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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
(Mark One)
{X} ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended March 31, 1999
OR
{_} TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition period from ______________to______________
Commission file number 000-22673
SCHICK TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 11-3374812
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
31-00 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 | | No |X|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
----------
The aggregate market value of Common Stock held by non-affiliates of the
registrant as of March 7, 2000 was approximately $ 18,220,731. Such aggregate
market value is computed by reference to the average of the closing bid and
asked prices of the Common Stock on such date.
As of March 7, 2000, the number of shares outstanding of the Registrant's
Common Stock, par value $.01 per share, was 10,136,113
DOCUMENT INCORPORATED BY REFERENCE
NONE
Table of Contents
Item of Form 10-K Page
- ------------------------------------------------------------------------------------------------------
Part I
Item 1. Business 1
Item 2. Properties 12
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 14
Part II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters 14
Item 6. Selected Financial Data 16
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 23
Item 8. Financial Statements and Supplementary Data 23
Item 9. Changes in and Disagreements with Accountants
On Accounting and Financial Disclosure 23
Part III
Item 10. Directors and Executive Officers of the Registrant 23
Item 11. Executive Compensation 27
Item 12. Security Ownership of Certain Beneficial Owners And Management 31
Item 13. Certain Relationships and Related Transactions 33
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K F-1
PART I
ITEM 1. BUSINESS
Schick Technologies, Inc. (the "Company") designs, develops and
manufactures innovative digital radiographic imaging systems and devices for the
dental and medical markets. The Company's products, which are based on
proprietary digital imaging technologies, create instant high resolution
radiographs with reduced levels of radiation.
In the field of dentistry, the Company's CDR(R) computed dental radiography
imaging system was introduced in March 1994 and has become a leading product in
its field. The CDR system uses an intra-oral sensor to produce instant, full
size, high resolution dental x-ray images on a color computer monitor without
film or the need for chemical development, while reducing the radiation dose by
up to 80% or more as compared with that required for conventional x-ray film.
The Company also manufactures and sells the CDRCam(R) 2000, an intra-oral camera
which fully integrates with the CDR system, and the CDRPan(TM), a digital
panoramic imaging device. The Company is also developing other products and
devices for the dental field in addition to newer versions of its current
products.
In the field of medical radiography, the Company manufactures and sells the
accuDEXA(R) bone densitometer, a low-cost and easy-to-operate device for the
assessment of bone mineral density and fracture risk. Additionally, the Company
is developing a digital mammography device which, it believes, will offer high
quality diagnostic capability at a reasonable cost, and has commenced
development of a general digital radiography device for intended use in various
applications, including mobile medicine, orthopedics, podiatry, veterinary
medicine and industrial non-destructive testing.
The Company's core products are based primarily on its proprietary
active-pixel sensor ("APS") imaging technology. In addition, certain of the
Company's products are based upon its proprietary enhanced charged coupled
device ("CCD") imaging technology. APS allows the fabrication of large-area
imaging devices with high resolution at a fraction of the cost of traditional
technologies. APS technology was originally developed by the California
Institute of Technology and licensed to Photobit Corporation; it is sublicensed
to the Company for a broad range of health care applications.
The Company's objective is to be the leading provider of high resolution,
low-cost digital radiography products. The Company plans to leverage its
technological advantage in the digital imaging field to penetrate a broad range
of diagnostic imaging markets. The Company believes that its proprietary
technologies and expertise in electronics, imaging software and advanced
packaging may enable it to compete successfully in these markets. Key elements
of the Company's strategy include (i) expanding market leadership in dental
digital radiography through expanded sales channels, further product
enhancements, and increased marketing activities; (ii) broadening the marketing
of accuDEXA(R) to the medical market through a combination of direct sales and
other distribution channels; (iii) introducing new products based on patented
and proprietary APS technology for digital mammography and other medical and
industrial applications; and (iv) enhancing international distribution channels
for existing and new products.
The Company's business was founded in 1992 and it was incorporated in
Delaware in 1997. On July 7, 1997, the Company completed an initial public
offering of its Common Stock. Proceeds to the Company after expenses of the
offering were approximately $33,508,000.
On December 27, 1999, the Company established a strategic relationship with
Greystone Funding Corporation ("Greystone") and entered into a Loan Agreement
with Greystone which provides for the establishment of a credit facility for the
Company in an amount of up to $7.5 million. In connection with this Agreement,
as amended and restated on March 17, 2000, Greystone designees were appointed to
the Company's Board of Directors and key executive management positions. The
Company believes that the Greystone line of credit will be used to provide it
with working capital and help facilitate future growth. See "Item 7 --
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The Company's offices are located at 31-00 47th Avenue, Long Island City,
New York 11101. The Company's
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telephone number is (718) 937-5765, and its web site address is
http://www.schicktech.com.
PRODUCTS / INDUSTRY
Dental Imaging
X-ray imaging, or radiography, is widely used as a basic diagnostic
technique in a broad range of medical applications. To produce a conventional
radiograph, a film cassette is placed behind the anatomy to be imaged. A
generator, which produces high energy photons known as x-rays, is positioned
opposite the film cassette. The transmitted x-rays pass through soft tissue,
such as skin and muscle, and are absorbed by harder substances, such as bone.
These x-rays then form a latent image upon the film. After exposure, the film is
passed through a series of chemicals and then dried.
Film, however, has certain inherent limitations, including the time,
operating expense, inconvenience and uncertainty associated with film
processing, as well as the cost of disposal of waste chemicals and the need for
compliance with environmental regulations. Furthermore, the radiation dosage
levels required to assure adequate image quality in conventional film raise
concerns regarding the health risks associated with exposure to radiation. Also,
conventional film images cannot be electronically retrieved from patient records
or electronically transmitted to health care providers or insurance carriers at
remote locations, a capability which has become increasingly important in
today's managed care environment. While x-ray scanning systems convert x-rays
into digital form, they add to the substantial time and expense associated with
the use of conventional film and do not eliminate the drawbacks of film
processing.
Digital radiography products have been developed to overcome the
limitations of conventional film. These systems replace the conventional film
cassette with an electronic receptor which directly converts the incident x-rays
to digital images. The first system to employ certain aspects of this technique
was Computed Radiography(TM) ("CR"), a "near real time" system, in which a laser
scanner reads the x-ray image from a specially designed cassette. While CR
allows the images to be electronically displayed and stored, it does not achieve
instant results, and employs a large, costly scanning system. Other technologies
which allow for instant acquisition of digital x-rays have been developed,
including CCD arrays and amorphous silicon panels, neither of which is well
suited for imaging large areas due, respectively, to high cost and limited
resolution.
Dentists, who typically perform their own radiology work, represent the
single largest group of radiologists in the world and the dental industry is, in
terms of unit volume, the largest consumer of radiographic products and
equipment.
The Company believes that there is a potential market for approximately 1.1
million digital dental radiography devices worldwide. According to the American
Dental Association, there are approximately 150,000 practicing dentists in the
United States. The Company believes that each of them, on average, operates 2.5
radiological units, creating a potential market of 375,000 digital dental
radiography devices in the United States. In addition, the Company believes that
there are approximately 600,000 practicing dentists in the world's major
healthcare markets outside of the United States and, the Company believes that
each of them, on average, operates 1.25 radiological units, creating a potential
market of 750,000 additional devices.
The Company believes that Dentists have a particularly strong motivation to
adopt digital radiography. Radiographic examinations are an integral part of
routine dental checkups and the dentist is directly involved in the film
development process. The use of digital radiography eliminates delays in film
processing, thus increasing the dentist's potential revenue stream and
efficiency, and reduces overhead expenses. The use of digital radiography also
allows dentists to more effectively communicate diagnosis and treatment plans to
patients, which the Company believes has the potential to increase the rate of
patients' treatment acceptance and resulting revenues. Finally, the dosage
required to produce an intra-oral dental x-ray, which is high when compared with
other medical radiographs, can be reduced by up to 80% or more through the use
of digital radiography.
The Company's principal revenue-generating product is its CDR(R) computed
dental radiography imaging system.
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The Company's CDR(R) system is easy to operate and can be used with any dental
x-ray generator. To produce a digital x-ray image using CDR(R), the dentist
selects an intra-oral sensor of suitable size and places it in the patient's
mouth. The sensor converts the x-rays into a digital image that is displayed on
the computer monitor within five seconds and automatically stored as part of the
patient's clinical records. CDR(R) system software allows the dentist to perform
a variety of advanced diagnostic operations on the image. The sensor can then be
repositioned for the next x-ray. As the x-ray dose is significantly lower than
that required for conventional x-ray film, concern over the potential health
risk posed by multiple x-rays is greatly diminished. The process is easy and
intuitive, enabling nearly any member of the dental staff to operate the CDR(R)
system with minimal training.
The Company manufactures digital sensors in three sizes which correspond to
the three standard size conventional x-ray films. Size 0 measures 31 x 22 x 5mm
and is designed for pediatric use; size 1 measures 37 x 24 x 5mm and is designed
for taking anterior dental images; and size 2 measures 43 x 30 x 5mm and is
designed to take bitewing images. All of the Company's CDR(R) sensors can be
sterilized using cold solutions or gas. The typical CDR(R) configuration
includes a computer, display monitor and size 2 digital sensor. Since mid-1998,
the computers sold by the company as a component part of the CDR(R) system have
been manufactured exclusively by Dell Computer Corporation, pursuant to an
agreement between the Company and Dell.
The Company began selling its intra-oral camera, the CDRCam(R), in early
1997 and introduced the CDRCam(R) 2000, a redesigned version of the product, in
November 1999. CDRCam(R) fully integrates with the CDR(R) system to provide
color video images of the structures of the mouth. Since their introduction in
1991, intra-oral cameras have become widely accepted as a dental communication
and presentation tool. CDRCam(R) is "ETL Listed." ETL is a North American Safety
Mark indicating compliance with safety standard UL-2601-1.
In March, 1999, the Company commenced the sale of its digital panoramic
imaging device, the CDRPan(TM). This device, which is designed to be retrofitted
into conventional panoramic dental x-ray machines, replaces film with electronic
sensors and a computer. This obviates the need for film and provides
instantaneous images, thus offering substantial savings in terms of time and
costs. Additionally, the CDRPan easily integrates with practice management and
other computer software applications.
Bone Mineral Density / Fracture Risk Assessment
Assessment of bone mineral density ("BMD") is an essential component in the
diagnosis and monitoring of osteoporosis. Osteoporosis is a disease that causes
progressive loss of bone mass which, in serious cases, may result in bone
fractures and even death. Osteoporosis can develop over the course of many years
without apparent symptoms, until bone is sufficiently degenerated and fractures
occur. The National Osteoporosis Foundation has estimated that approximately 200
million people suffer from the disease worldwide, which affects one out of three
postmenopausal women and one out of ten men over the age of 70. In the United
States, an estimated 28 million people suffer from the disease or have low bone
mass, placing them at increased risk for osteoporosis. The total estimated
health care cost of osteoporosis in the United States, including indirect costs,
is approximately $14 billion annually.
Until recently, osteoporosis was considered neither treatable nor
preventable. Because effective treatments are now available and because
osteoporosis may be preventable if detected in its early stages, the demand for
BMD diagnostic equipment has significantly increased. Because of the large
population segment which could benefit from BMD testing, the Company believes
that there is a need for a practical, instant, cost effective, precise, compact
and easy-to-use BMD testing device for the primary care physician. Primary care
physicians consist of internal medicine, family, geriatric and OB/GYN practices.
These practices represent approximately 172,000 potential testing sites in the
United States alone. Traditional BMD assessment devices have been large, costly
and difficult to operate, and are mainly found in large hospitals and diagnostic
imaging centers. It is estimated that in 1999, there were approximately 6,000
such BMD assessment devices in use in the United States.
The Company has developed an innovative BMD assessment device to assist
doctors in the diagnosis of low bone density and prediction of fracture risk.
This low-cost and highly precise diagnostic tool, which is marketed under the
trade name accuDEXA(R), assesses BMD more quickly, accurately and easily than
any comparable product currently on the market, while using a minimal radiation
dosage. It is a point-of-treatment tool, designed for use by primary
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care physicians as an integral part of a patient's regular physical examination.
In December 1997, the Company received clearance from the United States Food and
Drug Administration ("FDA") for the general use and marketing of the accuDEXA(R)
as a BMD assessment device; in June, 1998, the FDA granted the Company
additional clearance for its marketing of the accuDEXA(R) as a predictor of
fracture risk.
Based on APS technology, accuDEXA(R) is a small self-contained unit capable
of instantly assessing the BMD of a specific portion of the patient's hand, a
relative indicator of BMD elsewhere in the body. This device is the first BMD
assessment instrument that is virtually automatic, requiring little operator
intervention, calibration or interfacing other than the entry of relevant
patient data into a built-in touch sensitive LCD screen. The device requires no
external x-ray generator or computer and it exposes the patient to less than 1%
of the radiation of a single conventional chest x-ray. To perform a test using
the accuDEXA(R), the patient places his or her hand into a positioner and, upon
activation by the operator, the device automatically emits two low-dosage x-ray
pulses. The patient's bone density and fracture risk information is displayed on
the screen in less than 30 seconds. The accuDEXA(R) is "ETL Listed." ETL is a
North American Safety Mark indicating compliance with safety standard UL-2601-1.
Mammography
Breast cancer is the leading cause of cancer death among women in the
United States between the ages of 40 and 55, and the second leading cause of
cancer death among all women in the United States. According to the American
Cancer Society, approximately 180,200 new cases of breast cancer were diagnosed
and approximately 43,900 women died from the disease between 1997 and 1998. The
annual cost of breast cancer screening and diagnosis in the United States alone
is estimated at $6 billion. Successful treatment of breast cancer depends in
large part on the early detection of malignant lesions in the breast. According
to the National Cancer Institute, the five year survival rate decreases from
more than 90% to 72% after the cancer has spread to the lymph nodes, and to 18%
after it has spread to other organs such as the lungs, liver or brain.
Mammography techniques have not changed significantly over the past 20
years, although slight improvements have been made in x-ray film quality. A
major drawback of current mammography systems is their limited ability to image
dense breast tissue, typically found in women under the age of 50, resulting in
an unduly high rate of `false positive' test results and the concomitant
consequences: unwarranted surgical biopsies, significant cost and great anxiety
and concern to the patient. According to the American Cancer Society, women
under age 50 experience significant incidence of breast cancer, with 23% of
breast cancer cases detected in women under age 50.
Another limitation of conventional mammography is the time and cost
required to develop the film. Time is particularly problematic in the case of
stereotactic needle biopsies, in which a hollow needle is inserted into the
breast to obtain a tissue sample of a suspected lesion. Multiple mammograms must
be obtained during the procedure in order to properly position the needle.
According to the National Center for Health Statistics' November 1998 report, in
1997-1998, approximately 324,000 breast biopsies were performed in the United
States, of which up to 208,000 were stereotactic needle biopsies.
Digital mammography offers significant advantages over current film-based
systems, yielding higher contrast, improved resolution and lower radiation
dosage. Digital mammography may be especially useful in screening women under
the age of 50 because of its enhanced ability to image the denser breast tissue
typically found in younger women. Clinical testing has shown that digital
mammography, as compared with non-digital devices, can increase accurate
diagnosis by 20%. Digital mammography also provides instant images allowing for
real time stereotactic needle biopsies.
In January 2000, General Electric Company received clearance from the FDA
to market the first screening digital mammography system. Three other
manufacturers, Trex Medical Corporation, Fuji Medical Systems and Fischer
Imaging Corporation, are preparing clinical trials for digital devices. The
Company believes that the price range for these devices will likely exceed
$250,000.
According to the 13th Edition of Medical & Healthcare Marketplace Guide, as
of 1998 there were approximately 14,000 screening mammography machines in the
United States located in approximately 9,500 facilities and the
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Company believes that there were approximately 15,000 additional screening
mammography machines in other major health care markets. The market for
mammography machines is driven by increased awareness of breast cancer risk, the
emphasis on early detection, the growing number of stereotactic needle biopsies
and the advancement of digital technology.
The Company has developed a method of producing high quality digital
mammography sensors at a cost which, it believes, will be substantially lower
than its competitors' existing and proposed systems. The Company believes that
its digital mammography sensors will yield higher contrast, improved resolution
and lower radiation dosage than current film based systems, will be especially
useful in screening the denser breast tissue typically found in women under the
age of 50 and will allow for real time stereotactic needle biopsies. Clinical
testing has shown that, in comparison with non-digital devices, digital
mammography can increase accurate diagnosis by 20%.
The Company's proprietary technology allows the fabrication of high
resolution, large-area devices at low cost. The Company has manufactured a
prototype of an 10" x 6" sensor and currently plans to commence clinical trials
this year. The Company has not yet filed for FDA clearance of this device. There
can be no assurance that the Company will file for such clearance or that the
FDA will grant such clearance. See "Government Regulation."
General Digital Radiography
The Company is also developing a mobile 8"x 10" digital radiography system
for various applications. This unit is targeted primarily for peripheral x-ray
images, such as orthopedic and podiatric. The unit is also suitable for
veterinary and non-destructive testing applications. Management believes that
the unit will be available for sale by mid-2001, pending clearance by the FDA.
There can be no assurance that the Company will file for such clearance or that
the FDA will grant such clearance. See "Government Regulation."
Schick X-Ray Corporation
On September 24, 1997, the Company completed the acquisition of certain
assets of Keystone Dental X-Ray, Inc., a manufacturer of x-ray equipment for the
medical and dental radiology field, for $1.5 million in cash. The acquired
assets were integrated into the Company's former subsidiary, Schick X-Ray
Corporation ("Schick X-Ray"). In August 1999, Schick X-Ray was dissolved and its
operations absorbed by the Company.
MANUFACTURING
The Company's products are manufactured at its facility in Long Island
City, New York, which includes a 2,300 square foot controlled environment sensor
production facility. This facility is subject to periodic inspection by the FDA.
The Company has invested in automated and semi-automated equipment for the
fabrication and machining of parts and assemblies incorporated in its products.
The Company's quality assurance program includes various quality control
measures from inspection of raw materials, purchased parts and assemblies
through in-process and final inspection and conforms to the guidelines of the
International Quality Standard, ISO 9001. In August 1998, the Company was
granted ISO 9001 certification.
The Company manufactures most of its custom components itself in order to
minimize dependence on suppliers, for quality control purposes and to help
maintain process propriety. While the Company does procure certain components
from outside sources which, are sole suppliers, it believes that those
components could be obtained from additional sources without substantial
difficulty, although the need to change suppliers or to alternate between
suppliers might cause significant delays in delivery or significantly increase
the Company's costs. The Company procures its APS and CCD semiconductor wafers,
a significant component of its products, each from a single supplier. Extended
interruptions of this supply could have a material adverse effect on the
Company's ability to produce its products and its results of operations. The
Company's manufacturing processes are, for the most part, vertically integrated,
although selective outsourcing is employed to take advantage of economies of
scale at outside manufacturing facilities and to alleviate manufacturing
bottlenecks. Certain components used in existing products of the Company, as
well as products under development, may be purchased from single sources.
