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, 2000
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 |X| No | |
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ]
----------
The aggregate market value of Common Stock held by non-affiliates of the
registrant as of June 13, 2000 was approximately $13,285,451. Such
aggregate market value is computed by reference to the closing sale price
of the Common Stock on such date.
As of June 13, 2000, the number of shares outstanding
of the Registrant's Common Stock, par value $.01
per share, was 10,136,113
DOCUMENTS INCORPORATED BY REFERENCE
NONE
<PAGE>
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 ... 13
Part II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters ................................... 14
Item 6. Selected Financial Data ............................... 15
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations ................... 16
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk .................................................. 21
Item 8. Financial Statements and Supplementary Data ........... 22
Item 9. Changes in and Disagreements with Accountants
On Accounting and Financial Disclosure ................ 22
Part III
Item 10. Directors and Executive Officers of the Registrant .... 22
Item 11. Executive Compensation ................................ 25
Item 12. Security Ownership of Certain Beneficial Owners And
Management ............................................ 28
Item 13. Certain Relationships and Related Transactions ........ 31
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K .............................................. F-1
<PAGE>
PART I
ITEM 1. BUSINESS
Schick Technologies, Inc. (the "Company") designs, develops and
manufactures innovative digital radiographic imaging systems and devices for the
dental and medical markets. The Company's products, which are based on
proprietary digital imaging technologies, create instant high resolution
radiographs with reduced levels of radiation.
In the field of dentistry, the Company's CDR(R) computed dental radiography
imaging system was introduced in March 1994 and has become a leading product in
its field. The CDR system uses an intra-oral sensor to produce instant, full
size, high resolution dental x-ray images on a color computer monitor without
film or the need for chemical development, while reducing the radiation dose by
up to 80% or more as compared with conventional x-ray film. The Company also
manufactures and sells the CDRCam(R) 2000, an intra-oral camera which fully
integrates with the CDR system, and the CDRPan(TM), a digital panoramic imaging
device. The Company is also developing other products and devices for the dental
field in addition to newer versions of its current products.
In the field of medical radiography, the Company manufactures and sells the
accuDEXA(R) bone densitometer, a low-cost and easy-to-operate device for the
assessment of bone mineral density and fracture risk. Additionally, the Company
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 strategic distribution agreements ; (ii) broadening the
marketing of accuDEXA(R) to the medical market through a combination of direct
sales and increased marketing activities; (iii) introducing new products based
on patented and proprietary APS technology for other medical and industrial
applications; and (iv) enhancing international distribution channels for
existing and new products.
The Company's business was founded in 1992 and it was incorporated in
Delaware in 1997. On July 7, 1997, the Company completed an initial public
offering of its Common Stock. Proceeds to the Company after expenses of the
offering were approximately $33,508,000.
On December 27, 1999, the Company established a strategic relationship with
Greystone Funding Corporation ("Greystone") and entered into a Loan Agreement
with Greystone which 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 intends 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
1
<PAGE>
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
2
<PAGE>
system. The Company's CDR(R) system is easy to operate and can be used with any
dental x-ray generator. To produce a digital x-ray image using CDR(R), the
dentist selects an intra-oral sensor of suitable size and places it in the
patient's mouth. The sensor converts the x-rays into a digital image that is
displayed on the computer monitor within five seconds and automatically stored
as part of the patient's clinical records. CDR(R) system software allows the
dentist to perform a variety of advanced diagnostic operations on the image. The
sensor can then be repositioned for the next x-ray. As the x-ray dose is
significantly lower than that required for conventional x-ray film, concern over
the potential health risk posed by multiple x-rays is greatly diminished. The
process is easy and intuitive, enabling nearly any member of the dental staff to
operate the CDR(R) system with minimal training.
The Company manufactures digital sensors in three sizes which correspond to
the three standard 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.
The Company believes that 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
3
<PAGE>
any comparable product currently on the market, while using a minimal radiation
dosage. It is a point-of-treatment tool, designed for use by primary care
physicians as an integral part of a patient's regular physical examination. In
December 1997, the Company received clearance from the United States Food and
Drug Administration ("FDA") for the general use and marketing of the accuDEXA(R)
as a BMD assessment device; in June, 1998, the FDA granted the Company
additional clearance for its marketing of the accuDEXA(R) as a predictor of
fracture risk.
