graham 40 Vice President - Sales
Terry D. Myers 51 Vice President - Research & Clinical
William D. Myers 57 Chairman of the Board of Directors
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 Executive Vice President -
Operations in August 1998. He had been the Senior Vice President - Operations of
American Dental since November 1996 and became a director in
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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.
William S. Parker - Mr. Parker was appointed Senior Vice President - Dental in
August 1998. He had been the Vice President - Marketing and Sales of American
Dental since November 1996. Mr. Parker had been New Product Manager for American
Dental since joining the Company in June 1991.
William E. Graham - Mr. Graham was appointed Vice President - Sales in March
1999. Mr. Graham had been National Sales Manager - Ultracam for American Dental
since joining the Company in August 1998. Prior to joining American Dental, Mr.
Graham was a high tech product consultant for Meer Dental, a large regional
dental distributor, from November 1996 until August 1998. From August 1993 to
November 1996, he was a sales representative for Insight Imaging, Inc., an intra
oral camera manufacturer.
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 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.
ITEM 2. DESCRIPTION OF PROPERTIES
In April 1998, the offices of American Dental relocated to an acquired
12,000 square foot office building at 18860 W. Ten Mile Rd., Southfield,
Michigan 48075. Prior to this time, American Dental leased approximately 5,000
square feet for its principal executive offices located at 28411 Northwestern
Highway, Suite 1100, Southfield, Michigan 48034.
American Dental owns an approximately 43,000 square foot manufacturing
facility on 5.2 acres 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 sought
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. In August 1998, the Court granted American Dental summary judgement
for liability against Kreativ for false advertising. The trial for damages was
held in January 1999 and the Company was awarded $635,203. In February 1999, the
Company requested the court to award enhanced damages, attorneys fees and other
costs. The court has not yet ruled on the Company's request at this time. The
Company has not recognized the $635,203 award in its 1998 financial statements
due to the pending rulings.
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. In December 1998, certain
claims by the Company were dismissed on procedural grounds. The Company is
appealing this decision and will vigorously pursue its reversal. Kreativ has
filed a counter claim against the Company for false advertising. The Company is
unable to estimate the range of possible loss that may result from this claim.
The Company is vigorously defending these claims and has incurred legal expenses
related to these claims in excess of $850,000, of which approximately $500,000
has been recorded as a receivable as the Company expects to be reimbursed for
these expenses from the Company's insurance companies.
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On May 5, 1998, the Company filed a third 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 U.S. Patent No.
5,476,596 issued on May 5, 1998, 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 patent. A trial date has been
tentatively scheduled for July 1999.
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.
Closing Price
High Low
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1997
First Quarter $ 12.000 $ 4.750
Second Quarter 7.750 4.625
Third Quarter 10.375 4.562
Fourth Quarter 8.375 4.500
1998
First Quarter $ 5.375 $ 4.750
Second Quarter 5.563 4.438
Third Quarter 5.063 3.500
Fourth Quarter 4.375 3.438
The records of the transfer agent reflect that as of March 19, 1999,
there were approximately 4,000 beneficial and record holders of American Dental
common stock based upon the records of the Company's stock transfer agent and
security position listings.
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."
(in thousands, except per share amounts)
1998 1997 1996 1995 1994
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Operating Data:
Net revenue $28,285 $21,652 $20,510 $13,617 $11,531
Net income (loss) 8,849(1) 3,621 5,628(2) (1,274) (4,181)
Net income (loss)
per common share
assuming dilution $1.20 $.47 $.90 $(.34) $(1.28)
Weighted average number
of common shares 7,375 7,640(5) 6,284(5) 3,836(6) 3,291(7)
Balance Sheet Data:
Total assets $41,855(3) $22,530 $21,280(4) $12,984 $11,137
Long-term obligations 6,271 135 577 3,664 4,030
Stockholders' equity (8) 31,809 20,257 16,809(5) 1,832(6) 2,190(7)
Working capital (deficit) 17,504 8,290 5,153 (1,437)(9) 12
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(1) Includes $5,072,117 income tax benefit related to reversal of a previously
recorded deferred tax asset valuation allowance
(2) Includes $2,700,000 related party royalty income and a $560,000
restructuring expense.
(3) Includes goodwill of $4,229,500 and other assets of $3,948,000 recorded in
connection with the acquisitions of The Dental Probe and Dental Vision
Direct in February 1998 and August 1998, respectively.
(4) 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.
(5) Includes 2,857,443 shares of common stock issued in connection with the
acquisition of Texas Airsonics, Inc.
(6) Includes 222,222 shares of restricted common stock issued in a private
placement.
(7) Includes 749,750 shares of restricted common stock issued in a private
placement.
(8) No dividends were paid on the common stock during the periods presented.
(9) Includes $1,500,000 current note payable, proceeds of which were utilized
for a $1,410,000 non-current deposit related to litigation.
9
10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Business Acquisitions
On August 1, 1998, the Company acquired 100% of the outstanding stock
of Dental Vision Direct ("DVD"), which manufactures and markets intra oral
cameras and related equipment. The total consideration paid was $7,620,000,
including $3,000,000 in cash, a promissory note of $3,900,000 and warrants to
purchase 600,000 shares of Company common stock at a price of $5.50 per share.
The $3,900,000 promissory note was repaid in October 1998 with proceeds from the
line of credit as described in Note 4 to the consolidated financial statements.
The acquisition was accounted for as a purchase and, accordingly, the total
consideration paid of $7,620,000 has been allocated to the acquired assets and
assumed liabilities based on their estimated fair values as of the acquisition
date and the excess consideration of $3,837,000 has been allocated to goodwill
to be amortized over a 25 year period. The results of operations for DVD have
been included in the consolidated statements of operations for the Company from
the acquisition date.
On February 15, 1998, the Company acquired 100% of the outstanding
stock of the Dental Probe, Inc. ("TDP") in exchange for $250,000 in cash and
61,500 shares of common stock. The acquisition was accounted for as a purchase
and accordingly, the total consideration paid of $557,500, has been allocated to
the acquired assets and assumed liabilities based on their estimated fair values
as of the acquisition date and the excess consideration of $392,500 has been
allocated to goodwill to be amortized over a fifteen year period. The results of
operations for TDP have been included in the consolidated statements of
operations for the Company from the acquisition date.
