UNITED STATES
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, 2003
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. |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes |_| No |X|
The aggregate market value of Common Stock held by non-affiliates of the
registrant as of September 30, 2002, the last business day of the registrant's
most recently completed second fiscal quarter, was approximately $14,501,462.
Such aggregate market value is computed by reference to the closing sale price
of the Common Stock on such date.
As of June 3, 2003, the number of shares outstanding of the Registrant's
Common Stock, par value $.01 per share, was 10,228,198
DOCUMENTS INCORPORATED BY REFERENCE:
NONE
Table of Contents
Item of Form 10-K Page
Part I
Item 1. Business .............................................. 1
Item 2. Properties ............................................ 9
Item 3. Legal Proceedings ..................................... 9
Item 4. Submission of Matters to a Vote of Security Holders ... 10
Part II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters ................................... 10
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 .................................................. 18
Item 8. Financial Statements and Supplementary Data ........... 18
Item 9. Changes in and Disagreements with Accountants
On Accounting and Financial Disclosure ................ 18
Part III
Item 10. Directors and Executive Officers of the Registrant .... 18
Item 11. Executive Compensation ................................ 22
Item 12. Security Ownership of Certain Beneficial Owners And
Management ............................................ 26
Item 13. Certain Relationships and Related Transactions ........ 28
Item 14. Controls and Procedures................................. 29
Part IV
Item 15. Exhibits, Financial Statement Schedules and Reports on
Form 8-K .............................................. F-1
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 99.2 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.
PART I
ITEM 1. BUSINESS
Schick Technologies, Inc. (the "Company") designs, develops and
manufactures innovative digital radiographic imaging systems and devices, which
are based on proprietary digital imaging technologies, for the dental and
medical markets.
In the field of dentistry, the Company's products include the CDR(R)
computed dental radiography imaging system, introduced in March 1994. The CDR(R)
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. In
February 2003, the Company introduced CDR Wireless(TM), an innovative wireless
instant digital dental x-ray system. The Company also manufactures and sells the
USBCam (TM), an intra-oral camera which fully integrates with the CDR(R) system,
and the CDRPan(R), 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; (ii) enhancing the Company's international distribution
channels; and (iii) broadening the Company's product offerings.
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.
Under generally accepted accounting principles, the Company operates in
one reportable segment: digital radiographic imaging systems. Note 1 to the
Company's Consolidated Financial Statements summarizes the percent of the
Company's revenues from its principal products.
1
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.
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. According to a survey of United
States dentists, reported in Dental Products Report in June 2002, the market
penetration for digital dental radiography devices among the survey respondents
was 14%.
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% 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
2
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.
In February 2003, the Company announced the introduction of CDR
Wireless(TM), which the Company believes to be the world's first wireless
instant dental x-ray system. It allows dentists to produce high-quality instant
radiographs with low radiation dosage and without the need for a cable between
the intra-oral sensor and computer.
The Company began selling its intra-oral camera, the CDRCam(R), in early
1997 and a redesigned version, the CDRCam 2000(R), in November 1999. In April
2002, the Company introduced the USBCam(TM), an innovative intra-oral camera
which fully integrates with the CDR(R) system to provide color video images of
the structures of the mouth. The Company believes that the USBCam(TM) was the
world's first intra-oral camera with a direct USB interface. Since their
introduction in 1991, intra-oral cameras have become widely accepted as a dental
diagnostic, communication and presentation tool. USBCam(TM) 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(R). 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(R) 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. 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. The Company's
accuDEXA(R)device is an innovative BMD assessment device used 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 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 and
May 2000, the FDA granted the Company additional clearances for its marketing of
the accuDEXA(R), respectively, as a predictor of fracture risk and to further
clarify issues regarding the collection of the normative database.
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)
3
is "ETL Listed". "ETL" is a North American Safety Mark indicating compliance
with safety standard UL-2601-1.
MANUFACTURING
The Company's manufacturing facility is located at its headquarters in
Long Island City, New York. This facility is subject to periodic inspection by
the FDA. The Company assembles its CDR(R) sensors, CDRPan(R) sensors, USBCam(TM)
intra-oral cameras and accuDEXA(R) bone densitometers at this manufacturing
facility. The Company outsources the assembly of certain subassemblies, such as
printed circuit boards, plastics and cables, but performs the final assembly and
testing process at its manufacturing facility.
