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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
(Mark One)
{X} ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended March 31, 2001
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 number 000-22673
SCHICK TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 11-3374812
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
30-00 47th Avenue, Long Island City, NY 11101
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (718) 937-5765
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common stock, par value $.01 per share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been 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 the 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. [X]
----------
The aggregate market value of Common Stock held by non-affiliates of the
registrant as of July 10, 2001 was approximately $7,355,274. Such aggregate
market value is computed by reference to the closing sale price of the Common
Stock on such date.
As of July 12, 2001, the number of shares outstanding of the Registrant's
Common Stock, par value $.01 per share, was 10,138,922
DOCUMENTS INCORPORATED BY REFERENCE:
NONE
Table of Contents
Item of Form 10-K Page
- --------------------------------------------------------------------------------
Part I
Item 1. Business .............................................. 1
Item 2. Properties ............................................ 11
Item 3. Legal Proceedings ..................................... 11
Item 4. Submission of Matters to a Vote of Security Holders ... 12
Part II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters ................................... 12
Item 6. Selected Financial Data ............................... 13
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations ................... 14
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk .................................................. 19
Item 8. Financial Statements and Supplementary Data ........... 19
Item 9. Changes in and Disagreements with Accountants
On Accounting and Financial Disclosure ................ 20
Part III
Item 10. Directors and Executive Officers of the Registrant .... 20
Item 11. Executive Compensation ................................ 22
Item 12. Security Ownership of Certain Beneficial Owners And
Management ............................................ 25
Item 13. Certain Relationships and Related Transactions ........ 27
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K .............................................. F-1
PART I
ITEM 1. BUSINESS
Schick Technologies, Inc. (the "Company") designs, develops and
manufactures innovative digital radiographic imaging systems and devices for the
dental and medical markets. The Company's products, which are based on
proprietary digital imaging technologies, create instant high resolution
radiographs with reduced levels of radiation.
In the field of dentistry, the Company's CDR(R) computed dental radiography
imaging system was introduced in March 1994 and has become a leading product in
its field. The CDR system uses an intra-oral sensor to produce instant, full
size, high resolution dental x-ray images on a color computer monitor without
film or the need for chemical development, while reducing the radiation dose by
up to 80% or more as compared with conventional x-ray film. The Company also
manufactures and sells the CDRCam(R) 2000, an intra-oral camera which fully
integrates with the CDR system, and the CDRPan(TM), a digital panoramic imaging
device. The Company is also developing other products and devices for the dental
field in addition to newer versions of its current products.
In the field of medical radiography, the Company manufactures and sells the
accuDEXA(R) bone densitometer, a low-cost and easy-to-operate device for the
assessment of bone mineral density and fracture risk. Additionally, the Company
has commenced development of a general digital radiography device for intended
use in various applications, including mobile medicine, orthopedics, podiatry,
veterinary medicine and industrial non-destructive testing.
The Company's core products are based primarily on its proprietary
active-pixel sensor ("APS") imaging technology. In addition, certain of the
Company's products are based upon its proprietary enhanced charged coupled
device ("CCD") imaging technology. APS allows the fabrication of large-area
imaging devices with high resolution at a fraction of the cost of traditional
technologies. APS technology was originally developed by the California
Institute of Technology and licensed to Photobit Corporation; it is sublicensed
to the Company for a broad range of health care applications.
The Company's objective is to be the leading provider of high resolution,
low-cost digital radiography products. The Company plans to leverage its
technological advantage in the digital imaging field to penetrate a broad range
of diagnostic imaging markets. The Company believes that its proprietary
technologies and expertise in electronics, imaging software and advanced
packaging may enable it to compete successfully in these markets. Key elements
of the Company's strategy include (i) expanding market leadership in dental
digital radiography through expanded sales channels, further product
enhancements and strategic distribution agreements ; (ii) broadening the
marketing of accuDEXA(R) to the medical market through increased marketing
activities; (iii) introducing new products based on patented and proprietary APS
technology for other medical and industrial applications; and (iv) enhancing
international distribution channels for existing and new products.
The Company's business was founded in 1992 and it was incorporated in
Delaware in 1997. On July 7, 1997, the Company completed an initial public
offering of its Common Stock. Proceeds to the Company after expenses of the
offering were approximately $33,508,000.
On December 27, 1999, the Company established a strategic relationship with
Greystone Funding Corporation ("Greystone") and entered into a Loan Agreement
with Greystone which provided for the establishment of a credit facility for the
Company in an amount of up to $7.5 million. In connection with this Agreement,
as amended and restated on March 17, 2000, Greystone designees were appointed to
the Company's Board of Directors and key executive management positions. The
Company has used the Greystone line of credit to provide it with working capital
and to help facilitate future growth. On July 5, 2001, the Company repaid all
outstanding advances under the Greystone line of credit, together with all
unpaid accrued interest thereunder, and concurrently surrendered said line of
credit in its entirety. See "Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations."
The Company's offices are located at 30-00 47th Avenue, Long Island City,
New York 11101. The Company's telephone number is (718) 937-5765, and its web
site address is http://www.schicktech.com.
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PRODUCTS / INDUSTRY
Dental Imaging
X-ray imaging, or radiography, is widely used as a basic diagnostic
technique in a broad range of medical applications. To produce a conventional
radiograph, a film cassette is placed behind the anatomy to be imaged. A
generator, which produces high energy photons known as x-rays, is positioned
opposite the film cassette. The transmitted x-rays pass through soft tissue,
such as skin and muscle, and are absorbed by harder substances, such as bone.
These x-rays then form a latent image upon the film. After exposure, the film is
passed through a series of chemicals and then dried.
Film, however, has certain inherent limitations, including the time,
operating expense, inconvenience and uncertainty associated with film
processing, as well as the cost of disposal of waste chemicals and the need for
compliance with environmental regulations. Furthermore, the radiation dosage
levels required to assure adequate image quality in conventional film raise
concerns regarding the health risks associated with exposure to radiation. Also,
conventional film images cannot be electronically retrieved from patient records
or electronically transmitted to health care providers or insurance carriers at
remote locations, a capability which has become increasingly important in
today's managed care environment. While x-ray scanning systems convert x-rays
into digital form, they add to the time and expense associated with the use of
conventional film and do not eliminate the drawbacks of film processing.
Digital radiography products have been developed to overcome the
limitations of conventional film. These systems replace the conventional film
cassette with an electronic receptor which directly converts the incident x-rays
to digital images. The first system to employ certain aspects of this technique
was Computed Radiography(TM) ("CR"), a "near real time" system, in which a laser
scanner reads the x-ray image from a specially designed cassette. While CR
allows the images to be electronically displayed and stored, it does not achieve
instant results, and employs a large, costly scanning system. Other technologies
which allow for instant acquisition of digital x-rays have been developed,
including CCD arrays and amorphous silicon panels, neither of which is well
suited for imaging large areas due, respectively, to high cost and limited
resolution.
Dentists, who typically perform their own radiology work, represent the
single largest group of radiologists in the world and the dental industry is, in
terms of unit volume, the largest consumer of radiographic products and
equipment.
The Company believes that there is a potential market for approximately 1.1
million digital dental radiography devices worldwide. According to the American
Dental Association, there are approximately 150,000 practicing dentists in the
United States. The Company believes that each of them, on average, operates 2.5
radiological units, creating a potential market of 375,000 digital dental
radiography devices in the United States. In addition, the Company believes that
there are approximately 600,000 practicing dentists in the world's major
healthcare markets outside of the United States and, the Company believes that
each of them, on average, operates 1.25 radiological units, creating a potential
market of 750,000 additional devices.
The Company believes that dentists have a particularly strong motivation to
adopt digital radiography. Radiographic examinations are an integral part of
routine dental checkups and the dentist is directly involved in the film
development process. The use of digital radiography eliminates delays in film
processing, thus increasing the dentist's potential revenue stream and
efficiency, and reduces overhead expenses. The use of digital radiography also
allows dentists to more effectively communicate diagnosis and treatment plans to
patients, which the Company believes has the potential to increase the rate of
patients' treatment acceptance and resulting revenues. Finally, the dosage
required to produce an intra-oral dental x-ray, which is high when compared with
other medical radiographs, can be reduced by up to 80% or more through the use
of digital radiography.
The Company's principal revenue-generating product is its CDR(R)computed
dental radiography imaging system. The Company's CDR(R) system is easy to
operate and can be used with any dental x-ray generator. To produce a digital
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x-ray image using CDR(R), the dentist selects an intra-oral sensor of suitable
size and places it in the patient's mouth. The sensor converts the x-rays into a
digital image that is displayed on the computer monitor within five seconds and
automatically stored as part of the patient's clinical records. CDR(R) system
software allows the dentist to perform a variety of advanced diagnostic
operations on the image. The sensor can then be repositioned for the next x-ray.
As the x-ray dose is significantly lower than that required for conventional
x-ray film, concern over the potential health risk posed by multiple x-rays is
greatly diminished. The process is easy and intuitive, enabling nearly any
member of the dental staff to operate the CDR(R) system with minimal training.
The Company manufactures digital sensors in three sizes which correspond to
the three standard size conventional x-ray films. Size 0 measures 31 x 22 x 5mm
and is designed for pediatric use; size 1 measures 37 x 24 x 5mm and is designed
for taking anterior dental images; and size 2 measures 43 x 30 x 5mm and is
designed to take bitewing images. All of the Company's CDR(R) sensors can be
sterilized using cold solutions or gas. The typical CDR(R) configuration
includes a computer, display monitor and size 2 digital sensor.
The Company began selling its intra-oral camera, the CDRCam(R), in early
1997 and introduced the CDRCam(R) 2000, a redesigned version of the product, in
November 1999. CDRCam(R) fully integrates with the CDR(R) system to provide
color video images of the structures of the mouth. Since their introduction in
1991, intra-oral cameras have become widely accepted as a dental communication
and presentation tool. CDRCam(R) is "ETL Listed." ETL is a North American Safety
Mark indicating compliance with safety standard UL-2601-1.
In March 1999, the Company commenced the sale of its digital panoramic
imaging device, the CDRPan(TM). This device, which is designed to be retrofitted
into conventional panoramic dental x-ray machines, replaces film with electronic
sensors and a computer. This obviates the need for film and provides
instantaneous images, thus offering substantial savings in terms of time and
costs. Additionally, the CDRPan (TM) easily integrates with practice management
and other computer software applications.