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DEPENDENCE ON CUSTOMERS
During fiscal 1999, a single customer, Henry Schein, Inc., accounted for
annual sales by the Company of $7.2 million, or 15.8% of annual sales. During
fiscal 1998 and 1997, no single customer accounted for more than ten percent of
the Company's annual sales. During fiscal 1999, 1998 and 1997, respectively,
sales of approximately, $6.0 million, $7.1 million and $3.9 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. 5,582,647,
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, and `Dental Radiography Using an
Intraoral Linear Array Sensor,' U.S. Patent No. 5,995,583, which expires on
November 30, 2019. In addition, the Company is the licensee of U.S. Patent No.
5,179,579, for a 'Radiograph display system with anatomical icon for selecting
digitized stored images,' under a worldwide, non-exclusive, fully paid license.
The Company also has two additional patent applications currently pending before
the United States Patent and Trademark Office.
The Company is the exclusive sub-licensee for use in medical radiography
applications of certain patents, patent applications and other know-how related
to complementary metal oxide semiconductor ("CMOS") active pixel sensor
technology (collectively, the "APS Technology"), which was developed by the
California Institute of Technology and licensed to Photobit Corp. from which the
Company obtained its sub-license. The Company's exclusive rights to such
technology are subject to government rights to use, noncommercial educational
and research rights to use by California Institute of Technology and the Jet
Propulsion Laboratory, and the right of a third party to obtain a nonexclusive
license from the California Institute of Technology with respect to such
technology. The Company believes that, as of the date of this filing, except for
such third party's exercise of its right to obtain a nonexclusive license to use
APS Technology in a field other than medical radiography, none of the foregoing
parties have given notice of their exercise of any of their respective rights to
the APS Technology. There can be no assurance that this will continue to be the
case, and any such exercise could have a material adverse effect on the Company.
Additionally, the agreement between the Company and Photobit Corp. requires,
among other things, that the Company use all commercially reasonable efforts to
timely introduce, improve and market and distribute licensed products. There can
be no assurance that the Company will comply with its obligations under its
agreement with Photobit Corp., any such failure to comply could have a material
adverse effect on the Company.
Trademarks
The Company has been issued PTO trademarks by 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; and (iv) "accuDEXA" for its BMD assessment
product. The Company has three additional trademark applications pending before
the PTO.
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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,
including employees, consultants, vendors and independent contractors. These
agreements generally provide that all confidential information developed by or
made known to the individual by the Company during the course of the
individual's relationship with the Company is the property of the Company, and
is to be kept confidential and not disclosed to third parties, except in
specific limited circumstances. The agreements also generally provide that all
inventions conceived by the individual in the course of rendering services to
the Company shall be the exclusive property of the Company. However, there can
be no assurances that these agreements will not be breached, that the Company
would have adequate remedies available for any breach or that the Company's
trade secrets will not otherwise become known to, or independently developed by,
its competitors.
GOVERNMENT REGULATION
Products that the Company is currently developing or may develop in the
future are likely to require certain forms of governmental clearance, including
marketing clearance by the United States Food and Drug Administration (the
"FDA"). The FDA review process typically requires extended proceedings
pertaining to product safety and efficacy. The Company believes that its future
success will depend to a large degree upon commercial sales of improved versions
of its current products and sales of new products; the Company will not be able
to market such products in the United States without FDA marketing clearance.
There can be no assurance that any products developed by the Company in the
future will be given clearance by applicable governmental authorities or that
additional regulations will not be adopted or current regulations amended in
such a manner as to adversely affect the Company.
Pursuant to the Federal Food, Drug and Cosmetic Act, as amended (the "FD&C
Act"), the FDA classifies medical devices intended for human use into three
classes: Class I, Class II, and Class III. In general, Class I devices are
products for which the FDA determines that safety and effectiveness can be
reasonably assured by general controls under the FD&C Act relating to such
matters as adulteration, misbranding, registration, notification, records and
reports. The CDRCam(R) is a Class I device.
Class II devices are products for which the FDA determines that general
controls are insufficient to provide a reasonable assurance of safety and
effectiveness, and that require special controls such as promulgation of
performance standards, post-market surveillance, patient registries or such
other actions as the FDA deems necessary. The CDR(R) system, CDRPan(TM) and
accuDEXA(R) have been classified as Class II devices.
Class III devices are devices for which the FDA has insufficient
information to conclude that either general controls or special controls would
be sufficient to assure safety and effectiveness, and which are life-supporting,
life-sustaining, of substantial importance in preventing impairment of human
health, or present a potential unreasonable risk of illness or injury. Devices
in this case require pre-market approval, as described below. None of the
Company's existing products are in the Class III category.
The FD&C Act further provides that, unless exempted by regulation, medical
devices may not be commercially distributed in the United States unless they
have been cleared by the FDA. There are two review procedures by which medical
devices can receive such clearance. Some products may qualify for clearance
under a Section 510(k) procedure, in which the manufacturer submits to the FDA a
pre-market notification that it intends to begin marketing the product, and
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.
7
If a product does not qualify for the 510(k) procedure (either because it
is not substantially equivalent to a legally marketed device or because it is a
Class III device), the FDA must approve a Pre-Market Approval ("PMA")
application before marketing can begin. PMA applications must demonstrate, among
other things, that the medical device is safe and effective. A PMA application
is typically a complex submission that includes the results of clinical studies.
Preparation of such an application is a detailed and time-consuming process.
Once a PMA application has been submitted, the FDA's review process may be
lengthy and include requests for additional data. By statute and regulation, the
FDA may take 180 days to review a PMA application, although such time may be
extended. Furthermore, there can be no assurance that a PMA application will be
approved by the FDA.
In February 1994, the FDA cleared the Company's 510(k) application for
general use and marketing of the CDR(R) system. In November 1996, the FDA
cleared the Company's 510(k) application for general use and marketing of the
CDRCam(R). In December 1997, the FDA cleared the Company's 510(k) application
for general use and marketing of accuDEXA(R). On June 4, 1998, the FDA granted
the Company additional clearance to market accuDEXA(R) as a predictor of
fracture risk. In December 1998, the FDA cleared the Company's 510(k)
application for CDRPan(TM). The Company has not yet submitted a 510(k)
application for digital mammography sensors. There can be no assurance that the
Company will submit such application or that it will obtain FDA clearance for
such products.
In addition to the requirements described above, the FD&C Act requires that
all medical device manufacturers and distributors register with the FDA annually
and provide the FDA with a list of those medical devices which they distribute
commercially. The FD&C Act also requires that all manufacturers of medical
devices comply with labeling requirements and manufacture their products and
maintain their documents in a prescribed manner with respect to manufacturing,
testing, and quality control activities. The FDA's Medical Device Reporting
regulation subjects medical devices to post-market reporting requirements for
death or serious injury, and for certain malfunctions that would be likely to
cause or contribute to a death or serious injury if malfunction were to recur.
In addition, the FDA prohibits a device which has received marketing clearance
from being marketed for applications for which marketing clearance has not been
obtained. Furthermore, the FDA generally requires that medical devices not
cleared for marketing in the United States receive FDA marketing clearance
before they are exported, unless an export certification has been granted.
The Company must obtain certain approvals by and marketing clearances from
governmental authorities, including the FDA and similar health authorities in
foreign countries, to market and sell its products in those countries. The FDA
regulates the marketing, manufacturing, labeling, packaging, advertising, sale
and distribution of "medical devices," as do various foreign authorities in
their respective jurisdictions. The FDA enforces additional regulations
regarding the safety of equipment utilizing x-rays. Various states also impose
similar regulations.
The FDA review process typically requires extended proceedings pertaining
to the safety and efficacy of new products. A 510(k) application is required in
order to market a new or modified medical device. If specifically required by
the FDA, a pre-market approval ("PMA") may be necessary. Such proceedings, which
must be completed prior to marketing a new medical device, are potentially
expensive and time consuming. They may delay or hinder a product's timely entry
into the marketplace. Moreover, there can be no assurance that the review or
approval process for these products by the FDA or any other applicable
governmental authorities will occur in a timely fashion, if at all, or that
additional regulations will not be adopted or current regulations amended in
such a manner as will adversely affect the Company. The FDA also regulates the
content of advertising and marketing materials relating to medical devices.
Failure to comply with such regulations may result in a delay in obtaining
approval for the marketing of such products or the withdrawal of such approval
if previously obtained.
The Company is currently developing new products for the dental and medical
markets. The Company expects to file 510(k) applications with the FDA in
connection with the digital mammography sensors currently under development by
the Company, and other future products, including its general digital
radiography sensors. There can be no assurance that the Company will file such
510(k) applications and/or will obtain pre-market clearance for the digital
mammography sensors or any other future products, or that in order to obtain
510(k) clearance, the Company will not be required to submit additional data or
meet additional FDA requirements that may substantially delay the
8
510(k) process and result in substantial additional expense. Moreover, such
pre-market clearance, if obtained, may be subject to conditions on the marketing
or manufacturing of the digital mammography sensors which could impede the
Company's ability to manufacture and/or market the product. There can be no
assurance that the digital mammography or general digital radiography sensors or
any other products which may be developed by the Company will be approved by or
receive marketing clearance from applicable governmental authorities. If the
Company is unable to obtain regulatory approval for and market new products and
enhancements to existing products, it will have a material adverse effect on the
Company.
Failure to comply with applicable regulatory requirements can, among other
consequences, result in fines, injunctions, civil penalties, suspensions or loss
of regulatory approvals, product recalls, seizure of products, operating
restrictions and criminal prosecution. In addition, governmental regulations may
be established that could prevent or delay regulatory clearance of the Company's
products. Delays in receipt of clearance, failure to receive clearance or the
loss of previously received clearance would have a material adverse effect on
the Company's business, financial condition and results of operations.
In addition to laws and regulations enforced by the FDA, the Company is
subject to government regulations applicable to all businesses, including, among
others, regulations related to occupational health and safety, workers' benefits
and environmental protection. The extent of government regulation that might
result from any future legislation or administrative action cannot be accurately
predicted. Failure to comply with regulatory requirements could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Distribution of the Company's products in countries other than the United
States may be subject to regulations in those countries. These regulations vary
significantly from country to country; the Company typically relies on its
independent distributors in such foreign countries to obtain the requisite
regulatory approvals. The Company has obtained the "CE mark," necessary for the
marketing of its products in the member countries of the European Union. The CE
mark is a European Union symbol of adherence to quality assurance standards and
compliance with the European Union's Medical Device Directives. The Company has
developed and implemented a quality assurance program in accordance with the
guidelines of the International Quality Standard, ISO 9001. In August of 1998,
the Company was granted ISO 9001 certification. The Company's current products
also have been awarded the "ETL" and "CSA" marks. These are North American
safety marks which indicate compliance with U.L. Standard 2601.
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
available on commercially acceptable terms, or at all.
RESEARCH AND DEVELOPMENT
During fiscal 1999, 1998 and 1997, research and development expenses were
$4.4 million, $3.9 million and $1.4 million, respectively.
9
BACKLOG
The backlog of orders was approximately $2.1 million and $.7 million at
March 8, 2000 and March 8, 1999, respectively. Such figures include
approximately $741,000 and $269,000 of orders on hold pending credit approval at
March 8, 2000 and March 8, 1999, respectively. Orders included in backlog may
generally be cancelled or rescheduled by customers without significant penalty.
EMPLOYEES
As of March 1, 2000, the Company had 185 full-time employees, engaged in
the following capacities: sales and marketing (45); general and administrative
(32); operations (89); and research and development (19). 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 the United States, the Company markets and sells its products through a
direct sales and third-party distribution system.
The direct sales system incorporates dental trade shows and professional
seminars, advertisements in dental periodicals, journals and other publications,
direct mail and product announcements. The Company employs approximately 33
direct sales representatives who are located throughout the United States and
are organized into territories. A sales and marketing support staff of
approximately 10 individuals, based at the Company's offices in New York,
supports the direct sales force by planning events and developing promotional
and marketing materials. In addition, the Company has an in-house sales program
which focuses on universities and continuing education programs. As of March 1,
2000, 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.
During fiscal 1999, the Company broadened its sales strategy by negotiating
distribution agreements, both domestically and internationally. In the
international market, the Company sells the CDR(R) system via independent
regional distributors. There are currently approximately 59 independent CDR(R)
dealers, covering over 70 countries. A dedicated in-house staff provides the
foreign distributors with materials, technical assistance and training, both in
New York and abroad.
In addition the Company's dental products are currently marketed and sold
domestically through a group of approximately 24 independent dealers. These
sales constitute approximately 40% of the Company's total domestic sales of
dental products. Henry Schein, Inc.'s subsidiary, Sullivan-Schein Dental Corp.,
sells the CDR(R) system abroad under its own trade name, "easyray(TM),". The
Company's goal is to utilize its leading position in the industry, secure as
many productive sales channels as possible and to rapidly penetrate additional
segments of the international market.
BMD / Fracture Risk Assessment
The Company sells the accuDEXA(R) primarily through a direct sales force
and, to a limited degree, established independent distributors of medical and
radiological equipment. To date, accuDEXA(R) sales have taken place primarily
within the United States, with a relatively small number of sales (less than 3%)
abroad. The primary end-users for accuDEXA(R) are primary care physicians,
including OB/GYN practices, and osteopathic and geriatric specialists.
Pharmaceutical companies are currently involved in wide-scale osteoporosis
education and awareness programs targeted at physicians. A number of such
companies, including Novartis Pharma AG, Wyeth-Ayerst Laboratories, Eli
10
Lilly Co. and Merck & Co., currently have FDA-approved therapies for the
treatment of osteoporosis. The Company believes that several other companies,
including Procter & Gamble, Boehringer-Mannheim GmbH, Sanofi-Synthelabo, Inc.
and Pfizer Inc. , have additional products that are currently in clinical
trials. The Company expects that the efforts of pharmaceutical companies to
develop medicines and treatment programs will result in the expansion of
doctors' involvement in initial screening and routine management of
osteoporosis, thereby increasing the market for BMD assessment devices. The
Company intends to capitalize on these efforts both in the United States and
abroad.
The Company has successfully completed a number of research studies and has
collected normative reference data for the accuDEXA(R) databases. These research
studies addressed issues of long-term importance such as the detection of
osteoporosis and patient risk for bone fracture. The Company has established
normative reference databases for Asian female, African-American female,
Hispanic female, Caucasian female and Caucasian male populations. The Company
will utilize these databases to address the needs of healthcare markets in
different countries and regions and expects them to positively impact upon sales
of accuDEXA(R) abroad. The Company is currently conducting research studies to
investigate the accuDEXA's ability to successfully monitor a course of therapy
over a period of time.
Mammography
The Company's sales strategy will be to market its mammography devices
through a direct sales force as well as through third parties, including
established manufacturers in the mammography market.
COMPETITION
Competition relating to the Company's current products is intense and
includes various companies, both within and outside of the United States. Many
of the Company's competitors are large companies with financial, sales and
marketing, and other resources which are substantially greater than those of the
Company. In addition, they may have substantially greater experience in
obtaining regulatory approvals than that of the Company. In addition, there can
be no assurance that the Company's competitors are not currently developing, or
will not attempt to develop, technologies and products that are more effective
than those of the Company or that would otherwise render the Company's products
obsolete or uncompetitive. No assurance can be given that the Company will be
able to compete successfully.
Dental Products
A number of companies currently sell intra-oral digital dental sensors.
These include Trex Medical Corporation's Trophy Radiologie subsidiary,
Provisions Dental Systems, Inc., Sirona Dental Systems., Cygnus Imaging, Inc.,
and DMD. In addition, Dentsply International and Soredex Corporation sell a
storage-phosphor based intra-oral dental system. The CDR(R) system has thus far
competed successfully against other products. If other companies enter the
digital radiography field, it may result in a significantly more competitive
market in the future. Several companies are involved in the manufacture and sale
of intra-oral cameras, including Dentsply International Inc., Welch-Allyn Co.,
Henry Schein Co., Ultra-Cam, Air Technics and DMD. Digital panoramic dental
devices are manufactured by several companies, including Sirona, Signet, Sorodex
and Planmeca. Of those, only the device manufactured by Signet is designed to be
incorporated into existing conventional panoramic devices.
BMD / Fracture Risk Assessment
Two other companies, Lunar Corporation and Norland Medical Systems, Inc.,
are currently marketing peripheral BMD densitometers. Several companies
including Lunar, Hologic, Inc. and Norland are marketing peripheral ultrasound
devices. A number of other companies have submitted 510(k) applications to the
FDA seeking clearance to market other devices. Two companies, Ostex
International Inc. and Metra Biosystems, Inc., have developed biochemical
markers which indicate the rate at which the body is resorbing (i.e., breaking
down) bone. Another potential competitor of the Company's accuDEXA(R)is the
Osteogram 2000, manufactured by CompuMed Inc., a peripheral screening test
employing RA technology, conventional hand x-rays and computer analysis.
11
Mammography
The companies in the digital mammography market include the following
manufacturers of traditional mammography devices: GE Medical Systems, Fischer
Imaging, Trex Medical, Instrumentarium Imaging, Philips and Siemens.
FORWARD-LOOKING STATEMENTS
This Form 10-K Annual Report contains forward-looking statements that
involve risk and uncertainties. All statements, other than statements of
historical facts, included in this Annual Report regarding the Company, its
financial position, business strategy and plans and objectives of management of
the Company for future operations, are forward-looking statements. When used in
this Annual Report, words such as "anticipate," "believe," "estimate," "expect,"
"intend," "objectives," "plans" and similar expressions, or the negatives
thereof or variations thereon or comparable terminology as they relate to the
Company, its products or its management, identify forward-looking statements.
Such forward-looking statements are based on the beliefs of the Company's
management, as well as assumptions made by and information currently available
to the Company's management. Actual results could differ materially from those
contemplated by the forward-looking statements as a result of various factors,
including, but not limited to, those contained in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in this Annual Report
and the "Risk Factors" set forth in Exhibit 99 to this Annual Report. All
subsequent written and oral forward-looking statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by this paragraph.
ITEM 2. PROPERTIES
The Company presently leases approximately 103,000 square feet of space in
Long Island City, New York. This space houses the Company's executive offices,
sales and marketing headquarters, research and development laboratories and
production and shipping facilities. The Company believes that such space will be
adequate for its needs for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
The Company and/or certain of its officers and former officers, are
involved in the proceedings described below:
I. The Company is a named defendant in two lawsuits instituted by Trophy
Radiologie, S.A. (`Trophy S.A.'), a subsidiary of Trex Medical Corporation. One
lawsuit was instituted in France and the other in the United States.
The French lawsuit was filed in November 1995, in the tribunal de Grande
Instance de Bobigny, the French patent court, and originally alleged that the
Company's CDR(R)system infringes French Patent No. 2,547,495, European Patent
No. 129,451 and French Certificate of Addition No. 2,578,737. These patents, all
of which are related, are directed to a CCD-based intra-oral sensor. Since
filing its lawsuit, Trophy S.A. has withdrawn its allegation of infringement
with respect to the Certificate of Addition. Trophy S.A. is seeking a permanent
injunction and unspecified damages, including damages for its purported lost
profits. The Company believes that the lawsuit is without merit and is
vigorously defending it.