Based on APS technology, accuDEXA(R) is a small self-contained unit capable
of instantly assessing the BMD of a specific portion of the patient's hand, a
relative indicator of BMD elsewhere in the body. This device is the first BMD
assessment instrument that is virtually automatic, requiring little operator
intervention, 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
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.
4
<PAGE>
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 "Business - 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 "Business - 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 and, since that time, has been subject to
semi-annual audits to ensure the maintenance of such certification.
The Company manufactures most of its custom components itself in order to
minimize dependence on suppliers, for quality control purposes and to help
maintain process propriety. While the Company does procure certain components
from outside sources which are sole suppliers, it believes that those components
could be obtained from additional sources without substantial difficulty,
although the need to change suppliers or to alternate between suppliers might
cause significant delays in delivery or significantly increase the Company's
costs. The Company procures its APS and CCD semiconductor wafers, a significant
component of its products, each from a single supplier. Extended interruptions
of this supply could have a material adverse effect on the Company's ability to
produce its products and its results of operations. The Company's manufacturing
processes are, for the most part,
5
<PAGE>
vertically integrated, although selective outsourcing is employed to take
advantage of economies of scale at outside manufacturing facilities and to
alleviate manufacturing bottlenecks. Certain components used in existing
products of the Company, as well as products under development, may be purchased
from single sources.
DEPENDENCE ON CUSTOMERS
During fiscal 2000 and 1999, a single customer, Henry Schein, Inc.,
accounted for annual sales by the Company of $2.6 and $7.2 million, or 11.7% and
15.8%, respectively, of annual sales. During fiscal 1998, no single customer
accounted for more than ten percent of the Company's annual sales. During fiscal
2000, 1999 and 1998, respectively, sales of approximately $6.5 million, $6.0
million, and $7.1 million were made to foreign customers.
PATENTS, TRADE SECRETS AND PROPRIETARY RIGHTS
The Company seeks to protect its intellectual property through a
combination of patent, trademark and trade secret protection. The Company's
future success will depend in part on its ability to obtain and enforce patents
for its products and processes, preserve its trade secrets and operate without
infringing the proprietary rights of others.
Patents
The Company has an active corporate patent program, the goal of which is to
secure patent protection for its technology. The Company currently has issued
United States patents for an `Intra-Oral Sensor For Computer Aided Radiography,'
U.S. Patent No. 5,434,418, which expires on October 16, 2012; a `Large Area
Image Detector,' U.S. Patent No. 5,834,782, which expires on November 20, 2016;
a `Method and Apparatus for Measuring Bone Density,' U.S. Patent No. 5,852,647,
which expires on September 24, 2017; an 'Apparatus for Measuring Bone Density
Using Active Pixel Sensors,' U.S. Patent No. 5,898,753, which expires on June 6,
2017; a 'Dental Imaging System with Lamps and Method,' U.S. Patent No.
5,908,294, which expires on June 12, 2017; an 'X-ray Detection System Using
Active Pixel Sensors,' U.S. Patent No. 5,912,942, which expires on June 6, 2017;
a `Dental Imaging System with White Balance Compensation,' U.S. Patent No.
6,002,424, which expires on June 12, 2017; and `Dental Radiography Using an
Intraoral Linear Array Sensor,' U.S. Patent No. 5,995,583, which expires on
November 13, 2016; and a `Method for Reading Out Data from an X-Ray Detector,'
U.S. Patent No. 6,069,935, which expires on June 6, 2017. 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 additional
U.S. and foreign patent applications currently pending.
The Company is the exclusive sub-licensee for use in medical radiography
applications of certain patents, patent applications and other know-how 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 obtained trademarks from the United States Patent and
Trademark Office for the marks (i) "CDR" for its digital dental radiography
product; (ii) "CDRCam" (both textual and stylized) for its intra-oral camera
6
<PAGE>
(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.
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
7
<PAGE>
must include data from human clinical studies.