Bone Mineral Density / Fracture Risk Assessment
Assessment of bone mineral density ("BMD") is an essential component in the
diagnosis and monitoring of osteoporosis. Osteoporosis is a disease that causes
progressive loss of bone mass which, in serious cases, may result in bone
fractures and even death. Osteoporosis can develop over the course of many years
without apparent symptoms, until bone is sufficiently degenerated and fractures
occur. The National Osteoporosis Foundation has estimated that approximately 200
million people suffer from the disease worldwide, which affects one out of three
postmenopausal women and one out of ten men over the age of 70. In the United
States, an estimated 28 million people suffer from the disease or have low bone
mass, placing them at increased risk for osteoporosis. The total estimated
health care cost of osteoporosis in the United States, including indirect costs,
is approximately $14 billion annually.
Until recently, osteoporosis was considered neither treatable nor
preventable. Because effective treatments are now available and because
osteoporosis may be preventable if detected in its early stages, the demand for
BMD diagnostic equipment has significantly increased. Because of the large
population segment which could benefit from BMD testing, the Company believes
that there is a need for a practical, instant, cost effective, precise, compact
and easy-to-use BMD testing device for the primary care physician. Primary care
physicians consist of internal medicine, family, geriatric and OB/GYN practices.
These practices represent approximately 172,000 potential testing sites in the
United States alone. Traditional BMD assessment devices have been large, costly
and difficult to operate, and are mainly found in large hospitals and diagnostic
imaging centers. It is estimated that in 2000, there were approximately 7,500
such BMD assessment devices in use in the United States.
The Company has developed an innovative BMD assessment device to assist
doctors in the diagnosis of low bone density and prediction of fracture risk.
The Company believes that this low-cost and precise diagnostic tool, which is
marketed under the trade name accuDEXA(R), assesses BMD more quickly, accurately
and easily than any comparable product currently on the market, while using a
minimal radiation dosage. It is a point-of-treatment tool, designed for use by
primary care physicians as an integral part of a patient's regular physical
examination. In December 1997, the Company received clearance from the United
States Food and Drug Administration ("FDA")for the general use and
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marketing of the accuDEXA(R) as a BMD assessment device; in June, 1998, the FDA
granted the Company additional clearance for its marketing of the accuDEXA(R) as
a predictor of fracture risk.
Based on APS technology, accuDEXA(R) is a small self-contained unit capable
of instantly assessing the BMD of a specific portion of the patient's hand, a
relative indicator of BMD elsewhere in the body. This device is the first BMD
assessment instrument that is virtually automatic, requiring little operator
intervention or interfacing other than the entry of relevant patient data into a
built-in touch sensitive LCD screen. The device requires no external x-ray
generator or computer and it exposes the patient to less than 1% of the
radiation of a single conventional chest x-ray. To perform a test using the
accuDEXA(R), the patient places his or her hand into a positioner and, upon
activation by the operator, the device automatically emits two low-dosage x-ray
pulses. The patient's bone density and fracture risk information is displayed on
the screen in less than 30 seconds. The accuDEXA(R) is "ETL Listed." ETL is a
North American Safety Mark indicating compliance with safety standard UL-2601-1.
General Digital Radiography
The Company is also developing a mobile 8"x 10" digital radiography system
for various applications. This unit is targeted primarily for peripheral x-ray
images, such as orthopedic and podiatric. The unit will also be suitable for
veterinary and non-destructive testing applications. Management currently
expects that the unit will be available for sale by the end of 2002, pending
clearance by the FDA. There can be no assurance that the Company will file for
such clearance or that the FDA will grant such clearance. See "Business --
Government Regulation."
Mammography
In late 2000, the Company suspended its development of a digital
mammography device. Management determined that the Company would instead focus
its resources on core product development. The Company may resume development of
a digital mammography device in the future, but there can be no assurance that
it will do so or that, if it does, it will be successful in such endeavor.
Schick X-Ray Corporation
On September 24, 1997, the Company completed the acquisition of certain
assets of Keystone Dental X-Ray, Inc., a manufacturer of x-ray equipment for the
medical and dental radiology field, for $1.5 million in cash. The acquired
assets were integrated into the Company's former subsidiary, Schick X-Ray
Corporation ("Schick X-Ray"). In August 1999, Schick X-Ray was dissolved and its
operations absorbed by the Company.
MANUFACTURING
The Company's products are manufactured at its facility in Long Island
City, New York, which includes a controlled environment sensor production
facility. This facility is subject to periodic inspection by the FDA. The
Company has invested in automated and semi-automated equipment for the
fabrication and machining of parts and assemblies incorporated in its products.
The Company's quality assurance program includes various quality control
measures from inspection of raw materials, purchased parts and assemblies
through in-process and final inspection and conforms to the guidelines of the
International Quality Standard, ISO 9001. In August 1998, the Company was
granted ISO 9001 certification and, since that time, has been subject to
semi-annual audits to ensure the maintenance of such certification.
The Company manufactures most of its custom components itself in order to
minimize dependence on suppliers, for quality control purposes and to help
maintain process propriety. While the Company does procure certain components
from outside sources which are sole suppliers, it believes that those components
could be obtained from additional sources without substantial difficulty,
although the need to change suppliers or to alternate between suppliers might
cause significant delays in delivery or significantly increase the Company's
costs. The Company procures its APS and CCD semiconductor wafers, a significant
component of its products, each from a single supplier. Extended interruptions
of this supply could have a material adverse effect on the Company's ability to
produce its products and its results of operations. The Company's manufacturing
processes are, for the most part, vertically integrated, although selective
outsourcing is employed to take advantage of economies of scale at outside
manufacturing facilities and to alleviate manufacturing bottlenecks.
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Certain components used in existing products of the Company, as well as products
under development, may be purchased from single sources.
DEPENDENCE ON CUSTOMERS
During fiscal 2001, Patterson Dental Company and RoSCH AG Medizintechnik
accounted for annual sales by the Company of $4.5 million and $3.0 million, or
21% and 14%, respectively, of annual sales. During fiscal 2000 and 1999, a
single customer, Henry Schein, Inc., accounted for annual sales by the Company
of $2.6 and $7.2 million, or 11.7% and 15.8%, respectively, of annual sales.
During fiscal 2001, 2000 and 1999, respectively, sales of approximately $8.1
million, $6.5 million and $6.0 million were made to foreign customers.
PATENTS, TRADE SECRETS AND PROPRIETARY RIGHTS
The Company seeks to protect its intellectual property through a
combination of patent, trademark and trade secret protection. The Company's
future success will depend in part on its ability to obtain and enforce patents
for its products and processes, preserve its trade secrets and operate without
infringing the proprietary rights of others.
Patents
The Company has an active corporate patent program, the goal of which is to
secure patent protection for its technology. The Company currently has issued
United States patents for an `Intra-Oral Sensor For Computer Aided Radiography,'
U.S. Patent No. 5,434,418, which expires on October 16, 2012; a `Large Area
Image Detector,' U.S. Patent No. 5,834,782, which expires on November 20, 2016;
a `Method and Apparatus for Measuring Bone Density,' U.S. Patent No. 5,852,647,
which expires on September 24, 2017; an 'Apparatus for Measuring Bone Density
Using Active Pixel Sensors,' U.S. Patent No. 5,898,753, which expires on June 6,
2017; a 'Dental Imaging System with Lamps and Method,' U.S. Patent No.
5,908,294, which expires on June 12, 2017; an 'X-ray Detection System Using
Active Pixel Sensors,' U.S. Patent No. 5,912,942, which expires on June 6, 2017;
a `Dental Imaging System with White Balance Compensation,' U.S. Patent No.
6,002,424, which expires on June 12, 2017; `Dental Radiography Using an
Intraoral Linear Array Sensor,' U.S. Patent No. 5,995,583, which expires on
November 13, 2016; a `Method for Reading Out Data from an X-Ray Detector,' U.S.
Patent No. 6,069,935, which expires on June 6, 2017; and a `Filmless Dental
radiography System Using Universal Serial Bus Port,' U.S. Patent No. 6,134,298,
which expires on August 7, 2018. In addition, the Company is the licensee of
U.S. Patent No. 5,179,579, for a 'Radiograph Display System with Anatomical Icon
for Selecting Digitized Stored Images,' under a worldwide, non-exclusive,
fully-paid license. The Company also has foreign patent applications currently
pending.
The Company is the exclusive sub-licensee for use in medical radiography
applications of certain patents, patent applications and other know-how related
to complementary metal oxide semiconductor ("CMOS") active pixel sensor
technology (collectively, the "APS Technology"), which was developed by the
California Institute of Technology and licensed to Photobit Corp. from which the
Company obtained its sub-license. The Company's exclusive rights to such
technology are subject to government rights to use, noncommercial educational
and research rights to use by California Institute of Technology and the Jet
Propulsion Laboratory, and the right of a third party to obtain a nonexclusive
license from the California Institute of Technology with respect to such
technology. The Company believes that, as of the date of this filing, except for
such third party's exercise of its right to obtain a nonexclusive license to use
APS Technology in a field other than medical radiography, none of the foregoing
parties have given notice of their exercise of any of their respective rights to
the APS Technology. There can be no assurance that this will continue to be the
case, and any such exercise could have a material adverse effect on the Company.
Additionally, the agreement between the Company and Photobit Corp. requires,
among other things, that the Company use all commercially reasonable efforts to
timely introduce, improve and market and distribute licensed products. There can
be no assurance that the Company will comply with its obligations under its
agreement with Photobit Corp. Any such failure to comply could have a material
adverse effect on the Company.
5
Trademarks
The Company has obtained trademark registrations from the United States
Patent and Trademark Office for the marks (i) "CDR" for its digital dental
radiography product; (ii) "CDRCam" (both textual and stylized) for its
intra-oral camera (iii) "QuickZoom" (both textual and stylized) for a viewing
feature in its digital dental radiography product; (iv) "accuDEXA" for its BMD
assessment product and(v) "CDR Discovery" for its x-ray generating product. The
Company has two additional trademark applications pending before the PTO.
Trade Secrets
In addition to patent protection, the Company owns trade secrets and
proprietary know-how which it seeks to protect, in part, through appropriate
Non-Disclosure, Non-Solicitation, Non-Competition and Inventions Agreements,
and, to a limited degree, employment agreements with appropriate individuals.
These agreements generally provide that all confidential information developed
by or made known to the individual by the Company during the course of the
individual's relationship with the Company is the property of the Company, and
is to be kept confidential and not disclosed to third parties, except in
specific limited circumstances. The agreements also generally provide that all
inventions conceived by the individual in the course of rendering services to
the Company shall be the exclusive property of the Company. However, there can
be no assurances that these agreements will not be breached, that the Company
would have adequate remedies available for any breach or that the Company's
trade secrets will not otherwise become known to, or independently developed by,
its competitors.
GOVERNMENT REGULATION
Products that the Company is currently developing or may develop in the
future are likely to require certain forms of governmental clearance, including
marketing clearance by the United States Food and Drug Administration (the
"FDA"). The FDA review process typically requires extended proceedings
pertaining to product safety and efficacy. The Company believes that its future
success will depend to a large degree upon commercial sales of improved versions
of its current products and sales of new products; the Company will not be able
to market such products in the United States without FDA marketing clearance.