The lawsuit in the United States was filed in March 1996 by Trophy S.A.,
Trophy Radiology, Inc., a United States subsidiary of Trophy S.A. (`Trophy
Inc.') and the named inventor on the patent in suit, Francis Mouyen, a French
citizen. The suit was brought in the United States District Court for the
Eastern District of New York, and alleges that the Company's CDR(R) system
infringes United States Patent No. 4,593,400 (the `400 patent'), which is
related to the patents in the French lawsuit. Trophy S.A., Trophy Inc. and
Mouyen are seeking a permanent injunction and unspecified damages, including
damages for purported lost profits, enhanced damages for the Company's purported
willful infringement and an award of attorney fees. The Company believes that
the lawsuit is without merit and is vigorously defending it. The Company's
counsel in the United States suit has issued a formal opinion that the CDR
system does not infringe the 400 patent.
12
In addition, the Company has counter-sued Trophy S.A. and Trophy Inc. for
infringement of United States Patent No. 4,160,997, an expired patent which was
exclusively licensed to the Company by its inventor, Dr. Robert Schwartz, and
for false advertising and unfair competition. The Company believes that its
counter-suit is meritorious, and is vigorously pursuing it.
On September 12, 1997, after having been given permission to do so by the
Court, the Company served two motions for summary judgment seeking dismissal of
the action pending in the United States District Court for the Eastern District
of New York, on the grounds of non-infringement and patent invalidity. On
February 22, 2000, oral argument on these motions was heard by the Court. The
motions are currently pending.
While the Company believes such suits against it are without merit, there
can be no assurance that the Company will be successful in its defense of any of
these actions, or in its counter-suit. If the Company is unsuccessful in its
defense of any of these actions, it could have a material adverse effect upon
the Company. Moreover, regardless of their outcome, the Company may be forced to
expend significant amounts of money in legal fees in connection with these
lawsuits.
II. In late 1998 through early 1999, nine shareholder complaints purporting
to be class action lawsuits were filed in the United States District Court for
the Eastern District of New York. Plaintiffs filed a Consolidated and Amended
Complaint on or about May 27, 1999 and, on or about November 24, 1999, filed a
Second Amended and Consolidated Complaint (the "Complaint"). The Complaint names
as defendants the Company, David B. Schick, Thomas E. Rutenberg, and David
Spector (collectively, the "Individual Defendants"), as well as
PricewaterhouseCoopers LLP.
The Complaint alleges, inter alia, that certain defendants issued false and
misleading statements concerning the Company's publicly reported earnings in
violation of the federal securities laws. The Complaint seeks certification of a
class of persons who purchased the Company's Common Stock between July 1, 1997
and February 19, 1999, inclusive, and does not specify the amount of damages
sought.
The Company has retained counsel, believes that these lawsuits are without
merit, and intends to vigorously defend them. On or about February 11, 2000, the
Company and the Individual Defendants filed a Motion to Dismiss the Complaint.
As these actions are in their preliminary stages, the Company is unable to
predict their ultimate outcome. The outcome, if unfavorable, could have a
material adverse effect on the Company.
III. In August 1999, the Company, through its outside counsel, contacted
the Division of Enforcement of the Securities and Exchange Commission ("SEC") to
advise it of certain matters related to the Company's restatement of earnings.
See "Item 7 -- Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Matters Relating to Restatement of Financial Results."
The SEC has made a voluntary request for the production of certain documents.
The Company intends to cooperate fully with the SEC staff and has provided
responsive documents to it. This matter is in a preliminary stage and the
Company cannot predict its potential outcome.
The Company may be a party to a variety of legal actions (in addition to
those referred to above), such as employment and employment
discrimination-related suits, employee benefit claims, breach of contract
actions, tort claims, shareholder suits, including securities fraud,
governmental investigations, 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 may 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, 1999.
13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCK HOLDER MATTERS
The Company's Common Stock began trading on The Nasdaq National Market
under the symbol "SCHK" on July 1, 1997. Prior to such date, there was no
established public trading market for the Company's Common Stock.
By letter dated September 15, 1999, the Company was advised by the Nasdaq
Stock Market's Listing Qualifications Panel (the "Panel") that the Company's
Common Stock would no longer be listed on the Nasdaq National Market effective
with the close of business on September 15, 1999. The Panel's action was based
on the Company's inability to timely file its Annual Report on Form 10-K for the
fiscal year ended March 31, 1999 and Form 10-Q for the quarter ended June 30,
1999, as well as the revenue recognition and sales practices which had been the
subject of an investigation by the Audit Committee of the Company's Board of
Directors and had led to the filing delays and the need for the restatement of
the Company's financial reports.
The Company timely requested a review of this decision, in accordance with
Nasdaq Marketplace Rules, and was advised, by letter dated October 25, 1999,
that the Nasdaq Listing and Hearing Review Council would review the Panel's
decision and would likely issue its decision in April 2000.
Since the delisting of the Company's Common Stock, there has been no
established trading market for such stock, which has been trading in the
over-the-counter market.
The following table sets forth, for the period indicated, the high and low
sales prices of the Company's Common Stock, as quoted on The Nasdaq National
Market.
Fiscal Year Ended March 31, 1999 High Low
First Quarter 27.50 13.75
Second Quarter 19.50 14.50
Third Quarter 20.00 7.50
Fourth Quarter 10.375 3.938
Fiscal Year Ended March 31, 1998 High Low
First quarter n/a n/a
Second Quarter 30.75 15.50
Third Quarter 29.00 17.50
Fourth Quarter 28.75 19.125
On March 7, 2000, the closing bid and asked prices per share of the
Company's Common Stock in the over-the-counter market, as reported by National
Quotation Bureau LLC, were $ 2.50 and $ 2.54 per share, respectively. Such
prices represent quotations between dealers, without dealer mark-up, mark-down
or commission, and may not represent actual transactions. On March 7, 2000,
there were 181 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.
On July 7, 1997, the Company's initial public offering (the "Offering") of
1,750,000 shares of its common stock, $.01 par value per share (the "Common
Stock") was completed. The Company's registration statement on Form S-1
(Registration No. 333-33731) was declared effective by the Securities and
Exchange Commission on June 30, 1997.
14
As part of the Offering, the Company granted to the Underwriters over-allotment
options to purchase up to 262,500 shares of Common Stock ("the "Underwriters'
Option"). On July 10, 1997, the underwriters exercised the Underwriters' Option
purchasing 262,500 shares of Common Stock from the Company.
The aggregate net proceeds received by the Company from the Offering and as
a result of the exercise of the Underwriters' Option, after deducting
underwriting and commissions and expenses were $33,508,731. During the period of
July 1, 1997 through March 31, 1999, such net proceeds have been applied as
follows: (i) $1,606,000 for leasehold improvements; (ii) $5,248,000 for plant
and equipment; (iii) $1,450,000 to purchase certain assets of Keystone Dental
X-Ray Corp.; (iv) $1,250,000 to purchase a 5% interest in Photobit, Inc.; (v)
$1,512,833 to pay the notes payable and interest in the amount of $144,296 to
Merck & Co., Inc.; and (vii) the remaining $22,442,000 was used in its entirety
for working capital purposes and to fund the Company's substantial operation
losses in 1999. None of the net proceeds were paid, directly or indirectly, to
directors, officers, controlling stockholders, or affiliates of the Company.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data are derived from, and are qualified
by reference to, the audited financial statements of the Company for the period
indicated. The information presented below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in ITEM 7 and the Financial Statements included in ITEM 8 of this
Report.
Year Ended March 31,
-------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(in thousands, except per share data)
Statement of Operations Data:
Revenue, net $ 2,726 $ 6,804 $ 16,101 $ 38,451 $ 45,605
-------------------------------------------------------
Cost of sales 1,501 3,343 7,907 17,658 34,611
Excess and obsolete inventory -- -- 114 -- 5,466
-------------------------------------------------------
Total cost of sales 1501 3,343 8,021 17,658 40,077
-------------------------------------------------------
Gross profit 1,225 3,461 8,080 20,793 5,528
-------------------------------------------------------
Operating expenses:
Selling and marketing 517 1,620 4,961 10,645 18,440
General and administrative 560 1,388 2,054 3,954 7,338
Research and development 150 458 1,418 3,852 4,354
Bad debt expense -- -- 34 164 5,598
Patent litigation settlement -- -- -- 600 --
-------------------------------------------------------
Total operating expenses 1,227 3,466 8,467 19,215 35,730
-------------------------------------------------------
Income (loss) from operations (2) (5) (387) 1,578 (30,202)
Total other income (expense) (22) (108) 35 1,111 244
-------------------------------------------------------
Income (loss) before income taxes (24) (113) (352) 2,689 (29,958)
Provision (benefit) for income taxes -- -- -- 328 (352)
-------------------------------------------------------
Net income (loss) $ (24) $ (113) $ (352) $ 2,361 ($29,606)
-------------------------------------------------------
Basic earnings (loss) per share $ (0.00) $ (0.02) $ (0.05) $ 0.25 ($ 2.96)
-------------------------------------------------------
Diluted earnings (loss) per share $ (0.00) $ (0.02) $ (0.04) $ 0.24 ($ 2.96)
-------------------------------------------------------
15
March 31,
-------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
Balance Sheet Data:
Cash and cash equivalents $ 128 $ 525 $ 1,710 $ 6,217 $ 1,415
Working capital (deficiency) 35 1,240 5,518 33,745 2,902
Total assets 1,615 4,395 11,060 51,674 29,386
Total liabilities 1,289 3,026 4,973 9,565 16,850
Retained earnings (accumulated deficit) (1,091) (1,203) (1,556) 805 (28,801)
Stockholders' equity 326 1,369 6,087 42,109 12,536
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements included elsewhere in this Report. This
discussion contains forward-looking statements based on current expectations
that involve risks and uncertainties. Actual results and the timing of certain
events may differ significantly from those projected in such forward-looking
statements due to a number of factors, including those set forth in "Results of
Operations" in this Item and elsewhere in this Report. See "ITEM 1 -- Business
- -- Forward-Looking Statements" and Exhibit 99 to this Report.
Overview
The Company designs, develops and manufactures digital imaging systems for
the dental and medical markets. In the field of dentistry, the Company has
developed and currently manufactures and markets an intra-oral digital
radiography system. The Company has also developed a bone mineral density
assessment device to assist in the diagnosis and treatment of osteoporosis,
which was introduced in December 1997. The Company is also developing a
radiographic imaging device for digital mammography, and has commenced
development of a general digital radiography device for intended use in various
applciations.
The Company's revenues during fiscal 1999 were derived primarily from sales
of its CDR(R) and accuDEXA(R) products. The Company recognizes revenue on sales
of its products at the time of shipment to its customers and when no significant
vendor obligations exist and collectability is probable. Revenues from the sales
of extended warranties are recognized on a straight-line basis over the life of
the extended warranty, which is generally a one-year period. The Company
utilizes both a direct sales force and a limited number of distributors for
sales of its products within the United States. International sales are made
primarily through a network of independent foreign distributors. In fiscal 1999,
1998 and 1997, sales to customers within the United States were approximately
87%, 82% and 76% of total revenues, respectively. The Company's international
sales are made primarily to distributors in Western Europe, Russia, Australia
and South America. The Company intends to expand its business in other
international markets, including Asia. All of the Company's sales are
denominated in United States dollars.
Costs of sales consists of raw materials and computer components,
manufacturing labor, facilities overhead, product support, warranty costs and
installation costs. The Company procures its APS and CCD semiconductor wafers, a
significant component of its products, each from a single supplier. The Company
believes that sourcing from a single supplier provides certain competitive
advantages to the Company. Extended interruptions of this supply, however, such
as occurred during the fourth quarter of fiscal 1998, could have a material
adverse effect on the Company's results of operations.
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 and from changes in technology, including
sensors, cameras and associated electronics and the Company's phase-out of
production of its CCD sensors (as well as its first generation of APS sensors)
in favor of its new APS sensors.
16
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 incurred to
establish the technological feasibility of software applications are expensed as
incurred. Bad debt expense is a result of product shipments which were
determined to be uncollectible or not collected.
Results Of Operations
The following table sets forth, for the fiscal years indicated, certain
items from the Statement of Operations expressed as a percentage of net
revenues:
Year ended March 31,
-----------------------------
1999 1998 1997
----- ----- -----
Revenue, net 100.0% 100.0% 100.0%
-----------------------------
Cost of sales 75.9% 45.9% 49.1%
Excess and obsolete inventory 12.0% -- 0.7%
-----------------------------
Total cost of sales 87.9% 45.9% 49.8%
-----------------------------
Gross Profit 12.1% 54.1% 50.2%
-----------------------------
Operating expenses:
Selling and marketing 40.4% 27.7% 30.8%
General and administrative 16.1% 10.3% 12.8%
Research and development 9.5% 10.0% 8.8%
Bad debt expense 12.3% 0.4% 0.2%
Patent litigation settlement -- 1.6% --
Fiscal Year Ended March 31, 1999 as Compared to Fiscal Year Ended March 31, 1998
Net revenues increased 18.6% to $45.6 million in fiscal 1999 from $38.5
million in fiscal 1998. This increase was principally attributable to an
increase in sales of the Company's accuDEXA(R) bone mineral density assessment
device that rose to $12.8 million from $4.1 million in sales in fiscal 1998
following the product's introduction in December 1997.
Fiscal 1999 revenues were negatively impacted by a rate of return for the
Company's products, which was higher than the historical return rate for the
Company's products. In addition, revenues were negatively affected by an
increase in reserves for goods which may be returned in the future. Provisions
for returns are comprised of actual returns and estimates for future returns.
The increased return rate for CDR is believed to be attributable to several
factors including the following:
The Company has experienced technical problems in transitioning its CDR
product line from CCD sensors to APS sensors. Shipments of the Company's initial
version of its new APS sensor for the CDR product, which were primarily
delivered from April 1998 through August 1998, exhibited a high failure rate and
other technical problems. The Company has provided for replacements of systems
where practical and provided for anticipated returns for units which were not
upgradeable. In September 1998, the Company began shipping a new version of the
APS sensor which has exhibited a lower failure rate than the initial version.
Customers currently own approximately 250 units of the initial version. The
Company continues to work to improve the reliability and enhance the
self-diagnostic capabilities of the CDR product.
17
The Company's single user CDR System requires minimal installation.
Commencing in September 1998, the Company initiated a program in coordination
with its computer supplier, in which the supplier installed all single-user CDR
Systems. As a result of logistical problems in implementing this program, the
supplier's installations experienced significant delays, which led to a higher
than normal rate of return for single user systems shipped in this period.
Starting in January 1999, the Company resumed direct management of its single
user CDR installations.
The Company also experienced a higher than normal rate of returns of
accuDEXA units. The Company believes that these returns are due to several
factors, including the following:
First, shipments of accuDEXA experienced a higher than expected failure
rate due to several reasons, including shipping damage, as well as humidity and
temperature sensitivity of several components included in the initial design of
the product. The Company has taken steps to address these problems and believes
that failure rates relating to such damage and sensitivity have dropped
significantly. In this regard, the Company currently expects to implement a
number of additional improvements to accuDEXA, to further increase reliability,
in the first half of fiscal 2001.
Second, the Company initiated a change in its sales policy which affected
accuDEXA sales made from May 1998 through November 1998. During that time, the
Company waived its customary 10% deposit which it had charged to customers prior
to shipment of goods. In December 1998, the Company changed its credit policy,
requiring prepayment from non-dealer customers.
Total cost of sales increased 127.0% to $40.0 million (87.9% of net
revenues) in fiscal 1999 from $17.7 million (45.9% of net revenues) in fiscal
1998. The increase in cost of sales is attributable to (1) change in product
sales mix and customer mix; (2) expense to upgrade products for CDR customers;
(3) increased warranty expenses; (4) greater than expected returns; and (5)
excess capacity resulting from expansion of the Company's personnel and
facilities in support of sales projections that were not achieved. Excess and
obsolete inventory reserve provisions were $5.5 million (12.0% of net revenues)
in fiscal 1999 compared to none in fiscal 1998. These reserves arose largely
from the overstock of various dies and/or obsolete X-Ray inventory that the
Company may not use or otherwise salvage and from changes in technology,
including sensors, cameras and associated electronics, including the Company's
phase-out of production of its CCD sensors (as well as its first generation APS
sensors) in favor of its new APS sensors.
Selling and marketing expenses increased 73.2% to $18.4 million (40.4% of
net revenues) in fiscal 1999 from $10.6 million (27.7% of net revenues) in
fiscal 1998. This increase was attributable primarily to the hiring and training
of new salespeople and a significant expansion in the Company's marketing
activities in support of sales projections that were not achieved.
General and administrative expenses increased 85.6% to $7.3 million (16.1%
of net revenues) in fiscal 1999 from $4.0 million (10.3% of net revenues) in
fiscal 1998. The increase was attributable primarily to increase in payroll and
facilities expenses as the Company expanded its capacity in support of sales
projections that were not achieved, as well as certain professional expenses
that had not been anticipated.
Research and development expenses increased 13.0% to $4.4 million (9.5% of
net revenues) in fiscal 1999 from $3.9 million (10.0% of net revenues) in fiscal
1998. This increase was attributable principally to increased research and
development expenses associated with the enhancement of the accuDEXA, bone
mineral density assessment device and to the CDR system as well as continued
development of a mammography system. All research and development costs are
expensed as incurred.
Bad debt expenses were $5.6 million (12.3% of net revenues) in fiscal 1999
compared to $.2 million (.4% of net revenues) in fiscal 1998. The increase is
attributable to (1) shipments to a distributor which were determined to be
uncollectible during fiscal 1999 ($1.0 million); and (2) other sales which were
not collected subsequently and for which provision for doubtful accounts was
established at March 31, 1999.
Interest income decreased to $505,000 in fiscal 1999 from $1.2 million in
fiscal 1998 due to the utilization of cash balances and investments in
short-term interest-bearing securities in support of the Company's operating
deficiencies.
18
Interest expense increased to $261,000 in fiscal 1999 from $77,000 in
fiscal 1998 due to the cost of financing provided by DVI Financial Services Inc.
under the Company's Capital Lease and Bridge Loan arrangements. Bridge Loan
costs include lease termination expense related to the cancellation and return
of system sales financed by DVI.
Current income tax benefit for fiscal 1999 reflects the refund of taxes
paid by the Company in fiscal year 1998. The Company has not provided deferred
income benefit of future income tax carryforwards because there is no certainty
that such benefits will be utilized. The Company has charged $349,000 to
earnings representing deferred income taxes from fiscal 1998 which it may not
collect.
Fiscal Year Ended March 31, 1998 as Compared to Fiscal Year Ended March 31, 1997
Net revenues increased 138.8% to $38.5 million in fiscal 1998 from $16.1
million in fiscal 1997. This increase was attributable principally to an
increase in the number of CDR(R) products sold. Also contributing to the
increase was the introduction of the Company's accuDEXA(R) bone mineral density
assessment device in December 1997. The number of CDR(R) products sold was
positively affected by the Company's increased expenditures on sales and
marketing, personnel recruiting, selling events and other promotional activities
and the increased use of domestic distributors of dental and medical products.