Marketing may commence once the FDA issues a clearance letter finding such
substantial equivalence. According to FDA regulations, the agency has 90 days in
which to respond to a 510(k) notification. There can be no assurance, however,
that the FDA will provide a timely response, or that it will reach a finding of
substantial equivalence.
If a product does not qualify for the 510(k) procedure (either because it
is not substantially equivalent to a legally marketed device or because it is a
Class III device), the FDA must approve a Pre-Market Approval ("PMA")
application before marketing can begin. PMA applications must demonstrate, among
other things, that the medical device is safe and effective. A PMA application
is typically a complex submission that includes the results of clinical studies.
Preparation of such an application is a detailed and time-consuming process.
Once a PMA application has been submitted, the FDA's review process may be
lengthy and include requests for additional data. By statute and regulation, the
FDA may take 180 days to review a PMA application, although such time may be
extended. Furthermore, there can be no assurance that a PMA application will be
approved by the FDA.
In February 1994, the FDA cleared the Company's 510(k) application for
general use and marketing of the CDR(R) system. In November 1996, the FDA
cleared the Company's 510(k) application for general use and marketing of the
CDRCam(R). In December 1997, the FDA cleared the Company's 510(k) application
for general use and marketing of accuDEXA(R). On June 4, 1998, the FDA granted
the Company additional clearance to market accuDEXA(R) as a predictor of
fracture risk. In December 1998, the FDA cleared the Company's 510(k)
application for CDRPan(TM). The Company has not yet submitted a 510(k)
application for digital mammography sensors. There can be no assurance that the
Company will submit such application or that it will obtain FDA clearance for
such products.
In addition to the requirements described above, the FD&C Act requires that
all medical device manufacturers and distributors register with the FDA annually
and provide the FDA with a list of those medical devices which they distribute
commercially. The FD&C Act also requires that all manufacturers of medical
devices comply with labeling requirements and manufacture their products and
maintain their documents in a prescribed manner with respect to manufacturing,
testing, and quality control activities. The FDA's Medical Device Reporting
regulation subjects medical devices to post-market reporting requirements for
death or serious injury, and for certain malfunctions that would be likely to
cause or contribute to a death or serious injury if malfunction were to recur.
In addition, the FDA prohibits a device which has received marketing clearance
from being marketed for applications for which marketing clearance has not been
obtained. Furthermore, the FDA generally requires that medical devices not
cleared for marketing in the United States receive FDA marketing clearance
before they are exported, unless an export certification has been granted.
The Company must obtain certain approvals by and marketing clearances from
governmental authorities, including the FDA and similar health authorities in
foreign countries, to market and sell its products in those countries. The FDA
regulates the marketing, manufacturing, labeling, packaging, advertising, sale
and distribution of "medical devices," as do various foreign authorities in
their respective jurisdictions. The FDA enforces additional regulations
regarding the safety of equipment utilizing x-rays. Various states also impose
similar regulations.
The FDA review process typically requires extended proceedings pertaining
to the safety and efficacy of new products. A 510(k) application is required in
order to market a new or modified medical device. If specifically required by
the FDA, a pre-market approval ("PMA") may be necessary. Such proceedings, which
must be completed prior to marketing a new medical device, are potentially
expensive and time consuming. They may delay or hinder a product's timely entry
into the marketplace. Moreover, there can be no assurance that the review or
approval process for these products by the FDA or any other applicable
governmental authorities will occur in a timely fashion, if at all, or that
additional regulations will not be adopted or current regulations amended in
such a manner as will adversely affect the Company. The FDA also regulates the
content of advertising and marketing materials relating to medical devices.
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.
8
<PAGE>
The Company is currently developing new products for the dental and medical
markets. The Company expects to file 510(k) applications with the FDA in
connection with the digital mammography sensors currently under development by
the Company, and other future products, including its general digital
radiography sensors. There can be no assurance that the Company will file such
510(k) applications and/or will obtain pre-market clearance for the digital
mammography sensors or any other future products, or that in order to obtain
510(k) clearance, the Company will not be required to submit additional data or
meet additional FDA requirements that may substantially delay the 510(k) process
and result in substantial additional expense. Moreover, such pre-market
clearance, if obtained, may be subject to conditions on the marketing or
manufacturing of the digital mammography sensors which could impede the
Company's ability to manufacture and/or market the product. There can be no
assurance that the digital mammography or general digital radiography sensors or
any other products which may be developed by the Company will be approved by or
receive marketing clearance from applicable governmental authorities. If the
Company is unable to obtain regulatory approval for and market new products and
enhancements to existing products, it will have a material adverse effect on the
Company.
