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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, 2002
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 (IRS 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. |_|
----------
The aggregate market value of Common Stock held by non-affiliates of the
registrant as of June 6, 2002 was approximately $20,685,491. Such aggregate
market value is computed by reference to the closing sale price of the Common
Stock on such date.
As of June 6, 2002, the number of shares outstanding of the Registrant's
Common Stock, par value $.01 per share, was 10,144,520
DOCUMENTS INCORPORATED BY REFERENCE:
NONE
Table of Contents
Item of Form 10-K Page
- --------------------------------------------------------------------------------
Part I
Item 1. Business ............................................... 1
Item 2. Properties ............................................. 10
Item 3. Legal Proceedings ...................................... 10
Item 4. Submission of Matters to a Vote of Security Holders .... 11
Part II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters .................................... 11
Item 6. Selected Financial Data ................................ 12
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations .................... 13
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 ................. 19
Part III
Item 10. Directors and Executive Officers of the Registrant ..... 19
Item 11. Executive Compensation ................................. 23
Item 12. Security Ownership of Certain Beneficial Owners And
Management ............................................. 26
Item 13. Certain Relationships and Related Transactions ......... 28
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K ............................................... F1
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 products include the CDR(R)
computed dental radiography imaging system, introduced in March 1994. The CDR
system, a leading product in its field, 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. In addition, the Company is developing other products
and devices for the dental field, as well as updated 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 purpose digital radiography device for
various intended uses, including cephalometric imaging.
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, developed by the California Institute
of Technology and initially licensed to Photobit Corporation, is licensed to
Micron Technology, Inc.; 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.
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
website address is http://www.schicktech.com.
PRODUCTS/INDUSTRY
Digital 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.
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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.
Dental Imaging
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 radiation
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
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 sizes of conventional dental x-ray film. 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 for taking 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
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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 recognized 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 primarily 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's accuDEXA(R) device is 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
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 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 position 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.
Cephalometric Digital Radiography
The Company is also developing an 8"x 10" general-purpose digital
radiography sensor for various intended uses, including cephalometric (i.e.,
skull) imaging. Management currently believes that the unit will be available
for sale by mid-2003 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."
3
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. 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 2002, Patterson Dental Company accounted for annual sales by
the Company of $9.9 million or 41% of annual sales. 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, a single customer, Henry Schein, Inc.,
accounted for annual sales by the Company of $2.6 or 12% of annual sales. During
fiscal 2002, 2001 and 2000, respectively, sales of approximately $6.2 million,
$8.1 million and $6.5 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
4
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 U.S. and 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
(collectively, the "Intellectual Property") related to complementary metal oxide
semiconductor ("CMOS") active pixel sensor technology (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. Photobit was
subsequently acquired by Micron Technology, Inc., which continues to sublicense
the CMOS Intellectual Property to the Company. 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.
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; v) "CDR Discovery" for its x-ray generating product and (vi)
"CDRPan" for its panoramic digital dental radiography product. In addition, the
Company has common-law trademark rights in several other names it uses
commercially in connection with its products.
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
5
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
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 the FDA will approve a PMA
application.
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 its general-purpose digital radiography sensor. 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
6
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.
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 its future products. There can be no assurance that the Company
will file such 510(k) applications and/or will obtain pre-market clearance for
the digital radiography 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 radiography sensors which could impede the
Company's ability to manufacture and/or market the product. There can be no
assurance that the general-purpose digital radiography sensor 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's products bear 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
7
and implemented a quality assurance program in accordance with the guidelines of
the International Quality Standard, ISO 9001. In August 1998, the Company was
granted ISO 9001 certification. The Company's current products also comply with
the requirements for the "U.L." 2601-1 (U.S.A.) and "CSA" (Canada) standards and
bear the "ETL" mark indicating such compliance.
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 2002, 2001 and 2000, research and development expenses were
$2.2 million, $2.2 million, and $2.8 million, respectively.
BACKLOG
The backlog of orders was approximately 0.5 million, $0.5 million and $2.0
million at June 1, 2002, 2001 and 2000, respectively. Such figures include
approximately 0.4 million, $0.1 million and $0.6 million of orders on hold
pending credit approval at June 1, 2002, 2001 and 2000, respectively. Orders
included in backlog may generally be cancelled or rescheduled by customers
without significant penalty.