The Company purchases components for its products from a number of outside
vendors. While the Company strives to maintain multiple sources of supply for
each component, certain highly-specialized components, including semiconductor
wafers used in the assembly of sensors, are primarily provided by a single
supplier. In these cases, the Company strives to maintain sufficient inventory
so as to provide extra time in which to locate an acceptable alternate supplier
in the event of a supply interruption. However, in such event, there can be no
assurance that an acceptable alternate supplier would be found. The need to
replace a supplier may have a material adverse impact on the Company if it
causes a disruption in the Company's ability to deliver its products or
increases the Company's costs.
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 evaluate the Company's eligibility to maintain such
certification.
DEPENDENCE ON CUSTOMERS
During fiscal 2003, Patterson Dental Company ("Patterson"), the Company's
exclusive distributor in the United States and Canada, accounted for annual
sales by the Company of $15.4 million or 52% of annual sales. During fiscal
2002, Patterson accounted for annual sales by the Company of $9.9 million or 41%
of annual sales. During fiscal 2001, Patterson and Roesch 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 2003, 2002 and 2001,
respectively, sales of approximately $6.2 million, $6.2 million and $8.1 million
were made to foreign customers.
PATENTS, TRADE SECRETS AND PROPRIETARY RIGHTS
The Company seeks to protect its intellectual property through a
combination of patent, trademark and trade secret protection. The Company's
future success will depend in part on its ability to obtain and enforce patents
for its products and processes, preserve its trade secrets and operate without
infringing the proprietary rights of others.
Patents
The Company has an active corporate patent program, the goal of which is
to secure patent protection for its technology. The Company currently has issued
United States patents for an `Intra-Oral Sensor For Computer Aided Radiography',
U.S. Patent No. 5,434,418, which expires on October 16, 2012; a `Large Area
Image Detector', U.S. Patent No. 5,834,782, which expires on November 20, 2016;
a `Method and Apparatus for Measuring Bone Density', U.S. Patent No. 5,852,647,
which expires on September 24, 2017; an 'Apparatus for Measuring Bone Density
Using Active Pixel Sensors', U.S. Patent No. 5,898,753, which expires on June 6,
2017; a 'Dental Imaging System with Lamps and Method', U.S. Patent No.
5,908,294, which expires on June 12, 2017; an 'X-ray Detection System Using
Active Pixel Sensors', U.S. Patent No. 5,912,942, which expires on June 6, 2017;
a `Dental Imaging System with White Balance Compensation', U.S. Patent No.
6,002,424, which expires on June 12, 2017; `Dental Radiography Using an
Intraoral Linear Array Sensor,' U.S. Patent No. 5,995,583, which expires on
November 13, 2016; a `Method for Reading Out Data from an X-Ray Detector,' U.S.
Patent No. 6,069,935, which expires on June 6, 2017; and a `Filmless Dental
radiography System Using Universal Serial Bus Port', U.S. Patent No. 6,134,298,
which expires on August 7, 2018. In addition, the Company is the licensee of
U.S. Patent No. 5,179,579, for a 'Radiograph Display System with Anatomical Icon
for Selecting Digitized Stored Images', under a worldwide, non-exclusive,
4
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. required, among other things, that the Company use all
commercially reasonable efforts to timely introduce, improve and market and
distribute licensed products in various fields. The Company has not introduced
licensed products in certain of these fields, and there can be no assurance that
the Company will do so in the future. Such failure to introduce licensed
products could result in a termination or modification of the Company's rights
with respect to the fields in which the Company has not introduced licensed
products. This 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 pending trademark applications, and 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 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.
5
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(R) 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, and in October 2002, cleared the
Company's expanded 510(k) application for the CDR wireless product. 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). The FDA granted
the Company additional clearances in connection with the accuDEXA(R), on June 4,
1998, to market accuDEXA(R) as a predictor of fracture risk, and on May 26,
2000, to further clarify issues regarding the collection of the normative
database. In December 1998 and May 2003, the FDA cleared the Company's 510(k)
applications for CDRPan(R) and CDRPanX(TM), respectively. 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 product.
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
any 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 2003, 2002 and 2001, research and development expenses were
$2.6, $2.2 million and $2.2 million, respectively.
BACKLOG
The backlog of orders was approximately $0.5 million at each of June 3,
2003, June 1, 2002 and June 1, 2001, respectively. Such figures include
approximately $0.2 million, $0.4 million and $0.1 million of orders on hold
pending credit approval at June 3, 2003, June 1, 2002 and June 1, 2001,
respectively. Orders included in backlog may generally be cancelled or
rescheduled by customers without significant penalty.