Failure to comply with applicable regulatory requirements can, among other
consequences, result in fines, injunctions, civil penalties, suspensions or loss
of regulatory approvals, product recalls, seizure of products, operating
restrictions and criminal prosecution. In addition, governmental regulations may
be established that could prevent or delay regulatory clearance of the Company's
products. Delays in receipt of clearance, failure to receive clearance or the
loss of previously received clearance would have a material adverse effect on
the Company's business, financial condition and results of operations.
In addition to laws and regulations enforced by the FDA, the Company is
subject to government regulations applicable to all businesses, including, among
others, regulations related to occupational health and safety, workers' benefits
and environmental protection. The extent of government regulation that might
result from any future legislation or administrative action cannot be accurately
predicted. Failure to comply with regulatory requirements could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Distribution of the Company's products in countries other than the United
States may be subject to regulations in those countries. These regulations vary
significantly from country to country; the Company typically relies on its
independent distributors in such foreign countries to obtain the requisite
regulatory approvals. The Company has obtained the "CE mark," necessary for the
marketing of its products in the member countries of the European Union. The CE
mark is a European Union symbol of adherence to quality assurance standards and
compliance with the European Union's Medical Device Directives. The Company has
developed and implemented a quality assurance program in accordance with the
guidelines of the International Quality Standard, ISO 9001. In August of 1998,
the Company was granted ISO 9001 certification. The Company's current products
also have been awarded the "ETL" and "CSA" marks. These are North American
safety marks which indicate compliance with U.L. Standard 2601.
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 2000, 1999 and 1998, research and development expenses were
$2.8 million, $4.4 million and $3.9 million, respectively.
BACKLOG
The backlog of orders was approximately $2.0 million and $2.5 million at
June 1, 2000 and June 1, 1999,
9
<PAGE>
respectively. Such figures include approximately $634,000 and $887,000 of orders
on hold pending credit approval at June 1, 2000 and June 1, 1999, respectively.
Orders included in backlog may generally be cancelled or rescheduled by
customers without significant penalty.
EMPLOYEES
As of June 7, 2000, the Company had 153 full-time employees, engaged in the
following capacities: sales and marketing (30); general and administrative (31);
operations (73); 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 April 2000, the Company and Patterson Dental Company ("Patterson")
entered into an exclusive distribution agreement and, as of May 1, 2000, the
Company began marketing and selling its CDR(R) dental products in the United
States and Canada through Patterson. The Company believes that Patterson is one
of the largest distributors of dental products in North America, with more than
1,000 field sales personnel in the U.S. and Canada. In addition, the Company has
an in-house sales program which focuses on universities and continuing education
programs. As of March 1, 2000, CDR(R) had been sold to 47 of the 54 dental
schools in the United States. The Company also employs a government sales
program to sell directly to the Armed Services, Veterans Administration
hospitals, United States Public Health Service and other government-sponsored
health institutions.
The Company employs approximately 17 area sales managers located throughout
the United States to interface with and assist Patterson in its sales effort. A
sales and marketing support staff of approximately 3 individuals, based at the
Company's offices in New York, supports the sales managers and the direct sales
force by planning events and developing promotional and marketing materials.
In the international market, the Company sells the CDR(R) system via
independent regional distributors. There are currently approximately 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.
The Company's goal is to utilize its leading position in the industry,
secure as many productive sales channels as possible and to rapidly penetrate
additional segments of the international market.
BMD / Fracture Risk Assessment
The Company currently sells the accuDEXA(R) primarily through a direct
in-house sales force and is exploring alternative sales avenues and potential
strategic partnerships. 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 Lilly
Co., Merck & Co. and Procter & Gamble, currently have FDA-approved therapies for
the treatment of osteoporosis. The Company believes that several other
companies, including Boehringer-Mannheim GmbH, Sanofi-Synthelabo, Inc. and
Pfizer Inc. , have additional products that are currently in clinical trials.