EMPLOYEES
As of June 7, 2002, the Company had 127 full-time employees, engaged in
the following capacities: sales and marketing (29); general and administrative
(25); operations (55); 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 31, 2002, 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 19 area sales managers ("ASM"s) located throughout the
United States and one in Canada to interface with and assist Patterson in its
sales effort. Two individuals, based at the Company's corporate offices in New
York, manage the ASM staff. In addition, a sales and marketing support staff of
3 individuals, also based at the Company's offices in New York, supports the
sales managers and the ASM's 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 about 40 countries. A dedicated in-house
staff, as well as 3 individuals based in Europe, Latin America and Canada,
provide the foreign distributors with materials, sales support, technical
assistance and training, both in New York and abroad.
8
The Company's goal is to utilize its leading position in the industry,
secure as many productive sales channels as possible and to 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.
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. Several
companies, including Sirona, Signet, Instrumentarium Imaging and Planmeca
manufacture digital panoramic dental devices. 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
9
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.
ITEM 2. PROPERTIES
The Company presently leases approximately 50,000 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. 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 named
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 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 were to be dismissed without presumption or admission of any
liability or wrongdoing. The principal terms of the settlement agreement called
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.
In an Order and Final Judgment entered by the Court on February 12, 2002,
the terms of the settlement were approved by the Court and the Complaint was
dismissed with prejudice.
II. 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 provided the SEC with the subpoenaed
materials.
10
The Company has been informed that since January 2002 the SEC and the United
States Attorney's Office for the Southern District of New York have served
subpoenas upon and/or contacted certain individuals, including current and
former officers and employees of the Company, and a current Director, in
connection with this matter. On June 13, 2002, the Company was advised by
counsel to David Schick, the Company's Chief Executive Officer, that the United
States Attorney's Office for the Southern District of New York had recently
notified such counsel that Mr. Schick was a target of the United States
Attorney's investigation of this matter. The Company has cooperated fully with
the SEC staff and U.S. Attorney's Office, and intends to continue such
cooperation. The Company cannot predict the potential outcome of the inquiry.
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, 2002.
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. From September
15, 1999, following the Company's delisting from the Nasdaq National Market, as
described below, to January 29, 2002, there was no established trading market
for the Company's stock, which traded in the over-the-counter market. Since
January 30, 2002, the Company's Common Stock has been traded on the
over-the-counter Bulletin Board.
By letter dated September 15, 1999, the Nasdaq Stock Market's Listing
Qualifications Panel (the Panel") advised the Company 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.
The following table sets forth, for the periods indicated, the high and
low closing bid prices of the Company's Common Stock in the over-the-counter
market through January 29, 2002, as reported on the "pink sheets" published by
Pink Sheets LLC (formerly known as National Quotation Bureau LLC), and the high
and low bid prices of the Company's Common Stock as quoted on the
over-the-counter Bulletin Board commencing January 30, 2002.
Fiscal Year Ended March 31, 2001 High Low
-------------------------------- ------ -----
First Quarter $2.625 $1.25
Second Quarter 1.625 1.15
Third Quarter 1.30 0.40
Fourth Quarter 1.15 0.42
Fiscal Year Ended March 31, 2002 High Low
-------------------------------- ------ -----
First Quarter 1.05 0.70
Second Quarter 1.05 0.55
Third Quarter 1.06 0.51
Fourth Quarter (through January 29, 2002) 2.15 1.07
Fourth Quarter (commencing January 30,2002) 2.40 1.50
11
On June 6, 2002, the closing bid and asked prices per share of the
Company's Common Stock, as quoted on the over-the-counter Bulletin Board, were
$2.80 and $3.00 per share, respectively. Such prices represent quotations
between dealers, without dealer mark-up, markdown or commission, and may not
represent actual transactions. On June 4, 2002, there were 192 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.
The following table sets forth the following information, as of March 31,
2002, with respect to compensation plans (including individual compensation
arrangements) under which equity securities of the Company are authorized for
issuance: the number of securities to be issued upon the exercise of outstanding
options, warrants and rights; the weighted-average exercise price of such
options, warrants and rights; and, other than the securities to be issued upon
the exercise of such options, warrants and rights, the number of securities
remaining available for future issuance under the plan.