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 consideration of $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 allocated to goodwill to 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.
Results of Operations
For the year ended December 31, 1998, the Company earned $8,849,317
compared to $3,621,770 for the same period in 1997. Net income in 1998 includes
recognition of a $5,072,117 income tax benefit related to the Company's net
operating loss carryforwards and other temporary differences, that had been
previously reserved, and 1997 net income includes a non-recurring license fee of
$375,000. Excluding the income tax benefit in 1998 and the non-recurring license
fee in 1997, net income was $3,777,200 in 1998 compared to $3,246,770 in 1997.
This 16% increase is primarily due to increased revenues. Income from operations
for 1998 was $3,841,990 compared to $3,220,277 in 1997. This 19% increase in
income from operations was primarily due to increased revenues, which was
partially offset by increased legal fees incurred during 1998 for defending the
Company's business reputation and patents (see Item 3. Legal Proceedings).
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 $3,220,277 compared to $2,930,804
in 1996. The 10% increase in income from operations is primarily due to
increased gross profit, resulting from the acquisition of 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, 1998, the Company's revenues increased
31% compared to 1997. This increase in revenues is primarily due to a 32%
increase in revenues in North America, a 44% increase in revenues in Japan and a
2% increase in Europe. The increase in North America is due to the addition of
the Ultracam intra oral product line as a result of the acquisition of Dental
Vision Direct in August 1998 and increased sales of the stand alone curing
light. The increase in revenues in Japan and Europe reflect an increase in
purchasing in 1998 compared to 1997 and 1996. The Japanese and European
distributors had reduced purchasing in 1997 and 1996 to lower their inventory
levels.
For the year ended December 31, 1997, the Company's revenues increased 6%
compared to 1996. This increase was primarily due to a 51% increase in revenues
in North America, which was significantly offset by a 52% reduction in revenues
in Europe and a 56% reduction in Japan. The increase in North America was
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11
primarily due to an increase in revenues from the KCP product line. The
reductions in Europe and Japan were related to distributors reducing existing
inventories and poor economic conditions.
Management anticipates that revenues will continue to improve in 1999
compared to 1998, primarily in North America and Japan. In North America, the
Ultracam product line is expected to be a significant contributor to the
increase in anticipated revenues in 1999. Further, the Company has received
purchase contracts from Denics Co., Ltd. for lasers and curing lights
aggregating $5,850,000 through March 2000 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 revenues was 54% for the year ended
December 31, 1998, compared to 57% in 1997 and 49% in 1996. The decrease in
gross profit as a percentage of revenues in 1998 compared to 1997 is due to
price reductions for promotional discounts extended to North American
distributors and a lower gross profit as a percentage of revenues on the
Ultracam product line. The increase in gross profit as a percentage of revenues
in 1997 compared to 1996 is attributable to the July 1996 acquisition of Texas
Air, the manufacturer of the Company's KCP product line. This acquisition
increased the gross profit on KCP products due to the addition of the
manufacturing margin after the acquisition date.
Selling, general and administrative expenses were $10,618,210 in 1998,
$8,418,271 in 1997 and $5,894,834 in 1996. The increase in 1998 is attributable
to increased selling and marketing expenses in North America and legal expenses
in excess of $500,000, for the purpose of defending the Company's business
reputation and patents. The increase in 1997 from 1996 is attributable to the
Company's manufacturing agreement with Texas Air, prior to its acquisition, to
share legal and marketing expenses. 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.
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, $250,000
and $210,000 of the restructuring costs were paid in 1996, 1997 and 1998,
respectively.
Research and development expenses were $947,202 in 1998, $641,984 in
1997 and $668,796 in 1996. The increase in research and development expense
during 1998 was due to expenses relating to clinical reports for regulatory
approvals and the completion of two new products. The decrease in research and
development in 1997 from 1996 is primarily due to reduced personnel costs and
the completion of clinical trials related to governmental approval for laser
applications in 1996.
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.
Interest expense was $206,856 in 1998, $52,857 in 1997 and $110,556 in
1996. The increase in interest expense in 1998 is primarily due to the debt
incurred to fund the acquisition of DVD in August 1998.
In 1998, the Company reversed its previously recorded deferred tax
asset valuation allowance as the Company determined that it was more likely than
not that they would realize the related deferred tax asset. The effect of the
reversal was to increase net income by $5,072,117 for this income tax benefit.
The Company's income taxes at U. S. statutory rates differs from its recorded
income tax benefit primarily due to the reversal of a previously recorded
deferred tax valuation allowance in 1998. At December 31, 1998, the Company had
net
11
12
deferred tax assets totaling $5,303,000, primarily consisting of a net operating
loss carryforward of $4,047,000. These net operating loss carryforwards expire
in various amounts in the years 2006 through 2010.
Liquidity and Capital Resources
The Company's operating activities provided $1,019,062 in cash
resources in 1998. Cash provided by operating activities in 1998 was due to net
income of $8,849,317, resulting primarily from increased revenues in Japan and
North America, an increase in accounts payable of $1,580,876 and $1,469,910 of
non-cash depreciation and amortization expense. Cash provided by operating
activities was reduced primarily by a non-cash change in deferred taxes of
$5,212,619 and changes in operating assets and liabilities, including an
increase in accounts receivable of $2,221,040 and an increase in inventory of
$3,788,370.
The Company's investing activities used $4,865,083 in cash resources in
1998. The cash used in investing activities in 1998 related to the acquisitions
of DVD and The Dental Probe, the purchase of an office building in Southfield,
Michigan and an expansion of the manufacturing facility in Corpus Christi,
Texas.
At December 31, 1998, the Company had a $7,500,000 revolving line of
credit from a bank, with interest at prime or the LIBOR rate (Eurodollar rates,
which were approximately 5.30% at December 31, 1998) plus 1.5%, which expires
in September 2000. The Company's borrowing is secured by a pledge of the
Company's accounts receivable, inventory, equipment, instruments, patents,
copyrights and trademarks. As of December 31, 1998, the Company had $5,950,000
outstanding and $1,550,000 available under this line of credit. The borrowings
were used to fund the Company's acquisition of DVD.