EMPLOYEES
As of June 3, 2003, the Company had 128 full-time employees, engaged in
the following capacities: sales and marketing (30); general and administrative
(20); operations (58); and research and development (20). 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 entered into an exclusive
distribution agreement covering the United States and Canada; 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
1,100 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, 2003, CDR(R) had been sold to 47 of the 55 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 18 area sales managers ("ASMs") 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
4 individuals, three of whom are based at the Company's offices in New York, and
one in California, supports the sales managers and the ASMs by planning events
and product seminars 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 65
independent CDR(R) dealers, covering about 57 countries. A dedicated in-house
staff, as well as 2 individuals based in Europe and Latin America, 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 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.
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 that 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
under various brand names. These include PracticeWorks, Inc. ("Trophy"), Dentrix
Dental Systems, Inc. ("ImageRay"), Provisions Dental Systems, Inc. ("Dexis"),
Sirona Dental Systems ("Sidexis") and Suni Imaging, Inc. ("Dr. Suni"). In
addition, Dentsply International, Air Techniques and Soredex Corporation sell a
storage-phosphor based intra-oral dental system. The Company believes that its
CDR 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,
Henry Schein Co., Digital Doc and Air Techniques. 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 Cooper-Surgical, Inc., are
currently marketing peripheral dual-X-Ray-absorptiometry (DXA) BMD
densitometers. Several companies including GE Lunar, Hologic, Inc., Sunlight,
Inc. and Norland are marketing peripheral ultrasound devices. A number of other
companies market other devices including ones that assess hand densitometry. Two
companies, Ostex International Inc. and Quidel Corp., Inc., have developed
biochemical markers which indicate the rate at which the body is resorbing
(i.e., breaking down) bone.
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 matters described below:
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
9
Company provided the SEC with the requested materials. On August 17, 2000 and
April 30, 2003, the SEC served subpoenas upon the Company, pursuant to a formal
order of investigation, requiring the production of certain documents. The
Company timely provided the SEC with the subpoenaed materials. The Company has
been informed that since January 2002 the SEC and/or 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 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.
On June 11, 2003, the Company and its chief executive officer, David
Schick, received notifications from the staff of the SEC of their intention to
recommend that the SEC authorize civil enforcement actions against them. The
contemplated actions would allege violations of federal securities law relating
to the Company's publicly filed financial statements, including those for the
first three quarters of the Company's fiscal year ended March 31, 1999,
restatements of which were filed in March 2000. In connection with the
contemplated actions, the staff would ask for authority to seek injunctive
relief, civil penalties and a bar against Mr. Schick from serving as an officer
or director of a public company. The Company cannot predict the potential
outcome of these matters.
The Company could become a party to a variety of legal actions (in
addition to that 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, 2003.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER 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.
10
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, 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
Fiscal Year Ended March 31, 2003 High Low
-------------------------------- ------ -----
First Quarter $3.60 $2.10
Second Quarter $3.01 $1.10
Third Quarter $3.00 $1.78
Fourth Quarter $4.75 $2.72
On June 3, 2003, the closing bid and asked prices per share of the
Company's Common Stock, as quoted on the over-the-counter Bulletin Board, were
$6.95 and $7.01 per share, respectively. Such prices represent quotations
between dealers, without dealer mark-up, markdown or commission, and may not
represent actual transactions. On June 3, 2003, there were 180 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.
Equity Compensation Plan Information
The following table sets forth the following information, as of March 31,
2003, 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 Weighted-average Number of securities
securities to be exercise price remaining available
issued upon of outstanding for future issuance
exercise of options, under equity
outstanding warrants and compensation
options, rights (excluding
warrants and securities reflected
rights in column (a)
-------------------------------------------------------------------------------------
Equity compensation 2,077,538 $2.54 1,522,462
plans approved by
security holders
-------------------------------------------------------------------------------------
Equity compensation
plans not approved by
security holders -- -- --
-------------------------------------------------------------------------------------
Total 2,077,538 $2.54 1,522,462
-------------------------------------------------------------------------------------
In addition to the options described in the table above, the Company has
outstanding an aggregate of 5,650,000 warrants exercisable at an initial
exercise price of $0.75 per share, which warrants are held by Greystone Funding
Corporation ("Greystone") or its assignee. Such
11
warrants, which are described in Note 10 to the Company's Consolidated Financial
Statements, were issued in connection with loan transactions.
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.
Schick Technologies, Inc.