-------------------------------------------------------------------------------------------
(a) (b) (c)
-------------------------------------------------------------------------------------------
Plan category Number of Number of securities
securities to be remaining available
issued upon Weighted-average for future issuance
exercise of exercise price under equity
outstanding of outstanding compensation
options, options, (excluding
warrants and warrants and securities reflected
rights rights in column (a)
-------------------------------------------------------------------------------------------
Equity compensation
plans approved by
security holders 1,840,435 $2.47 1,459,656
-------------------------------------------------------------------------------------------
Equity compensation
plans not approved
by security holders -- -- --
-------------------------------------------------------------------------------------------
Total 1,840,435 $2.47 1,459,656
-------------------------------------------------------------------------------------------
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.
12
Schick Technologies, Inc.
Selected Financial Data
Year Ended March 31,
--------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(in thousands, except per share data)
Statement of Operations Data:
Revenue, net $ 24,399 $ 21,252 $ 21,989 $ 45,605 $38,451
-------- -------- -------- -------- -------
Cost of sales 8,540 9,736 15,393 34,611 17,658
Excess and obsolete inventory 292 570 898 5,466 --
-------- -------- -------- -------- -------
Total cost of sales 8,832 10,306 16,291 40,077 17,658
-------- -------- -------- -------- -------
Gross profit 15,567 10,946 5,698 5,528 20,793
-------- -------- -------- -------- -------
Operating expenses:
Selling and marketing 5,291 5,314 7,636 18,440 10,645
General and administrative 4,148 4,161 7,339 7,338 3,954
Research and development 2,176 2,220 2,830 4,354 3,852
Bad debt expense (recovery) (93) (454) -- 5,598 164
Abandonment of leasehold 118 275 -- -- --
Patent litigation settlement -- -- -- -- 600
-------- -------- -------- -------- -------
Total operating costs 11,640 11,516 17,805 35,730 19,215
-------- -------- -------- -------- -------
Income (loss) from operations 3,927 (570) (12,107) (30,202) 1,578
Total other income (expense) (839) (1,068) (224) 244 1,111
-------- -------- -------- -------- -------
Income (loss) before income taxes 3,088 (1,638) (12,331) (29,958) 2,689
Provision (benefit) for income taxes -- -- -- (352) 328
Net income (loss) $ 3,088 $ (1,638) $(12,331) $(29,606) $ 2,361
======== ======== ======== ======== =======
Basic earnings (loss) per share $ 0.30 $ (0.16) $ (1.23) $ (2.96) $ 0.25
======== ======== ======== ======== =======
Diluted earnings (loss) per share $ 0.26 $ (0.16) $ (1.23) $ (2.96) $ 0.24
======== ======== ======== ======== =======
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Balance Sheet Data:
Cash and cash equivalents $ 1,622 $ 2,167 $ 1,429 $ 1,415 $ 6,217
Working capital/(deficiency) 1,133 (1,586) 841 2,902 33,745
Total assets 11,957 12,646 16,290 29,386 51,674
Total liabilities 9,057 12,835 14,974 16,850 9,565
Retained earnings (accumulated deficit) (39,682) (42,770) (41,132) (28,801) 805
Stockholders' equity 2,900 (189) 1,316 12,536 42,109
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 worldwide dental and medical markets. In the field of dentistry, the Company
currently manufactures and markets a variety of digital imaging products
including an intra-oral digital radiography system (CDR) a digital panoramic
radiography sensor (CDRPAN) and an intra-oral camera system (CDRCam). The
Company has also developed a bone mineral density assessment device (accuDEXA)
to assist in the diagnosis and treatment of osteoporosis, which was introduced
in December 1997. In addition, the Company has commenced development of a
general-purpose digital radiography device for various intended uses, including
cephalometric imaging. All of the Company's products are CE marked and are sold
worldwide.
13
The Company's revenues during fiscal 2002 were derived primarily from
sales of its CDR(R) and accuDEXA(R) products. The Company records sales revenue
upon shipment to international dealers and to end-users in the U.S. In the case
of sales made by Patterson, revenue arising from inventory in Patterson's
possession is recorded in deferred revenue, and revenue is recognized upon
shipment from Patterson's warehouses to end-users. 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
Patterson Dental Company as the exclusive distributor for sales of its dental
products within North America. The Company's accuDEXA product is sold through a
network of independent sales representatives in the United States. International
sales are made primarily through a network of independent foreign distributors.