There can be no assurance that any products developed by the Company in the
future will be given clearance by applicable governmental authorities or that
additional regulations will not be adopted or current regulations amended in
such a manner as to adversely affect the Company.
Pursuant to the Federal Food, Drug and Cosmetic Act, as amended (the "FD&C
Act"), the FDA classifies medical devices intended for human use into three
classes: Class I, Class II, and Class III. In general, Class I devices are
products for which the FDA determines that safety and effectiveness can be
reasonably assured by general controls under the FD&C Act relating to such
matters as adulteration, misbranding, registration, notification, records and
reports. The CDRCam(R) is a Class I device.
Class II devices are products for which the FDA determines that general
controls are insufficient to provide a reasonable assurance of safety and
effectiveness, and that require special controls such as promulgation of
performance standards, post-market surveillance, patient registries or such
other actions as the FDA deems necessary. The CDR(R) system, CDRPan(TM) and
accuDEXA(R) have been classified as Class II devices.
Class III devices are devices for which the FDA has insufficient
information to conclude that either general controls or special controls would
be sufficient to assure safety and effectiveness, and which are life-supporting,
life-sustaining, of substantial importance in preventing impairment of human
health, or present a potential unreasonable risk of illness or injury. Devices
in this case require pre-market approval, as described below. None of the
Company's existing products are in the Class III category.
The FD&C Act further provides that, unless exempted by regulation, medical
devices may not be commercially distributed in the United States unless they
have been cleared by the FDA. There are two review procedures by which medical
devices can receive such clearance. Some products may qualify for clearance
under a Section 510(k) procedure, in which the manufacturer submits to the FDA a
pre-market notification that it intends to begin marketing the product, and
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shows that the product is substantially equivalent to another legally marketed
product (i.e., that it has the same intended use and that it is as safe and
effective as a legally marketed device, and does not raise different questions
of safety and effectiveness than does a legally marketed device). In some cases,
the 510(k) notification must include data from human clinical studies.
Marketing may commence once the FDA issues a clearance letter finding such
substantial equivalence. According to FDA regulations, the agency has 90 days in
which to respond to a 510(k) notification. There can be no assurance, however,
that the FDA will provide a timely response, or that it will reach a finding of
substantial equivalence.
If a product does not qualify for the 510(k) procedure (either because it
is not substantially equivalent to a legally marketed device or because it is a
Class III device), the FDA must approve a Pre-Market Approval ("PMA")
application before marketing can begin. PMA applications must demonstrate, among
other things, that the medical device is safe and effective. A PMA application
is typically a complex submission that includes the results of clinical studies.
Preparation of such an application is a detailed and time-consuming process.
Once a PMA application has been submitted, the FDA's review process may be
lengthy and include requests for additional data. By statute and regulation, the
FDA may take 180 days to review a PMA application, although such time may be
extended. Furthermore, there can be no assurance that a PMA application will be
approved by the FDA.
In February 1994, the FDA cleared the Company's 510(k) application for
general use and marketing of the CDR(R) system. In November 1996, the FDA
cleared the Company's 510(k) application for general use and marketing of the
CDRCam(R). In December 1997, the FDA cleared the Company's 510(k) application
for general use and marketing of accuDEXA(R). On June 4, 1998, the FDA granted
the Company additional clearance to market accuDEXA(R) as a predictor of
fracture risk. In December 1998, the FDA cleared the Company's 510(k)
application for CDRPan(TM). The Company has not yet submitted a 510(k)
application for digital mammography sensors. There can be no assurance that the
Company will submit such application or that it will obtain FDA clearance for
such products.
In addition to the requirements described above, the FD&C Act requires that
all medical device manufacturers and distributors register with the FDA annually
and provide the FDA with a list of those medical devices which they distribute
commercially. The FD&C Act also requires that all manufacturers of medical
devices comply with labeling requirements and manufacture their products and
maintain their documents in a prescribed manner with respect to manufacturing,
testing, and quality control activities. The FDA's Medical Device Reporting
regulation subjects medical devices to post-market reporting requirements for
death or serious injury, and for certain malfunctions that would be likely to
cause or contribute to a death or serious injury if malfunction were to recur.
In addition, the FDA prohibits a device which has received marketing clearance
from being marketed for applications for which marketing clearance has not been
obtained. Furthermore, the FDA generally requires that medical devices not
cleared for marketing in the United States receive FDA marketing clearance
before they are exported, unless an export certification has been granted.
The Company must obtain certain approvals by and marketing clearances from
governmental authorities, including the FDA and similar health authorities in
foreign countries, to market and sell its products in those countries. The FDA
regulates the marketing, manufacturing, labeling, packaging, advertising, sale
and distribution of "medical devices," as do various foreign authorities in
their respective jurisdictions. The FDA enforces additional regulations
regarding the safety of equipment utilizing x-rays. Various states also impose
similar regulations.
The FDA review process typically requires extended proceedings pertaining
to the safety and efficacy of new products. A 510(k) application is required in
order to market a new or modified medical device. If specifically required by
the FDA, a pre-market approval ("PMA") may be necessary. Such proceedings, which
must be completed prior to marketing a new medical device, are potentially
expensive and time consuming. They may delay or hinder a product's timely entry
into the marketplace. Moreover, there can be no assurance that the review or
approval process for these products by the FDA or any other applicable
governmental authorities will occur in a timely fashion, if at all, or that
additional regulations will not be adopted or current regulations amended in
such a manner as will adversely affect the Company. The FDA also regulates the
content of advertising and marketing materials relating to medical devices.
7
Failure to comply with such regulations may result in a delay in obtaining
approval for the marketing of such products or the withdrawal of such approval
if previously obtained.
The Company is currently developing new products for the dental and medical
markets. The Company expects to file 510(k) applications with the FDA in
connection with the digital mammography sensors currently under development by
the Company, and other future products, including its general digital
radiography sensors. There can be no assurance that the Company will file such
510(k) applications and/or will obtain pre-market clearance for the digital
mammography sensors or any other future products, or that in order to obtain
510(k) clearance, the Company will not be required to submit additional data or
meet additional FDA requirements that may substantially delay the 510(k) process
and result in substantial additional expense. Moreover, such pre-market
clearance, if obtained, may be subject to conditions on the marketing or
manufacturing of the digital mammography sensors which could impede the
Company's ability to manufacture and/or market the product. There can be no
assurance that the digital mammography or general digital radiography sensors or
any other products which may be developed by the Company will be approved by or
receive marketing clearance from applicable governmental authorities. If the
Company is unable to obtain regulatory approval for and market new products and
enhancements to existing products, it will have a material adverse effect on the
Company.
Failure to comply with applicable regulatory requirements can, among other
consequences, result in fines, injunctions, civil penalties, suspensions or loss
of regulatory approvals, product recalls, seizure of products, operating
restrictions and criminal prosecution. In addition, governmental regulations may
be established that could prevent or delay regulatory clearance of the Company's
products. Delays in receipt of clearance, failure to receive clearance or the
loss of previously received clearance would have a material adverse effect on
the Company's business, financial condition and results of operations.
In addition to laws and regulations enforced by the FDA, the Company is
subject to government regulations applicable to all businesses, including, among
others, regulations related to occupational health and safety, workers' benefits
and environmental protection. The extent of government regulation that might
result from any future legislation or administrative action cannot be accurately
predicted. Failure to comply with regulatory requirements could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Distribution of the Company's products in countries other than the United
States may be subject to regulations in those countries. These regulations vary
significantly from country to country; the Company typically relies on its
independent distributors in such foreign countries to obtain the requisite
regulatory approvals. The Company has obtained the "CE mark," necessary for the
marketing of its products in the member countries of the European Union. The CE
mark is a European Union symbol of adherence to quality assurance standards and
compliance with the European Union's Medical Device Directives. The Company has
developed and implemented a quality assurance program in accordance with the
guidelines of the International Quality Standard, ISO 9001. In August of 1998,
the Company was granted ISO 9001 certification. The Company's current products
also have been awarded the "ETL" and "CSA" marks. These are North American
safety marks which indicate compliance with U.L. Standard 2601-1.
PRODUCT LIABILITY INSURANCE
The Company is subject to the risk of product liability and other liability
claims in the event that the use of its products results in personal injury or
other claims. Although the Company has not experienced any product liability
claims to date, any such claims could have an adverse impact on the Company. The
Company maintains insurance coverage related to product liability claims, but
there can be no assurance that product liability or other claims will not exceed
its insurance coverage limits, or that such insurance will continue to be
maintained or that it will be available on commercially acceptable terms, or at
all.
RESEARCH AND DEVELOPMENT
During fiscal 2001, 2000 and 1999, research and development expenses were
$2.2 million, $2.8 million and $4.4 million, respectively.
8
BACKLOG
The backlog of orders was approximately $0.5 million and $2.0 million at
June 1, 2001 and June 1, 2000, respectively. Such figures include approximately
$0.1 million and $0.6 million of orders on hold pending credit approval at June
1, 2001 and June 1, 2000, respectively. Orders included in backlog may generally
be cancelled or rescheduled by customers without significant penalty.
EMPLOYEES
As of July 12, 2001, the Company had 134 full-time employees, engaged in
the following capacities: sales and marketing (28); general and administrative
(43);operations (45); and research and development (18). The Company believes
that its relations with its employees are good. No Company employees are
represented by a labor union or are subject to a collective bargaining
agreement, nor has the Company experienced any work stoppages due to labor
disputes.
SALES AND MARKETING
Dental Products
In April 2000, the Company and Patterson Dental Company ("Patterson")
entered into an exclusive distribution agreement and, as of May 1, 2000, the
Company began marketing and selling its CDR(R) dental products in the United
States and Canada through Patterson. The Company believes that Patterson is one
of the largest distributors of dental products in North America, with more than
1,000 field sales personnel in the U.S. and Canada. In addition, the Company has
an in-house sales program which focuses on universities and continuing education
programs. As of March 1, 2001, CDR(R) had been sold to 47 of the 54 dental
schools in the United States. The Company also employs a government sales
program to sell directly to the Armed Services, Veterans Administration
hospitals, United States Public Health Service and other government-sponsored
health institutions.
The Company employs approximately 18 area sales managers located throughout
the United States to interface with and assist Patterson in its sales effort. A
sales and marketing support staff of approximately 3 individuals, based at the
Company's offices in New York, supports the sales managers and the direct sales
force by planning events and developing promotional and marketing materials.