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
established a team that has completed an awareness program and assessment
project to address the Year 2000 issue including information technology (IT) and
non-IT systems. The Company has determined that it will be required to upgrade
or replace portions of its software so that its computer and phone systems will
properly utilize dates beyond December 31, 1999 and that certain non-IT systems,
such as alarms, equipment, and heating and cooling systems may need to be
upgraded or replaced. The Company expects to be able to complete all of its
planned year 2000 remediation by the end of the second quarter of 1999 and
believes that its systems will then be Year 2000 compliant. If such planned
remediation cannot be completed prior to the end of 1999, the Year 2000 issue
could cause production interruptions that could have a material impact on the
operations of the Company. Anticipated spending for Year 2000 remediation,
expected to cost approximately $50,000, will be expensed as incurred and is not
expected to have a significant impact on the Company's ongoing results of
operations. Through December 31, 1998, the Company has incurred approximately
$15,000 attributable to year 2000 remediation.
The Company has initiated communications with a substantial majority of
its significant suppliers and large customers to determine their plans to
address the Year 2000 issue. While the Company expects a successful resolution
of all issues, there can be no guarantee that the systems of other companies
will be converted in a timely manner, or that a failure to convert by a supplier
or customer would not have a material adverse effect on the Company. The Company
considers the failure of a supplier or customer to be Year 2000 compliant to be
the most reasonably likely worst case scenario, since it expects to be Year 2000
compliant prior to the end of the second quarter of 1999 and it has determined
it has no material exposure to contingencies related to the Year 2000 issue for
the products it has sold. The Company plans to document its preliminary
contingency plan by April 1999 and to finalize these plans no later than June
30, 1999 after assessing which third parties are most likely to have an adverse
effect on the Company. Some material adverse effect could result despite such
contingency planning.
The costs of the project and the date by which the Company plans to
complete the Year 2000 upgrades are based on management's best estimates, which
were derived utilizing third party plans and other factors. However, there can
be no guarantee that these estimates will be achieved and actual results could
differ materially from those plans. Specific factors that might cause such
material differences include, but are not limited to, the compatibility of the
upgrades and conversions, availability of personnel to correct capability issues
and similar uncertainties.
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ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
In the normal course of business, the Company is subject to market
exposure from changes in foreign exchange rates, interest rates and raw material
prices.
Foreign Currency
The Company sells its products in North America, Europe (primarily
Germany), Japan and other foreign countries. The Company is headquartered in the
United States and has a German subsidiary. Except for revenues generated by its
German subsidiary, the Company sells its products to its foreign customers in
United States dollars. As a result the Company's financial results could be
affected by factors such as changes in foreign currency exchange rates or weak
economic conditions in the foreign markets in which the Company distributes its
products. The Company's operating results are primarily exposed to changes in
exchange rates between the United States dollar and the German deutsche mark.
As currency rates change, translation of the income statements of the
Company's German subsidiary into United States dollars affects year-over-year
comparability of operating results. The Company does not generally hedge
operating translation risks because cash flows from the German operations are
generally reinvested locally.
As of December 31, 1998, the Company's net assets (defined as current
assets less current liabilities) subject to foreign currency translation risk
are $964,512. The potential decrease in net assets from a hypothetical 10%
adverse change in quoted foreign currency exchange rates would be approximately
$96,451.
Interest Rate Risk
The Company's variable interest expense is sensitive to changes in the
general level of United States and European interest rates. The Company's long
term debt represents borrowings under a revolving line of credit at the bank's
prime rate and various notes at Eurodollar rates plus 1.5% and is sensitive to
changes in interest rates. The borrowings under the Eurodollar rates have
maturity dates varying between 30 to 120 days. At December 31, 1998, the
weighted average interest rate of the $5,950,000 debt was 6.88% and the fair
value of the debt approximates its carrying value.
The Company had interest expense of $206,856 in 1998. The potential
increase in interest expense from a hypothetical 2% adverse change, assuming the
December 31, 1998 debt was outstanding for the entire year, would be
approximately $118,000.
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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, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1998. 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, 1998 and 1997, and the
consolidated results of its operations and its cash flows for each of three
years in the period ended December 31, 1998, 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 26, 1999
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15
American Dental Technologies, Inc.
Consolidated Statements of Operations
Year Ended December 31
1998 1997 1996
---------------------------------------------------------
Revenues:
Equipment:
Trade $ 24,545,421 $ 19,386,836 $ 15,375,663
Related party (Note 3) 3,465,819 2,060,505 5,099,313
------------ ------------ ------------
28,011,240 21,447,341 20,474,976
Royalties 273,480 204,533 35,246
------------ ------------ ------------
28,284,720 21,651,874 20,510,222
Cost of sales:
Trade 12,877,318 9,371,342 9,329,352
Related party (Note 2) -- -- 1,126,436
------------ ------------ ------------
12,877,318 9,371,342 10,455,788
------------ ------------ ------------
Gross profit 15,407,402 12,280,532 10,054,434
Selling, general and administrative 10,618,210 8,418,271 5,894,834
Restructuring (Note 2) -- -- 560,000
Research and development 947,202 641,984 668,796
------------ ------------ ------------
Income from operations 3,841,990 3,220,277 2,930,804
Other income (expense)
License transfer fee (Note 6) -- 375,000 --
Royalty income - non-recurring:
Related party (Note 3) -- -- 2,700,000
Other income 142,066 79,350 108,538
Interest expense (206,856) (52,857) (110,556)
------------ ------------ ------------
Income before income taxes 3,777,200 3,621,770 5,628,786
Income tax benefit (5,072,117) -- --
------------ ------------ ------------
Net income $ 8,849,317 $ 3,621,770 $ 5,628,786
============ ============ ============
Net income per share $ 1.21 $ 0.52 $ 1.08
======= ======= ======
Net income per share
assuming dilution $ 1.20 $ 0.47 $ 0.90
======= ======= ======
See accompanying notes.
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American Dental Technologies, Inc.