In fiscal 2002, 2001 and 2000, sales to customers within the United States were
approximately 75%, 62%, and 68% of total revenues, respectively. The Company's
international sales are made primarily to distributors in Europe. All of the
Company's sales are denominated in United States dollars.
Costs of sales consists of raw materials manufacturing labor, facilities
overhead, product support, warranty costs and installation costs. 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 recovery is a result of the
receipt, in cash, for shipments previously deemed uncollectible.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires the Company to make
estimates and assumptions that affect amounts reported in the accompanying
consolidated financial statements and related footnotes. These estimates and
assumptions are evaluated on an ongoing basis based on historical developments,
market conditions, industry trends and other information the Company believes to
be reasonable under the circumstances. There can be no assurance that actual
results will conform to the Company's estimates and assumptions, and that
reported results of operations will not be materially adversely affected by the
need to make accounting adjustments to reflect changes in these estimates and
assumptions from time to time. The following policies are those that the Company
believes to be the most sensitive to estimates and judgments. The Company's
significant accounting policies are more fully described in Note 1 to the
consolidated statements.
Revenue recognition
The Company recognizes revenue when each of the following four criteria
are met: 1) a contract or sales arrangement exists; 2) products have been
shipped and title has been transferred or services have been rendered; 3) the
price of the products or services is fixed or determinable; and 4)
collectibility is reasonably assured. The Company records sales revenue upon
shipment to international dealers and to end-users in the U.S. In the case of
sales made by Patterson, revenue is recognized upon shipment from Patterson's
warehouses to end-users. Revenue arising from inventory in Patterson's
possession is recorded in deferred revenue. The Company records warranty renewal
revenue over the warranty renewal period (generally one-year). The unamortized
portion of warranty revenue is recorded in deferred revenue.
Accounts receivable
The Company primarily sells on open credit terms to Patterson and to the
US Government, hospitals and universities based upon signed purchase orders. The
Company's international sales are generally prepaid, guaranteed by irrevocable
letter of credit or underwritten by credit insurance. In a limited number of
cases, international dealers are granted limited open credit terms. Warranty
shipments are prepaid. The Company's estimate of doubtful
14
accounts relates, primarily to shipments made before fiscal 2000, when credit
policies were less restrictive. Revenue from customers is subject to agreements
allowing limited rights of return. Accordingly, the Company reduces revenue
recognized for estimated future returns. The estimate of future returns is
adjusted periodically based upon historical rates of return.
Inventories
Inventories are stated at the lower of cost or market. The cost of
inventories is determined principally on the standard cost method for
manufactured goods and on the average cost method for other inventories, each of
which approximates actual cost on the first-in, first-out ("FIFO") method. The
Company establishes reserves for inventory estimated to be obsolete,
unmarketable or slow moving inventory equal to the difference between the cost
of inventory and estimated market value based upon assumptions about future
demand and market conditions. If actual market conditions are less favorable
than those anticipated or if changes in technology affect the Company's products
additional inventory reserves may be required.
Goodwill and other long-lived assets
Effective April 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 142 ("SFAS 142"), "Goodwill and other Intangible
Assets". This statement requires that the amortization of goodwill be
discontinued and instead an annual impairment approach be applied. The
impairment tests will be performed upon adoption and annually thereafter (or
more often if adverse events occur) and will be based upon a fair value approach
rather than an evaluation of the undiscounted cash flows. If impaired, the
resulting charge reflects the excess of the asset's carrying value to the extent
it exceeds the recalculated goodwill.
Other long-lived assets such as patent and property and equipment are
amortized or depreciated over their estimated useful lives. These assets are
reviewed for impairment whenever events or circumstances provide evidence that
suggest that the carrying amount of the asset may not be recoverable with
impairment being based upon an evaluation of the identifiable undiscounted cash
flows. If impaired, the resulting charge reflects the excess of the asset's
carrying cost over its fair value.
If market conditions become less favorable, future cash flows, the key
variable in assessing the impairment of these assets, may decrease and as a
result the Company may be required to recognize impairment charges.