In the international market, the Company sells the CDR(R)system via
independent regional distributors. There are currently approximately 30
independent CDR(R) dealers, covering nearly 40 countries. A dedicated in-house
staff provides the foreign distributors with materials, technical assistance and
training, both in New York and abroad.
The Company's goal is to utilize its leading position in the industry,
secure as many productive sales channels as possible and to rapidly penetrate
additional segments of the international market.
BMD / Fracture Risk Assessment
The Company currently sells the accuDEXA(R) primarily through a network of
manufacturer representatives. To date, accuDEXA(R) sales have taken place
primarily within the United States, with a relatively small number of sales
abroad. The primary end-users for accuDEXA(R) are primary care physicians,
including OB/GYN practices, and osteopathic and geriatric specialists.
Pharmaceutical companies are currently involved in wide-scale osteoporosis
education and awareness programs targeted at physicians. A number of such
companies, including Novartis Pharma AG, Wyeth-Ayerst Laboratories, Eli Lilly
Co., Merck & Co. and Procter & Gamble, currently have FDA-approved therapies for
the treatment of osteoporosis. The Company believes that several other
companies, including Boehringer-Mannheim GmbH, Sanofi-Synthelabo, Inc. and
Pfizer Inc. , have additional products that are currently in clinical trials.
The Company expects that the efforts of pharmaceutical companies to develop
medicines and treatment programs will result in the expansion of doctors'
involvement in initial screening and routine management of osteoporosis, thereby
increasing the market for BMD assessment devices. The Company intends to
capitalize on these efforts both in the United States and abroad.
9
The Company has successfully completed a number of research studies and has
collected normative reference data for the accuDEXA(R) databases. These research
studies addressed issues of long-term importance such as the detection of
osteoporosis and patient risk for bone fracture. The Company has established
normative reference databases for Asian female, African-American female,
Hispanic female, Caucasian female and Caucasian male populations. The Company
will utilize these databases to address the needs of healthcare markets in
different countries and regions and expects them to positively impact upon sales
of accuDEXA(R) abroad. The Company is currently conducting research studies to
investigate the accuDEXA's ability to successfully monitor a course of therapy
over a period of time.
COMPETITION
Competition relating to the Company's current products is intense and
includes various companies, both within and outside of the United States. Many
of the Company's competitors are large companies with financial, sales and
marketing, and other resources which are substantially greater than those of the
Company. In addition, they may have substantially greater experience in
obtaining regulatory approvals than that of the Company. In addition, there can
be no assurance that the Company's competitors are not currently developing, or
will not attempt to develop, technologies and products that are more effective
than those of the Company or that would otherwise render the Company's products
obsolete or uncompetitive. No assurance can be given that the Company will be
able to compete successfully.
Dental Products
A number of companies currently sell intra-oral digital dental sensors.
These include Provisions Dental Systems, Inc., Sirona Dental Systems and Cygnus
Imaging, Inc. In addition, Dentsply International and Soredex Corporation sell a
storage-phosphor based intra-oral dental system. The Company believes that the
CDR(R) system has thus far competed successfully against other products. If
other companies enter the digital radiography field, it may result in a
significantly more competitive market in the future. Several companies are
involved in the manufacture and sale of intra-oral cameras, including Dentsply
International Inc., Henry Schein Co., Ultra-Cam and Air Technics. Digital
panoramic dental devices are manufactured by several companies, including
Sirona, Signet, Instrumentarium Imaging and Planmeca. Of those, only the device
manufactured by Signet is designed to be incorporated into existing conventional
panoramic devices.
BMD / Fracture Risk Assessment
Two other companies, GE Lunar Corporation and Norland Medical Systems,
Inc., are currently marketing peripheral dual-X-Ray-absorptiometry(DXA) BMD
densitometers. Several companies including GE Lunar, Hologic, Inc. and Norland
are marketing peripheral ultrasound devices. A number of other companies market
other devices including ones which assess hand densitometry. Two companies,
Ostex International Inc. and Quidel Corp., Inc., have developed biochemical
markers which indicate the rate at which the body is resorbing (i.e., breaking
down) bone.
FORWARD-LOOKING STATEMENTS
This Form 10-K Annual Report contains forward-looking statements that
involve risk and uncertainties. All statements, other than statements of
historical facts, included in this Annual Report regarding the Company, its
financial position, business strategy and plans and objectives of management of
the Company for future operations, are forward-looking statements. When used in
this Annual Report, words such as "anticipate," "believe," "estimate," "expect,"
"intend," "objectives," "plans" and similar expressions, or the negatives
thereof or variations thereon or comparable terminology as they relate to the
Company, its products or its management, identify forward-looking statements.
Such forward-looking statements are based on the beliefs of the Company's
management, as well as assumptions made by and information currently available
to the Company's management. Actual results could differ materially from those
contemplated by the forward-looking statements as a result of various factors,
including, but not limited to, those contained in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in this Annual Report
and the "Risk Factors" set forth in Exhibit 99 to this Annual Report. All
subsequent written and oral forward-looking statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by this paragraph.
10
ITEM 2. PROPERTIES
The Company presently leases approximately 57,000 square feet of space in
Long Island City, New York. This space houses the Company's executive offices,
sales and marketing headquarters, research and development laboratories and
production and shipping facilities. The Company believes that such space will be
adequate for its needs for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
The Company and/or certain of its officers and former officers, are
involved in the proceedings described below:
I. The Company was a named defendant in two lawsuits instituted by Trophy
Radiologie, S.A. ('Trophy S.A.'), a subsidiary of Trex Medical Corporation. One
lawsuit was instituted in France and the other in the United States. On or about
June 6, 2001, an agreement for the settlement and discontinuance of these two
lawsuits was executed by the parties.
The French lawsuit was filed in November 1995, in the tribunal de Grande
Instance de Bobigny, the French patent court, and originally alleged that the
Company's CDR(R)system infringes French Patent No. 2,547,495, European Patent
No. 129,451 and French Certificate of Addition No. 2,578,737. These patents, all
of which are related, are directed to a CCD-based intra-oral sensor. Subsequent
to filing its lawsuit, Trophy S.A. withdrew its allegation of infringement with
respect to the Certificate of Addition. Trophy S.A. was seeking a permanent
injunction and unspecified damages, including damages for its purported lost
profits. In October 2000, the French patent court dismissed this lawsuit. The
court dismissed all of Trophy's claims, finding no infringement of either
patent. The court also ordered Trophy to pay the sum of 65,000 French Francs to
the Company as partial reimbursement for legal fees.
The lawsuit in the United States was filed in March 1996 by Trophy S.A.,
Trophy Radiology, Inc., a United States subsidiary of Trophy S.A. ('Trophy
Inc.') and the named inventor on the patent in suit, Francis Mouyen, a French
citizen. The suit was brought in the United States District Court for the
Eastern District of New York, and alleged that the Company's CDR(R)system
infringes United States Patent No. 4,593,400 (the '400 patent'), which is
related to the patents in the French lawsuit. Trophy S.A., Trophy Inc. and
Mouyen were seeking a permanent injunction and unspecified damages, including
damages for purported lost profits, enhanced damages for the Company's purported
willful infringement and an award of attorney fees. In this action, the Company
counter-sued Trophy S.A. and Trophy Inc. for infringement of United States
Patent No. 4,160,997, an expired patent which was exclusively licensed to the
Company by its inventor, Dr. Robert Schwartz, and for false advertising and
unfair competition.
On September 12, 1997, after having been given permission to do so by the
Court, the Company served two motions for summary judgment seeking dismissal of
the action pending in the United States District Court for the Eastern District
of New York, on the grounds of non-infringement and patent invalidity. On
February 22, 2000, oral argument on these motions was heard by the Court. To
date, the Court has not ruled on these motions.
On June 6, 2001, the parties executed an agreement for the settlement and
discontinuance of these two lawsuits. Under the Settlement Agreement, all claims
and counterclaims by the parties are to be dismissed with prejudice without any
admission of wrongdoing by any party and each party releases the other from all
claims. The terms of such Agreement are confidential. On June 11, 2001 the
United States District Court for the Eastern District of New York discontinued
the case without costs to any party.
II. In late 1998 through early 1999, nine shareholder complaints purporting
to be class action lawsuits were filed in the United States District Court for
the Eastern District of New York. Plaintiffs filed a Consolidated and Amended
Complaint on or about May 27, 1999 and, on or about November 24, 1999, filed a
Second Amended and Consolidated Complaint (the "Complaint"). The Complaint names
as defendants the Company, David B. Schick, Thomas E. Rutenberg, and David
Spector (collectively, the "Individual Defendants"), as well as
PricewaterhouseCoopers LLP.
The Complaint alleged, inter alia, that certain defendants issued false and
misleading statements concerning the Company's publicly reported earnings in
11
violation of the federal securities laws. The Complaint sought certification of
a class of persons who purchased the Company's Common Stock between July 1, 1997
and February 19, 1999, inclusive, and did not specify the amount of damages
sought.
On May 23, 2000, the Company entered into an agreement in principle with
the plaintiffs for the settlement of the class action lawsuit, as reflected in a
Memorandum of Understanding. On June 5, 2001, a Stipulation of Settlement was
executed, under which all claims against the Company and the Individual
Defendants are to be dismissed without presumption or admission of any liability
or wrongdoing. The principal terms of the settlement agreement call for payment
to the Plaintiffs, for the benefit of the class, of the sum of $3.4 million. The
settlement amount will be paid in its entirety by the Company's insurance
carrier and is not expected to have any material impact on the financial results
of the Company. The settlement is subject to approval by the Court.
III. In August 1999, the Company, through its outside counsel, contacted
the Division of Enforcement of the Securities and Exchange Commission ("SEC") to
advise it of certain matters related to the Company's restatement of earnings
for interim periods of fiscal 1999. Subsequent thereto, the SEC requested the
voluntary production of certain documents and the Company provided the SEC with
the requested materials. On August 17, 2000, the SEC served a subpoena upon the
Company, pursuant to a formal order of investigation, requiring the production
of certain documents. The Company has provided the SEC with the subpoenaed
materials and has cooperated fully with the SEC staff. The inquiry is in a
preliminary stage and the Company cannot predict its potential outcome.
The Company could become a party to a variety of legal actions (in addition
to those referred to above), such as employment and employment
discrimination-related suits, employee benefit claims, breach of contract
actions, tort claims, shareholder suits, including securities fraud, and
intellectual property related litigation. In addition, because of the nature of
its business, the Company is subject to a variety of legal actions relating to
its business operations. Recent court decisions and legislative activity may
increase the Company's exposure for any of these types of claims. In some cases,
substantial punitive damages could be sought. The Company currently has
insurance coverage for some of these potential liabilities. Other potential
liabilities may not be covered by insurance, insurers may dispute coverage, or
the amount of insurance may not be sufficient to cover the damages awarded. In
addition, certain types of damages, such as punitive damages, may not be covered
by insurance and insurance coverage for all or certain forms of liability may
become unavailable or prohibitively expensive in the future.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter
ended March 31, 2001.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCK HOLDER MATTERS
The Company's Common Stock began trading on The Nasdaq National Market
under the symbol "SCHK" on July 1, 1997. Prior to such date, there was no
established public trading market for the Company's Common Stock.