Consolidated Balance Sheets
December 31
1998 1997
-----------------------------
Assets
Current assets:
Cash $1,409,404 $ 1,831,683
Accounts receivable:
Trade, less allowance of $175,000
in 1998 and $250,000 in 1997 4,423,633 3,129,352
Related parties (Note 3) 1,143,475 223,150
---------- -----------
5,567,108 3,352,502
Inventories (Note 1) 11,225,208 4,128,905
Deferred taxes 1,857,143 90,000
Prepaid expenses and other current assets 919,633 524,084
Note receivable-related party (Note 3) 300,000 500,000
----------- -----------
Total current assets 21,278,496 10,427,174
Deferred taxes 3,445,476 ---
Property and equipment, net (Note 1) 2,462,747 1,199,130
Intangible assets, net (Notes 1,2 and 3):
Goodwill 12,170,149 8,712,250
Air abrasive technology rights 730,878 909,918
Other 1,667,439 1,181,835
----------- -----------
14,568,466 10,804,003
Other receivable (Note 6) 100,000 100,000
----------- -----------
Total assets $41,855,185 $22,530,307
=========== ===========
See accompanying notes.
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American Dental Technologies, Inc.
Consolidated Balance Sheets
December 31
1998 1997
---------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ -- $ 250,000
Accounts payable 2,877,517 1,316,986
Compensation and employee benefits 405,850 247,025
Other accrued liabilities 491,180 323,468
------------ ------------
Total current liabilities 3,774,547 2,137,479
Other non-current liabilities (Note 4) 321,336 135,392
Notes payable (Note 4) 5,950,000 --
Commitments and contingencies (Note 4 and 9) -- --
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: 7,419,259
shares in 1998; and 6,948,011 shares in 1997 296,773 277,923
Additional paid-in capital 42,359,016 40,446,624
Warrants and options 772,500 --
Accumulated deficit (11,513,230) (20,362,547)
Foreign currency translation (105,757) (104,564)
------------ ------------
Total stockholders' equity 31,809,302 20,257,436
------------ ------------
Total liabilities and stockholders' equity $ 41,855,185 $ 22,530,307
============ ============
See accompanying notes.
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American Dental Technologies, Inc.
Consolidated Statements of Cash Flows
Year ended December 31
1998 1997 1996
---------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 8,849,317 $ 3,621,770 $ 5,628,786
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 244,566 121,435 542,686
Amortization 1,225,344 990,742 728,199
Deferred taxes (5,212,619) (45,000) --
Other non-cash gains -- (100,000) (1,335)
Advances from Texas Airsonics, Inc. prior
to acquisition -- -- 399,474
Changes in operating assets and liabilities:
Accounts receivable (2,221,040) 124,343 (1,373,980)
Inventories (3,788,370) (905,068) (239,740)
Prepaid expenses and other current assets (300,218) (29,098) 216,276
Notes and other receivables 200,000 (600,000) --
Prepaid foreign taxes -- -- 225,000
Accounts payable 1,580,876 (754,470) (2,128,263)
Compensation and employee benefits 157,977 11,243 (109,180)
Other accrued liabilities 99,240 (694,750) (829,396)
Other non-current liabilities 183,989 (41,780) 145,182
Deferred royalty income -- -- (3,000,000)
----------- ----------- -----------
Net cash provided by operating activities 1,019,062 1,699,367 203,709
INVESTING ACTIVITIES
Acquisition of businesses (3,315,000) -- --
Purchases of property, plant & equipment (1,242,296) (126,718) (397,788)
Increase in intangible assets (307,787) (1,087,639) (367,071)
Cash obtained upon merger -- -- 217,772
Decrease in non-current deposits -- -- 1,410,267
----------- ----------- -----------
Net cash providing by (used in) investing activities (4,865,083) (1,214,357) 863,180
FINANCING ACTIVITIES
Payments on note payable to related party -- (500,000) (200,000)
Payments on note payable (5,800,000) (250,000) (1,290,000)
Proceeds from note payable 7,600,000 -- 500,000
Proceeds from exercise of warrants 1,564,000 -- --
Proceeds from exercise of stock options 59,742 264,481 89,585
----------- ----------- -----------
Net cash provided (used in) by financing activities 3,423,742 (485,519) (900,415)
----------- ----------- -----------
Increase (decrease) in cash (422,279) (509) 166,474
Cash at beginning of year 1,831,683 1,832,192 1,665,718
----------- ----------- -----------
Cash at end of year $ 1,409,404 $ 1,831,683 $ 1,832,192
=========== =========== ===========
See accompanying notes.
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American Dental Technologies, Inc
Consolidated Statements of Stockholders' Equity
Additional Warrants Foreign
Common Stock Paid-In and Accumulated Currency
Shares Amount Capital Options Deficit Translation Total
----------------------------------------------------------------------------------------------
Balance at January 1, 1996 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)
------------
Comprehensive income 5,609,681
------------
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)
------------
Comprehensive income 3,560,794
------------
Exercise of stock options 65,205 2,608 261,872 264,480
Redemption of stock 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
Net income for 1998 8,849,317 8,849,317
Foreign currency translation (1,193) (1,193)
------------
Comprehensive income 8,848,124
------------
Issuance of common stock for
acquisition of business (Note 2) 61,500 2,460 305,040 307,500
Exercise of stock options 18,748 750 58,992 59,742
Issuance of options for intangible
assets 52,500 52,500
Exercise of warrants 391,000 15,640 1,548,360 1,564,000
Issuance of warrants for
acquisition of business (Note 2) 720,000 720,000
---------------------------------------------------------------------------------------------
Balance at December 31, 1998 7,419,259 $ 296,773 $ 42,359,016 $ 772,500 $(11,513,230) $($105,757) $ 31,809,302
========= ========= ============ ========= ============ ========== ============
See accompanying notes.
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Notes to Consolidated Financial Statements
December 31, 1998
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 by the first-in
first-out method, or market. At December 31, inventories consisted of the
following:
1998 1997
-----------------------------------
Finished goods $ 1,255,608 $ 920,919
Raw materials, parts and supplies 9,969,600 3,207,986
----------- -----------
$11,225,208 $ 4,128,905
=========== ===========
Inventories at December 31, 1998 and 1997 are net of valuation allowances of
$555,000 and $715,000, 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:
1998 1997
----------------------------
Building and improvements $ 1,469,583 $ 745,266
Office furniture and equipment 2,737,837 1,953,969
----------- -----------
4,207,420 2,699,235
Accumulated depreciation (1,744,673) (1,500,105)
----------- -----------
$ 2,462,747 $ 1,199,130
=========== ===========
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 periods
ranging from 15 to 25 years, air abrasive technology rights over 10 years and
other intangible assets over lives ranging from 5 to 17 years. Accumulated
amortization was $4,351,647 and $3,126,303 at December 31, 1998 and 1997,
respectively.