Total cost of sales increased 120.0% to $17.7 million (45.9% of net
revenues) in fiscal 1998 from $8.0 million (49.8% of net revenues) in fiscal
1997. The increase in cost of sales is directly attributable to the increase in
sales of the Company's products. Cost of sales as a percentage of revenues
decreased during fiscal 1998 as compared with 1997 due to increased
manufacturing efficiencies, increased production yields, lower material costs,
improved fixed overhead utilization, product mix and decreased warranty costs.
The effect of these improvements was partially offset by a decline in
manufacturing labor productivity attributable to an interruption in the
semiconductor wafer supply flow from the supplier during the fourth quarter of
fiscal 1998 and the increased use of domestic distributors. The interruption in
supply resulted in manufacturing and product shipment delays and therefore lower
revenues than anticipated during the fourth quarter of 1998.
Selling and marketing expenses increased 114.6% to $10.6 million (27.7% of
net revenues) in fiscal 1998 from $5.0 million (30.8% of net revenues) in fiscal
1997. This increase was attributable principally to the hiring and training of
new salespeople as the Company continued to increase the size of its national
sales force. In addition, the Company significantly increased its promotional
activities to create greater market awareness, and developed market strategies
for new products.
General and administrative expenses increased 92.5% to $4.0 million (10.3%
of net revenues) in fiscal 1998 from $2.1 million (12.8% of net revenues) in
fiscal 1997. The decrease as a percentage of revenues in 1998 was attributable
principally to increases in sales of the Company's products and partially offset
by growth in administrative expenditures, primarily the hiring of additional
administrative personnel.
Expenses for research and development in fiscal 1998 increased 171.7% to
$3.9 million (10.0% of net revenues) from $1.4 million (8.8% of net revenues) in
fiscal 1997. This increase was attributable principally to increased research
and development expenses associated with the development of accuDEXA(R), a bone
mineral density assessment device and enhancements to the CDR(R) system, as well
as the CDRCam(R), and continued development of a mammography system. All
research and development costs are expensed as incurred.
In July 1997, the Company, in connection with the settlement of certain
pending patent litigation involving a United States patent directed to a display
for digital dental radiographs, was granted a worldwide, non-exclusive fully
paid license covering such patent in consideration of a payment by the Company
of $600,000, which constituted a fiscal 1998 operating expense.
Interest income increased to $1.2 million in fiscal 1998 from $196,000 in
fiscal 1997. This increase was due to higher cash balances and investments in
short-term interest-bearing securities which were purchased from the proceeds of
the Company's initial public offering.
19
Interest expense decreased to $77,000 in fiscal 1998 from $161,000 in
fiscal 1997. Interest expense was principally attributable to a loan from Merck
& Co., Inc. (the "Merck Loan") which was repaid upon consummation of the
Company's initial public offering in July 1997.
Income tax expense for fiscal 1998 reflects a combined federal and state
effective tax rate of 12.2%. The low effective rate in fiscal 1998 was primarily
due to the utilization of net operating loss carryforwards, research and
development tax credits generated in prior years and the reversal of valuation
reserves provided for deferred tax assets in prior years.
MATTERS RELATING TO RESTATEMENT OF FINANCIAL RESULTS
In February 1999, the Company restated its financial results for the first
and second quarters of fiscal 1999. Such restatements were made to reflect
increased reserves and allowances for sales returns and bad debts. In addition,
at that time, the Company reanalyzed the timing of various sales transactions,
which resulted in certain revenues being shifted from the first quarter of
fiscal 1999 to the second quarter of fiscal 1999 and the elimination of certain
revenue recognized in the second quarter.
On September 3, 1999, the Company announced restated financial results for
the first, second and third quarters of fiscal 1999. These restatements
reflected the findings of an investigation initiated by the Audit Committee of
the Company's Board of Directors concerning the Company's revenue recognition
and sales practices. The investigation was conducted by independent outside
counsel with the assistance of Ernst and Young LLP. The restatements arose from
certain previously reported sales transactions which had been recognized
prematurely, or improperly recorded, during interim periods of fiscal 1999. In
addition to the required adjustments to revenues, reserves for sales returns
were restated to reflect actual return rates associated with certain promotional
programs which had not previously been considered in the Company's estimates of
sales returns. These restatements revised the restated financial results for the
first and second quarters announced by the Company in February 1999.
QUARTERLY RESULTS
The following table sets forth certain unaudited quarterly financial
information for each of the eight quarters in the period ended March 31, 1999.
This information is presented on the same basis as the audited financial
statements appearing elsewhere in this Report and, in the opinion of the
Company, includes all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the unaudited quarterly results. The
quarterly results should be read in conjunction with the audited consolidated
financial statements of the Company and related notes thereto. The operating
results for any quarter are not necessarily indicative of the operating results
for any future period. In addition, the Company's CDR(R) products are subject to
seasonal variations. Historically the Company has experienced higher sales
growth rates in its first and third fiscal quarters than in its second and
fourth fiscal quarters.
The Company's Financial Statements for the fiscal quarters ended June 30,
1998, September 30, 1998 and December 31, 1998 are being restated and set forth
in the following table, from amounts previously reported by the Company in its
Forms 10-Q for those respective quarters.
(in thousands)
June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30, Dec. 31, Mar. 31,
1997 1997 1997 1998 1998 1998 1998 1999
-------- -------- -------- -------- -------- -------- -------- --------
Statement of Operations Data:
Revenue, net $ 6,040 $ 8,224 $ 11,912 $ 12,275 $ 10,439 $ 12,309 $ 15,540 $ 7,317
Total cost of sales 2,831 3,867 5,529 5,431 5,636 8,004 14,772 11,665
Gross Profit 3,209 4,357 6,383 6,844 4,803 4,305 768 (4,348)
Gross Profit Margin 53.1% 53.0% 53.6% 55.8% 46.0% 35.0% 4.9% (59.4%)
Operating expenses 3,912 3,910 5,384 6,009 6,702 6,987 10,383 11,658
Income (loss) from Operations (703) 447 999 835 (1,899) (2,682) (9,615) (16,006)
Net income (loss) $ (697) $ 1,010 $ 1,225 $ 823 $ (1,691) $ (2,537) $ (9,004) $(16,374)
20
The Company may in the future experience significant quarter-to-quarter
fluctuations in its results, which may result in volatility in the price of the
Company's common stock. Quarterly results of operations may fluctuate as a
result of a variety of factors, including demand for the Company's products, the
introduction of new or enhanced products by the Company or its competitors,
market acceptance of new products, the timing of significant marketing programs,
the commencement of new product development programs, supply and manufacturing
delays, the extent and timing of the hiring of additional personnel, competitive
conditions in the industry and general economic conditions. See Exhibit 99 to
this Report.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, the Company had $1.4 million in cash and cash
equivalents, $360 thousand in short-term investments and $2.9 million in working
capital, compared to $6.2 million in cash and cash equivalents, $14.0 million in
short term investments and $33.7 million in working capital at March 31, 1998.
The decrease in working capital at March 31, 1999, is primarily
attributable to the loss from operations for the year then ended. Ongoing losses
in fiscal 2000 have further reduced working capital. As of December 31, 1999,
the Company's working capital deficiency was $3.7 million.
DVI Financial Services, Inc. ("DVI") has provided the Company with loans
and advances up to $6.222 million in the aggregate (the "Bridge Loan"), which is
secured by first priority liens on collateral (the "Collateral") consisting of
all of the Company's now-owned and hereafter-acquired tangible and intangible
personal property including, without limitation, cash, marketable securities,
accounts receivable, inventories, contract rights, patents, trademarks,
copyrights and other general intangibles, machinery, equipment and interests in
real estate of the Company, together with all products and proceeds thereof. In
connection with the Bridge Loan, and reflecting the Company's repayment
obligations thereunder as well as the security interest created thereby in the
Collateral, the Company executed a Secured Promissory Note and a Security
Agreement (the "Security Agreement") dated January 25, 1999, and executed an
Amended and Restated Secured Promissory Note dated July 30, 1999. The Security
Agreement provides, in part, that the Company may not permit the creation of any
lien or encumbrance on the Company's property or assets. The Company is not in
compliance with certain financial covenants and other terms and provisions
contained in the Bridge Loan. The Company and DVI have entered into a commitment
letter for the restructuring of its Bridge Loan.
In December 1999, the Company entered into a Loan Agreement (as amended,
the "Loan Agreement") with Greystone Funding Corporation ("Greystone") to
provide up to $7.5 million of subordinated debt in the form of a secured credit
facility. Pursuant to the Loan Agreement, and to induce Greystone to enter into
said Agreement, the Company issued to Greystone and its designees, warrants to
purchase 3,000,000 shares of Company's Common Stock at an exercise price of
$0.75 per share. The Company agreed to issue to Greystone or its designees
warrants to purchase an additional 2,000,000 shares at an exercise price of
$0.75 per share in connection with a cash payment of $1 million by Greystone to
the Company in consideration of a sale of Photobit stock by the Company to
Greystone. The sale of the Photobit stock was made subject to a right of first
refusal held by Photobit and its founders. By letter dated February 17, 2000,
counsel for Photobit informed the Company that Photobit considers the Company's
sale of its shares to Greystone to be void on the basis of the Company's
purported failure to properly comply with Photobit's right of first refusal.
On March 17, 2000, the Company and Greystone entered into an Amended and
Restated Loan Agreement effective as of December 27, 1999 (the "Amended Loan
Agreement"), which amended and restated the Loan Agreement pursuant to which
Greystone agreed to provide up to $7.5 million of subordinated debt in the form
of a secured credit facility. The $1 million cash payment to the Company was
converted as of December 27, 1999 into an initial advance of $1,000,000 under
the Amended Loan Agreement. Pursuant to the Amended Loan Agreement and to induce
Greystone to enter into said Agreement, the Company issued warrants to Greystone
and its designees, consisting of those warrants previously issued under the Loan
Agreement, to purchase 5,000,000 shares, of the Company's Common Stock at an
exercise price of $0.75 per share, exercisable at any time after December 27,
1999. Under the Amended Loan Agreement, the Company also issued to Greystone or
its designees warrants (the "Additional Warrants") to purchase an additional
13,000,000 shares of common stock, which Additional Warrants will vest and be
exercisable at a rate of two shares of Common Stock for each dollar advanced
under the
21
Amended Loan Agreement in excess of the initial draw of $1,000,000. Any
additional warrants which do not vest prior to expiration or surrender of the
line of credit will be forfeited and canceled. In connection with the Greystone
secured credit facility, effective as of February 15, 2000, DVI consented to the
Company's grant to Greystone of a second priority lien encumbering the Company's
assets, under and subject in priority and right of payment to all liens granted
by the Company to DVI.
The Company has also undertaken various cost-cutting measures including
reduction of facilities and personnel by over 40% from peak levels of fiscal
1999. The Company discontinued certain promotional programs which had resulted
in increased credit risk, and concomitantly limited credit to selected domestic
dealers. The Company continues efforts to improve its products and methods of
production and believes it has strengthened customer support services to its
customers.
In spite of the Company's cost reductions, refinancing and tightening of
credit, there can be no assurance that the Company will achieve profitability or
generate sufficient working capital to permit its continuation as a going
concern. See Note 2 to The Consolidated Financial Statements. The ability of the
Company to satisfy its cash requirements is dependent in part on the Company's
ability to attain adequate sales and profit levels and to control warranty
obligations by increasing warranty revenues and reducing warranty costs.
Management currently believes that existing capital resources and sources of
credit, including the Greystone credit facility, are adequate to meet its
current cash requirements. However, if the Company's cash needs are greater than
anticipated, the restructuring of the DVI Bridge Loan is not completed or the
Company does not satisfy drawdown conditions under the Amended Loan Agreement,
the Company will be required to seek additional or alternative financing
sources. There can be no assurance that such financing will be available or
available on terms acceptable to the Company.
Year 2000 Compliance
The Year 2000 problem is the result of computer programs having been
written using two digits rather than four to define the applicable year. A
computer program that has date sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. Should systems fail to process
date information correctly because of the calendar year change to 2000,
significant problems could occur as a result. Through the filing date of this
Report, the Company has not experienced any material adverse effects resulting
from or relating to the Year 2000 computer problem.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The DVI Bridge Loan bears an annual interest rate based on the prime rate
plus 2.5%. 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
Information responsive to this item was previously reported in the
Company's Current Reports on Form 8-K, dated September 2, 1999 and September 24,
1999.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) The Directors of the Company are as follows:
22
Euval Barrekette, Ph.D. Age 69, has served as a Director of the Company
since April 1992. Dr. Barrekette's current term on
the Board, which was initially scheduled to expire
at the Company's Annual Meeting of Stockholders in
1999, shall expire once his successor is elected
and qualified. Dr. Barrekette is a licensed
Professional Engineer in New York State. Since
1986 Dr. Barrekette has been a consulting engineer
and physicist. From 1984 to 1986 Dr. Barrekette
was Group Director of Optical Technologies of the
IBM Large Systems Group. From 1960 to 1984 Dr.
Barrekette was employed at IBM's T.J. Watson
Research Center in various capacities, including
Assistant Director of Applied Research, Assistant
Director of Computer Science, Manager of
Input/Output Technologies and Manager of Optics
and Electrooptics. Dr. Barrekette holds an A.B.
degree from Columbia College, a B.S. degree from
Columbia University School of Engineering, an M.S.
degree from its Institute of Flight Structures and
a Ph.D. from the Columbia University Graduate
Faculties. Dr. Barrekette is a fellow of the
American Society of Civil Engineers, a Senior
Member of the Institute of Electronic & Electrical
Engineers, and a member of The National Society of
Professional Engineers, The New York State Society
of Professional Engineers, The Optical Society of
America and The New York Academy of Science. Dr.
Barrekette is the uncle of David B. Schick and the
brother-in-law of Dr. Allen Schick.
David B. Schick Age 38, 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 2000. Mr. Schick is
also a member of the Board of Directors of
Photobit Corporation. From September 1991 to April
1992, Mr. Schick was employed by Philips N.V.
Laboratories, where he served as a consulting
engineer designing high-definition television
equipment. From February 1987 to August 1991, Mr.
Schick was employed as a senior engineer at Cox
and Company, an engineering firm in New York City.
From January 1985 to January 1987, Mr. Schick was
employed as an electrical engineer at Grumman
Aerospace Co. Mr. Schick holds a B.S. degree in
electrical engineering from the University of
Pennsylvania's Moore School of Engineering. Mr.
Schick is the son of Dr. Allen Schick and the
nephew of Dr. Barrekette.
Allen Schick, Ph.D. Age 65, 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 2000. Since 1981, Dr. Schick has
been a professor at the University of Maryland and
since 1988 has been a Visiting Fellow at the
Brookings Institution. Dr. Schick holds a Ph.D.
degree from Yale University. Dr. Schick is David
B. Schick's father and the brother-in-law of Dr.
Barrekette.
Jeffrey T. Slovin Age 35, has served as the Company's President and
as a Director since December 1999. Mr. Slovin's
current term on the Board expires at the Company's
Annual Meeting of Stockholders in 2001. Mr. Slovin
is currently a Managing Director of Greystone &
Co., Inc. From 1996 to 1999, Mr. Slovin served in
various executive capacities at Sommerset
Investment Capital LLC, including President, and
as Managing Director of Sommerset Realty
Investment Corp. During 1995, Mr. Slovin was a
Manager at Fidelity Investments Co. From 1991 to
1994, Mr. Slovin was Chief Financial Officer of
SportsLab USA Corp. and, from 1993 to 1994, was
also President of Sports and Entertainment Inc.
From 1987 to 1991, Mr. Slovin was an associate at
Bear Stearns & Co., Inc., specializing in mergers
and acquisitions and corporate finance. Mr. Slovin
holds an MBA degree from Harvard Business School.
23
Robert Barolak Age 46, has served as a Director of the Company
since December 1999. Mr. Barolak's current term on
the Board expires at the Company's Annual Meeting
of Shareholders in 2001. Since 1989, Mr. Barolak
has been employed at Greystone & Co. in various
executive capacities and has been its Executive
Vice President since 1995. From 1979 to 1989, Mr.
Barolak was an attorney at the firm of Ballard
Spahr Andrews & Ingersoll, LLP in Philadelphia.
Mr. Barolak holds a J.D. degree from the
University of Pennsylvania School of Law.
(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................... 38 Chairman of the Board and Chief Executive
Officer 1992
Jeffrey T. Slovin................. 35 President and Director 1999
John Pauley....................... 53 Chief Operating Officer 1999
Zvi N. Raskin, Esq................ 37 Secretary and General Counsel 1992
Stan Mandelkern................... 40 Vice President of Engineering 1999
William Rogers.................... 59 Vice President of Operations 1999
Michael Stone..................... 47 Vice President of Sales and Marketing 2000
The business experience of each of the executive officers who is not a
Director is set forth below.
JOHN PAULEY has served as the Company's Chief Operating Officer since
October 1999. From 1985 to 1999, Mr. Pauley was President and Chief
Executive Officer of PFCM Corporation, a management consulting firm. From
1983 to 1985, Mr. Pauley was Director of Construction Engineering and
Facilities Operations at NBC, Inc. and, from 1979 to 1983, was President
and Chief Executive Officer of Hospital Energists, Inc. / Oak Ridge
Associated Universities. Mr. Pauley holds a B.A. Degree in Biology and a
B.S. Degree in Chemistry from the University of Tennessee.
ZVI N. RASKIN, Esq., 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. From 1990 to 1992, Mr. Raskin was an associate at the New
York law firm of Dornbush Mandelstam & Silverman. Mr. Raskin holds a J.D.
degree from Yale Law School.
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.
WILLIAM ROGERS has served as the Company's Vice President of Operations
since January, 2000. From 1998 to 2000, Mr. Rogers was the Company's
Director of Materials and Manufacturing Engineering. From
24
1995 to 1998, Mr. Rogers was Director of Operations at Vecco Instruments
Co., and from 1993 to 1995 was Director of Manufacturing for Scully Signal
Company. Mr. Rogers holds a B.S. Degree in electrical engineering from
Northeastern University.
MICHAEL STONE has served as the Company's Vice President of Sales and
Marketing since January 2000. From 1993 to 2000, Mr. Stone was General
Manager of the Dental Division of Welch-Allyn Company, and from 1989 to
1993 was Director of Marketing for Welch-Allyn. Mr. Stone holds an MBA
degree from the University of Rochester.
Section 16(A) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive officers and directors and persons who beneficially own more than 10%
of the Company's Common Stock to file initial reports of ownership and reports
of changes in ownership with the Commission. Such executive officers and
directors and greater than 10% beneficial owners are required by the regulations
of the Commission to furnish the Company with copies of all Section 16(a)
reports they file.
Based solely on a review of the copies of such reports furnished to the
Company and written representations from the executive officers and directors,
the Company believes that all Section 16(a) filing requirements applicable to
its executive officers and directors and greater than 10% beneficial owners were
complied with.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain information concerning compensation
received for the fiscal years ended March 31, 1999, 1998 and 1997 by the
Company's chief executive officer and each of the current and former executive
officers of the Company whose total salary and other compensation exceeded
$100,000 (the "Named Executives") for services rendered in all capacities
(including service as a director of the Company) during the year ended March 31,
1999.