By letter dated September 15, 1999, the Company was advised by the Nasdaq
Stock Market's Listing Qualifications Panel (the "Panel") that the Company's
Common Stock would no longer be listed on the Nasdaq National Market effective
with the close of business on September 15, 1999. The Panel's action was based
on the Company's inability to timely file its Annual Report on Form 10-K for the
fiscal year ended March 31, 1999 and Form 10-Q for the quarter ended June 30,
1999, as well as the revenue recognition and sales practices which had been the
subject of an investigation by the Audit Committee of the Company's Board of
Directors and had led to the filing delays and the need for the restatement of
the Company's financial reports. The Company timely requested a review of this
decision and, on May 25, 2000, the Nasdaq Listing and Hearing Review Council
informed the Company of its determination to affirm the Panel's decision.
Since the delisting of the Company's Common Stock, there has been no
established trading market for such stock, which has been trading in the
12
over-the-counter market.
The following table sets forth, for the periods indicated, the high and low
sales prices of the Company's Common Stock, as quoted on The Nasdaq National
Market through September 15, 1999, and the high and low closing bid prices of
the Company's Common Stock in the over-the-counter market, as reported on the
"pink sheets" published by Pink Sheets LLC (formerly known as National Quotation
Bureau LLC),commencing September 16, 1999.
Fiscal Year Ended March 31, 2000 High Low
- -------------------------------- ------ -----
First Quarter 5.75 2.438
Second Quarter (through 9/15/99 delisting) 2.875 1.75
Second Quarter (commencing 9/16/99) .625 .50
Third Quarter 1.50 .375
Fourth Quarter 2.625 1.00
Fiscal Year Ended March 31, 2001 High Low
- -------------------------------- ------ -----
First Quarter 2.625 1.25
Second Quarter 1.625 1.15
Third Quarter 1.30 .40
Fourth Quarter 1.15 .42
On July 12, 2001, the closing bid and asked prices per share of the
Company's Common Stock in the over-the-counter market, as reported on the "pink
sheets" published by Pink Sheets LLC, were $0.95 and $1.05 per share,
respectively. Such prices represent quotations between dealers, without dealer
mark-up, mark-down or commission, and may not represent actual transactions. On
May 31, 2001, there were 189 holders of record of the Company's Common Stock.
However, the Company believes that the number of beneficial owners of such stock
is substantially higher.
To date, the Company has not paid any dividends on its Common Stock. The
Company currently intends to retain future earnings to finance the growth and
development of the Company's business and does not anticipate paying any
dividends in the foreseeable future. The payment of dividends is within the
discretion of the Board of Directors and will depend upon the Company's
earnings, its capital requirements, financial condition and other relevant
factors.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data are derived from, and are qualified
by reference to, the audited financial statements of the Company for the period
indicated. The information presented below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in ITEM 7 and the Financial Statements included in ITEM 8 of this
Report.
Year Ended March 31,
--------------------
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
(in thousands, except per share data)
Statement of Operations Data:
Revenue, net $ 16,101 $ 38,451 $ 45,605 $ 21,989 $ 21,252
-------- -------- -------- -------- --------
Cost of sales 7,907 17,658 34,611 15,393 9,736
Excess and obsolete inventory 114 -- 5,466 898 570
-------- -------- -------- -------- --------
Total cost of sales 8,021 17,658 40,077 16,291 10,306
-------- -------- -------- -------- --------
Gross profit 8,080 20,793 5,528 5,698 10,946
-------- -------- -------- -------- --------
Operating expenses:
Selling and marketing 4,961 10,645 18,440 7,636 5,314
General and administrative 2,054 3,954 7,338 7,339 4,161
Research and development 1,418 3,852 4,354 2,830 2,220
Bad debt expense (benefit) 34 164 5,598 - (454)
Abandonment of leasehold -- -- -- -- 275
13
Patent litigation settlement -- 600 -- -- --
-------- -------- -------- -------- --------
Total operating costs 8,467 19,215 35,730 17,805 11,516
-------- -------- -------- -------- --------
Income (loss) from operations (387) 1,578 (30,202) (12,107) (570)
Total other income (expense) 35 1,111 244 (224) (1,068)
-------- -------- -------- -------- --------
Income (loss) before income taxes (352) 2,689 (29,958) (12,331) (1,638)
Provision (benefit) for income taxes -- 328 (352) -- --
-------- -------- -------- -------- --------
Net income (loss) $ (352) $ 2,361 $(29,606) $(12,331) $ (1,638)
======== ======== ======== ======== ========
Basis earnings (loss) per share $ (0.05) $ 0.25 $ (2.96) $ (1.23) $ (0.16)
======== ======== ======== ======== ========
Diluted earnings (loss) per share $ (0.05) $ 0.24 $ (2.96) $ (1.23) $ (0.16)
======== ======== ======== ======== ========
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
Balance Sheet Data:
Cash and cash equivalents $ 1,710 $ 6,217 $ 1,415 $ 1,429 $ 2,167
Working capital / (deficiency) 5,518 33,745 2,902 841 (1,586)
Total assets 11,060 51,674 29,386 16,290 12,646
Total liabilities 4,973 9,565 16,850 14,974 12,835
Retained earnings (accumulated deficit) (1,556) 805 (28,801) (41,132) (42,770)
Stockholders' equity (deficiency) 6,087 42,109 12,536 1,316 (189)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements included elsewhere in this Report. This
discussion contains forward-looking statements based on current expectations
that involve risks and uncertainties. Actual results and the timing of certain
events may differ significantly from those projected in such forward-looking
statements due to a number of factors, including those set forth in "Results of
Operations" in this Item and elsewhere in this Report. See "ITEM 1 - Business --
Forward-Looking Statements" and Exhibit 99 to this Report.
Overview
The Company designs, develops and manufactures digital imaging systems for
the dental and medical markets. In the field of dentistry, the Company has
developed and currently manufactures and markets an intra-oral digital
radiography system. The Company has also developed a bone mineral density
assessment device to assist in the diagnosis and treatment of osteoporosis,
which was introduced in December 1997. The Company has also commenced
development of a general digital radiography device for intended use in various
applications.
The Company's revenues during fiscal 2001 were derived primarily from sales
of its CDR(R) and accuDEXA(R) products. The Company recognizes revenue on sales
of its products at the time of shipment to its customers and when no significant
vendor obligations exist and collectibility is probable. Revenues from the sales
of extended warranties are recognized on a straight-line basis over the life of
the extended warranty, which is generally a one-year period. The Company
utilizes both a direct sales force and a limited number of distributors for
sales of its products within the United States. Effective May 1, 2000, the
Company entered into an exclusive distribution agreement with Patterson Dental
Company and terminated its existing domestic dealer arrangements and reduced its
direct sales force. International sales are made primarily through a network of
independent foreign distributors. In fiscal 2001, 2000 and 1999, sales to
customers within the United States were approximately 62%, 68% and 87% of total
revenues, respectively. The Company's international sales are made primarily to
distributors in Europe, Australia and South America. The Company intends to
expand its business in other international markets, including Asia. All of the
Company's sales are denominated in United States dollars.
Costs of sales consists of raw materials and computer components,
manufacturing labor, facilities overhead, product support, warranty costs and
installation costs. The Company procures its APS and CCD semiconductor wafers, a
significant component of its products, each from a single supplier. The Company
believes that sourcing from a single supplier provides certain competitive
advantages to the Company.
14
Excess and obsolete inventory expense relates to the overstocking or
obsolescence of various dies and/or obsolete X-Ray inventory that the Company
may not use or otherwise salvage.
Operating expenses include selling and marketing expenses, general and
administrative expenses and research and development expenses, and bad debt
expense. Selling and marketing expenses consist of salaries and commissions,
advertising, promotional and sales events and travel. General and administrative
expenses include executive salaries, professional fees, facilities, overhead,
accounting, human resources, and general office administration expenses.
Research and development expenses are comprised of salaries, consulting fees,
facilities overhead and testing materials used for basic scientific research and
the development of new and improved products and their uses. Research and
development costs are expensed as incurred. Development costs are expensed as
incurred. Bad debt expense is a result of product shipments that were determined
to be uncollectible or not collected. Bad debt benefit is a result of the
recovery, in cash, of shipments previously deemed uncollectible.
Results Of Operations
The following table sets forth, for the fiscal years indicated, certain
items from the Statement of Operations expressed as a percentage of net
revenues:
Year ended March 31,
--------------------
2001 2000 1999
---- ---- ----
Revenue, net 100.0% 100.0% 100.0%
------ ------ ------
Cost of sales 45.8% 70.0% 75.9%
Excess and obsolete inventory 2.7% 4.1% 12.0%
---- ---- -----
Total cost of sales 48.5% 74.1% 87.9%
----- ----- -----
Gross profit 51.5% 25.9% 12.1%
Operating expenses:
Selling and marketing 25.0% 34.7% 40.4%
General and administrative 19.6% 33.4% 16.1%
Research and development 10.4% 12.9% 9.5%
Bad debt expense (benefit) (2.1)% 0.0% 12.3%
Abandonment of leasehold 1.3% 0.0% 0.0%
---- ---- ----
Total operating costs 54.2% 81.0% 78.3%
----- ----- -----
Operating loss -2.7% -55.1% -66.2%
Fiscal Year Ended March 31, 2001 as Compared to Fiscal Year Ended March 31, 2000
Net revenues decreased $0.7 million (3.4%) to $21.3 million in fiscal 2001
from $22.0 million in fiscal 2000. The revenue decline is due to lower sales of
the CDR(R) dental radiography product and accuDEXA (R) bone mineral density
assessment device, offset in part by higher sales of CDR(R) warranties.
CDR(R) sales declined $1.7 million (9.8%) to $15.7 million from $17.4
million during fiscal 2000. The Company believes that this decline was due to
the Company's consolidation of its sales channels in North America in May 2000.
At that time, the Company ceased selling the CDR(R) product line through a
combination of its direct sales force and non-exclusive-dealer network and
entered into an exclusive distribution agreement with Patterson Dental Company
("Patterson"). This agreement grants Patterson exclusive rights to distribute
the Company's dental products in the United States and Canada, with the Company
retaining direct relationships for hospitals, universities and governmental
agencies. The Company believes that the establishment and phasing-in of this new
distribution channel resulted in lower CDR(R) sales as the Patterson sales force
became familiar with the CDR(R) product line. CDR(R) warranty revenue increased
$2.9 million (200.5%) to $4.4 million from $1.5 million during fiscal
15
2000. The Company believes that this increase was due primarily to improvements
made in the implementation of its product warranty programs, including policy
enforcement and timely notification of warranty-coverage expirations.