Income taxes
Income taxes are determined in accordance with Statement of Financial
Accounting Standards No. 109 ("SFAS 109"), which requires recognition of
deferred income tax liabilities and assets for the expected future tax
consequences of events that have been included in the financial statements or
tax returns. Under this method, deferred income liabilities and assets are
determined based on the difference between financial statements and tax bases of
liabilities and assets using enacted tax rates in effect for the year in which
the differences are expected to reverse. SFAS 109 also provides for the
recognition of deferred tax assets if it is more likely than not that the assets
will be realized in future years. A valuation allowance has been established for
deferred tax assets for which realization is not likely. At March 31, 2002 the
deferred tax asset ($19.8 million) has been fully reserved. In assessing the
valuation allowance, the Company has considered future taxable income and
ongoing tax planning strategies. Changes in these circumstances, such as a
decline in future taxable income, may result in the continuation of a full
valuation allowance being required.
Warranty obligations
Products sold are generally covered by a warranty against defects in
material and workmanship for a period of one year. The Company accrues a
warranty reserve for estimated costs to provide warranty services. The Company
estimates costs to service warranty obligations based on historical experience
and expectation of future conditions. To the extent the Company experiences
increased warranty claim activity or increased costs associated with servicing
those claims, warranty accrual will increase, resulting in decreased gross
profit.
15
Litigation and contingencies
The Company and its subsidiary are from time to time parties to lawsuits
and regulatory administrative proceedings arising out of their respective
operations. The Company records liabilities when a loss is probable and can be
reasonably estimated. These estimates are based on an analysis made by internal
and external legal counsel who consider information known at the time. The
Company believes it has estimated well in the past; however court decisions
could cause liabilities to be incurred in excess of estimates.
Contractual Obligations and Commercial Commitments
The following table summarizes contractual obligations and commercial
commitments at March 31, 2002:
PAYMENTS DUE BY PERIOD
----------------------------------------------
Less
than 1 1-3 4-5 After 5
CONTRACTUAL OBLIGATIONS Total year years years years
Long-Term Debt $3,854 $1,815 $1,961 $ 78 $ --
Operating leases 2,567 445 953 1,032 137
Employment agreements 1,827 857 970 -- --
------ ------ ------ ------ ----
Total Contractual
Cash Obligations $8,248 $3,117 $3,884 $1,110 $137
====== ====== ====== ====== ====
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,
--------------------
2002 2001 2000
---- ---- ----
Revenue, net 100.0% 100.0% 100.0%
----- ----- -----
Cost of sales 35.0% 45.8% 70.0%
Excess and obsolete inventory 1.2% 2.7% 4.1%
----- ----- -----
Total cost of sales 36.2% 48.5% 74.1%
----- ----- -----
Gross profit 63.8% 51.5% 25.9%
Operating expenses:
Selling and marketing 21.7% 25.0% 34.7%
General and administrative 17.0% 19.6% 33.3%
Research and development 8.9% 10.4% 12.9%
Bad debt expense (recovery) -0.4% -2.1% 0.0%
Abandonment of leasehold 0.5% 1.3% 0.0%
----- ----- -----
Total operating costs 47.7% 54.2% 80.9%
----- ----- -----
Operating income (loss) 16.1% -2.7% -55.0%
===== ===== =====
Fiscal Year Ended March 31, 2002 as Compared to Fiscal Year Ended March 31, 2001
Net revenues increased $3.1 million (14.8%) to $24.4 million in fiscal
2002 from $21.3 million in fiscal 2001. The revenue increase is due to higher
sales of both CDR(R) dental radiography product and accuDEXA(R) bone mineral
density assessment device. Domestic revenues increased $5.1 million (38.8%) to
$18.3 million (74.9% of net revenue) from $13.2 million (61.2% of net revenue)
in fiscal 2001. International sales declined $2.0 million (24.2%) to $6.1
million (25.1% of net revenue) from $8.1 million (38.8% of net revenue in fiscal
2001.
CDR(R) product sales increased $2.7 million (17.2%) to $18.4 million
during fiscal 2002 from $15.7 million during fiscal 2001. AccuDEXA(R) product
sales increased $0.1 million (14.3%) to $0.8 million during fiscal 2002 from
$0.7 million during fiscal 2001. Warranty
16
revenues increased $0.8 million (18.2%) to $5.2 million during fiscal 2002 from
$4.4 million during fiscal 2001. This increase is the result of the expansion of
the Company's warranty program.