25
Summary Compensation Table
Long-Term
Compensation
Annual Compensation Awards
------------------- ------
Other
Annual Securities All Other
Name and Principal Fiscal Compensa- Underlying Compensa-
Position Year Salary($) Bonus($) tion Options(#)(2) tion($)(3)
- -------------------------------------------------------------------------------------------------------------------------
David B. Schick 1999 $217,500 $ -- --(1) 12,251 $ --
Chairman of the Board
and Chief Executive 1998 143,385 39,692 -- 3,267 4,569
Officer
1997 140,308 5,890 -- 5,715 2,000
- -------------------------------------------------------------------------------------------------------------------------
Fred Levine 1999 179,167 47,500(4) -- 12,055 --
Former Vice President of
Sales and Marketing and 1998 137,318 23,826(4) -- 1,000 4,031
Former Director
1997 105,846 42,353 -- -- --
- -------------------------------------------------------------------------------------------------------------------------
Jonathan Singer 1999 131,667 -- -- 12,695 --
Former Vice President of
Engineering and Former 1998 109,423 -- -- 2,027 1,812
Director
1997 90,569 5,993 -- -- --
- -------------------------------------------------------------------------------------------------------------------------
Zvi N. Raskin, Esq 1999 132,500 -- -- 17,006 --
General Counsel and
Secretary 1998 99,539 25,000 -- 2,343 3,113
1997 84,000 5,365 -- -- 1,100
- -------------------------------------------------------------------------------------------------------------------------
George C. Rough, Jr 1999 13,846(5) 150,000(6) -- 100,000(7) --
Former Chief Financial
Officer 1998 -- -- -- -- --
1997 -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------
(1) Aggregate amount 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
1997, 1998 and 1999, 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
1997, 1998 and 1999.
(4) Represents a commission received by Mr. Levine in connection with certain
sales targets that were met or exceeded.
(5) Reflects payment of salary to Mr. Rough from March 1, 1999, upon
commencement of his employment with the Company, through March 31, 1999.
(6) At or about the time of his commencement of employment with the Company in
March 1999, Mr. Rough was
26
paid a bonus of $150,000.
(7) Upon his employment with the Company on March 1, 1999, Mr. Rough was
granted stock options to purchase 100,000 shares, 25% of which stock
options were to vest on March 1, 2000, 25% on March 1, 2001, 25% on March
1, 2002, and the remaining 25% on March 1, 2003, pursuant to the 1996
Employee Stock Option Plan. Upon his termination from employment with the
Company in October 1999, all such options terminated and were returned to
the Company.
Employment Agreements and Termination of Employment Arrangement
In February 2000, the Company entered into a three-year employment
agreement with David Schick, pursuant to which Mr. Schick is employed as Chief
Executive Officer of the Company. The term of the agreement is renewable
thereafter on a year-to-year basis unless either party gives 60-day written
notice of termination before the end of the then-current term. Mr. Schick's
annual base annual salary is $200,000, subject to annual increases of at least
ten percent (10%). In addition to base salary, Mr. Schick is eligible to receive
annual merit or cost-of-living increases as may be determined by the Executive
Compensation Committee of the Board of Directors. Mr. Schick will also receive
incentive compensation in the form of a bonus which is calculated using a
formula based on the Company's EBITDA as a percentage of the Company's net
revenues. Additionally, all Company stock options held by, or to be issued to,
Mr. Schick will immediately vest in the event that the Company has a change in
control or is acquired by another company or entity.
In February 2000, the Company entered into a three-year employment
agreement with Zvi Raskin, effective January 1, 2000, pursuant to which Mr.
Raskin is employed as General Counsel of the Company. Mr. Raskin's annual base
annual salary is $200,000. In addition to base salary, Mr. Raskin will receive a
minimum bonus of $20,000 per calendar year and is eligible to receive additional
performance bonuses at the sole discretion of the Executive Compensation
Committee of the Board of Directors. Mr. Raskin was also awarded 75,000 shares
of the Company's Common Stock, subject to a risk of forfeiture which expires as
to 25,000 shares on each of December 31, 2000, 2001 and 2002. Upon the sale of
any such vested shares, Mr. Raskin is required to pay the Company the sum of
$1.32 per share sold within 30 days following such sale. In the event that Mr.
Raskin is terminated from employment with the Company without cause, he would
receive 12 months of severance pay.
In August 1999, the Company and Fred Levine entered into a Separation,
Severance and General Release Agreement. The Agreement provided that Mr.
Levine's employment at the Company and membership on the Board of Directors
would cease as of August 27, 1999, and that he would receive continued payment
of his then-current salary, in the gross annual amount of $170,000, as well as
continued medical and dental insurance coverage, for a period of one year
following such cessation of employment. The Agreement also provided that the
Company stock options granted to Mr. Levine in fiscal 1996 could be exercised
until their expiration on December 31, 2000. Mr. Levine also agreed to a
24-month non-competition covenant. Additionally, the parties mutually released
one another from any current or future claims arising out of Mr. Levine's
employment with the Company, his separation from such employment and/or his
compensation.
In February 1999, the Company entered into a three-year employment
agreement with George C. Rough, Jr. to commence on March 1, 1999, pursuant to
which Mr. Rough was employed as Chief Financial Officer and Vice-President of
the Company. The term of the agreement was renewable thereafter on a
year-to-year basis unless either party were to give 60-day written notice of
termination before the end of the then-current term. Mr. Rough's base annual
salary was $240,000, subject to annual increases at the discretion of the
Company's Chief Executive Officer, contingent upon approval by the Executive
Compensation Committee of the Board of Directors. In addition to base salary,
Mr. Rough also received compensation in the form of a bonus, in the amount of
$150,000, paid to him in April 1999 and was also to receive a guaranteed annual
bonus of $40,000, payable at the end of each fiscal year during the term of his
employment. Mr. Rough was also awarded, upon commencement of his employment with
the Company, 100,000 Incentive Stock Options under the Company's 1996 Employee
Stock Option Plan, as amended. In October, 1999, Mr. Rough resigned from his
position at the Company, and, as a result, the 100,000 stock options awarded to
him have since terminated.
27
Compensation of Directors
Directors who are also employees of the Company are not separately
compensated for any services they provide as directors. In fiscal 1999, each
non-employee director of the Company was eligible to receive $500 for each
meeting of the Board of Directors attended, $300 for each committee meeting
attended, and an annual retainer of $1,200. The Company may, but did not, pay
such fees in Common Stock. In addition, non-employee directors are entitled to
receive annual grants of stock options under the Company's Directors Stock
Option Plan.
Compensation Committee Interlocks and Insider Participation
The Executive Compensation Committee reviews and makes recommendations
regarding the compensation for top management and key employees of the Company,
including salaries and bonuses. The members of the Executive Compensation
Committee during the fiscal year ended March 31, 1999 were Howard Wasserman,
D.D.S. and Mark Bane, Esq. (who resigned as member of the Board of Director as
of February 18, 1999). None of such persons is an officer or employee, or former
officer or employee, of the Company or any of its subsidiaries. No interlocking
relationship existed during the fiscal year ended March 31, 1999, between the
members of the Company's Board of Directors or Compensation Committee and the
board of directors or compensation committee of any other company, nor had any
such interlocking relationship existed in the past. No person who served as a
member of the Executive Compensation Committee was a party to any material
transaction set forth under "Certain Transactions."
Stock Option Grants
The following table sets forth information regarding grants of options to
purchase Common Stock made by the Company during the year ended March 31, 1999
to each of the Named Executives.
Option Grants in Fiscal 1999
Individual Grants
Number of Percent of
Securities Total Options
Underlying Granted to Exercise
Options Employees in Price Expiration Grant Date
Name Granted(#) Fiscal 1999(1) ($/Share) Date Value(2)
- --------------------------------------------------------------------------------------------
David B. 2,251 .4% $27.72 4/01/2003 $ 39,000
Schick 10,000 1.9% 19.33 10/01/2003 119,000
Fred Levine 2,055 .39% 25.20 4/01/2008 36,000
10,000 1.9% 17.58 10/01/2008 122,000
Jonathan 2,695 .52% 25.20 4/01/2008 48,000
Singer 10,000 1.9% 17.58 10/01/2008 122,000
Zvi N. Raskin 2,006 .39% 25.20 4/01/2008 63,000
5,000 .96% 17.96 7/29/2008 63,000
10,000 1.9% 17.58 10/01/2008 122,000
George C. 100,000 19.2% 4.91 3/01/09 342,000
Rough, Jr.
(1) The Company granted employees options to purchase a total of 520,523 shares
of Common Stock in fiscal 1999.
28
(2) Grant date value was determined on the date of grant using the
Black-Scholes option pricing model based on the following assumptions:
volatility - 85%; expected life - 5 years; risk-free interest rate - 4.13%
to 5.46%; and no dividend yield.
Option Exercises and Year-End Value Table
The following table sets forth information regarding the exercise of stock
options during fiscal 1999 and the number and value of unexercised options held
at March 31, 1999 by each Named Executive.
Aggregated Option Exercises in Fiscal 1999
and Fiscal 1999 Year-End Option Values
Number of
Securities Value of
Underlying Unexercised
Unexercised "In-the-Money"
Options at Options at
Shares March 31, 1999 March 31, 1999
Acquired on Value Exercisable/ Exercisable/
Name Exercise(#) Realized ($) Unexercisable Unexercisable(1)
---- ----------- ------------ ------------- ----------------
David B. Schick -- -- 10,412(2) / 10,821 0 / 0
- ------------------------------------------------------------------------------------------------------------
Fred Levine -- -- 56,250 / 12,805 130,760(3) / 0
- ------------------------------------------------------------------------------------------------------------
Jonathan Singer -- -- 6,880 / 14,215(4) 0 / 0
- ------------------------------------------------------------------------------------------------------------
Zvi N. Raskin -- -- 585 / 18,764 0 / 0
- ------------------------------------------------------------------------------------------------------------
George C. Rough, -- -- 0 / 100,000 0 / 0
Jr.
(1) Options are "in-the-money" if the fair market value of the underlying
securities exceeds the exercise price of the options. The amounts set forth
represent the difference between $4.125 per share, the closing price per
share on March 31, 1999, and the exercise price of the option, multiplied
by the applicable number of options.
(2) The fiscal 1997 stock option grant of 5,715 stock options to Mr. Schick is
a time-vesting option. Twenty-five percent of such option vested on July
22, 1997, 25% vested on July 22, 1998, 25% vested on July 22, 1999, and the
remaining 25% vests on July 22, 2000. The stock option was exercisable upon
grant.
(3) Includes options to purchase 56,000 shares of Common Stock at an exercise
price of $1.79 a share granted to Mr. Levine in fiscal 1996 in connection
with Mr. Levine's commencement of employment with the Company, of which all
options are vested. Such options expire on December 31, 2000.
(4) The fiscal 1997 stock option grant of 6,373 stock options to Mr. Singer is
a time-vesting option. Twenty-five percent of such option vested on July
22, 1997, 25% vested on July 22, 1998, 25% vested on July 22, 1999 and the
remaining 25% vests on July 22, 2000. The stock option was exercisable upon
grant.
29
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of March 7, 2000 by (i) each person
who is known by the Company to own beneficially more than 5% of the Common
Stock, (ii) each director, (iii) each Named Executive of the Company and (iv)
all directors and executive officers of the Company as a group. Unless otherwise
noted, the stockholders listed in the table have sole voting and investment
powers with respect to the shares of Common Stock owned by them.
Number of Shares Percentage of
Name Beneficially Owned(1) Outstanding Shares
- ---- --------------------- ------------------
David B. Schick(2) ............................... 2,192,843(3) 21.6%
George C. Rough Jr.(4) ........................... --(5) --
Fred Levine(6) ................................... 97,792(7) *
Zvi N. Raskin(2) ................................. 115,722(8) 1.1%
Jonathan Singer(2) ............................... 329,639(9) 3.2%
Euval S. Barrekette(10) .......................... 116,490(11) 1.2%
Allen Schick(12) ................................. 534,374(13) 5.3%
Jeffrey T. Slovin(2) ............................. 750,000(14) 6.9%
Robert Barolak(15) ............................... -- --
Greystone Funding Corp.(16) ...................... 4,250,000(17) 29.5%
All current executive Officers and Directors as a
group ............................................ 7,959,429(18) 41.2%
* Less than 1%
(1) Beneficial ownership is determined in accordance with rules of the
Securities and Exchange Commission and includes voting power and/or
investment power with respect to securities. Shares of Common Stock subject
to options or warrants currently exercisable or exercisable within 60 days
of March 7, 2000 are deemed outstanding for computing the number and the
percentage of outstanding shares beneficially owned by the person holding
such options but are not deemed outstanding for computing the percentage
beneficially owned by any other person.
(2) Such person's business address is c/o Schick Technologies, Inc., 31-00 47th
Avenue, Long Island City, New York 11101.
(3) Consists of 2,183,300 shares held jointly by Mr. Schick and his wife; 4,285
shares issuable upon the exercise of stock options granted to Mr. Schick in
July 1996; 1,632 shares issuable upon the exercise of stock options granted
to Mr. Schick in July 1997; 1125 shares issuable upon the exercise of stock
options granted to Mr. Schick in April 1998; and 2,500 shares issuable upon
the exercise of stock options granted to Mr. Schick in October 1998,
pursuant to the 1996 Employee Stock Option Plan.
30
(4) Such person's business address is c/o PricewaterhouseCoopers LLP, 1301
Avenue of the Americas, New York, New York 10036.
(5) Upon his employment with the Company on March 1, 1999, Mr. Rough was
granted stock options to purchase 100,000 shares, 25% of which stock
options were to vest on March 1, 2000, 25% on March 1, 2001, 25% on March
1, 2002, and the remaining 25% on March 1, 2003, pursuant to the 1996
Employee Stock Option Plan. Upon his termination from employment with the
Company in October 1999, all such options terminated and reverted to the
Company.
(6) Such person's address is 3 Cottonwood Lane, Wesley Hills, New York 10901.
(7) Consists of 41,792 shares held jointly by Mr. Levine and his wife, and
56,000 shares issuable upon the exercise of options granted to Mr. Levine
in fiscal 1996.
(8) Consists of 34,800 shares held jointly by Mr. Raskin and his wife; an
additional 75,000 shares (the "Shares") issued by the Company to Mr. Raskin
on February 6, 2000, which are subject to the following restrictions on
their sale or transfer: (i) none of the Shares may be sold or transferred
prior to December 31, 2000, (ii) one-third (i.e., 25,000) of the Shares may
be sold or transferred on or after December 31, 2000, (iii) an additional
one-third (i.e., an additional 25,000) of the Shares may be sold or
transferred on or after December 31, 2001, and (iv) the final one-third
(i.e., the final 25,000) of the Shares may be sold or transferred on or
after December 31, 2002; 1,170 shares issuable upon the exercise of stock
options granted to Mr. Raskin in July 1997; 1,002 shares issuable upon the
exercise of options granted to Mr. Raskin in April 1998; 1,250 shares
issuable upon the exercise of options granted to Mr. Raskin in July 1998;
and 2,500 shares issuable upon the exercise of options granted to Mr.
Raskin in October 1998, pursuant to the 1996 Employee Stock Option Plan.
(9) Consists of 320,000 shares held jointly by Mr. Singer and his wife; 4,779
shares issuable upon the exercise of stock options granted to Mr. Singer in
July 1996; 1,012 shares issuable upon the exercise of stock options granted
to Mr. Singer in July 1997; 1,347 shares issuable upon the exercise of
stock options granted to Mr. Singer in April 1998; and 2,500 shares
issuable upon the exercise of stock options granted to Mr. Singer in
October 1998, pursuant to the 1996 Employee Stock Option Plan.
(10) Dr. Barrekette's address is 90 Riverside Drive, New York, New York 10024.
(11) Consists of 115,240 shares held by Dr. Barrekette, and 1250 shares issuable
upon the exercise of stock options granted to Dr. Barrekette in July, 1998,
pursuant to the 1997 Directors Stock Option Plan.
(12) Dr. Schick's address is 1222 Woodside Parkway, Silver Spring, Maryland
20910.
(13) Consists of 488,324 shares held jointly by Dr. Schick and his wife; 44,800
shares held by Dr. Schick as custodian for the minor children of David
Schick; and 1,250 shares issuable upon the exercise of stock options
granted to Dr. Schick in July 1998, pursuant to the 1997 Directors Stock
Option Plan. Dr. Schick disclaims beneficial ownership of the 44,800 shares
held as custodian.
(14) Consists of 750,000 shares issuable upon the exercise of warrants held by
Mr. Slovin.
(15) Such person's business address is c/o Greystone & Co., 152 West 57th
Street, New York, New York 10019.
(16) Greystone's address is 152 West 57th Street, New York, New York 10019.
(17) Consists of 4,250,000 shares issuable upon the exercise of warrants held by
Greystone.
(18) Includes the shares underlying warrants described in Note 14 as well as the
shares subject to options held by officers and directors.
In connection with, and as a condition to, the Loan Agreement with Greystone on
December 27, 1999, the Company, David B. Schick, Allen Schick and Greystone
entered into a Stockholders Agreement (the "Stockholders Agreement") dated as of
December 27, 1999. (David B. Schick and Allen Schick are collectively referred
to herein as the "Stockholders") pursuant to which, among other things, (i) the
Stockholders agree to vote shares of Common Stock which they or family members
or certain affiliates own or which the Stockholders control (the "Stockholder
Shares") as necessary to cause the Company's Board of Directors (the "Board") to
consist of a minimum of six members or such other number as required by the Loan
Agreement; (ii) the Stockholders agree to vote the Stockholder Shares in favor
of the election or reelection of designees of Greystone for the number of seats
on the Board (initially two) as provided in the Loan Agreement; (iii) the
Stockholders agree to take action and vote to appoint a Greystone designee to
fill any vacancy on the Board by reason of the death, resignation or removal of
a Greystone designee; (iv) the Stockholders agree not to vote Stockholder Shares
to remove a Greystone designee from the Board; (v) each Stockholder who is a
director of the Registrant agrees, in his capacity as director (and subject to
his fiduciary duties), to cause Jeffrey Slovin to hold the office of President
of the Registrant and to vote as provided in clauses (i) through (iv) above, as
well as to vote to elect or reelect (and not vote to remove) individuals
appointed by Greystone to the audit committee and compensation committee of the
Board, as provided in the Loan Agreement. The Stockholders have also agreed to
vote all of their respective Stockholder Shares in favor of a proposal to
increase the number of stockholder options available for grant to employees by
750,000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
31
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON
FORM 8-K
SCHICK TECHNOLOGIES, INC.