Selected Financial Data
Year ended March 31,
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
(in thousands, except per share data)
Statement of Operations Data:
Revenue, net $ 29,817 $ 24,399 $ 21,252 $ 21,989 $ 45,605
-------- -------- -------- -------- --------
Cost of sales 9,369 8,540 9,736 15,393 34,611
Excess and obsolete inventory 259 292 570 898 5,466
-------- -------- -------- -------- --------
Total cost of sales 9,628 8,832 10,306 16,291 40,077
-------- -------- -------- -------- --------
Gross profit 20,189 15,567 10,946 5,698 5,528
-------- -------- -------- -------- --------
Operating expenses:
Selling and marketing 5,911 5,291 5,314 7,636 18,440
General and administrative 5,041 4,148 4,161 7,339 7,338
Research and development 2,598 2,176 2,220 2,830 4,354
Bad debt expense (recovery) -- (93) (454) -- 5,598
Abandonment of leasehold -- 118 275 -- --
-------- -------- -------- -------- --------
Total operating costs 13,550 11,640 11,516 17,805 35,730
-------- -------- -------- -------- --------
Income (loss) from operations 6,639 3,927 (570) (12,107) (30,202)
Total other income (expense) (174) (839) (1,068) (224) 244
-------- -------- -------- -------- --------
Income (loss) before income taxes 6,465 3,088 (1,638) (12,331) (29,958)
Income tax benefit 5,360 -- -- -- 352
-------- -------- -------- -------- --------
Net income (loss) $ 11,825 $ 3,088 $ (1,638) $(12,331) $(29,606)
======== ======== ======== ======== ========
Basic earnings (loss) per share $ 1.17 $ 0.30 $ (0.16) $ (1.23) $ (2.96)
======== ======== ======== ======== ========
Diluted earnings (loss) per share $ 0.78 $ 0.26 $ (0.16) $ (1.23) $ (2.96)
======== ======== ======== ======== ========
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Balance Sheet Data:
Cash and cash equivalents $ 7,100 $ 1,622 $ 2,167 $ 1,429 $ 1,415
Working capital / (deficiency) 9,157 1,133 (1,586) 841 2,902
Total assets 22,610 11,957 12,646 16,290 29,386
Long-term obligations -- 2,039 4,080 6,938 45
Total liabilities 7,747 9,057 12,835 14,974 16,850
Retained earnings (accumulated deficit) (27,857) (39,682) (42,770) (41,132) (28,801)
Stockholders' equity 14,863 2,900 (189) 1,316 12,536
12
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 99.2 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(R)), a digital panoramic
radiography sensor (CDRPAN(R)) and an intra-oral camera system (CDRCam(R)). 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. The Company's revenues during fiscal 2003 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 distribution centers. 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 as the exclusive distributor for sales of its dental
products within the United States and Canada. The Company's accuDEXA(R) 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 2003, 2002 and 2001, sales to customers within
the United States were approximately 78%, 75% and 62% 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.
13
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. 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, and to 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. 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 were performed upon adoption and are performed 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
over the recalculated goodwill. Impairment tests performed in August 2002 and
March 2003 indicate that goodwill is not impaired.
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
14
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 it is
not more likely than not that the deferred tax asset will be realized. At March
31, 2003 the deferred tax asset ($16.9 million) has a partial reserve of $11.1
million, reflecting a reduction in the valuation allowance of $5.8 million
during the year ended March 31, 2003. In assessing the valuation allowance, the
Company has considered future taxable income and ongoing tax planning strategies
and has determined that it is more likely than not that $5.8 million of the
deferred tax asset will be realized. Changes in these circumstances, such as a
decline in future taxable income, may result in the continuation of a full
valuation allowance being required. Continued future income results may provide
for additional reversals of the valuation allowance. During fiscal 2003, the
Company's utilization of its net operating losses resulted in a reduction of
current taxes in the amount of $2.9 million.
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.
Stock-based compensation
Stock based compensation is accounted for under the recognition and
measurement principles of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. No stock-based employee compensation
cost is reflected in net income, as all options granted under the Company's
option plans had an exercise price equal to the market value of the underlying
common stock on the date of grant. The Company determines the fair value of
options issued based on the Black-Scholes model. The Black-Scholes model is
based on certain assumptions including the expected life of the option, risk
free interest rates, expected volatility and expected dividend yield.