The Company expects that the efforts of pharmaceutical companies to develop
medicines and treatment programs will result in the expansion of doctors'
involvement in initial screening and routine management of osteoporosis, thereby
increasing the market for BMD assessment devices. The Company intends to
capitalize on these efforts both in the United States and abroad.
10
<PAGE>
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 is considering several possible sales strategies for the
marketing and distribution of its mammography devices and has not yet determined
which strategies it will employ.
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 Company believes that the
CDR(R) system has thus far competed successfully against other products. If
other companies enter the digital radiography field, it may result in a
significantly more competitive market in the future. Several companies are
involved in the manufacture and sale of intra-oral cameras, including Dentsply
International Inc., Welch-Allyn Co., Henry Schein Co., Ultra-Cam, Air Technics
and DMD. Digital panoramic dental devices are manufactured by several companies,
including Sirona, Signet, Instrumentarium Imaging and Planmeca. Of those, only
the device manufactured by Signet is designed to be incorporated into existing
conventional panoramic devices.
BMD / Fracture Risk Assessment
Two other companies, 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.
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.
11
<PAGE>
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.
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
12
<PAGE>
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 alleged, inter alia, that certain defendants issued false and
misleading statements concerning the Company's publicly reported earnings in
violation of the federal securities laws. The Complaint sought certification of
a class of persons who purchased the Company's Common Stock between July 1, 1997
and February 19, 1999, inclusive, and did not specify the amount of damages
sought.
On May 23, 2000, the Company entered into an agreement in principle with
the plaintiffs for the settlement of the class action lawsuit. Under the
settlement agreement, reflected in a Memorandum of Understanding, all claims
against the Company and the Individual Defendants are to be dismissed without
presumption or admission of any liability or wrongdoing. The principal terms of
the settlement agreement call for payment to the Plaintiffs, for the benefit of
the class, of the sum of $3.4 million. The settlement amount will be paid in its
entirety by the Company's insurance carrier and is not expected to have any
material impact on the financial results of the Company. The settlement is
subject to approval by the Court.
III. In August 1999, the Company, through its outside counsel, contacted
the Division of Enforcement of the Securities and Exchange Commission ("SEC") to
advise it of certain matters related to the Company's restatement of earnings
for interim periods of fiscal 1999. The SEC has made a request for the voluntary
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.
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, 2000.
13
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCK HOLDER MATTERS
The Company's Common Stock began trading on The Nasdaq National Market
under the symbol "SCHK" on July 1, 1997. Prior to such date, there was no
established public trading market for the Company's Common Stock.
By letter dated September 15, 1999, the Company was advised by the Nasdaq
Stock Market's Listing Qualifications Panel (the "Panel") that the Company's
Common Stock would no longer be listed on the Nasdaq National Market effective
with the close of business on September 15, 1999. The Panel's action was based
on the Company's inability to timely file its Annual Report on Form 10-K for the
fiscal year ended March 31, 1999 and Form 10-Q for the quarter ended June 30,
1999, as well as the revenue recognition and sales practices which had been the
subject of an investigation by the Audit Committee of the Company's Board of
Directors and had led to the filing delays and the need for the restatement of
the Company's financial reports. The Company timely requested a review of this
decision and, on May 25, 2000, the Nasdaq Listing and Hearing Review Council
informed the Company of its determination to affirm the Panel's decision.
Since the delisting of the Company's Common Stock, there has been no
established trading market for such stock, which has been trading in the
over-the-counter market.
The following table sets forth, for the periods indicated, the high and low
sales prices of the Company's Common Stock, as quoted on The Nasdaq National
Market through September 15, 1999, and in the over-the-counter market, as
reported on the "pink sheets" published by National Quotation Bureau LLC,
commencing September 16, 1999.