The Company periodically evaluates intangible assets for indicators of
impairment in value. When impairment is indicated, the Company revalues the
assets based on their estimated fair value.
Revenue Recognition
The Company recognizes revenues and related estimated warranty expense when
title is transferred to the customer, generally upon shipment. The Company
recognizes revenue on certain sales to two of its largest distributors under
terms which require shipment to a local independent warehouse.
20
21
Notes to Consolidated Financial Statements
December 31, 1998
1. Organization and Significant Accounting Policies (continued)
Net Income Per Share
The following table sets forth the computation for basic and diluted earnings
per share:
1998 1997 1996
---- ---- ----
Numerator:
Net income $8,849,317 $3,621,770 $5,628,786
---------- ---------- ----------
Numerator for basic and diluted earnings per
share - income available to common
stockholders after assumed conversions $8,849,317 $3,621,770 $5,628,786
Denominator:
Denominator for basic earnings per share -
weighted-average shares 7,310,510 6,933,740 5,193,192
Effect of dilutive securities:
Employee stock options 51,626 138,409 181,468
Warrants 12,858 568,231 909,720
---------- ---------- ----------
Dilutive potential common shares
Denominator for diluted earnings per
share - adjusted weighted-average
shares after assumed conversions 7,374,994 7,640,380 6,284,380
========== ========== ==========
Net income per share $1.21 $0.52 $1.08
===== ===== =====
Net income per share assuming dilution $1.20 $0.47 $0.90
===== ===== =====
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.
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 $1,353,500, $1,042,000 and $530,000 in 1998, 1997 and 1996,
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.
21
22
Notes to Consolidated Financial Statements
December 31, 1998
1. Organization and Significant Accounting Policies (continued)
Reclassifications
Certain amounts in prior year financial statements have been reclassified to
conform with the presentation used in 1998.
2. Business Acquisitions
Dental Vision Direct
On August 1, 1998, the Company acquired 100% of the outstanding stock of Dental
Vision Direct ("DVD"), which manufactures and markets intra oral cameras and
related equipment. The total consideration paid was $7,620,000, including
$3,000,000 in cash, a promissory note of $3,900,000 and warrants to purchase
600,000 shares of Company common stock at a price of $5.50 per share. The
$3,900,000 promissory note was repaid in October 1998 with proceeds from the
line of credit as described in Note 4. The acquisition was accounted for as a
purchase and, accordingly, the total consideration paid of $7,620,000 has been
allocated to the acquired assets and assumed liabilities based on their
estimated fair values as of the acquisition date and the excess consideration of
$3,837,000 has been allocated to goodwill to be amortized over a 25 year period.
The results of operations for DVD have been included in the consolidated
statements of operations for the Company from the acquisition date.
The following unaudited pro forma financial information for the twelve months
ended December 31, 1998 and 1997 assume the DVD acquisition occurred as of the
beginning of the respective periods, after giving effect to certain adjustments,
including the amortization of intangible assets, interest expense on acquisition
debt and income tax effects. The pro forma results have been prepared for
comparative purposes only and are not necessarily indicative of the results of
operations which may occur in the future or that would have occurred had the
acquisition of DVD been consummated on the dates indicated, nor are they
necessarily indicative of the company's future results of operations.
Year Ended December 31
1998 1997
-----------------------------
Revenues $32,313,902 $29,081,521
Net income 8,932,401 2,270,229
Net income per share $1.21 $0.30
The Dental Probe
On February 15, 1998, the Company acquired 100% of the outstanding stock of the
Dental Probe, Inc. ("TDP") in exchange for $250,000 in cash and 61,500 shares of
common stock. The acquisition was accounted for as a purchase and accordingly,
the total consideration paid of $557,500, has been allocated to the acquired
assets and assumed liabilities based on their estimated fair values as of the
acquisition date and the excess consideration of $392,500 has been allocated to
goodwill to be amortized over a fifteen year period. The results of operations
for TDP have been included in the consolidated statements of operations for the
Company from the acquisition date.
Texas Airsonics, Inc.
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 consideration of $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 allocated to goodwill to 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.
22
23
Notes to Consolidated Financial Statements
December 31, 1998
2. Business Acquisitions (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. Texas Air
shared research and development, legal, and marketing costs of $1,220,000
through July 31, 1996.
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. The Company paid approximately $210,000,
$250,000 and $100,000 related to these restructuring costs in 1998, 1997 and
1996, respectively.
3. Agreements with Related Parties
Denics Co., Ltd.
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. In August 1998, the Company agreed to modify the repayment
terms of the note receivable to $200,000 due August 31, 1998 and five monthly
installments of $60,000 commencing in April 1999. As of December 31, 1998,
$300,000 was outstanding.
Sales of lasers and KCPs to Denics were $3,465,819, $2,060,505 and $5,099,313 in
1998, 1997 and 1996, respectively. The Company had accounts receivable of
$1,143,475 and $223,150 from Denics at December 31, 1998 and 1997, respectively.
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, in 1996 the Company recognized
$2,700,000, net of foreign taxes, of related party royalty income.
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 and $190,000 in 1997 and 1996, respectively, for
such services. There was no such expense in 1998.
4. Line of Credit and Other Non-Current Liabilities
On September 30, 1998, the Company entered into an agreement for a $7,500,000
revolving line of credit from a bank, with interest at prime or the LIBOR rate
(Eurodollar rates, which were approximately 5.30% at December 31, 1998) plus
1.5%, which expires in September 2000. The Company's borrowing is secured by a
pledge of the Company's accounts receivable, inventory, equipment, instruments,
patents, copyrights and trademarks. As of December 31, 1998, the Company had
$5,950,000 outstanding and $1,550,000 available under this line of credit.