AccuDEXA(R) sales declined $1.9 million (73.7%) to $0.7 million from $2.6
million during fiscal 2000. The Company believes that this decline resulted from
its discontinuing direct accuDEXA(R) sales during fiscal 2001. The Company is
currently reintroducing accuDEXA(R) via a network of manufacturer's
representatives.
Total cost of sales decreased $6.0 million (36.6%) to $10.3 million (48.6%
of net revenues) in fiscal 2001 from $16.3 million (74.1% of net revenues) in
fiscal 2000. The total cost of sales decreased due to lower direct and indirect
labor costs, warranty expenditures, material costs and overhead costs as a
result of lower levels of product discounting, decreased provision for excess
and obsolete inventory, increased manufacturing efficiency and an improved rate
of recovery of warranty replacement inventory from customers.
Selling and marketing expenses decreased $2.3 million (30.4%) to $5.3
million (25.0% of net revenues) in fiscal 2001 from $7.6 million (34.7% of net
revenues) in fiscal 2000. This decrease is principally due to a reduction in the
Company's direct sales force and reduction in other promotional and trade show
expenses principally as a result of the Patterson distribution agreement.
General and administrative expenses decreased $3.1 million (43.2%) to $4.2
million (19.6% of net revenues) in fiscal 2001 from $7.3 million (33.4% of net
revenues) in fiscal 2000. The decrease in general and administrative expenses
was primarily attributable to a decrease in payroll and professional fees.
Research and development expenses decreased $0.6 million (21.6%) to $2.2
million (10.4% of net revenues) in fiscal 2001 from $2.8 million (12.9% of net
revenues) in fiscal 2000. This decrease was principally attributable to
decreased payroll and a decrease in related costs due to a reduction in
materials purchased. All research and development costs are expensed as
incurred.
In March 2001 the lease for a portion of the Company's premises expired.
The cost of leasehold improvements for the remaining premises, approximately
$0.5 million, will be amortized over the remaining six-year life of the lease.
The unamortized cost of leasehold improvements associated with the portion of
the former premises ($0.3 million) has been charged to operations.
Interest expense increased $0.2 million in fiscal 2001 from $0.9 million in
fiscal 2000 due to the cost of increased borrowing provided by DVI Financial
Services Inc. and term note financing arrangements provided by Greystone Funding
Corporation's secured credit facility.
As a result of the above items, the loss for the year ended March 31, 2001
was $1.6 million as compared to a loss of $12.3 million for the period ending
March 31, 2000.
Fiscal Year Ended March 31, 2000 as Compared to Fiscal Year Ended March 31, 1999
Net revenues decreased 51.8% to $22.0 million in fiscal 2000 from $45.6
million in fiscal 1999. The revenue decline is due to lower sales of the
Company's CDR(R) dental product and accuDEXA(R) bone mineral density assessment
device. Fiscal 2000 revenues were reduced due to a reduction of marketing
activity for the Company's products, reduction of credit granting to select
dealers, hospitals, universities and governmental agencies and, the Company
believes, by the negative perception that existed in the marketplace concerning
the Company's viability and long-term ability to upgrade and service its
products.
The rate of return in fiscal 2000 for the Company's CDR and accuDEXA (R)
products decreased significantly to 4.3% of gross sales in fiscal 2000 from
28.6% of gross sales in fiscal 1999. The decreased return rate for the CDR is
believed to be attributable to several factors including the resolution of
certain technical problems in transitioning its CDR product line from CCD
sensors to APS sensors. Second, the Company's single user CDR System requires
minimal installation. Commencing in September 1998, the Company initiated a
program in coordination with its computer supplier, in which the supplier
installed all single-user CDR Systems. As a result of logistical problems in
implementing this program, the supplier's installations experienced significant
16
delays, which led to a higher than normal rate of return for single user systems
shipped in this period. Starting in January 1999, the Company resumed direct
management of its single user CDR installations.
The Company also experienced a higher than normal rate of returns of
accuDEXA units. The Company believes that these returns are due to several
factors, including the following: First, early shipments of accuDEXA experienced
a higher than expected failure rate due to several reasons, including shipping
damage, as well as humidity and temperature sensitivity of several components
included in the initial design of the product. The Company took steps to address
these problems and believes that failure rates relating to such damage and
sensitivity have dropped significantly. In this regard, the Company currently
expects to implement a number of additional improvements to accuDEXA, to further
increase reliability, in the first half of fiscal 2001. Second, the Company
initiated a change in its sales policy that affected accuDEXA sales made from
May 1998 through November 1998. During that time, the Company waived its
customary 10% deposit, which it had charged to customers prior to shipment of
goods. In December 1998, the Company changed its credit policy, requiring
prepayment from non-dealer customers.
Total cost of sales decreased 59.4% to $16.3 million (74.1% of net
revenues) in fiscal 2000 from $40.1 million (87.9% of net revenues) in fiscal
1999. The total cost of sales is decreased due to lower direct and indirect
labor costs, warranty expenditures, material costs, royalty costs and overhead
costs as a result of decreased revenues and a decrease in the provision for
excess and obsolete inventory. The decrease in the provision for excess and
obsolete inventory from 1999 to 2000 is primarily attributable to the
obsolescence of inventory in the third and fourth quarter of 1999 due to the
introduction of the new APS sensors. In January 1999, in an effort to streamline
operations and reduce expenses, and as a result of more efficient manufacturing
processes and a higher rate of outsourcing, the Company reduced its direct
manufacturing labor force from 101 to 64 employees and relocated the operations
of its wholly-owned subsidiary, Schick X-Ray, Corp. from its facility in
Roebling, New Jersey to the Company's headquarters in Long Island City, New
York. In August 1999, Schick X-Ray was dissolved and its operations absorbed by
the Company.
Selling and marketing expenses decreased 58.6% to $7.6 million (34.7% of
net revenues) in fiscal 2000 from $18.4 million (40.4% of net revenues) in
fiscal 1999. This decrease is due to decreased selling expenses in the CDR and
accuDEXA product lines, trade show expenses and other marketing expenses as a
result of decreased revenues. Additionally, the Company reduced its direct sales
force and associated overhead expenses as a result of decreased revenues.
General and administrative expenses remained at $7.3 million, 33.3% of net
revenues in fiscal 2000 and 16.1% of net revenues in fiscal 1999. However,
general and administrative expenses increased as a percent of sales primarily
due to an increase in professional services rendered in connection with the
restatement of the Company's interim financial statements for fiscal 1999. This
increase was partially offset by decreases in payroll and related costs.
Research and development expenses decreased 35.0% to $2.8 million (12.9% of
net revenues) in fiscal 2000 from $4.4 million (9.5% of net revenues) in fiscal
1999. This decrease was largely attributable to decreased payroll and related
costs due to a reduction in personnel partially offset by an increase in test
services and supply expenses. All research and development costs are expensed as
incurred.
Bad debt expenses were $9 thousand in fiscal 2000 compared to $5.6 million
(12.3% of net revenues) in fiscal 1999. The Company believes that the decrease
is attributable to the Company's tightened credit policy as described above.
Interest income decreased to $.1 million in fiscal 2000 from $.5 million in
fiscal 1999 due to the utilization of cash balances and investments in
short-term interest-bearing securities in support of the Company's operating
deficiencies.
Interest expense increased to $.9 million in fiscal 2000 from $.3 million
in fiscal 1999 due to the cost of financing provided by DVI Financial Services
Inc. under the Company's Capital Lease and term note financing arrangements and
by Greystone Funding Corporation's secured credit facility.
17
Liquidity and Capital Resources
At March 31, 2001, the Company had $2.2 million in cash and cash
equivalents and working capital deficiency of $1.6 million compared to $1.4
million in cash and cash equivalents and $0.8 million in working capital at
March 31, 2000. The decrease in working capital is primarily attributable to
current maturity of long term debt, collection of accounts receivable and
reduction of inventory.
During fiscal 2001 cash provided by operations was $1.2 million compared to
$2.1 million used in operations during fiscal 2000. Increases in cash were
primarily provided by improved operating performance. Accounts receivable
decreased to $1.0 million at March 31, 2001 compared to $1.5 million at March
31, 2000 due to improved collections and restricted credit granting to select
dealers, hospitals, universities and governmental agencies. Inventories
decreased to $3.8 million at March 31, 2001 compared to $5.6 million at March
31, 2000 due to the Company's planned reduction of inventory levels. The
Company's capital expenditures increased $0.1 million in fiscal 2001 from $0.2
million in fiscal 2000. Fiscal 2001 expenditures included leasehold
improvements, computers and production equipment.
DVI Financial Services, Inc. ("DVI") has provided the Company with
financing evidenced by notes payable for $6.6 million which are secured by first
priority liens on substantially all of the Company's assets. The Company issued
promissory notes (amended in June 2000)(the "DVI Notes") and security agreements
that provide, in part, that the Company may not permit the creation of any
additional lien or encumbrance on the Company's property or assets. The DVI
Notes are due in varying installments through fiscal 2006. Interest is paid
monthly at the prime rate (8% at March 31, 2001) plus 2.5%. In connection with
the DVI Notes, the Company granted DVI 650,000 warrants at an exercise price of
$2.19 per share. In connection with the amended DVI Notes, the warrants'
exercise price was reduced to $.75 and the expiration date extended to December
2006.
In connection with the DVI loan, the Company prepaid $750K of outstanding
principal during the first quarter of fiscal 2002. As of July 12, 2001, the
outstanding principal balance of the DVI loan is $5.3 million, subject to
periodic prepayment in accordance with the terms of the loan documents.
In December 1999, the Company entered into a Loan Agreement (the "Loan
Agreement") with Greystone Funding Corporation ("Greystone") to provide up to
$7.5 million of subordinated debt in the form of a secured credit facility.
Pursuant to the Loan Agreement, and to induce Greystone to enter into said
Agreement, the Company issued to Greystone and its designees, warrants to
purchase 3,000,000 shares of the Company's Common Stock at an exercise price of
$.75 per share. The Company agreed to issue Greystone additional warrants to
purchase 2,000,000 shares at an exercise price of $.75 per share in connection
with a cash payment of $1 million by Greystone to the Company in consideration
of a sale of Photobit stock by the Company to Greystone. The sale of the
Photobit stock was made subject to a right of first refusal held by Photobit and
it founders. By letter dated February 17, 2000, counsel for Photobit informed
the Company that Photobit considers the Company's sale of its shares to
Greystone to be void on the basis of the Company's purported failure to properly
comply with Photobit's right of first refusal.