Domestic sales increased due to higher sales to Patterson and higher
warranty revenue. International sales declined due to lower sales to certain
distributors in Europe. Overall sales returns have fallen to 0.2% of revenue in
fiscal 2002 from 2.0% in fiscal 2001. The Company believes this improvement is
the result of its continuing product improvement.
Total cost of sales for fiscal 2002 decreased $1.5 million (14.3%) to $8.8
million (36.2% of net revenue) from $10.3 million (48.5% of net revenue) in
fiscal 2001. Total cost of sales declined due to improved operating efficiency
as the Company reduced overhead 10% as a result of the consolidation of its
facilities into a single location after fiscal 2001. Additionally product
improvements resulted in reduced expense in support of its warranty program. The
Company's reserve for excess and obsolete inventory decreased to 1.2% of net
revenue in fiscal 2002 from 2.7% in fiscal 2001 as a result of improved
inventory management.
Selling and marketing expense remained unchanged at $5.3 million (21.7%
and 25.0% of net revenue in fiscal 2002 and 2001, respectively). Increases in
payroll and creative development expenses were offset by reduced advertising and
occupancy costs. General and administrative expense remained unchanged at $4.2
million (17.0% and 19.6% of net revenue in fiscal 2002 and 2001, respectively).
Research and development expense remained unchanged at $2.2 million (8.9% and
10.4% of net revenue in fiscal 2002 and 2001, respectively).
Bad debt recoveries declined $0.4 million to $0.1 million from $0.5
million in fiscal 2001. Recoveries are related to receipt of prior fiscal year
reserved receivables which declined during fiscal 2002.
Interest expense increased $0.1 million in fiscal 2002 due to the
Company's July 2001 prepayment in full of $1 million it had borrowed from
Greystone Funding Corporation. The prepayment resulted in the write off of $0.4
million of deferred interest expense. This increase was offset by declines in
the level of borrowing and the prime interest rate during fiscal 2002.
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 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
reintroduced 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.
17
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.
Liquidity and Capital Resources
At March 31, 2002, the Company had $1.6 million in cash and cash
equivalents and working capital of $1.1 million compared to $2.2 million in cash
and cash equivalents and $1.0 million in working capital deficiency at March 31,
2001. In addition, The Company had short-term investments of 0.5 million as of
March 31, 2002. The increase in working capital is primarily attributable to
operating profit during fiscal 2002.
During fiscal 2002 cash provided by operations was $3.5 million compared
to $1.2 million provided by operations during fiscal 2001. Accounts receivable
increased to $2.8 million at March 31, 2002 compared to $1.0 million at March
31, 2001 due to increased sales activity. Inventories decreased to $2.8 million
at March 31, 2002 compared to $3.8 million at March 31, 2001 due to the
Company's planned reduction of inventory levels. The Company's capital
expenditures increased to $0.8 million in fiscal 2002 from $0.3 million in
fiscal 2001. Fiscal 2002 capital expenditures were primarily related to the
Company's consolidation into a portion of its premises during the first quarter.
In January 1999, DVI Financial Services, Inc. ("DVI") 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 (4 3/4% at March 31, 2002) 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 $236 and $750 of
outstanding principal during the first quarter of fiscal 2003 and 2002,
respectively. As of June 10, 2002, the outstanding principal balance of the DVI
loan is $3.5 million.
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
Funding Corporation ("Greystone"). By letter dated October 11, 2000, DVI
directed the Company to make all remaining payments due under the DVI Notes
directly to Greystone.
18
Effective as of December 17, 1999 (as amended on March 17, 2000), the
Company entered into a Loan Agreement (the "Amended Loan Agreement") with
Greystone to provide up to $7.5 million of subordinated debt in the form of a
secured credit facility. No funds were advanced under the Amended Loan Agreement
in excess of an 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 the Amended
Loan Agreement. Approximately $423 representing the unamortized discount and
deferred financing costs relating to the Amended Loan Agreement was 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 for 0.75 per
share 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 (who was seconded by
Greystone) holds the office of President of the Company, the Company would
reimburse Greystone in the amount of $17 thousand monthly. Effective November 1,
2001 Mr. Slovin joined the Company on a full-time basis as President and Chief
Operating Officer, thereby canceling this reimbursement provision of the
agreement.