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. The Company believes it has estimated appropriately 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, 2003:
=============================================================================
PAYMENTS DUE BY PERIOD
--------------------------------------------------------
Less
CONTRACTUAL than 1 1-3 4-5 After 5
OBLIGATIONS Total year years years years
-----------------------------------------------------------------------------
Long-Term Debt $ 1,503 $ 1,503 $ -- $ -- $ --
-----------------------------------------------------------------------------
Operating leases 2,122 467 992 663 --
-----------------------------------------------------------------------------
Employment
agreements 970 648 322 -- --
-----------------------------------------------------------------------------
Total Contractual
Cash Obligations $ 4,595 $ 2,618 $ 1,314 $ 663 $ --
=============================================================================
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:
15
Year ended March 31,
--------------------------
2003 2002 2001
---- ---- ----
Revenue, net 100.0% 100.0% 100.0%
------ ------ ------
Cost of sales 31.4% 35.0% 45.8%
Excess and obsolete inventory 0.9% 1.2% 2.7%
------ ------ ------
Total cost of sales 32.3% 36.2% 48.5%
------ ------ ------
Gross profit 67.7% 63.8% 51.5%
Operating expenses:
Selling and marketing 19.8% 21.7% 25.0%
General and administrative 16.9% 17.0% 19.6%
Research and development 8.7% 8.9% 10.4%
Bad debt recovery -- -0.4% -2.1%
Abandonment of leasehold -- 0.5% 1.3%
------ ------ ------
Total operating costs 45.4% 47.7% 54.2%
------ ------ ------
Operating income 22.3% 16.1% -2.7%
====== ====== ======
Fiscal Year Ended March 31, 2003 as Compared to Fiscal Year Ended March 31, 2002
Net revenues increased $5.4 million (22.2%) to $29.8 million in fiscal
2003 from $24.4 million in fiscal 2002. The revenue increase was due to higher
sales of CDR(R) dental radiography products principally through expansion of
sales through its exclusive domestic distributor, Patterson Dental Company
("Patterson"). Domestic revenues increased $5.3 million (29.0%) to $23.6 million
(79.3% of net revenue) from $18.3 million (75.0% of net revenue) in fiscal 2002.
International sales increased $0.1 million (0.2%) to $6.2 million (20.7% of net
revenue) from $6.1 million (25.0% of net revenue) in fiscal 2002.
CDR(R) product sales increased $5.9 million (31.6%) to $24.4 million
(81.9% of total revenue) during fiscal 2003 from $18.5 million (75.8% of total
revenue) during fiscal 2002. AccuDEXA(R) product sales decreased $0.2 million
(25.0%) to $0.6 million (2.0% of total revenue) during fiscal 2003 from $0.8
million (3.3% of total revenue) during fiscal 2002. Warranty revenues decreased
$0.2 million (4.0%) to $4.8 million (16.1% of total revenue) during fiscal 2003
from $5.0 million (20.5% of total revenue) during fiscal 2002.
Patterson revenue amounted to 51.7% and 40.3% of total revenue in fiscal
2003 and 2002, respectively. No other individual customer exceeded 10% of total
revenue. Overall sales returns remained at 0.2% of revenue in fiscal 2003 and
2002.
Total cost of sales for fiscal 2003 increased $0.8 million (9.0%) to $9.6
million (32.3% of net revenue) from $8.8 million (36.2% of net revenue) in
fiscal 2002. The decline in relative cost of sales is due to improved operating
efficiency as the Company reduced overhead as a result of the consolidation of
its facilities into a single location during the first quarter of fiscal 2002
and a shift in product sales mix. Additionally, product improvements resulted in
reduced expense in support of its warranty program. The Company's provision for
excess and obsolete inventory decreased to 0.9% of net revenue in fiscal 2003
from 1.2% in fiscal 2002.
Selling and marketing expense for fiscal 2003 increased $0.6 million
(11.7%) to $5.9 million (19.8% of net revenue) from $5.3 million (21.7% of net
revenue) in fiscal 2002. Increased sales and sales activities resulted in higher
payroll, commissions and related travel expenses.
General and administrative expense for fiscal 2003 increased $0.9 million
(21.5%) to $5.0 million (16.9% of revenue) from $4.1 million (17.0% of revenue)
in fiscal 2002. Increases are principally the result of higher payroll, travel
and insurance expenses.
Research and development expense in fiscal 2003 increased $0.4 million
(19.4%) to $2.6 million (8.7% of revenue) from $2.2 million (8.9% of revenue) in
fiscal 2002. The increase is the result of higher payroll and research materials
expenses.
16
Interest expense in fiscal 2003 decreased $0.7 million (68.2%) to $0.3
million from $1.0 million in fiscal 2002 due to the Company's July 2001
prepayment of $1 million it had borrowed from Greystone. The prepayment resulted
in the write off of $0.4 million of deferred interest expense in fiscal 2002.