Index to Consolidated Financial Statements
Page
Index to Consolidated Financial Statements ..................................................... F-1
Report of Independent Accountants................................................................ F-2
Report of Independent Certified Public Accountants ........................................... F-3
Consolidated Balance Sheets as of March 31, 1999 and 1998 ...................................... F-4
Consolidated Statements of Operations for the years ended March 31, 1999, 1998 and 1997 ........ F-5
Consolidated Statements of Changes in Stockholders' Equity for the years ended March 31,
1999, 1998 and 1997 ....................................................................... F-7
Consolidated Statements of Cash Flows for the years ended March 31, 1999, 1998 and 1997 ........ F-7
Notes to Consolidated Financial Statements ..................................................... F-8
F-1
Report of Independent Accountants
To the Board of Directors and Stockholders of
Schick Technologies, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of changes in stockholders' equity and of
cash flows present fairly, in all material aspects, the financial position of
Schick Technologies, Inc. and its subsidiaries (the "Company") at March 31,
1998, and the results of their operations and their cash flows for each of the
two years in the period ended March 31, 1998, in conformity with accounting
principles generally accepted in the United States. In addition, in our opinion,
Schedule II, Valuation and Qualifying Accounts, for the years ended March 31,
1998 and 1997 presents fairly, in all material respects, the information set
forth therein when read in conjunction with the related consolidated financial
statements. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States,
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
June 9, 1998
F-2
Report of Independent Certified Public Accountants
To the Board of Directors
and Stockholders of Schick Technologies, Inc.
We have audited the accompanying consolidated balance sheet of Schick
Technologies, Inc. (the "Company") as of March 31, 1999 and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Schick
Technologies, Inc. as of March 31, 1999, and the consolidated results of their
operations and their consolidated cash flows for the year then ended, in
conformity with accounting principles generally accepted in the United States.
We have also audited Schedule II of Schick Technologies, Inc. for the year ended
March 31, 1999. In our opinion, this schedule presents fairly, in all material
respects, the information required to be set fourth therein.
The accompanying consolidated financial statements and financial statement
schedule have been prepared assuming that the Company will continue as a going
concern. As more fully described in Note 2, the Company has incurred significant
losses for the year ended March 31, 1999. In addition, as more fully described
in Note 13, the Company has been named as a defendant in several putative class
action lawsuits that have been consolidated into an amended complaint. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 2. The consolidated financial statements and financial statement
schedule do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty.
Grant Thornton LLP
New York, New York
March 8, 2000 (except for the last paragraph in Note 19 as to which the date is
March 17, 2000)
F-3
Schick Technologies, Inc.
Consolidated Balance Sheets
(In thousands, except share amounts)
March 31,
------------------------
1999 1998
-------- --------
Assets
Current assets
Cash and cash equivalents $ 1,415 $ 6,217
Short-term investments 360 14,022
Accounts receivable, net of allowance for
doubtful accounts of $4,512 and $200, respectively 4,205 10,173
Inventories 10,686 12,152
Income taxes receivable 2,720 --
Prepayments and other current assets 321 746
-------- --------
Total current assets 19,707 43,310
-------- --------
Equipment, net 7,221 5,801
Investments 1,250 1,000
Deferred tax asset -- 349
Other assets 1,208 1,214
-------- --------
Total assets $ 29,386 $ 51,674
======== ========
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable and accrued expenses $ 8,946 $ 7,010
Bridge note payable 5,000 --
Accrued salaries and commissions 1,296 1,473
Deferred revenue 564 362
Deposits from customers 513 331
Warranty obligations 402 245
Income taxes payable -- 144
Capital lease obligations, current 84 --
-------- --------
Total current liabilities 16,805 9,565
-------- --------
Capital lease obligations, long term 45 --
-------- --------
Total liabilities 16,850 9,565
Commitments and contingencies
Stockholders' equity
Preferred stock ($0.01 par value; 2,500,000
shares authorized; none issued and outstanding) -- --
Common stock ($.01 par value; 25,000,000 shares authorized;
10,059,384 and 9,992,057 shares issued and outstanding) 101 100
Additional paid-in capital 41,236 41,204
(Accumulated deficit) retained earnings (28,801) 805
-------- --------
Total stockholders' equity 12,536 42,109
-------- --------
Total liabilities and stockholders' equity $ 29,386 $ 51,674
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
Schick Technologies, Inc.
Consolidated Statements of Operations
(In thousands, except per share amounts)
Year Ended March 31,
----------------------------------------
1999 1998 1997
-------- -------- --------
Revenues, net $ 45,605 $ 38,451 $ 16,101
-------- -------- --------
Cost of sales 34,611 17,658 7,907
Excess and obsolete inventory 5,466 -- 114
-------- -------- --------
Total cost of sales 40,077 17,658 8,021
-------- -------- --------
Gross profit 5,528 20,793 8,080
-------- -------- --------
Operating expenses
Selling and marketing 18,440 10,645 4,961
General and administrative 7,338 3,954 2,054
Research and development 4,354 3,852 1,418
Bad debt expense 5,598 164 34
Patent litigation settlement -- 600 --
-------- -------- --------
Total operating expenses 35,730 19,215 8,467
-------- -------- --------
(Loss) income from operations (30,202) 1,578 (387)
-------- -------- --------
Other income (expense)
Interest income 505 1,188 196
Interest expense (261) (77) (161)
-------- -------- --------
Total other income 244 1,111 35
-------- -------- --------
(Loss) income before income taxes (29,958) 2,689 (352)
-------- -------- --------
(Benefit) provision for income taxes (352) 328 --
-------- -------- --------
Net (loss) income $(29,606) $ 2,361 $ (352)
======== ======== ========
Basic (loss) earnings per share $ (2.96) $ 0.25 $ (0.05)
======== ======== ========
Diluted (loss) earnings per share $ (2.96) $ 0.24 $ (0.04)
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
Schick Technologies, Inc.
Consolidated Statements of Changes in Stockholders' Equity
(In thousands, except share amounts)
(Accumulated
Common Stock Additional Deficit) Total
------------------------- Paid-in Retained Stockholders'
Shares Amount Capital Earnings Equity
---------- ---------- ---------- ---------- ----------
Balance at April 1, 1996 7,052,870 $ 71 $ 2,502 $ (1,204) $ 1,369
Issuance of common stock upon
conversion of notes payable 376,446 4 729 -- 733
Issuance and sale of common
stock and warrants 526,470 5 4,307 -- 4,312
Issuance of compensatory
stock options to employees -- -- 13 -- 13
Issuance of compensatory
common stock to an employee 1,445 -- 12 -- 12
Net loss -- -- -- (352) (352)
---------- ---------- ---------- ---------- ----------
Balance at March 31, 1997 7,957,231 80 7,563 (1,556) 6,087
Issuance and sale of common stock in initial
public offering 2,012,500 20 33,488 -- 33,508
Issuance of common stock upon
exercise of stock options 2,479 -- 18 -- 18
Issuance of common stock upon
exercise of warrants 19,847 -- 100 -- 100
Issuance of compensatory
stock options to employees -- -- 35 -- 35
Net income -- -- -- 2,361 2,361
---------- ---------- ---------- ---------- ----------
Balance at March 31, 1998 9,992,057 100 41,204 805 42,109
Issuance of common stock upon
exercise of stock options 3,848 -- 32 -- 32
Issuance of common stock upon
exercise of warrants 63,479 1 -- -- 1
Net loss -- -- -- (29,606) (29,606)
---------- ---------- ---------- ---------- ----------
Balance at March 31, 1999 10,059,384 $ 101 $ 41,236 $ (28,801) $ 12,536
========== ========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
Schick Technologies, Inc.
Consolidated Statements of Cash Flows
(In thousands)
Year Ended March 31,
------------------------------------
1999 1998 1997
-------- -------- --------
Cash flows from operating activities
Net (loss) income $(29,606) $ 2,361 $ (352)
Adjustments to reconcile net (loss) income to
net cash used in operating activities
Depreciation and amortization 1,710 943 318
Provision for excess and obsolete inventory 5,466 -- 114
Provision for bad debts 5,598 164 34
Stock and option grant compensation -- 35 25
Accrued interest on investments -- (428) (53)
Non-cash interest expense -- -- 98
Changes in assets and liabilities, net of effects of business acquired
Accounts receivable 370 (8,409) (1,017)
Inventories (4,000) (9,474) (667)
Prepayments and other current assets (2,295) (419) (167)
Other assets (148) (61) (115)
Deferred income taxes 349 (349) --
Accounts payable and accrued expenses 1,916 5,757 1,212
Income taxes payable (144) 144 --
Deferred revenue 202 221 141
Deposits from customers 182 194 53
Accrued interest on notes payable -- (102) 102
-------- -------- --------
Net cash used in operating activities (20,400) (9,423) (274)
-------- -------- --------
Cash flows from investing activities
Capitalization of software development costs -- (165) --
Business acquisition -- (1,450) --
Purchase of minority interest in Photobit Corporation (250) (1,000) --
Purchase of held-to-maturity investments (10,588) (23,425) (6,619)
Purchase of available-for-sale investments -- -- (990)
Proceeds from maturities of held-to-maturity investments 24,250 12,144 4,359
Proceeds from redemption of available-for-sale investments -- 490 500
Capital expenditures (2,777) (4,668) (1,082)
-------- -------- --------
Net cash provided by (used in) investing activities 10,635 (18,074) (3,832)
-------- -------- --------
Cash flows from financing activities
Net proceeds from issuance and sale of common stock and warrants -- -- 4,312
Net proceeds from issuance and sale of common stock 33 33,626 --
Proceeds from issuance of long-term notes -- -- 1,000
Proceeds from issuance of short-term notes 5,000 -- --
Principal payments on capital lease obligations (70) (109) (21)
Repayment of notes payable -- (1,513) --
-------- -------- --------
Net cash provided by financing activities 4,963 32,004 5,291
-------- -------- --------
Net (decrease) increase in cash and cash equivalents (4,802) 4,507 1,185
Cash and cash equivalents at
beginning of year 6,217 1,710 525
-------- -------- --------
Cash and cash equivalents at
end of year $ 1,415 $ 6,217 $ 1,710
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
Schick Technologies, Inc.
Notes to Consolidated Financial Statements
(Amounts In thousands, except share and per share amounts)
1. Organization and Business
Schick Technologies, Inc. (the "Company") designs, develops, manufactures
and markets innovative digital radiographic imaging systems and devices for
the dental and medical markets that utilize low dosage radiation to produce
instant computer generated, high-resolution, electronic x-ray images. The
Company's products are sold worldwide.
The Company operates in one reportable segment - digital radiographic
imaging systems. The Company's principal products include the CDR(R)
computed digital radiography imaging system and the accuDEXA(R) bone
densitometer.
The following is a summary of the Company's revenues from its principal
products:
% OF TOTAL REVENUE
1999 1998 1997
---- ---- ----
CDR 71% 90% 100%
accuDEXA 29% 10% --
--- --- ---
100% 100% 100%
=== === ===
The consolidated financial statements of the Company at March 31, 1999,
include the accounts of the Company and its wholly- owned subsidiaries,
Schick New York and Schick X-Ray Corporation. In August 1999, Schick X-Ray
was dissolved and its operations absorbed by the Company.
2. Basis of Presentation
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplate continuation of
the Company as a going concern. However, the Company incurred significant
operating losses for the year ended March 31, 1999 and in each of the first
three quarters of fiscal 2000. At March 31, 1999, the Company had an
accumulated deficit of $28,801 and working capital of $2,902. Such losses
are principally attributable to significant product returns, bad debts and
excess and obsolete inventory resulting from (a) a change in the
semiconductor technology utilized in the Company's CDR(R) dental products
during fiscal 1999, (b) product reliability issues associated with the
Company's production of the accuDEXA(R) bone densitometer in fiscal 1999,
(c) a change in the Company's installation methodology for its CDR(R)
dental products and (d) insufficient credit and collections policies and
procedures. Further, the Company and certain of its directors and officers
have been named as defendants in several shareholder complaints purporting
to be Class Action lawsuits which have been consolidated into an amended
complaint (see Note 13). In March 1999, the Company secured a $5,000 bridge
loan (See Note 10), which was scheduled to mature on July 30, 1999. The
maturity of the bridge loan was extended and the principal amount of the
note was increased to $6,222 effective July 30, 1999. As further described
in Note 19, the Company is not in compliance with certain financial
covenants, and other terms and provisions contained in the extended bridge
loan and is currently in the process of restructuring the obligation.
In view of the matters described in the preceding paragraph, recoverability
of a major portion of the recorded asset amounts shown in the accompanying
balance sheet is dependent upon continued operations of the Company, which
in turn is dependent upon the Company's ability to meet its financing
requirements on a continuing basis, to maintain present financing, to
succeed in its future operations, and satisfactorily settle legal matters.
The financial statements do not include any adjustments relating to the
recoverability and
F-8
classification of recorded asset amounts or amounts and classification of
liabilities that might be necessary should the Company be unable to
continue in existence.
In response to the losses incurred, management has implemented certain
corrective actions, which include, but are not limited to, (1) reducing
staff, space and other overhead expenditures, (2) curtailing certain sales
promotions, (3) tightening credit policies and payment terms, (4)
aggressively collecting past-due balances from customers, (5) consolidating
its sales force, (6) implementing programs to increase warranty revenue and
recover warranty parts from the Company's customers, (7) obtaining
additional financing from Greystone Funding Corporation ("Greystone"), (8)
renegotiating repayment terms with the secured lender, (9) employing new
senior management including Vice President of Sales and Marketing, and
Chief Operating Officer, (10) curtailing inventory acquisitions and
disposing of excess and obsolete inventory and, (11) modifying and
improving the Company's products to improve reliability and reduce warranty
expenditures.
3. Restatement of Interim Periods and Fourth Quarter Adjustments (unaudited
and not reviewed)
In February 1999, the Company restated its financial results for the first
and second fiscal quarters of 1999. Such restatements were made to reflect
increased reserves and allowances for sales returns and bad debts. In
addition, at that time, the Company reanalyzed the timing of various sales
transactions, which resulted in certain revenues being shifted from the
first quarter of fiscal 1999 to the second quarter of fiscal 1999 and the
elimination of certain revenue recognized in the second quarter.
In June 1999, the Company became aware that certain sales transactions of
both its CDR and accuDEXA systems had been recognized prematurely or
improperly recorded during interim periods of fiscal 1999. The Audit
Committee of the Company's Board of Directors subsequently initiated an
investigation of the Company's revenue recognition and sales practices. As
a result of the findings of the investigation and the year-end audit
process, the Company's financial statements for the first, second and third
quarters of fiscal 1999 have been restated from those previously announced
by the Company in February 1999. In addition to the required adjustments to
revenue, reserves for sales returns were restated to reflect actual return
rates associated with certain promotional programs. These promotional
programs had not been previously considered in the Company's estimates of
sales returns.
The following table sets forth the effect of the prior period adjustments
for the quarters ended June 30, 1998, September 30, 1998 and December 31,
1998:
Unaudited and not reviewed
Three Months Ended
--------------------------------------
June 30, September 30, December 31,
1998 1998 1998
-------- ------------- ------------
Revenues $(5,541) $(1,927) $(1,550)
Cost of sales 1,581 (1,069) 501
------- ------- -------
Gross profit (loss) (3,960) (2,996) (1,049)
Total operating expenses (162) 221 --
------- ------- -------
Gain (loss) from operations (4,122) (2,775) (1,049)
Income tax benefit 948 68 --
------- ------- -------
Net loss $(3,174) $(2,707) $(1,049)
======= ======= =======
The adjustments to revenues in the quarter ended June 30, 1998 result
primarily from premature revenue recognition related to "Bill & Hold"
transactions and promotional programs whereby the customer was provided a
trial period prior to the actual purchase of the Company's CDR and accuDEXA
systems. Revenues were initially recognized upon shipment of products
subject to the trial period versus at the expiration of the trial period or
upon confirmation from the customer of their acceptance of the purchase.
The adjustments resulted in $3,295 of revenues being shifted from the first
fiscal quarter to the second fiscal quarter. Revenues of $2,246 were
reduced in the first quarter of 1999 resulting from the accrual of returns
from the fourth quarter of 1999.
F-9
Revenues in the second quarter of 1999 were increased by the $3,295 shifted
from the first quarter. Such increase was offset by the reversal of
revenues in the amount of $1,998 related to consignment sales to
distributors and shipments for which the customer did not accept delivery.
In addition, $700 of revenues related to product shipments subject to trial
periods was shifted from the second quarter to the third quarter of fiscal
1999. Revenues in the amount of $413 related to shipments of products
subject to trial periods where the customer never confirmed acceptance of
the product and subsequently returned the product were reversed. Revenues
of $2,111 were reduced in the second quarter of 1999 resulting from the
accrual of returns from the fourth quarter of 1999.
Adjustments to revenues in the third quarter of fiscal 1999 include an
increase of $700 related to the revenues shifted from the second quarter.
Revenues in the amount of $353 were recognized during the third quarter for
consignment sales to distributors. These revenues were recognized upon
payment by the respective distributor. These increases in revenues were
offset by $90 of revenues related to product shipments subject to trial
periods, which were shifted to the fourth quarter of 1999. Revenues in the
amount of $357 related to shipments of products subject to trial periods
where the customer never confirmed acceptance of the product and
subsequently returned the product were reversed. Revenues of $2,149 were
reduced in the third quarter of 1999 resulting from the accrual of returns
from the fourth quarter of 1999.
Beginning in the quarter ended September 30, 1998, the rate of product
returns increased significantly. The increase in product returns and bad
debt expense is attributable to (a) change in the semiconductor technology
utilized in the Company's CDR dental products during fiscal 1999, (b)
product reliability issues associated with the Company's production of the
accuDEXA(R) bone densitometer in fiscal 1999, (c) a change in the Company's
installation methodology for its CDR dental products and, (d) insufficient
credit and collections policies and procedures. Also contributing to the
increase in returns were certain promotional programs. These programs had
not been considered in the Company's previous estimates of sales returns.
The actual rate of returns and accounts receivable charge-offs
significantly exceeded the respective provisions and reserves for sales
returns and bad debts. The restated results of operations for the first,
second and third quarters of fiscal 1999 reflect the actual rate of returns
versus the Company's initial estimates.
The previously reported results of operations for the quarters ended June
30, 1998, September 30, 1998 and December 31, 1998, as reported on Form
10-Q with the Securities and Exchange Commission, will be amended for the
restated results. The effect of such prior period adjustments on the
Company's previously reported quarters are as follows:
-----------------------------Unaudited and not reviewed---------------------
Three months ended Three months ended Three months ended
June 30, 1998 September 30, 1998 December 31, 1998
--------------------- --------------------- ----------------------
As As As
originally As originally As originally As
reported restated reported restated reported restated
-------- -------- -------- -------- -------- --------
Revenues, net $ 15,980 $ 10,439 $ 14,236 $ 12,309 $ 17,090 $ 15,540
Total cost of sales 7,217 5,636 6,935 8,004 15,273 14,772
-------- -------- -------- -------- -------- --------
Gross Profit 8,763 4,803 7,301 4,305 1,817 768
Total operating expenses 6,540 6,702 7,208 6,987 10,383 10,383
-------- -------- -------- -------- -------- --------
Income (loss) from operations 2,223 (1,899) 93 (2,682) (8,566) (9,615)
Total other Income 243 243 180 180 46 46
-------- -------- -------- -------- -------- --------
Income (loss) before taxes 2,466 (1,656) 273 (2,502) (8,520) (9,569)
Provision for (benefit from)
income taxes 983 35 103 35 (565) (565)
-------- -------- -------- -------- -------- --------
Net income (loss) $ 1,483 $ (1,691) $ 170 $ (2,537) $ (7,955) $ (9,004)
======== ======== ======== ======== ======== ========
Basic earnings (loss) per share $ 0.15 $ (0.17) $ 0.02 $ (0.25) $ (0.80) $ (0.90)
======== ======== ======== ======== ======== ========
Diluted earnings (loss) per
share $ 0.14 $ (0.17) $ 0.02 $ (0.25) $ (0.80) $ (0.90)
======== ======== ======== ======== ======== ========
F-10
The fourth quarter of 1999 includes certain charges as described below:
Provision for obsolete and slow moving inventory $2,725
Provision for bad debts 3,050
Reserve for returns and allowances 1,100
Write off of refundable income tax 143
------
$7,018
======
4. Restructuring and Recapitalization
In connection with the Company's initial public offering (the "IPO") under
the Securities Act of 1933, as amended, the Company engaged in the
following restructuring and recapitalization transactions. In April 1997,
the Company and its wholly- owned subsidiary, STI Acquisition Corporation
("STI") were formed under the General Corporation Law of the State of
Delaware for the purpose of forming a holding company and changing the
state of incorporation of Schick Technologies, Inc., a New York Corporation
("Schick New York" or the "Predecessor Corporation"). Effective June 4,
1997 (pursuant to a merger agreement among the Company, the Predecessor
Corporation and STI), the Company issued 7,957,231 shares of its common
stock for all the outstanding common stock of the Predecessor Corporation.