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, 2000 High Low
-------------------------------- ------ -----
First Quarter 5.75 2.438
Second Quarter (through 9/15/99 delisting) 2.875 1.75
Second Quarter (commencing 9/16/99) .625 .50
Third Quarter 1.50 .45
Fourth Quarter 2.625 1.00
On June 6, 2000, the closing bid and asked prices per share of the
Company's Common Stock in the over-the-counter market, as reported as reported
on the "pink sheets" published by National Quotation Bureau LLC, were $1.50 and
$1.75 per share, respectively. Such prices represent quotations between dealers,
without dealer mark-up, mark-down or commission, and may not represent actual
transactions. On June 7, 2000, there were 186 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.
14
<PAGE>
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. 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.
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.
<TABLE>
<CAPTION>
Year Ended March 31,
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue, net $ 6,804 $ 16,101 $ 38,451 $ 45,605 $ 21,989
-------- -------- -------- -------- --------
Cost of sales 3,343 7,907 17,658 34,611 15,393
Excess and obsolete inventory -- 114 -- 5,466 898
-------- -------- -------- -------- --------
Total cost of sales 3,343 8,021 17,658 40,077 16,291
-------- -------- -------- -------- --------
Gross profit 3,461 8,080 20,793 5,528 5,698
-------- -------- -------- -------- --------
Operating expenses:
Selling and marketing 1,620 4,961 10,645 18,440 7,636
General and administrative 1,388 2,054 3,954 7,338 7,330
Research and development 458 1,418 3,852 4,354 2,830
Bad debt expense -- 34 164 5,598 9
Patent litigation settlement -- -- 600 -- --
-------- -------- -------- -------- --------
Total operating costs 3,466 8,467 19,215 35,730 17,805
-------- -------- -------- -------- --------
Income (loss) from operations (5) (387) 1,578 (30,202) (12,107)
Total other income (expense) (108) 35 1,111 244 (224)
-------- -------- -------- -------- --------
Income (loss) before income taxes (113) (352) 2,689 (29,958) (12,331)
Provision (benefit) for income taxes -- -- 328 (352) --
-------- -------- -------- -------- --------
Net income (loss) $ (113) $ (352) $ 2,361 $(29,606) $(12,331)
======== ======== ======== ======== ========
Basis earnings (loss) per share $ (0.02) $ (0.05) $ 0.25 $ (2.96) $ (1.23)
======== ======== ======== ======== ========
Diluted earnings (loss) per share $ (0.02) $ (0.05) $ 0.24 $ (2.96) $ (1.23)
======== ======== ======== ======== ========
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
March 31,
---------
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents $ 525 $ 1,710 $ 6,217 $ 1,415 $ 1,429
Working capital 1,240 5,518 33,745 2,902 841
Total assets 4,395 11,060 51,674 29,386 16,290
Total liabilities 3,026 4,973 9,565 16,850 14,974
Retained earnings (accumulated deficit) (1,203) (1,556) 805 (28,801) (41,132)
Stockholders' equity 1,369 6,087 42,109 12,536 1,316
</TABLE>
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
applications.
The Company's revenues during fiscal 2000 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. Effective May 1, 2000, the
Company entered into an exclusive distribution agreement with Patterson Dental
Company and terminated its existing domestic dealer arrangements. International
sales are made primarily through a network of independent foreign distributors.
In fiscal 2000, 1999, and 1998, sales to customers within the United States were
approximately 68%, 87% and 82% 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.
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,
16
<PAGE>
including sensors, cameras and associated electronics and 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.
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:
<TABLE>
<CAPTION>
Year ended March 31,
--------------------
2000 1999 1998
----- ----- -----
<S> <C> <C> <C>
Revenue, net 100.0% 100.0% 100.0%
----- ----- -----
Cost of sales 70.0% 75.9% 45.9%
Excess and obsolete inventory 4.1% 12.0% --
----- ----- -----
Total cost of sales 74.1% 87.9% 45.9%
----- ----- -----
Gross profit 25.9% 12.1% 54.1%
Operating expenses:
Selling and marketing 34.7% 40.4% 27.7%
General and administrative 33.3% 16.1% 10.3%
Research and development 12.9% 9.5% 10.0%
Bad debt expense -- 12.3% 0.4%
Patent litigation settlement -- -- 1.6%
</TABLE>
Fiscal Year Ended March 31, 2000 as Compared to Fiscal Year Ended March 31, 1999
Net revenues decreased 51.8% to $22.0 million in fiscal 2000 from $45.6
million in fiscal 1999. The revenue decline is due to lower sales of the
Company's CDR(R) dental product and accuDEXA(R) bone mineral density assessment
device. Fiscal 2000 revenues were reduced due to a reduction of marketing
activity for the Company's products, reduction of credit granting to select
dealers, hospitals, universities and governmental agencies and, the Company
believes, by the negative perception that existed in the marketplace concerning
the Company's viability and long-term ability to upgrade and service its
products.