During fiscal 2003, the Company reduced its deferred tax valuation
allowance by $5.8 million resulting in an income tax benefit of $5.5 million,
net of alternative minimum income taxes ("AMT") of $0.3 million. The Company
reduced the valuation allowance because it believes it is more likely than not
that a portion of the net operating loss carryforward will be realized. The
Company continues to reserve approximately $11.1 million of deferred income
taxes. During fiscal 2003, the Company's utilization of its net operating losses
resulted in a reduction of current taxes in the amount of $2.9 million.
As a result of all of the foregoing items, the Company's net income in
fiscal 2003 increased $8.7 million (283%) to $11.8 million from $3.1 million in
fiscal 2002.
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 was due to higher
sales of both the CDR(R) dental radiography product and the 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 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 related to receipt of prior fiscal year
reserved receivables declining 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 a decline in
the level of borrowing and the prime interest rate during fiscal 2002.
Liquidity and Capital Resources
At March 31, 2003, the Company had $7.8 million in cash, cash equivalents
and short-term investments and working capital of $9.2 million compared to $2.1
million in cash, cash
17
equivalents and short-term investments and $1.1 million in working capital at
March 31, 2002. The increase in working capital is primarily attributable to
operating profit during fiscal 2003.
During fiscal 2003, cash provided by operations was $8.3 million compared
to $3.5 million provided by operations during fiscal 2002. Accounts receivable
increased to $3.0 million at March 31, 2003 compared to $2.8 million at March
31, 2002 due to increased sales activity. The allowance for doubtful accounts
decreased $675 to $42 at March 31, 2003 from $717 at March 31, 2002 due to the
write off of previously reserved accounts receivable, which are deemed
uncollectible. The amount due from Patterson included in accounts receivable
($1.8 million at March 31, 2003) were collected subsequent to year end.
Inventories increased to $3.0 million at March 31, 2003 compared to $2.8 million
at March 31, 2002 due to the Company's introduction of the CDR(R) wireless
product during the month of March 2003. The Company's capital expenditures
decreased to $0.5 million in fiscal 2003 from $0.8 million in fiscal 2002.
Fiscal 2003 capital expenditures primarily consisted of tooling costs and
computer upgrades. Fiscal 2002 capital expenditures were primarily related to
the Company's consolidation into a portion of its premises during the first
quarter.
During the fiscal years ended March 31, 2003 and 2002 the Company made
principal payments on long-term debt of $2.4 million and $3.4 million,
respectively. At March 31, 2003, $1.5 million in notes payable to Greystone were
outstanding, which are secured by first priority liens on substantially all of
the Company's assets. The Notes are expected to be paid in full during fiscal
2004.
The Company prepaid to Greystone $396 of outstanding principal during the
first quarter of fiscal 2004. Such payment constituted full satisfaction of the
Company's obligations to Greystone for the period through March 31, 2003,
pursuant to an Amendment and Waiver Agreement between the Company and Greystone
entered into in March 2003. As of June 3, 2003, the outstanding principal
balance of the Greystone notes is $889.
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. Expenses relating to the legal proceedings
described in Item 3, to the extent not covered by insurance, could affect the
Company's cash position. 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 may 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 notes payable to Greystone bear an annual interest rate based on the
prime rate plus 2.5%, provided, however, that if any payments thereunder 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
18
(a) The Directors of the Company are as follows:
Euval Barrekette, Ph.D. Age 72, 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 2005. Dr. Barrekette is a
licensed Professional Engineer in New York State.
Since 1986 Dr. Barrekette has been a consulting
engineer and physicist. From 1984 to 1986 Dr.
Barrekette was Group Director of Optical
Technologies of the IBM Large Systems Group. From
1960 to 1984 Dr. Barrekette was employed at IBM's
T.J. Watson Research Center in various capacities,
including Assistant Director of Applied Research,
Assistant Director of Computer Science, Manager of
Input/Output Technologies and Manager of Optics and
Electrooptics. Dr. Barrekette holds an A.B. degree
from Columbia College, a B.S. degree from Columbia
University School of Engineering, an M.S. degree
from its Institute of Flight Structures and a Ph.D.
from the Columbia University Graduate Faculties.
Dr. Barrekette is a fellow of the American Society
of Civil Engineers, a Senior Member of the
Institute of Electronic & Electrical Engineers, and
a member of The National Society of Professional
Engineers, The New York State Society of
Professional Engineers, The Optical Society of
America and The New York Academy of Science. Dr.
Barrekette is the uncle of David B. Schick and the
brother-in-law of Dr. Allen Schick.