STI and the Predecessor Corporation merged and the Predecessor Corporation
was the survivor of the merger, and became a wholly-owned subsidiary of the
Company. In connection with the restructuring and merger, the holders of
the Predecessor Corporation's outstanding warrants and options converted
such warrants and options to similar warrants and options of the Company
(based on the same ratio of exchange, 2.8 shares for 1 share, applicable to
the common stock exchange).
The 1996 Stock Option Plan of the Predecessor Corporation was amended by
the Company and the shares available for issuance pursuant to the Plan were
adjusted to 470,400. The Company also implemented its 1997 Stock Option
Plan for Non-Employee Directors ("the Directors Plan") whereby nonqualified
options to purchase up to 35,000 shares of the Company's common stock may
be granted to non-employee directors. Each option granted under the
Directors Plan becomes exercisable on the second anniversary date of its
grant and must have an exercise price equal to the fair market value of the
Company's common stock on the date of grant.
All common shares, stock options, warrants and related per share data
reflected in the accompanying financial statements and notes thereto have
been presented as if the recapitalization had been effective for all
periods presented.
References herein to the operations and historical financial information of
the "Company" prior to the date of the restructuring refer to the
operations and historical financial information of the Predecessor
Corporation.
5. Summary of Significant Accounting Policies
Basis of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All material intercompany
accounts and transactions have been eliminated in consolidation.
F-11
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Cash equivalents
Cash equivalents consist of short-term, highly liquid investments, with
original maturities of less than three months when purchased and are stated
at cost.
Investments
Investments with original maturities greater than three months and less
than one year when purchased are classified as short-term investments.
Investments are categorized as held-to-maturity and are carried at
amortized cost, without recognition of gains or losses that are deemed to
be temporary, as the Company has both the intent and the ability to hold
these investments until they mature (see Note 9).
Inventories
Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market value. Cost 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 method.
Equipment
Equipment is stated at cost. Depreciation and amortization are provided on
the straight-line method over the lesser of the estimated useful lives of
the related assets or, where appropriate, the lease term.
Revenue Recognition
Revenues from sales of the Company's hardware and software products are
recognized at the time of shipment to customers, and when no significant
obligations exist and collectibility is probable. The Company provides its
customers with a 30-day return policy but allows for an additional 15 days,
and, accordingly, recognizes allowances for estimated returns by customers
pursuant to such policy at the time of shipment. During 1999, due to
various operational issues, the Company accepted product returns for
products shipped during 1999 beyond the standard return policy. The Company
has recognized allowances at March 31, 1999 for estimated returns by
customers pursuant to the extended return period. Amounts received from
customers in advance of product shipment are classified as deposits from
customers. Revenues from the sale of extended warranties on the Company's
products are recognized on a straight-line basis over the life of the
extended warranty, which is generally for a one-year period. Deferred
revenues relate to extended warranty fees which have been paid by customers
prior to the performance of extended warranty services.
Advertising Costs
Advertising costs included in selling and marketing expenses are expensed
as incurred and were $1,494, $1,484 and $906 for the years ended March 31,
1999, 1998 and 1997, respectively.
Warranties
The Company provides its customers with a limited product warranty for a
period of one year subsequent to the sale of its products. The Company
recognizes estimated costs associated with the limited warranty at the time
of sale of its products.
F-12
Research and Development
Research and development costs consist of expenditures covering basic
scientific research and the application of scientific advances to the
development of new and improved products and their uses. Research and
development costs are expensed as incurred.
Software development costs for external use software incurred after the
establishment of technological feasibility are capitalized and amortized to
cost of revenues on a straight-line basis over the expected useful life of
the software. Software development costs incurred prior to the attainment
of technological feasibility are considered research and development and
are expensed as incurred. Costs of software developed for internal use
incurred during the development of the application are capitalized and
amortized to operating expense on a straight-line basis over the expected
useful life of the software.
The Company did not capitalize any software development costs during 1999.
The Company capitalized $165 of software development costs during the year
ended March 31, 1998 and recorded amortization expense related to such
capitalized costs of $35 and $7 during 1999 and 1998, respectively.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred income taxes are recorded for temporary differences between
financial statement carrying amounts and the tax basis of assets and
liabilities. Deferred tax assets and liabilities reflect the tax rates
expected to be in effect for the years in which the differences are
expected to reverse. A valuation allowance is provided if it is more likely
than not that some or all of the deferred tax asset will not be realized.
Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, accounts receivable,
accounts payable, accrued expenses and bridge notes payable approximates
fair value due to the relatively short maturity of these instruments.
Reclassifications
Certain prior year amounts have been reclassified to conform with the
fiscal 1999 presentation.
6. Earnings (Loss) Per Share
Basic earnings per share ("Basic EPS") is computed by dividing income
available to common stockholders by the weighted-average number of common
shares outstanding during the period. Diluted earnings per share ("Diluted
EPS") gives effect to all dilutive potential common shares outstanding
during the period. The computation of Diluted EPS does not assume
conversion, exercise or contingent exercise of securities that would have
an antidilutive effect on earnings.
The loss per share for the year ended March 31, 1997 has been restated for
the adoption of SFAS 128. The adoption of SFAS 128 did not have a
significant impact on the loss per share of the period.
The computations of basic (loss) earnings per share and diluted (loss)
earnings per share for the years ended March 31, 1999, 1998 and 1997 are as
follows:
F-13
1999 1998 1997
------------ ------------ ------------
Net (loss) income available to common stockholders $ (29,606) $ 2,361 $ (352)
Interest on convertible notes -- -- 23
------------ ------------ ------------
(Loss) income for diluted earnings per share $ (29,606) $ 2,361 $ (329)
============ ============ ============
Weighted-average shares outstanding for basic
(loss) earnings per share 10,013,061 9,474,590 7,643,307
Dilutive effect of stock options and warrants -- 339,464 --
------------ ------------ ------------
Weighted-average shares outstanding for diluted
(loss) earnings per share 10,013,061 9,814,054 7,643,307
============ ============ ============
Basic (loss) earnings per share $ (2.96) $ 0.25 $ (0.05)
============ ============ ============
Diluted (loss) earnings per share $ (2.96) $ 0.24 $ (0.04)
============ ============ ============
At March 31, 1999, outstanding options to purchase 593,466 shares of common
stock, with exercise prices ranging from $1.79 to $27.72 per share, have
been excluded from the computation of diluted loss per share as they are
antidilutive. Outstanding warrants to purchase 297,150 shares of common
stock with exercise prices ranging from $7.86 to $8.93 per share were also
antidilutive and excluded from the computation of diluted loss per share at
March 31, 1999.
7. Inventories
Inventories at March 31, 1999 and 1998, net of provisions for excess and
obsolete inventories, are comprised of the following:
1999 1998
------- -------
Raw materials $ 2,203 $ 7,108
Work-in-process 3,763 3,466
Finished goods 4,720 1,578
------- -------
Total inventories $10,686 $12,152
======= =======
8. Equipment
Equipment at March 31, 1999 and 1998 is comprised of the following:
1999 1998
-------- --------
Production equipment $ 5,188 $ 3,300
Computer and communications equipment 2,055 1,096
Demonstration equipment 803 934
Leasehold improvements 1,921 1,169
Other equipment 116 608
-------- --------
Total equipment 10,083 7,107
Less - accumulated depreciation and amortization (2,862) (1,306)
-------- --------
Equipment, net $ 7,221 $ 5,801
======== ========
F-14
At March 31, 1999, computer equipment included approximately $199 of
equipment acquired under capital leases. Accumulated depreciation related
to these assets approximated $17 at March 31, 1999.
9. Investments in Debt Securities
Held-to-maturity securities at March 31, 1999 and 1998 consist of
short-term U.S. Treasury and government agency debt securities of $360 and
$14,022, on an amortized cost basis, with maturity dates of less than one
year. The gross unrealized gains and losses at March 31, 1999 and 1998 on
held-to-maturity securities were insignificant.
10. Bridge Note Payable
In March 1999, the Company issued a secured short-term promissory note in
the principal amount of $5,000 to a third party. The note, which matured
July 30, 1999, bore interest at the rate of prime plus one-half percent per
annum. Interest on the note was payable monthly. The note was secured by
the Company's tangible and intangible assets. During 1999, the Company
recognized $14 of interest expense related to the note. Effective July 30,
1999, the maturity of the note was extended and the principal of the note
was increased to $6,222 (See Note 19).
11. Income Taxes
The components of the Company's (benefit) provision for income taxes is as
follows:
March 31,
-----------------------------------
1999 1998 1997
----- ----- -------
Current
Federal $(531) $ 415 $ --
State (170) 262 --
----- ----- -------
Total (701) 677 $ --
Deferred
Federal 282 (282) --
State 67 (67) --
----- ----- -------
349 (349) --
----- ----- -------
$(352) $ 328 $ --
===== ===== =======
The reconciliation between the U.S. federal statutory rate and the
Company's effective tax rate is as follows:
1999 1998 1997
------ ------ ------
Tax expense (benefit) at Federal statutory rate (34.0)% 34.0% (34.0)%
State income tax expense (benefit), net of Federal tax (0.2) 8.0 (9.0)
Non-deductible expenses 16.7 4.9 10.3
Research and development tax credit 0.8 (11.2) (20.6)
Valuation allowance on deferred tax assets 15.6 (23.5) 53.3
------ ------ ------
Effective tax rate (1.1)% 12.2% --
====== ====== ======
F-15
Significant components of the Company's deferred tax assets at March 31,
1999, 1998 and 1997 were as follows:
1999 1998 1997
-------- -------- --------
Net operating loss carryforwards $ 5,701 $ -- $ 241
Reserves and allowance for inventory 2,702 -- 212
Accounts receivable and warranties 3,488 355 --
Depreciation and other (445) (211) --
Other accrued expenses not currently deductible -- 205 48
Other 409 -- 122
-------- -------- --------
11,855 349 623
Valuation allowance (11,855) -- (623)
-------- -------- --------
Net deferred tax asset
$ -- $ 349 $ --
======== ======== ========
At March 31, 1999, the Company had a deferred tax asset of $11,855 (before
valuation allowance) consisting primarily of the future tax benefits from
net operating loss carryforwards, temporary differences and other tax
credits. Realization of the deferred tax asset depends on the Company's
ability to generate future U.S. taxable income.
Under Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes" ("SFAS No. 109"), the Company is required to recognize all or
a portion of its net deferred tax asset if it believes that it is more
likely than not, given the weight of all available evidence, that all or a
portion of the benefits of the carryforward losses and tax credits will be
realized. Management believes that it is more likely than not that the
Company will not realize any benefits from its net deferred tax asset and
has recorded a 100% reserve against the asset at March 31, 1999. Management
will continue to assess the realizability of the deferred tax asset at the
interim and annual balance date based upon actual and forecasted operating
results.
At March 31, 1999, the Company has a U.S. federal income tax net operating
loss carryforward of $13,574 available to offset future taxable income. The
carryforward has various expiration dates beginning in 2018.
Under current tax law, the utilization of the Company's tax attributes will
be restricted if an ownership change, as defined, were to occur. Section
382 of the Internal Revenue Code provides, in general, that if an
"ownership change" occurs with respect to a corporation with net operating
and other loss carryforwards, such carryforwards will be available to
offset taxable income in each taxable year after the ownership change only
up to the "Section 382 Limitation" for each year (generally, the product of
the fair market value of the corporation's stock at the time of the
ownership change, with certain adjustments, and a specified long-term
tax-exempt bond rate at such time). The Company's ability to use its loss
carryforwards would probably be limited in the event of an ownership
change.
12. Concentration of Risks and Customer Information
Substantially all of the Company's sales are to domestic and foreign
dentists and doctors, distributors of dental and medical supplies and
equipment, and third-party financing companies. Financial instruments which
potentially subject the Company to concentrations of credit risk are
primarily accounts receivable, cash equivalents and short-term investments.
The Company generally does not require collateral and the majority of its
trade receivables are unsecured. The Company is directly affected by the
financial well-being of the dental and medical industries. During 1999, the
Company recorded significant charges for bad debt expense due to product
reliability issues, customer service issues and insufficient credit and
collection policies. The Company has undertaken steps to correct the
deficiencies that resulted in the bad debt charges. The Company places its
cash equivalents in short-term money market instruments. Short-term
investments consist of U.S. Treasury and government agency debt obligations
(see Note 9).
F-16
The Company currently relies on two vendors to supply each of its primary
raw materials, the active-pixel sensor ("APS") and the charged coupled
device ("CCD") semiconductor wafers. During the fourth quarter of fiscal
1998, the Company experienced a delay in the supply flow from its CCD
vendor which resulted in manufacturing and product shipment delays.
Although there are a number of manufacturers capable of supplying these
materials, which the Company believes could provide for its semiconductor
requirements on comparable terms, such delays could occur again.
Approximately $5,961, $7,085 and $3,867 of the Company's sales in 1999,
1998 and 1997, respectively, were to foreign customers. The majority of
such foreign sales were to customers in Europe. During 1999, sales of
$7,187 were to a single distributor. In 1998 and 1997, no customer
accounted for 10% or more of sales.
13. Commitments and Contingencies
Operating and Capital Leases
The Company leases its facilities under operating lease agreements expiring
from February 2001 to August 2004. Rent expense for the years ended March
31, 1999, 1998 and 1997 was $718, $383 and $193, respectively.
Future minimum payments on a fiscal year basis under non-cancelable
operating and capital leases are as follows:
Operating Capital
--------- -------
2000 $ 971 $ 125
2001 981 48
2002 839 --
2003 873 --
2004 907 --
Thereafter 393 --
------ ------
Total minimum lease payments $4,964 $ 173
====== ------
Less: Amounts representing interest 44
------
Present value of future minimum lease payments 129
Less: Current maturities 84
------
Capital lease obligations - long term $ 45
======
Product Liability
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 or other
claims will not exceed its insurance coverage limits, or that such
insurance will continue to be available on commercially acceptable terms,
or at all.
SEC Investigation and Other
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
F-17
restatement of earnings. The SEC has made a voluntary request for the
production of certain documents. The Company intends to cooperate fully
with the SEC staff and has provided responsive documents to it. In
addition, investigators associated with the U.S. Attorneys Office have made
inquires of certain former employees, apparently in connection with the
same event. The inquiries are in a preliminary stage and the Company cannot
predict their potential outcome.
Litigation
During fiscal 1999, several shareholder class action lawsuits were filed
against the Company. In May 1999 a consolidated and amended class action
complaint was filed naming the Company, certain of its officers and former
officers and various third parties as defendants. The complaint alleges
that certain defendants issued false and misleading statements concerning
the Company's publicly reported earnings in violation of the federal
securities laws. The complaint seeks certification of a class of persons
who purchased the Company's common stock between July 1, 1997 and February
19, 1999, inclusive, and does not specify the amount of damages sought. The
Company intends to defend itself vigorously against such allegations and
believes the claims to be without merit. As these actions are in their
preliminary stages, the Company is unable to predict the ultimate outcome
of these claims. The outcome, if unfavorable, could have a material adverse
effect on the financial position and results of operations of the Company.
During 1996, the Company was named as defendant in patent infringement
litigation commenced by a competitor in the United States and France. The
Company is vigorously defending itself against such allegations and
believes the claims to be without merit. The Company has filed a
countersuit against the competitor for infringement of a U.S. Patent which
has been exclusively licensed to the Company. The Company has obtained a
formal opinion of intellectual property counsel that its products do not
infringe on the competitor's U.S. patent. The Company has filed motions for
Summary Judgment seeking the dismissal of the action in the United States.
Such motions are currently pending. The Company is unable to predict the
ultimate outcome of this litigation. The outcome, if unfavorable, could
have a material adverse effect on the financial position and results of
operations of the Company. No provision has been made for any potential
losses at March 31, 1999 and 1998 as the range of potential loss, if any,
cannot be reasonably estimated.
During 1997, the Company was named as a defendant in patent litigation
involving a patent directed to a display system for digital dental
radiographs. In July 1997 the Company reached a settlement under which it
paid $600 for a world wide, non-exclusive license for the patent. The
license fee was expensed during 1998.
The Company may be a party to a variety of legal actions (in addition to
those referred to above), such as employment and employment
discrimination-related suits, employee benefit claims, breach of contract
actions, tort claims, shareholder suits, including securities fraud, and
intellectual property related litigation. In addition, because of the
nature of its business, the Company is subject to a variety of legal
actions relating to its business operations. Recent court decisions and
legislative activity may increase the Company's exposure for any of these
types of claims. In some cases, substantial punitive damages may 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.
14. Stock Option Plan, Stock Grants and Defined Contribution Plan
Stock Option plan and Stock Grants
In April 1996, the Company implemented its 1996 Stock Option Plan (the
"Plan") whereby incentive and non-qualified options to purchase shares of
the Company's common stock may be granted to employees, directors and
consultants. In September 1998, the Plan was amended to increase the number
of shares of Common Stock issuable under the Plan from 470, 400 to
1,000,000. The exercise and vesting periods and the exercise price for
F-18
options granted under the Plan are determined by the Board of Directors.
The Plan stipulates that the exercise price of non-qualified options
granted under the Plan must have an exercise price equal to or exceeding
85% of the fair market value of the Company's common stock as of the date
of grant of the option and no option may be exercisable after ten years
from the date of grant. Options granted under the plan generally vest over
a period of four years.
During fiscal 1996, prior to implementation of the Plan, an employee of the
Company was granted an option to purchase 56,000 shares of the Company's
common stock at $1.79 per share, determined by the Company's Board of
Directors to be the fair market value of the Company's common stock at the
date of the option grant. As of March 31, 1999, all shares are exercisable
under such option.