On March 17, 2000, the Company and Greystone entered into an Amended and
Restated Loan Agreement effective as of December 17, 1999 (the "Amended loan
Agreement"), which amended and restated the Loan Agreement, pursuant to which
Greystone agreed to provide up to $7.5 million of subordinated debt in the form
of a secured credit facility. The $1 million cash payment to the Company was
converted as of December 27, 1999 into an initial advance of $1 million under
the Amended Loan Agreement. Pursuant to the Amended Loan Agreement and to induce
Greystone to enter into said Agreement, the Company issued warrants to Greystone
and its designees, consisting of those warrants previously issued under the Loan
Agreement and Photobit stock sale arrangement, to purchase 5,000,0000 shares of
the Company's Common Stock at an exercise price of $0.75 per share, exercisable
at any time after December 27, 1999. Under the Amended Loan Agreement, the
Company also issued to Greystone or its designees warrants (the "Additional
Warrants") to purchase an additional 13,000,000 shares of common stock, which
Additional Warrants will vest and be exercisable at a rate of two shares of
Common Stock for each dollar advanced under the Amended Loan Agreement in excess
of the initial draw of $1 million. Any additional warrants which do not vest
prior to expiration or surrender of the line of credit will be forfeited and
canceled. In connection with the Greystone secured credit
18
facility, effective February 15, 2000, DVI consented to the Company's grant to
Greystone of a second priority lien encumbering the Company's assets, under and
subject in priority and right of payment to all liens granted by the Company to
DVI. Effective August 28, 2000, DVI sold all its right, title and interest in,
to and under the warrants and DVI Notes, as described above, to Greystone. By
letter dated October 11, 2000, DVI directed the Company to make all remaining
payments due under the DVI Notes directly to Greystone.
No additional funds have been advanced under the Amended Loan Agreement in
excess of the initial draw of $1 million. On July 5, 2001, the Company remitted
payment to Greystone in the amount of $1.05 million, repaying all outstanding
advances under the Greystone Amended Loan Agreement, together with all unpaid
accrued interest thereunder, and concurrently terminated said Amended Loan
Agreement. Approximately $423 representing the unamortized discount and deferred
financing costs relating to the Amended Loan Agreement will be charged to
expense in July 2001.
On July 12, 2001, the Company and Greystone entered into a Termination
Agreement effective as of March 31, 2001, acknowledging the repayment and
termination of the Amended Loan Agreement and agreeing that all of the Company's
obligations thereunder have been fully satisfied. The Company and Greystone
further agreed, among other matters, that: (i)five million warrants held by
Greystone and its assigns to purchase Common Stock of the Company remain in full
force and effect; (ii) the Registration Rights Agreement between Greystone and
the Company dated as of December 27, 1999 remains in full force and effect; and
(iii) for so long as Jeffrey Slovin holds the office of President of the
Company, the Company shall reimburse Greystone in the amount of $17 thousand
monthly.
In July 2001, a Director of the Company made a commitment to make an equity
investment in the Company in the minimum amount of $1 million, subject to the
approval and acceptance of the Company's Board of Directors.
Effective May 1, 2000 the Company entered into an exclusive distribution
agreement with Patterson Dental Company ("Patterson"). Under the terms of this
agreement the Company discontinued all direct domestic sales of its dental
products, with the exception of those to governmental agencies and universities.
As a result of the agreement, the Company further reduced its sales force.
Remaining domestic sales representatives have become manufacturer
representatives charged with support of the Patterson sales effort. The Company
terminated all existing dealer agreements including its agreement with Henry
Schein, Inc. In fiscal 2001, the Company entered into several foreign
distributorship agreements.
The Company believes that its cost reductions, refinancing and new sales
arrangement should permit the Company to generate sufficient working capital to
meet its obligations as they mature. The ability of the Company to meet its cash
requirements is dependent, in part, on the Company's ability to attain adequate
sales and profit levels and to satisfy its existing warranty obligations without
incurring expenses substantially in excess of related warranty revenue and to
collect its accounts receivable on a timely basis. Management believes that
existing capital resources are adequate to meet its current cash requirements.
However, if the Company's cash needs are greater than anticipated , the Company
will be required to seek additional or alternative financing sources. There can
be no assurance that such financing will be available or available on terms
acceptable to the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The DVI Notes bear an annual interest rate based on the prime rate plus
2.5%, provided however, that if any payments to DVI are past due for more than
60 days, interest will thereafter accrue at the prime rate plus 5.5%. Because
the interest rate is variable, the Company's cash flow may be adversely affected
by increases in interest rates. Management does not, however, believe that any
risk inherent in the variable-rate nature of the loan is likely to have a
material effect on the Company's interest expense or available cash.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is included as a separate section of this Annual
Report on Form 10-K.
19
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DATA
Information responsive to this item was previously reported in the
Company's Current Reports on Form 8-K, dated September 2, 1999 and September 24,
1999.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) The Directors of the Company are as follows:
Euval Barrekette, Ph.D. Age 70, has served as a Director of the Company
since April 1992. Dr. Barrekette's current term on
the Board expires at the Company's Annual Meeting of
Stockholders in 2002. Dr. Barrekette is a licensed
Professional Engineer in New York State. Since 1986
Dr. Barrekette has been a consulting engineer and
physicist. From 1984 to 1986 Dr. Barrekette was
Group Director of Optical Technologies of the IBM
Large Systems Group. From 1960 to 1984 Dr.
Barrekette was employed at IBM's T.J. Watson
Research Center in various capacities, including
Assistant Director of Applied Research, Assistant
Director of Computer Science, Manager of
Input/Output Technologies and Manager of Optics and
Electrooptics. Dr. Barrekette holds an A.B. degree
from Columbia College, a B.S. degree from Columbia
University School of Engineering, an M.S. degree
from its Institute of Flight Structures and a Ph.D.
from the Columbia University Graduate Faculties. Dr.
Barrekette is a fellow of the American Society of
Civil Engineers, a Senior Member of the Institute of
Electronic & Electrical Engineers, and a member of
The National Society of Professional Engineers, The
New York State Society of Professional Engineers,
The Optical Society of America and The New York
Academy of Science. Dr. Barrekette is the uncle of
David B. Schick and the brother-in-law of Dr. Allen
Schick.
David B. Schick Age 40, is a founder of the Company and, since its
inception in April 1992, has served as the Company's
Chief Executive Officer and Chairman of the Board of
Directors. From the Company's inception to December
1999, Mr. Schick also served as the Company's
President. Mr. Schick's current term on the Board
expires at the Company's Annual Meeting of
Stockholders in 2003. Mr. Schick is also a member of
the Board of Directors of Photobit Corporation. From
September 1991 to April 1992, Mr. Schick was
employed by Philips N.V. Laboratories, where he
served as a consulting engineer designing
high-definition television equipment. From February
1987 to August 1991, Mr. Schick was employed as a
senior engineer at Cox and Company, an engineering
firm in New York City. From January 1985 to January
1987, Mr. Schick was employed as an electrical
engineer at Grumman Aerospace Co. Mr. Schick holds a
B.S. degree in electrical engineering from the
University of Pennsylvania's Moore School of
Engineering. Mr. Schick is the son of Dr. Allen
Schick and the nephew of Dr. Barrekette.
Allen Schick, Ph.D. Age 67, has served as a Director of the Company
since April 1992. Dr. Schick's current term on the
Board expires at the Company's Annual Meeting of
Stockholders in 2003. Since 1981, Dr. Schick has
been a professor at the University of Maryland and
since 1988 has been a Visiting Fellow at the
Brookings Institution. Dr. Schick holds a Ph.D.
degree from Yale University. Dr. Schick is David B.
Schick's father and the brother-in-law of Dr.
Barrekette.
Jeffrey T. Slovin Age 36, has served as the Company's President and as
a
20
Director since December 1999. Mr. Slovin's current
term on the Board expires at the Company's Annual
Meeting of Stockholders in 2001. Mr. Slovin is
currently a Managing Director of Greystone & Co.,
Inc. From 1996 to 1999, Mr. Slovin served in various
executive capacities at Sommerset Investment Capital
LLC, including Managing Director, and as President
of Sommerset Realty Investment Corp. During 1995,
Mr. Slovin was a Manager at Fidelity Investments Co.
From 1991 to 1994, Mr. Slovin was Chief Financial
Officer of SportsLab USA Corp. and, from 1993 to
1994, was also President of Sports and Entertainment
Inc. From 1987 to 1991, Mr. Slovin was an associate
at Bear Stearns & Co., Inc., specializing in mergers
and acquisitions and corporate finance. Mr. Slovin
holds an MBA degree from Harvard Business School.
Robert Barolak Age 47, has served as a Director of the Company
since December 1999. Mr. Barolak's current term on
the Board expires at the Company's Annual Meeting of
Stockholders in 2001. Since 1989, Mr. Barolak has
been employed at Greystone & Co. in various
executive capacities and has been its Executive Vice
President since 1995. From 1979 to 1989, Mr. Barolak
was an attorney at the firm of Ballard Spahr Andrews
& Ingersoll, LLP in Philadelphia. Mr. Barolak holds
a J.D. degree from the University of Pennsylvania
School of Law.
Jonathan Blank, Esq. Age 56, has served as a Director of the Company
since April 2000. Mr. Blank's current term on the
Board expires at the Company's Annual Meeting of
Stockholders in 2002. Since 1979, Mr. Blank has been
a member of the law firm of Preston Gates Ellis &
Rouvelas Meeds LLP, a managing partner of the firm
since 1995 and a member of the Executive Committee
of Preston Gates Ellis LLP since 1995.
(b) The following table shows the names and ages of all executive officers of
the Company, the positions and offices held by such persons and the period
during which each such person served as an officer. The term of office of each
person is generally not fixed since each person serves at the discretion of the
Board of Directors of the Company.
Officer
Name Age Position Since
---- --- -------- -------
David B. Schick................... 40 Chairman of the Board and Chief
Executive Officer 1992
Jeffrey T. Slovin................. 36 President and Director 1999
Michael Stone..................... 48 Executive Vice-President 2000
Stan Mandelkern................... 40 Vice President of Engineering 1999
Ari Neugroschl.................... 30 Vice President of Management
Information Systems 2000
Zvi N. Raskin..................... 38 Secretary and General Counsel 1992
William Rogers.................... 61 Vice President of Operations 1999
Ronald Rosner..................... 54 Director of Finance and
Administration 2000
The business experience of each of the executive officers who is not a
Director is set forth below.