23
24
Notes to Consolidated Financial Statements
December 31, 1998
4. Line of Credit and Other Non-Current Liabilities (continued)
The Company leases certain equipment under capital leases. Equipment related to
these capital leases had a net book value of approximately $379,000 at December
31, 1998. Future minimum lease payments under capital and operating leases as of
December 31, 1998 are as follows:
Operating Capital
Year Leases Leases
---- ---------------------------
1999 $ 65,364 $ 124,195
2000 124,195
2001 124,195
2002 79,066
2003 and thereafter 47,776
--------- ---------
$ 65,364 499,427
=========
Less amount representing interest (88,301)
---------
$ 411,126
=========
Capital lease obligations at December 31, 1998 consisted of the following:
Current portion $ 89,790
Non-current portion 321,336
---------
Total capital lease obligations $ 411,126
=========
Rental expense, primarily office facilities, for operating leases in 1998, 1997
and 1996 approximated $144,000, $154,000 and $257,000, respectively.
The Company paid interest of approximately $207,000, $63,000 and $135,000 in
1998, 1997 and 1996, respectively.
5. Stockholders' Equity, Stock Options and Warrants
The Company has authorized three stock option plans for employees, officers,
directors, consultants and other key personnel. As of December 31, 1998, the
Nonqualified Stock Option Plan has 287,500 shares reserved, 55,680 shares
available for issuance and 192,783 shares outstanding; the Long-Term Incentive
Plan has 625,000 shares reserved, 47,401 shares available for issuance and
498,619 shares outstanding; and the Stock Option Plan for Employees has 17,045
shares reserved, 541 shares available and 15,036 shares outstanding
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, 1998.
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 1996,
1997 and 1998, 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 .5, 1.1 and .373 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.
24
25
Notes to Consolidated Financial Statements
December 31, 1998
5. Stockholders' Equity, Stock Options and Warrants (continued)
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:
1998 1997 1996
----------- ---------- ----------
Proforma net income $8,438,709 $3,213,783 $5,197,430
Proforma net income per share $1.15 $0.46 $1.00
Proforma net income per share
assuming dilution $1.14 $0.42 $0.83
Stock option activity is summarized as follows:
Number Weighted-Average
of Shares Exercise Price
-----------------------------------------
Outstanding at January 1, 1996 601,345 $7.64
=======
Exercisable at January 1, 1996 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
=======
Options granted 51,560 4.72
Options exercised (18,748) 3.19
Options canceled (38,323) 5.55
-------
Outstanding at December 31, 1998 739,108 5.57
=======
Exercisable at December 31, 1998 535,598 5.63
=======
The weighted-average fair value of options granted during the year was $1.07,
$4.51 and $3.48 in 1998, 1997 and 1996, respectively. Exercise prices for
options outstanding as of December 31, 1998 ranged from $2.00 to $50.00. The
weighted-average remaining contractual life of those options is 4.7 years.
Warrant activity is summarized as follows:
Weighted-Average
Shares Exercise Price
---------- ----------------
Outstanding at January 1, 1996 1,819,194 $5.08
==========
Exercisable at January 1, 1996 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
=========
Warrants issued 600,000 5.50
Warrants exercised (391,000) 4.00
Warrants canceled (125,000) 4.00
---------
Outstanding at December 31, 1998 2,930,868 5.46
=========
Exercisable at December 31, 1998 2,930,868 5.46
=========
25
26
Notes to Consolidated Financial Statements
December 31, 1998
5. Stockholders' Equity, Stock Options and Warrants (continued)
The weighted-average fair value of warrants granted during the year was $1.20 in
1998 and $2.24 in 1996. Exercise prices for warrants outstanding as of December
31, 1998 ranged from $4.00 to $6.75. The weighted-average remaining contractual
life of those warrants is 1.5 years.
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, 1998, the Company had a $11,902,375 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:
December 31
1998 1997
-----------------------------
Allowance for doubtful accounts $ 72,000 $ 85,000
Inventory valuation reserves 189,000 243,000
Depreciation 287,000 300,000
Compensation and employee benefits 236,000 103,000
Alternative minimum tax credit carryforward 212,000 ---
Other 328,000 305,000
Net operating loss carryforwards 4,047,000 5,792,000
--------- ---------
Deferred tax asset 5,371,000 6,828,000
Deferred tax liabilities (68,000) ---
----------- -------------
5,303,000 6,828,000
Valuation allowance --- (6,738,000)
----------- -----------
Net deferred tax asset $5,303,000 $ 90,000
========== ========
The Company's income tax provision included the following:
1998 1997 1996
---- ---- ----
Current expense $ 140,000 $ 45,000 $ 45,000
Deferred benefit (5,212,000) (45,000) (45,000)
----------- ------------ ------------
$(5,072,000) $ --- $ ---
=========== ============ ============
Income taxes (benefit) at
US statutory rate $1,284,000 $ 1,231,000 $ 1,914,000
State taxes 65,000 --- ---
Non-deductible amortization 367,000 247,000 164,000
Deferred tax asset valuation
allowance adjustment (6,738,000) (1,420,000) (1,916,000)
Other (50,000) (58,000) (162,000)
------------ ------------ -----------
$(5,072,000) $ --- $ ---
============ ============ ===========
In 1998, the Company reversed its previously recorded deferred tax asset
valuation allowance as the Company determined that it was more likely than not
that they would realize the related deferred tax asset. The effect of the
reversal was to increase net income by $5,072,000 for this income tax benefit.
Income taxes paid were approximately $134,400, $94,100 and $70,000 in 1998, 1997
and 1996, respectively.
The Company's investment in its foreign subsidiary are considered to be
permanently invested and no provision for U.S. federal and state income taxes on
these translation adjustments have been provided.
26
27
Notes to Consolidated Financial Statements
December 31, 1998
8. Operations by Industry Segment, Geographic Area and Significant Customers
The Company adopted SFAS No. 131, Disclosures about Segments of an Enterprise
and Related Information, for the year ended December 31, 1998. SFAS No. 131
established standards for reporting information about operating segments in
annual financial statements and requires selected information about operating
segments in interim financial reports issued to stockholders. It also
established standards for related disclosures about products and services, and
geographic areas. Operating segments are defined as components of the enterprise
about which separate financial information is available that is evaluated
regularly by the chief operating decision maker, or decision making group, in
deciding how to allocate resources and in assessing performance.