During 1998, the Company adopted the Directors Plan. A total of 35,000
shares of Common Stock have been authorized for issuance under the
Directors Plan. At March 31, 1999, 25,000 options to purchase Common Stock
pursuant to the Directors Plan were outstanding. There were no options
outstanding at March 31, 1998.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations in accounting
for its plans and other stock-based compensation issued to employees and
directors. During the year ended March 31, 1999, the Company did not
recognize compensation expense for options granted to employees. During
1998 and 1997, the Company has recognized compensation expense in the
amounts of $36 and $13, respectively, for options granted to employees. Had
compensation cost for option grants to employees been determined based upon
the fair value at the grant date for awards under the Plan consistent with
the methodology prescribed under Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation," ("SFAS 123")
the Company's net loss in 1999 would have been increased by approximately
$759 ($.08 per basic share), net income in 1998 would have been decreased
by approximately $164 ($.02 per basic share) and the net loss in 1997 would
have been increased by approximately $45 ($.01 per basic share).
The fair value of options granted to employees during 1999, 1998 and 1997
has been determined on the date of the respective grant using the
Black-Scholes option-pricing model based on the following weighted-average
assumptions:
1999 1998 1997
------------- ------------- --------------
Dividend yield None None None
Risk-free interest rate on date of grant 4.13% - 5.48% 5.43% - 5.55% 6.27%
Forfeitures None None None
Expected life 5 years 5 years 5 years
Volatility 85% 75% --
The following table summarizes information regarding stock options for
1999, 1998 and 1997:
F-19
1997 1998 1999
----------------------- ----------------------- ----------------------
Shares Weighted- Shares Weighted- Shares Weighted-
under average Under average under average
option exercise Option exercise option exercise
price price price
--------- ---------- --------- ---------- -------- ---------
Options outstanding, 56,000 $ 1.79 130,953 $ 4.85 223,411 $ 11.46
beginning of year
Options granted 79,338 7.14 97,902 20.87 420,523 10.76
Options exercised -- -- (2,479) 7.14 (3,848) 7.14
Options forfeited (4,385) 7.14 (2,965) 20.88 (46,620) 20.44
------- ------- ------- ---------
Options outstanding,
end of year 130,953 $ 4.85 223,411 $ 11.46 593,466 $ 10.87
======= ======= ======= =========
Options outstanding Weighted-average remaining
Range of exercise price at March 31, 1999 contractual life (years)
- ----------------------- ----------------- ------------------------
At $ 1.79 56,000 6.8
$ 4.91 to $ 7.86 316,460 9.4
$15.81 to $22.97 155,502 8.9
$24.75 to $27.72 65,504 8.9
At March 31, 1999, there are 491,207 options available for grant pursuant
to the Company's option plans. Of the 593,466 options outstanding at March
31, 1999, 115,274 are exercisable at such date at a weighted-average
exercise price of $7.96.
The Company issued 1,445 shares of its common stock to an employee during
the year ended March 31, 1997 for services rendered by the employee to the
Company. The employee was immediately vested in the shares. The Board of
Directors of the Company has determined the fair market value of such
shares to be $8.16 per share. The Company recognized expense of $12 for the
year ended March 31, 1997 related to the grant.
Defined Contribution Plan
Effective October 1996, the Company implemented a defined contribution
savings plan, which qualifies under Section 401(k) of the Internal Revenue
Code, for employees meeting certain service requirements. Participants may
contribute up to 15% of their gross wages not to exceed, in any given year,
a limitation set by the Internal Revenue Service regulations. The plan
provides for mandatory matching contributions to be made by the Company to
a maximum amount of 2.5% of a plan participant's compensation. Company
contributions to the plan approximated $218, $111 and $38 in 1999, 1998 and
1997, respectively.
15. Supplemental Cash Flow Information
Cash payments for interest were $174, $144 and $56 in 1999, 1998 and 1997,
respectively. The Company paid $533 and $7 for income taxes in 1998 and
1997, respectively. There were no payments for income taxes in 1999.
During fiscal 1999 and 1997, the Company acquired $199 of computer
equipment and $95 of production equipment, respectively, under capital
leases.
16. Related Parties
In July 1997, the Company loaned its President, who is a principal
stockholder, $200. Such loan bore interest at a rate of 8% and was due and
payable on June 15, 1998. The loan, along with accrued interest in the
amount of $1, was repaid in August 1997.
17. Stockholders' Equity
In July 1997, the Company completed the IPO, selling 2,012,500 shares of
common stock at a price of $18.50 per share providing gross proceeds to the
Company of $37,231 and net proceeds, after underwriting discounts and
commissions and offering expenses payable by the Company, of $33,508.
F-20
During 1997, the Company completed a private offering of 520,315 units, as
defined in such offering, at a price per unit ranging from $7.86 to $8.93
based on the quantity of units purchased. Each unit consisted of one share
of the Company's common stock, $.01 par value, and a warrant to purchase
one additional share of the Company's common stock at a price per share
equal to the purchase price of the unit, on or before May 3, 1999. The
offering provided net proceeds of $4,312. In conjunction with the offering
the Company issued 6,155 units, as a placement fee, to certain individuals
who assisted the Company in selling the units. The fair value of such
units, in the amount of $55, or $8.93 per unit has been reflected as a
reduction of paid in capital.
During 1999, warrants to purchase 204,680 shares of common stock were
exercised using cashless exercises pursuant to which 63,479 shares of the
Company's common stock were issued. During 1998, warrants to purchase
24,640 shares of the Company's common stock were exercised. Exercises of
11,200 of such warrants, for which 11,200 shares of common stock were
issued, provided the Company with net proceeds of approximately $100. The
remaining 13,440 warrant exercises were cashless exercises pursuant to
which 8,647 shares of the Company's common stock were issued. At March 31,
1999, the Company has reserved 297,150 shares of its common stock for
issuance upon the exercise of outstanding warrants.
18. Acquisition and Investment
Keystone Acquisition
On September 24, 1997, the Company's wholly-owned subsidiary, Schick X-Ray
Corporation ("Schick X-Ray"), a Delaware corporation, acquired certain
assets of Keystone Dental X-Ray Inc. ("Keystone"), a manufacturer of x-ray
equipment for the medical and dental radiology field, for $1,450. Schick
X-Ray was formed on September 24, 1997, for the sole purpose of acquiring
the assets of Keystone. Schick X-Ray acquired inventory, manufacturing
equipment, tooling and intellectual property. The acquisition has been
accounted for using the purchase method, and Schick X-Ray has recorded
goodwill in the amount of $750, which is included in other assets and is
being amortized on a straight-line basis over 7 years. The Company
recognized $107 and $55 for amortization of goodwill in 1999 and 1998,
respectively.
Investment in Photobit Corporation
In September 1997, the Company purchased a minority interest of 5%, for
$1,000 in Photobit Corporation, a developer of complementary metal-oxide
semiconductor ("CMOS"), APS imaging technology. In July 1998, the Company
invested an additional $250 in Photobit Corporation, bringing its total
investment in Photobit to $1,250. The Company is the exclusive licensee of
the APS technology for medical applications and utilizes the technology in
its bone-mineral density assessment device and certain components of its
computed dental x-ray imaging system. The Company carries the investment at
cost. At March 31, 1999, it is not practicable to estimate the fair value
of this investment because of the lack of quoted market prices and the
inability to estimate fair value without incurring excessive costs. No
dividends were paid on this investment. In September 1999, the Company sold
250,000 shares of Photobit stock for $1,000 and recorded an investment gain
of approximately $580.
19. Subsequent Events
Bridge Note Payable
Effective July 30, 1999, the Company secured an extension to the secured
promissory note it initially issued in March 1999. Pursuant to the amended
and restated note, the principal of the note was increased to $6,222. The
increase in the principal amount resulted from the conversion of certain
trade payables owed to the third party lender into the principal balance of
the note. The amended and restated note bears interest at the rate of prime
plus two and one-half percent per annum. Interest on the note is payable
monthly and the note is secured by the Company's tangible and intangible
assets. The principal is payable in quarterly installments of $1,000
commencing December 31, 1999. The Company is also required to make
additional principal payments equal to 25% of the net proceeds of any
equity or debt financing or asset sale (other than sales of inventory in
the
F-21
ordinary course of business) to the extent that 25% of such proceeds
exceeds the $1,000 principal installment due at the end of the quarter in
which the financing or asset sale is completed. In connection with the
amended and restated note, the Company issued 650,000 warrants to the
note-holder. The warrants are exercisable for a period of 5 years and each
have an exercise price of $2.19. The Company is not in compliance with
certain financial covenants, and other terms and provisions contained in
the extended bridge loan and is currently in the process of refinancing the
obligation.
NASDAQ Delisting
On September 15, 1999, the Company received notice from the Nasdaq Listings
Qualifications Panel that its 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 public interest concerns regarding the Company's revenue
recognition and sales practices.
Greystone Funding Corporation
In December 1999, the Company entered into a Loan Agreement, (the "Loan
Agreement") with Greystone Funding Corporation ("Greystone") to provide up
to $7.5 million of subordinated debt in the form of a secured credit
facility. Pursuant to the Loan Agreement, and to induce Greystone to enter
into said Agreement, the Company issued to Greystone and its designees
warrants to purchase 3,000,000 shares of the Company's Common Stock at an
exercise price of $0.75 per share. The Company agreed to issue to Greystone
and its designees warrants to purchase an additional 2,000,000 shares at an
exercise price of $0.75 per share in connection with a cash payment of $1
million by Greystone to the Company in consideration of a sale of Photobit
stock by the Company to Greystone. The sale of the Photobit stock was made
subject to a right of first refusal held by Photobit and its founders. By
letter dated February 17, 2000, counsel for Photobit informed the Company
that Photobit considers the Company's sale of its shares to Greystone to be
void on the basis of the Company's purported failure to properly comply
with Photobit's right of first refusal.
On March 17, 2000, the Company and Greystone entered into an Amended and
Restated Loan Agreement effective as of December 27, 1999 (the "Amended
Loan Agreement") pursuant to which Greystone agreed to provide up to $7.5
million of subordinated debt in the form of a secured credit facility. The
$1 million cash payment to the Company was converted as of December 27,
1999 into an initial advance of $1,000,000 under the Amended Loan
Agreement. Pursuant to the Amended Loan Agreement, and to induce Greystone
to enter into said Agreement, the Company issued warrants to Greystone and
its designees, consisting of those warrants previously issued under the
Loan Agreement, to purchase 5,000,000 shares of the Company's Common Stock
at an exercise price of $0.75 per share, exercisable at any time after
December 27, 1999. Under the Amended Loan Agreement, the Company also
issued to Greystone and its designees warrants (the "Additional Warrants")
to purchase an additional 13,000,000 shares of common stock, which
Additional Warrants will vest and be exercisable at a rate of two shares of
Common Stock for each dollar advanced under the Amended Loan Agreement in
excess of the initial draw of $1,000,000. Any additional warrants which do
not vest prior to expiration or surrender of the line of credit will be
forfeited and canceled. In connection with the Greystone secured credit
facility, effective as of February 15, 2000, DVI consented to the Company's
grant to Greystone of a second priority lien encumbering the Company's
assets, under and subject in priority and right of payment to all liens
granted by the Company to DVI.
F-22
Schedule II
Schick Technologies, Inc.
Valuation and Qualifying Accounts
Additions
---------
Balance at Charged to Charged to Balance at
Beginning Costs and Other End
of Period Expenses Accounts Deductions of Period
----------- ----------- ----------- ----------- -----------
ALLOWANCE FOR DOUBTFUL ACCOUNTS
For the year ended March 31, 1997 $ 35,000 $ 33,933 $ -- $ 18,933(a) $ 50,000
For the year ended March 31, 1998 50,000 163,866 -- 13,866(a) 200,000
For the year ended March 31, 1999 200,000 5,598,000 -- 1,286,000(a) 4,512,000
RESERVE FOR OBSOLETE/SLOW MOVING INVENTORY
For the year ended March 31, 1997 $ -- $ 113,714 $ -- $ -- $ 113,714
For the year ended March 31, 1998 113,714 -- -- 113,714 --
For the year ended March 31, 1999 -- 5,466,000 -- --
5,466,000
VALUATION ALLOWANCE - DEFERRED TAX ASSET
For the year ended March 31, 1997 $ 490,000 $ -- $ 133,000(b) $ -- $ 623,000
For the year ended March 31, 1998 623,000 -- -- 623,000(c) --
For the year ended March 31, 1999 -- -- 11,855,000 11,855,000(c)
PROVISION FOR WARRANTY OBLIGATIONS
For the year ended March 31, 1997 $ 130,055 $ 199,371 $ -- $ -- $ 329,426
For the year ended March 31, 1998 329,426 -- 84,517(d) 244,909
For the year ended March 31, 1999 244,909 157,091 -- -- 402,000
(a) accounts receivable written off
(b) Increase in allowance resulting from increased deferred tax asset
(c) Reduction of allowance due to realization of deferred tax asset
(d) Reduction of warranty obligations outstanding
F-23
Page
(a) Documents filed as a part of this Report
(1) Consolidated Financial Statements filed as part of this Report:
Index to the Financial Statements F-1
Report of Independent Accounts F-2
Report of Independent Certified Public Accountants F-3
Consolidated Balance Sheet at March 31, 1999 and 1998 F-4
Consolidated Statement of Operations for the years ended
March 31, 1999, 1998 and 1997 F-5
Consolidated Statement of Stockholders' Equity for the year
ended March 31, 1999, 1998 and 1997 F-6
Consolidated Statement of Cash Flows for the year ended
March 31, 1999, 1998 and 1997 F-7
Notes to Consolidated Financial Statements F-8
(2) Financial statement schedules filed as part of this Report
Schedule II Valuation and Qualifying Accounts F-23
Schedules other than that mentioned above are omitted because the conditions
requiring their filing do not exist, or because the information is provided in
the financial statements filed herewith, including the notes thereto.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended March 31, 1999.
(c) The following Exhibits are included in this report:
Number Description
*3.1 Amended and Restated Certificate of Incorporation of the Company
**3.2 Bylaws of the Company, as amended
*4.1 Form of Common Stock certificate of the Company
*4.2 Form of Warrant of the Company
*4.3 Agreement and Plan of Merger dated as of May 15, 1997 among Schick
Technologies, Inc., a New York corporation, Schick Technologies Inc.,
a Delaware corporation and STI Acquisition Corp, a Delaware
corporation.
*10.1 Schick Technologies, Inc. 1996 Employee Stock Option Plan
32
*10.2 Schick Technologies, Inc. 1997 Stock Option Plan for Non Employee
Directors
*10.3 Form of Non-Disclosure, Solicitation, Solicitation, Non-Competition
and Inventions Agreements between Schick Technologies, Inc. and Named
Executives of Schick Technologies, Inc.
*10.5 Service and License Agreement between Photobit, LLC and Schick
Technologies, Inc. dated as of June 24, 1996
10.9 Asset Purchase Agreement dated September 24, 1997 among Keystone
Dental X-Ray, Inc., DisCovery X-Ray Corporation and Imaging Sciences,
Inc. (Incorporated by reference to Exhibit 10.1 to the Registrant's
Report on Form 8-K dated October 9, 1997.)
10.10 Secured Promissory Note between Schick Technologies, Inc. and DVI
Financial Services, Inc., dated as of January 25, 1999
10.10 Allonge to Secured Promissory Note by and between Schick Technologies,
Inc. and DVI Financial Services, Inc., dated as of March 4, 1999
10.12 Amended and Restated Promissory Note between Schick Technologies, Inc.
and DVI Financial Services, Inc., as of July 30, 1999.
10.13 Security Agreement between Schick Technologies, Inc. and DVI
Affiliated Capital, dated January 25, 1999
10.14 Employment Agreement between Schick Technologies, Inc. and George C.
Rough, Jr., dated February 25, 1999
10.15 Employment Agreement between Schick Technologies Inc. and David
Schick, dated February 29, 2000.
10.16 Employment Letter Agreement between Schick Technologies Inc. and Zvi
Raskin, dated February 6, 2000.
10.17 Employment Letter Agreement between Schick Technologies Inc. and
Michael Stone, dated January 12, 2000.
10.18 Employment Letter Agreement between Schick Technologies Inc. and
William F. Rogers, dated December 31, 1999.
10.19 Separation, Severance and General Release Agreement between Schick
Technologies Inc. and Fred Levine, dated August 27, 1999.
10.20 Separation, Severance and General Release Agreement between Schick
Technologies Inc. and Avi Itzhakov, dated August 20, 1999.
10.21 Loan Agreement, dated December 27, 1999, by and between Schick
Technologies, Inc., a Delaware corporation, Schick Technologies, Inc.,
a New York corporation, and Greystone Funding Corporation
("Greystone"), a Virginia corporation. (Filed as Exhibit 1 to the
Company's Current Report on Form 8-K dated December 27, 1999.)
33
10.22 Stockholders' Agreement, dated December 27, 1999, by and between
Schick Technologies, Inc., a Delaware corporation, David B. Schick,
Allen Schick and Greystone. (Filed as Exhibit 2 to the Company's
Current Report on Form 8-K dated December 27, 1999.)
10.23 Stock Purchase Agreement, dated December 27, 1999, by and between
Schick Technologies, Inc., a Delaware corporation, and Greystone.
(Filed as Exhibit 3 to the Company's Current Report on Form 8-K dated
December 27, 1999.)
10.24 Form of Warrant Certificate Issued to Greystone to Purchase Shares of
Common Stock of Schick Technologies, Inc., a Delaware corporation.
(Filed as Exhibit 4 to the Company's Current Report on Form 8-K dated
December 27, 1999.)
21 List of subsidiaries of Schick Technologies, Inc.
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of Grant Thornton LLP
24 Powers of Attorney (included on signature page of this Report)
27.1 Financial Data Schedule [filed in electronic format only]
99 Cautionary Statement for Purposes of the "Safe Harbor" Provisions of
the Private Securities Litigation Reform Act of 1995
* Filed as the same exhibit number as part of the registrant's Registration
Statement on Form S-1 (File No. 333-33731) declared effective by the
Securities and Exchange Commission on June 30, 1997 and incorporated by
reference herein.
** Filed as the same exhibit number as part of the registrant's Annual Report
on 10-K for the year ended March 31, 1998, filed with the Securities and
Exchange Commission on June 29, 1998.
34
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Long
Island City, State of New York, on March 20, 2000.
SCHICK TECHNOLOGIES, INC
By: /a/ David B. Schick
--------------------------------
David B. Schick
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on March 20, 2000.
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints David B. Schick and Zvi N. Raskin (with full
power to act alone), as his true and lawful attorneys-in-fact and agents, with
full powers of substitution and resubstitution, for him in his name, place and
stead to sign an Annual Report on Form 10-K of Schick Technologies, Inc, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents full power and authority to do and perform each and
every act and thing requisite or necessary to be done in and about the premises,
as fully to all intents and purposes as he or she might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents, or
their substitute or substitutes, lawfully do or cause to be done by virtue
hereof.
Signature Title
- --------- -----
/s/ David B. Schick
- -------------------------------- Chairman of the Board and Chief
David B. Schick Executive Officer
/s/ Jeffrey Slovin
- -------------------------------- Director and President
Jeffrey Slovin
/s/ Allen Schick
- -------------------------------- Director
Allen Schick
/s/ Euval Barrekette
- -------------------------------- Director
Euval Barrekette
/s/ Robert Barolak
- -------------------------------- Director
Robert Barolak
35