MICHAEL STONE has served as the Company's Executive Vice President since
September 2000 and as the Company's Vice President of Sales and Marketing
from January 2000 to September 2000. From September 1993 to January 2000,
Mr. Stone was General Manager of the Dental Division of
21
Welch-Allyn Company, and from October 1989 to September 1993 was Director
of Marketing for Welch-Allyn. Mr. Stone holds an MBA degree from the
University of Rochester.
STAN MANDELKERN has served as the Company's Vice President of Engineering
since November 1999. From 1998 to 1999, Mr. Mandelkern was the Company's
Director of Electrical Engineering, and was a Senior Electrical Engineer at
the Company from 1997 to 1998. From 1996 to 1997 Mr. Mandelkern was at
Satellite Transmission Systems as Project Leader for the Digital Video
Products Group. From 1989 to 1996 Mr. Mandelkern held various design and
management positions at Loral Corp. Mr. Mandelkern holds a M.S. Degree in
electrical engineering from Syracuse University.
ARI NEUGROSCHL has served as the Company's Vice President of Management
Information Systems since July 2000. From November 1997 to July 2000, Mr.
Neugroschl was the Company's Director of Management Information Systems,
and from February 1996 to November 1997 he served as the Company's Director
of Customer Service and Support. Mr. Neugroschl holds a B.S. in Economics
from Yeshiva University.
ZVI N. RASKIN has served as Secretary of the Company since April 1992 and
as General Counsel of the Company since September 1995. From April 1992 to
May 1996, Mr. Raskin was a Director of the Company. Mr. Raskin is admitted
to practice law before the Bars of the State of New York, the United States
District Courts for the Southern and Eastern Districts of New York and the
United States Court of Appeals for the Second Circuit. From 1992 to 1995,
Mr. Raskin was a senior associate at the New York law firm of Townley &
Updike. Mr. Raskin holds a J.D. degree from Yale Law School.
WILLIAM ROGERS has served as the Company's Vice President of Operations
since January 2000. From August 1998 to January 2000, Mr. Rogers was the
Company's Director of Materials and Manufacturing Engineering. From June
1995 to August 1998, Mr. Rogers was Director of Operations at Veeco
Instruments Co., and from May 1993 to February 1995 was Director of
Manufacturing for Scully Signal Company. Mr. Rogers holds a B.S. Degree in
electrical engineering from Northeastern University.
RONALD ROSNER has served as the Company's Director of Finance and
Administration since August 2000. From March 1999 to August 2000 Mr. Rosner
served the Company in several senior accounting and financial capacities.
Mr. Rosner holds a B.S. degree in Accounting from Brooklyn College and has
been a Certified Public Accountant in the State of New York since May 1972.
Prior to 1999, for a period of approximately four years, Mr. Rosner was an
audit manager with the predecessor to Ernst & Young LLP.
Section 16(A) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive officers and directors and persons who beneficially own more than 10%
of the Company's Common Stock to file initial reports of ownership and reports
of changes in ownership with the Commission. Such executive officers and
directors and greater than 10% beneficial owners are required by the regulations
of the Commission to furnish the Company with copies of all Section 16(a)
reports they file.
Based solely on a review of the copies of such reports furnished to the
Company and written representations from the executive officers and directors,
the Company believes that all Section 16(a) filing requirements applicable to
its executive officers and directors and greater than 10% beneficial owners were
complied with.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain information concerning compensation
received for the fiscal years ended March 31, 2001, 2000 and 1999 by the
Company's chief executive officer and each of the current and former executive
officers of the Company whose total salary and other compensation exceeded
$100,000 (the "Named Executives") for services rendered in all capacities
(including service as a director of the Company) during the year ended March 31,
2001.
22
Summary Compensation Table
Long-Term
Annual Compensation Compensation
------------------- Awards
------------
Other
Annual Securities All Other
Name and Principal Fiscal Compensa Underlying Compensa
Position Year Salary($) Bonus($) tion(1) Options(#)(2) tion($)(3)
-------- ---- --------- -------- -------- ------------- ---------
2001 $ 200,000 $ 16,308 -- -- $ 4,468
David B. Schick
Chairman of the Board and 2000 217,500 -- -- 12,251 3,980
Chief Executive Officer
1999 143,385 39,692 -- 3,267 4,569
- ------------------------------------------------------------------------------------------------------------------------------------
2001 200,001 20,000 -- -- 4,038
Zvi N. Raskin, Esq
General Counsel and 2000 132,500 -- -- 17,006 3,286
Secretary
1999 99,539 25,000 -- 2,343 3,113
- ------------------------------------------------------------------------------------------------------------------------------------
2001 175,000 -- -- -- 2,861
Michael Stone
Executive Vice President 2000 23,558 -- -- -- --
1999 -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
2001 135,000 -- -- -- --
Will Rogers
Vice President of Operations
2000 105,214 -- -- -- --
1999 62,384 -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
2001 121,878 -- -- -- 3,048
Stan Mandelkern
Vice President of Engineering
2000 118,500 -- -- -- 3,346
1999 121,962 -- -- -- 2,913
- ----------
(1) Does not include compensation if the aggregate amount thereof does not
exceed the lesser of $50,000 or 10% of the total annual salary and bonus
for the named officer.
(2) Represents options to purchase shares of Common Stock granted during fiscal
1999, 2000 and 2001, pursuant to the Company's 1996 Employee Stock Option
Plan.
(3) Reflects amounts contributed by the Company in the form of matching
contributions to the Named Executive's Savings Plan account during fiscal
1999, 2000 and 2001.
- ----------
Employment Agreements and Termination of Employment Arrangement
In February 2000, the Company entered into a three-year employment
agreement with David Schick, pursuant to which Mr. Schick is employed as Chief
Executive Officer of the Company. The term of the agreement is renewable
thereafter on a year-to-year basis unless either party gives 60-day written
notice of termination before the end of the then-current term. Mr. Schick's base
annual salary is $200,000, subject to annual increases of at least ten percent
(10%). In addition to base salary, Mr. Schick is eligible to receive annual
merit or cost-of-living increases as may be determined by the Executive
Compensation Committee of the Board of Directors. Mr. Schick will also receive
incentive compensation in the form of a bonus which is calculated using a
formula based on the Company's EBITDA as a percentage of the Company's net
revenues. Additionally, all Company stock options held by, or to be issued to,
Mr. Schick will immediately vest in the event that the Company has a change in
control or is acquired by another company or entity.
In February 2000, the Company entered into a three-year employment
agreement with Zvi Raskin, effective January 1, 2000, pursuant to which Mr.
Raskin is employed as General Counsel of the Company. Mr. Raskin's annual base
annual salary is $200,000. In addition to base salary, Mr. Raskin will receive a
minimum bonus of $20,000 per calendar year and is eligible to receive additional
performance bonuses at the sole discretion of the Executive Compensation
Committee of the Board of Directors. Mr. Raskin was also awarded 75,000 shares
of the Company's Common Stock, subject to a risk of forfeiture which expires as
to 25,000 shares on each of December 31, 2000, 2001 and 2002. Upon the sale of
any such vested shares, Mr. Raskin is required to pay the Company the sum of
23
$1.32 per share sold within 30 days following such sale. In the event that Mr.
Raskin is terminated from employment with the Company without cause, he would
receive 12 months of severance pay.
In January 2000, the Company entered into two-year employment agreement
with Michael Stone, pursuant to which Mr. Stone was employed as the Company's
Vice President of Sales and Marketing until September 2000 and is currently
employed as the Company's Executive Vice President. Mr. Stone's annual base
salary is $175,000. In addition to base salary, Mr. Stone is eligible to receive
an annual performance bonus tied to 0.5% of the Company's earnings before income
taxes, depreciation and amortization. Pursuant to the Agreement, Mr. Stone also
received 75,000 employee stock options. In the event that Mr. Stone is
terminated from employment with the Company without cause, he would receive 6
months of severance pay and immediate vesting of 50% of all unvested Company
stock options. Additionally, all unvested Company stock options held by Mr.
Stone will immediately vest in the event that the Company has a change of
management control.
In December 1999, the Company entered into a 2-year employment agreement with
William Rogers, pursuant to which Mr. Rogers serves as the Company's Vice
President of Operations. Mr. Rogers' annual base salary is $135,000. Pursuant to
the Agreement, Mr. Rogers is also to be awarded 25,000 employee stock options
which shall immediately vest in the event that the Company has a change in
control or is acquired by, merged into or consolidated with another entity.
Compensation of Directors
Directors who are also paid-employees of the Company are not separately
compensated for any services they provide as directors. In fiscal 2001, each
director of the Company who is not a paid-employee was eligible to receive $500
for each meeting of the Board of Directors attended and $300 for each committee
meeting attended. The Company may, but did not, pay such fees in Common Stock.
In addition, directors who are not paid- employees of the Company are eligible
to receive annual grants of stock options under the Company's Directors Stock
Option Plan.
Compensation Committee Interlocks and Insider Participation
The Executive Compensation Committee reviews and makes recommendations
regarding the compensation for top management and key employees of the Company,
including salaries and bonuses. The members of the Executive Compensation
Committee during the fiscal year ended March 31, 2001 were Robert J. Barolak
(for the entire year) and Jonathan Blank (commencing November 8, 2000). None of
such persons is an officer or employee, or former officer or employee, of the
Company or any of its subsidiaries. No interlocking relationship existed during
the fiscal year ended March 31, 2001, between the members of the Company's Board
of Directors or Compensation Committee and the board of directors or
compensation committee of any other company, nor had any such interlocking
relationship existed in the past. Mr. Barolak is an executive officer of
Greystone, a lender to the Company under the Amended and Restated Loan Agreement
between the Company and Greystone. See "Item 7 -- Management's Discussion and
Analysis - Liquidity and Capital Resources" and "Item 13 -- Certain
Relationships and Related Transactions."
Stock Option Grants
The following table sets forth information regarding grants of options
to purchase Common Stock made by the Company during the year ended March 31,
2001 to each of the Named Executives.
24
Option Grants in Fiscal 2001
Individual Grants
-----------------
Number of Percent of
Securities Total Options
Underlying Granted to Exercise
Options Employees in Price Expiration Grant Date
Name Granted(#) Fiscal 2001(1) ($/Share) Date Value
---- ---------- -------------- --------- ---------- ----------
David B. Schick 0 -- -- -- --
Michael Stone 25,000 17.0% .50 1/2/11 --
Stan Mandelkern 20,880 14.2% .50 1/2/11 --
Zvi N. Raskin 0 -- -- -- --
Will Rogers 15,000 10.2% .50 1/2/11 --
(1) The Company granted employees options to purchase a total of 147,442 shares
of Common Stock in fiscal 2001.
Option Exercises and Year-End Value Table
The following table sets forth information regarding the exercise of
stock options during fiscal 2001 and the number and value of unexercised options
held at March 31, 2001 by each Named Executive.
Aggregated