The Company develops, manufactures, markets and sells high technology dental
products, such as air abrasive equipment, lasers, curing lights and intra oral
cameras. The Company sells these products to national and regional dental
distributors in its four fundamental business segments: North America, Japan,
Europe and Other International. The reportable segments are managed separately
because selling techniques and market environments differ from country to
country. The remaining activities of the Company, which are reported as "Other",
include industrial, parts and accessories and royalty income.
The accounting policies of the business segments are consistent with those
described in Note 1. Operating results for North America, substantially all of
which is attributable to the United States, include the effects of the business
acquisitions, as described in Note 2. The Company's Chief Operating Decision
Maker evaluates segmental performance and allocates resources based on
operational earnings (gross profit less selling and marketing expenses).
1998 1997 1996
------------------------------------------------
Revenues:
North America $20,874,298 $15,826,885 $10,463,593
Europe 1,765,065 1,726,766 3,618,603
Japan 3,130,000 2,170,219 4,966,250
Other international 166,749 114,428 75,700
----------- ----------- -----------
$25,936,112 $19,838,298 $19,124,146
=========== =========== ===========
Reconciliation of revenues:
Total segment revenues $25,936,112 $19,838,298 $19,124,146
Other 2,348,608 1,813,576 1,386,076
----------- ----------- -----------
Total revenues $28,284,720 $21,651,874 $20,510,222
=========== =========== ===========
Operational earnings:
North America $ 5,521,650 $ 5,167,694 $ 2,524,620
Europe 139,284 (231,651) 212,287
Japan 1,491,754 1,073,979 2,308,984
Other international 65,071 (66,793) (72,765)
----------- ----------- -----------
$ 7,217,759 $ 5,943,229 $ 4,973,126
=========== =========== ===========
Reconciliation of operational earnings
to income from operations:
Total segment operational earnings $ 7,217,759 $ 5,943,229 $ 4,973,126
Other operational earnings 1,356,004 889,476 483,553
Research & development expenses (947,202) (641,984) (668,796)
Restructuring expenses --- --- (560,000)
Administrative expenses (3,784,571) (2,970,444) (1,297,079)
----------- ------------ -----------
Income from operations $ 3,841,990 $ 3,220,277 $ 2,930,804
=========== ============ ===========
Long lived assets (excluding deferred taxes):
North America $16,265,245 $11,147,339 $11,877,128
Europe 15,968 5,794 22,432
Japan --- --- ---
Other international 850,000 950,000 333,334
----------- ----------- -----------
$17,131,213 $12,103,133 $12,232,894
=========== =========== ===========
27
28
Notes to Consolidated Financial Statements
December 31, 1998
8. Operations by Industry Segment, Geographic Area and Significant
Customers (continued)
Sales to Patterson Dental Company, a major domestic distributor of the Company's
kinetic cavity preparation units, were approximately 30%, 34% and 28% of total
revenues in 1998, 1997 and 1996, respectively. Sales to Denics for certain Asian
and Pacific markets, primarily Japan, were approximately 12%, 10% and 25% of
total revenues in 1998, 1997 and 1996, respectively.
9. Litigation and Contingencies
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 sought
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. In August 1998, the Court granted American Dental Summary Judgement
for liability against Kreativ for false advertising. The trial for damages was
held in January 1999 and the Company was awarded $635,203. In February 1999, the
Company requested the court to award enhanced damages, attorneys fees and other
costs. The court has not yet ruled on the Company's request at this time. The
Company has not recognized the $635,203 award in its 1998 financial statements
due to the pending rulings.
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. In December 1998, certain claims by the Company
were dismissed on procedural grounds. The Company is appealing this decision and
will vigorously pursue its reversal. Kreativ has filed a counter claim against
the Company for false advertising. The Company is unable to estimate the range
of possible loss that may result from this claim. The Company is vigorously
defending these claims and has incurred legal expenses related to these claims
in excess of $850,000, of which approximately $500,000 has been recorded as a
receivable as the Company expects to be reimbursed for these expenses from the
Company's insurance companies.
On May 5, 1998, the Company filed a third 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 U.S. Patent No.
5,476,596 issued on May 5, 1998, 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 patent. A trial date has been
tentatively scheduled for July 1999.
10. Selected Quarterly Financial Data (unaudited)
Three Months Ended
March 31 June 30 September 30 December 31
1998 1998 1998 1998
------------------------------------------------------------------
Revenues $5,707,667 $6,396,913 $6,571,648 $9,608,492
Gross profit 3,128,833 3,678,363 3,374,039 5,226,167
Net income 840,664 1,002,397 549,859 6,456,397(1)
Net income per share
assuming dilution $0.12 $0.13 $0.07 $0.87
Three Months Ended
March 31 June 30 September 30 December 31
1997 1997 1997 1997
------------------------------------------------------------------
Revenues $5,526,831 $5,440,113 $4,054,167 $6,630,763
Gross profit 3,095,769 3,270,905 2,135,341 3,778,517
Net income 886,274 1,403,773(2) 157,014 1,174,709
Net income per share
assuming dilution $0.11 $0.18 $0.02 $0.15
(1) Includes $5,072,117 income tax benefit related to reversal of a previously
recorded deferred tax asset valuation allowance.
(2) Includes $375,000 non-recurring license transfer fee.
28
29
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
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
June 4, 1999 (the "1999 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 1999 Proxy Statement under the heading
"Executive Compensation" (but excluding the information in the Compensation
Committee Report and under "Stock Performance Graph") is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The information included in the 1999 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 1999 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,
1998, 1997, and 1996
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the Years Ended December 31,
1998, 1997, and 1996
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.