Jonathan Blank, Esq. Age 58, 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 2005. Since 1979, Mr.
Blank has been a member of the law firm of Preston
Gates Ellis & Rouvelas Meeds LLP and a managing
partner of the firm since 1995
William Hood Age 79, has served as a Director of the Company and
as Chairman 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. 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 and 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.
Uri Landesman Age 41, has served as a Director of the Company
since January 2003 and from April 1992 to June
1997. Mr. Landesman's current term on the Board
expires at the Company's Annual Shareholders
Meeting in 2003. Since February 2003, Mr. Landesman
has been a Senior Portfolio Manager at Federated
Global Investment Management Corp. From July 2001
to January 2003, Mr. Landesman was a Principal and
Portfolio Manager at Arlington Capital Management.
From April 1999 to June 2001, he was a Principal
and Chief Investment Officer at Aaron Fleck &
Associates, LLC/A.F.A. Management Partners, L.P.
From June 1993 to March 1999, Mr. Landesman was
employed at J.P. Morgan Investment Management, as
Vice-President and Lead Portfolio Manager from
February 1997 to March 1999, and as Vice-President
and Senior Analyst from June 1993 to January 1997.
He holds a B.A. degree from Yeshiva University.
Curtis M. Rocca III Age 40, has served as a Director of the Company and
as a member of the Audit Committee of the Board of
Directors since May 2002. Mr. Rocca's current term
on the Board expires at the Company's Annual
Meeting of Stockholders in 2004. 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
19
Partners, Inc. From 1990 to 1998, Mr. Rocca was
Chairman and Chief Executive Officer of Bio-Dental
Technologies Corp.
Allen Schick, Ph.D. Age 68, 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,
in 2000, was elected "Distinguished University
Professor", a title reserved for fewer than 2% of
the faculty. Since 1988, Dr. Schick 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.
David B. Schick Age 42, 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. 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.
Jeffrey T. Slovin Age 38, has served as the Company's President and
Chief Operating Officer since November 2001. He has
served as a Director of the Company since December
1999. From December 1999 to November 2001, Mr.
Slovin served as the Company's President. Mr.
Slovin's current term on the Board expires at the
Company's Annual Meeting of Stockholders in 2004.
Since November 2002, Mr. Slovin has been a member
of the Board of Directors of Electronic Global
Holdings Ltd. 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.
(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................... 42 Chairman of the Board and Chief
Executive Officer 1992
Jeffrey T. Slovin................. 38 President, Chief Operating Officer
and Director 1999
20
Michael Stone..................... 50 Executive Vice-President of
Sales & Marketing 2000
Stan Mandelkern................... 43 Vice President of Engineering 1999
Ari Neugroschl.................... 32 Vice President of Management
Information Systems 2000
Zvi N. Raskin..................... 40 Secretary and General Counsel 1992
Will Autz......................... 49 Vice President of Manufacturing 2003
Ronald Rosner..................... 56 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 of
Sales and Marketing since September 2000 and as the Company's Vice
President of Sales and Marketing from January 2000 to September 2000. From
September 1993 to January 2000, Mr. Stone was General Manager of the
Dental Division of 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.
WILL AUTZ has served as the Company's Vice President of Manufacturing
since January 2003. From January 2000 to December 2002, Mr. Autz was the
Company's Director of Manufacturing. From 1996 to 1999, Mr. Autz was the
Manager of Manufacturing Engineering at Trident International Inc., a
division of Illinois Tools Work Inc. From 1991 to 1996, Mr. Autz was the
Director of Manufacturing & Manufacturing Engineering at General Signal
Networks, a division of General Signal Inc. Mr. Autz holds a BS in
Electromechanical Technology from the New York Institute of Technology and
is a member of the American Society of Manufacturing Engineers.
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.
(c) Not applicable.
21
(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.
Audit Committee Financial Experts
The Company's Board of Directors has determined that two members of the
Audit Committee, Mr. Hood and Mr. Rocca, are "independent directors" and "audit
committee financial experts," as those terms are defined by the Securities and
Exchange Commission.
Section 16(A) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's executive officers and directors and persons who beneficially own more
than 10% of the Company's Common Stock to file initial reports of ownership and
reports of changes in ownership with the Commission. Such executive officers and
directors and greater than 10% beneficial owners are required by the regulations
of the Commission to furnish the Company with copies of all Section 16(a)
reports they file.