Based upon the Company's present operating conditions, management
anticipates that it will be able to meet its financing requirements on a
continuing basis. The ability of the Company to meet its cash requirements is
dependent, in part, on the Company's ability to maintain adequate sales and
profit levels, to satisfy 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 its existing capital
resources and other potential sources of credit 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 and could consider the reduction of certain discretionary
expenses and the sale of certain assets. 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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DATA
None.
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 71, 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
19
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 41, 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 37, has served as the Company's President and
as a Director since December 1999. Mr. Slovin's
current term on the Board expires at the Company's
Annual Meeting of Stockholders in 2004. From 1999
to November 2001, Mr. Slovin was 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 Sports Lab 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.
Jonathan Blank, Esq. Age 57, has served as a Director of the Company
and as a member of the Audit Committee of the
Board of Directors 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.
20
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.
William Hood Age 78, has served as a Director of the Company
and as a member of the Audit Committee of the
Board of Directors since February 2002. Mr. Hood's
current term on the Board expires at the Company's
Annual Meeting of Stockholders in 2004. Mr. Hood
is also a member of the Board of Directors of
Photobit Corporation. From 1972 to 1980, Mr. Hood
was President and Chief Executive Officer of
Hunt-Wesson Foods, Inc. From 1981 to 1983, he
served as Dean of the Chapman University School of
Business Management. From 1983 to 1988, Mr. Hood
was Senior Vice-President of American Bakeries
Company. From 1989 to 1996, he served as a
consultant to Harlyn Products, Inc. and as a
member of its Board of Directors. Mr. Hood is a
Trustee of Chapman University, a Director of the
Orange County Council Boy Scouts of America and a
consultant to E Com Technologies Inc.
Curtis M. Rocca III Age 39, has served as a Director of the Company
and as a member of the Audit Committee of the
Board of Directors since May 30, 2002. Mr. Rocca's
current term on the Board expires at the Company's
Annual Meeting of Stockholders in 2004. Mr. Rocca
is also a member of the Board of Directors of
Zila, Inc. Since 2000, Mr. Rocca has been the
Chief Executive Officer of Douglas, Curtis &
Allyn, LLC. From 1998 to 2000, he served as Chief
Executive Officer of Dental Partners, Inc. From
1990 to 1998, Mr. Rocca was Chairman and Chief
Executive Officer of Bio-Dental Technologies Corp.
(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....... 41 Chairman of the Board and Chief
Executive Officer 1992
Jeffrey T. Slovin..... 37 President, Chief Operating Officer
and Director 1999
Michael Stone......... 49 Executive Vice-President 2000
Stan Mandelkern....... 42 Vice President of Engineering 1999
Ari Neugroschl........ 31 Vice President of Management
Information Systems 2000
Zvi N. Raskin......... 39 Secretary and General Counsel 1992
William Rogers........ 62 Vice President of Operations 1999
Ronald Rosner......... 55 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
21
2000. From September 1993 to January 2000, Mr. Stone was General Manager
of the Dental Division of 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 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. From October 1998 to February 1999, Mr. Rosner was a
Consultant at Mercantile Ship Corporation, and from April 1997 to October
1998 was the CFO at Coast MFG. 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.
(d) Family Relationships
See Item 10(a).
(e) Business Experience
See Items 10(a) and 10(b).
(f) Involvement in Certain Legal Proceedings
There are no legal proceedings involving any of Company's Directors or
Officers which are reportable hereunder, with the following exception: Mr. Hood
served as a member of the Board of Directors of Harlyn Products, Inc. from May
1989 until November 1996. On March 21, 1997, Harlyn Products filed for
bankruptcy in the United States Bankruptcy Court, Central District of
California, under Chapter 11, and emerged from bankruptcy on April 25, 2000
under Chapter 7 with no remaining assets or liabilities.
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
22
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, except that a Form 3 for Mr. Rosner was not filed following his
appointment as the Company's Director of Finance and Administration.
Subsequently, a Form 5 has been filed for Mr. Rosner.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain information concerning compensation
received for the fiscal years ended March 31, 2002, 2001 and 2000 by the
Company's chief executive officer and each of the four most highly compensated
executive officers of the Company whose total salary and other compensation
exceeded $100,000 (the "Named Executives") for services rendered in all
capacities (including service as a director of the Company) during the year
ended March 31, 2002.