Exhibit Number Description of Document
- -------------- -----------------------
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)
3.4 Amended & Restated By-Laws of the Company, dated December 15, 1993
29
30
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 (Form 10-K for the year
ended December 31,1997)
4.10 Allonge and Amendment No. One to Revolving Credit Promissory Note
with The International Bank dated October 15, 1997 (Form 10-K for
the year ended December 31,1997)
4.11 Extension of Liens to the Deed of Trust to The International Bank
dated October 15, 1997 (Form 10-K for the year ended December
31,1997)
4.12 Form of revised July 1995 Common Stock Purchase Warrants, July
1998 (Form 10-Q for the quarter ended June 30, 1998)
4.13 Nontransferable Common Stock Purchase Warrant, dated August 5,
1998, 540,000 shares (Form 10-Q for the quarter ended September
30, 1998)
4.14 Nontransferable Common Stock Purchase Warrant, dated August 5,
1998, 60,000 shares (Form 10-Q for the quarter ended September 30,
1998)
4.15 Promissory Note to Ultrak, Inc.(Form 8-K filed August 5, 1998)
4.16 Line of Credit of Agreement between NBD Bank and American Dental
Technologies, Inc. dated September 26, 1998 (Form 10-Q for the
quarter ended September 30, 1998)
4.17 Revolving Business Credit Note (LIBOR - Based Interest Rate)
between NBD Bank and American Dental Technologies, Inc. dated
September 26, 1998 (Form 10-Q for the quarter ended September 30,
1998)
4.18 Collateral Assignment of Patent between NBD Bank and American
Dental Technologies, Inc. dated September 26, 1998 (Form 10-Q for
the quarter ended September 30, 1998)
4.19 Continuing Security Agreement between NBD Bank and American Dental
Technologies, Inc. dated September 26, 1998 (Form 10-Q for the
quarter ended September 30, 1998)
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)
10.16* Amended and Restated Long-Term Incentive Plan (Form 10-Q for the
quarter ended September 30, 1996, Exhibit 4.1)
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)
30
31
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)
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)
10.53** **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)
10.53a Assignment from Sunrise Technologies International, Inc. to Lares
Research dated June 24, 1997 (Form 10-K for the year ended
December 31,1997)
10.50 Promissory Note between the Company and Denics Co Ltd. dated
September 15, 1997 (Form 10-K for the year ended December 31,1997)
10.55 **Patent License Agreement dated June 29, 1998 Prep-Technology
Corp. and American Dental Technologies, Inc. (Form 10-Q for the
quarter ended June 30, 1998)
10.56 Stock Purchase Agreement dated August 5, 1998 American Dental
Technologies, Inc. and Ultrak, Inc. (Form 10-Q for quarter ended
June 30, 1998)
21.1 Subsidiaries of the Registrant
23.1 Consent of Independent Auditors
27.1 Financial Data Schedule
---------------
*Identifies current management contracts or compensatory plans or arrangements.
**Portion of this agreement were filed separately with the Commission pursuant
to Rule 24b-2 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, 1998.
31
32
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
AMERICAN DENTAL TECHNOLOGIES, INC.
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
- -------------------------------------------- ----------- ----------- ----------- -----------
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 allowance 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 395,600 320,000 -- 715,000
Valuation allowance for deferred taxes 8,158,000 -- 1,420,000(4) 6,738,000
Year Ended December 31, 1998
Valuation allowance for accounts receivable 250,000 -- 75,000(1) 175,000
Valuation allowance for inventories 715,000 -- 160,000(2) 555,000
Valuation allowance for deferred taxes 6,738,000 -- 6,738,000(5) --
(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.
(5) Reversal of valuation allowance.
33
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 19th day of March, 1999.
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 19, 1999.
/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/ 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
34
EXHIBIT INDEX
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.
Exhibit Number Description of Document
- -------------- -----------------------
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)
3.4 Amended & Restated By-Laws of the Company, dated December 15, 1993
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 (Form 10-K for the year
ended December 31,1997)
4.10 Allonge and Amendment No. One to Revolving Credit Promissory Note
with The International Bank dated October 15, 1997 (Form 10-K for
the year ended December 31,1997)
4.11 Extension of Liens to the Deed of Trust to The International Bank
dated October 15, 1997 (Form 10-K for the year ended December
31,1997)
4.12 Form of revised July 1995 Common Stock Purchase Warrants, July
1998 (Form 10-Q for the quarter ended June 30, 1998)
4.13 Nontransferable Common Stock Purchase Warrant, dated August 5,
1998, 540,000 shares (Form 10-Q for the quarter ended September
30, 1998)
4.14 Nontransferable Common Stock Purchase Warrant, dated August 5,
1998, 60,000 shares (Form 10-Q for the quarter ended September 30,
1998)
4.15 Promissory Note to Ultrak, Inc.(Form 8-K filed August 5, 1998)
4.16 Line of Credit of Agreement between NBD Bank and American Dental
Technologies, Inc. dated September 26, 1998 (Form 10-Q for the
quarter ended September 30, 1998)
4.17 Revolving Business Credit Note (LIBOR - Based Interest Rate)
between NBD Bank and American Dental Technologies, Inc. dated
September 26, 1998 (Form 10-Q for the quarter ended September 30,
1998)
4.18 Collateral Assignment of Patent between NBD Bank and American
Dental Technologies, Inc. dated September 26, 1998 (Form 10-Q for
the quarter ended September 30, 1998)
4.19 Continuing Security Agreement between NBD Bank and American Dental
Technologies, Inc. dated September 26, 1998 (Form 10-Q for the
quarter ended September 30, 1998)
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)
10.16* Amended and Restated Long-Term Incentive Plan (Form 10-Q for the
quarter ended September 30, 1996, Exhibit 4.1)
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)
10.43 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)
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)
10.53** **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)
10.53a Assignment from Sunrise Technologies International, Inc. to Lares
Research dated June 24, 1997 (Form 10-K for the year ended
December 31,1997)
10.50 Promissory Note between the Company and Denics Co Ltd. dated
September 15, 1997 (Form 10-K for the year ended December 31,1997)
10.55 **Patent License Agreement dated June 29, 1998 Prep-Technology
Corp. and American Dental Technologies, Inc. (Form 10-Q for the
quarter ended June 30, 1998)
10.56 Stock Purchase Agreement dated August 5, 1998 American Dental
Technologies, Inc. and Ultrak, Inc. (Form 10-Q for quarter ended
June 30, 1998)
21.1 Subsidiaries of the Registrant
23.1 Consent of Independent Auditors
27.1 Financial Data Schedule
---------------
*Identifies current management contracts or compensatory plans or arrangements.
**Portion of this agreement were filed separately with the Commission pursuant
to Rule 24b-2 of the Securities Act of 1934 governing requests for
confidential treatment of information.