Based solely on a review of the copies of such reports furnished to the
Company and written representations from 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 for the following: a Form 3 was filed on May 13, 2003 for
Mr. Autz who became Vice President of Manufacturing on April 9, 2003. A Form 4
was filed on February 5, 2003 for Mr. Landesman who was issued stock options on
January 29, 2003 by the Board of Directors, pursuant to the 1997 Directors Stock
Option Plan. Eight Forms 4 were filed on November 29, 2002 for the issuance of
employee stock options on November 18, 2002 by the Board of Directors to the
following executive officers, pursuant to the 1996 Employee Stock Option Plan:
Messrs. Mandelkern, Neugroschl, Raskin, Rogers, Rosner, Schick, Slovin and
Stone.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain information concerning compensation
received for the fiscal years ended March 31, 2003, 2002 and 2001 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 $100,000 (the "Named Executives") for services rendered in all
capacities (including service as a director of the Company) during the year
ended March 31, 2003.
Summary Compensation Table
Long-Term
Annual Compensation
------
Compensation
------------
Awards
------
Other
Annual Securities All Other
Name and Principal Fiscal Compensa- Underlying Compensa-
Position Year Salary($) Bonus($) tion(1) Options(2) tion($)(3)
-------- ---- --------- -------- ------- ---------- ----------
- -----------------------------------------------------------------------------------------------------------------
David B. Schick 2003 $246,540 $ 90,463 -- 8,572 $ 6,708
Chairman of the Board and
Chief Executive Officer 2002 225,246 50,000 -- 160,709 4,362
2001 200,000 16,308 -- -- 4,468
- -----------------------------------------------------------------------------------------------------------------
22
- -----------------------------------------------------------------------------------------------------------------
Jeffrey T. Slovin 2003 246,646 90,463 -- 8,502 6,710
President and Chief
Operating Officer 2002 89,430 57,263 -- 150,000 1,846
(4)
- -----------------------------------------------------------------------------------------------------------------
Michael Stone 2003 212,487 45,232 -- 7,439 5,894
Executive Vice President of
Sales and Marketing
2002 193,577 48,154 -- 135,207 4,491
2001 175,000 -- -- -- 2,861
- -----------------------------------------------------------------------------------------------------------------
Zvi N. Raskin, Esq 2003 222,690 28,025 -- 7,793 5,078
General Counsel and
Secretary 2002 204,154 20,000 -- 36,018 4,527
2001 200,001 20,000 -- -- 4,038
- -----------------------------------------------------------------------------------------------------------------
Stan Mandelkern 2003 163,241 5,952 -- 7,240 4,081
Vice President of
Engineering 2002 154,615 -- -- 30,108 3,865
2001 121,878 -- -- -- 3,048
(1) Does not include other 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 2003, 2002, and 2001 pursuant to the Company's 1996 Employee Stock
Option Plan.
(3) Reflects amounts contributed by the Company in the form of matching
contributions to the Named Executive's Savings Plan account during fiscal
2003, 2002 and 2001.
(4) Prior to November 1, 2001, Greystone paid Mr. Slovin for his service as
the Company's President. The Company reimbursed Greystone in the amount of
$17,000 per month pursuant to a Termination Agreement between the Company
and Greystone entered into on July 12, 2001 and made effective as of March
31, 2001. Such amounts are not included in the table above.
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 of Sales and Marketing. 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. Pursuant to the terms of the
employment agreement, Mr. Stone also received a performance bonus equal to 0.5%
of the Company's earnings before income taxes, depreciation and amortization for
the 2003 fiscal year. In addition, Mr. Stone 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
23
basis unless either party gives 60-days 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 November 2001, the Company entered into a three-year employment
agreement with Jeffrey T. Slovin. Pursuant to the Agreement, Mr. Slovin is
employed as President and Chief Operating Officer of the Company. Mr. Slovin's
initial base annual salary under the Agreement is $240,000. In addition to base
salary, Mr. Slovin 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. Slovin 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, Mr. Slovin also received 150,000 employee stock
options which vest as follows: 50,000 options on October 31, 2002, an additional
50,000 options on October 31, 2003, and the final 50,000 options on October 31,
2004. Additionally, all Company stock options held by, or issued to, Mr. Slovin
will immediately 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. Slovin 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. Slovin's title or diminishes, in any significant manner,
his duties or responsibilities of employment, Mr. Slovin 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 was employed as General Counsel of the Company until January 2003. Under
the expired employment agreement, Mr. Raskin's base annual salary was $220,000.
In addition to base salary, Mr. Raskin received a bonus of $20,000 per calendar
year and was 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 expired 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 was terminated from employment
with the Company without cause, he would have received 12 months of severance
pay. Since January 2003, Mr.