Summary Compensation Table
Long-Term
Annual Compensation
Compensation Awards
------------ ------
Other
Annual Securities All Other
Name and Principal Fiscal Compensa Underlying Compensa
Position Year Salary($) Bonus($) Tion(1) Options(#)(2) tion($)(3)
-------- ---- --------- -------- ------- ------------- ----------
- ---------------------------------------------------------------------------------------------------------
2002 $225,246 $50,000 -- 160,709 4,362
David B. Schick
Chairman of the Board and 2001 200,000 16,308 -- -- 4,468
Chief Executive Officer
2000 217,500 -- -- 12,251 3,980
- ---------------------------------------------------------------------------------------------------------
Michael Stone 2002 193,577 48,154 -- 135,207 4,491
Executive Vice President
2001 175,000 -- -- -- 2,861
2000 23,558 -- -- -- --
- ---------------------------------------------------------------------------------------------------------
2002 204,154 20,000 -- 36,018 4,527
Zvi N. Raskin, Esq.
General Counsel and 2001 200,001 20,000 -- -- 4,038
Secretary
2000 132,500 -- -- 17,006 3,286
- ---------------------------------------------------------------------------------------------------------
Will Rogers 2002 136,651 7,500 -- 33,089 --
Vice President of
Operations 2001 135,000 -- -- -- --
2000 105,214 -- -- -- --
- ---------------------------------------------------------------------------------------------------------
Stan Mandelkern 2002 154,615 -- -- 30,108 3,865
Vice President of
Engineering 2001 121,878 -- -- -- 3,048
2000 118,500 -- -- -- 3,346
- ---------------------------------------------------------------------------------------------------------
(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 2002, 2001, and 2000 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
2002, 2001 and 2000.
23
Employment Agreements and Termination of Employment Arrangement
In January 2002, the Company entered into two-year employment agreement
with Michael Stone, pursuant to which Mr. Stone is employed as the Company's
Executive Vice President. Mr. Stone's annual base salary is $210,000. In
addition to base salary, Mr. Stone is eligible to receive annual merit and/or
cost-of-living increases as may be determined by the Executive Compensation
Committee of the Board of Directors. Mr. Stone is also eligible to receive a
performance bonus by August 1, 2003 equal to 0.5% of the Company's earnings
before income taxes, depreciation and amortization for the 2003 fiscal year in
the event that the Company's net revenue for fiscal 2003 exceeds $28 million.
Pursuant to the Agreement, Mr. Stone also received 75,000 employee stock options
which vest as follows: 12,500 options upon grant, an additional 25,000 options
on January 14, 2003, an additional 25,000 options on January 14, 2004, and the
final 12,500 options on January 14, 2005. In the event that Mr. Stone is
terminated from employment with the Company without cause, he would receive 6
months of severance pay, a pro-rated performance bonus and immediate vesting 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 in control or is acquired by another entity.
In December 2001, the Company entered into a three-year employment
agreement with David Schick, replacing the previous employment agreement between
the Company and Mr. Schick, entered into in February 2000. Pursuant thereto, 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 initial base annual salary under the Agreement is $242,000.
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 an increase in
base salary as well as incentive compensation in the form of a bonus based on
the Company's EBITDA. Such incentive compensation is capped at $100,000 per
fiscal year. Pursuant to the Agreement, as amended by a letter agreement dated
March 4, 2002, Mr. Schick also received 150,000 employee stock options which
vest as follows: 50,000 options on December 20,2002, an additional 50,000
options on December 20, 2003, and the final 50,000 options on December 20, 2004.
Additionally, all Company stock options held by, or to be issued to, Mr. Schick
will immediately be granted and vest in the event that the Company has a change
in control or is acquired by another company or entity. In the event that Mr.
Schick is terminated from employment with the Company without cause, he would
receive severance pay for two years or the remainder of the term of the
Agreement, whichever time period is shorter. Under certain circumstances, where
the Company effects a change in Mr. Schick's title or diminishes, in any
significant manner, his duties or responsibilities of employment, Mr. Schick may
unilaterally resign from employment. In this instance, he would act as a
consultant to the Company for a period of one year following his resignation and
receive severance pay for one year.
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 currently $220,000. 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 $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.
24
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 2002, each
director of the Company who is not a paid-employee received $500