The rate of return in fiscal 2000 for the Company's CDR and accuDEXA
products decreased significantly to 4.3% of gross sales in fiscal 2000 from
28.6% of gross sales in fiscal 1999. The decreased return rate for the CDR is
believed to be attributable to several factors including the resolution of
certain technical problems in transitioning its CDR product line from CCD
sensors to APS sensors. Second, the Company's single user CDR System requires
minimal installation. Commencing in September 1998, the Company initiated a
program in coordination with its computer supplier, in which the supplier
installed all single-user CDR Systems. As a result of logistical problems in
implementing this program, the supplier's installations experienced significant
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.
17
<PAGE>
The Company also experienced a higher than normal rate of returns of
accuDEXA units. The Company believes that these returns are due to several
factors, including the following: First, early shipments of accuDEXA experienced
a higher than expected failure rate due to several reasons, including shipping
damage, as well as humidity and temperature sensitivity of several components
included in the initial design of the product. The Company took steps to address
these problems and believes that failure rates relating to such damage and
sensitivity have dropped significantly. In this regard, the Company currently
expects to implement a number of additional improvements to accuDEXA, to further
increase reliability, in the first half of fiscal 2001. Second, the Company
initiated a change in its sales policy 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 decreased 59.4% to $16.3 million (74.1% of net
revenues) in fiscal 2000 from $40.1 million (87.9% of net revenues) in fiscal
1999. The total cost of sales is decreased due to lower direct and indirect
labor costs, warranty expenditures, material costs, royalty costs and overhead
costs as a result of decreased revenues and a decrease in the provision for
excess and obsolete inventory. The decrease in the provision for excess and
obsolete inventory from 1999 to 2000 is primarily attributable to the
obsolescence of inventory in the third and fourth quarter of 1999 due to the
introduction of the new APS sensors. In January 1999, in an effort to streamline
operations and reduce expenses, and as a result of more efficient manufacturing
processes and a higher rate of outsourcing, the Company reduced its direct
manufacturing labor force from 101 to 64 employees and relocated the operations
of its wholly-owned subsidiary, Schick X-Ray, Corp. from its facility in
Roebling, New Jersey to the Company's headquarters in Long Island City, New
York. In August 1999, Schick X-Ray was dissolved and its operations absorbed by
the Company.
Selling and marketing expenses decreased 58.6% to $7.6 million (34.7% of
net revenues) in fiscal 2000 from $18.4 million (40.4% of net revenues) in
fiscal 1999. This decrease is due to decreased selling expenses in the CDR and
accuDEXA product lines, trade show expenses and other marketing expenses as a
result of decreased revenues. Additionally, the Company reduced its direct sales
force and associated overhead expenses as a result of decreased revenues.
General and administrative expenses remained at $7.3 million, 33.3% of net
revenues in fiscal 2000 and 16.1% of net revenues in fiscal 1999. However,
general and administrative expenses increased as a percent of sales primarily
due to an increase in professional services rendered in connection with the
restatement of the Company's interim financial statements for fiscal 1999. This
increase was partially offset by decreases in payroll and related costs.
Research and development expenses decreased 35.0% to $2.8 million (12.9% of
net revenues) in fiscal 2000 from $4.4 million (9.5% of net revenues) in fiscal
1999. This decrease was largely attributable to decreased payroll and related
costs due to a reduction in personnel partially offset by an increase in test
services and supply expenses. All research and development costs are expensed as
incurred.
Bad debt expenses were $9 thousand in fiscal 2000 compared to $5.6 million
(12.3% of net revenues) in fiscal 1999. The Company believes that the decrease
is attributable to the Company's tightened credit policy as described above.
Interest income decreased to $.1 million in fiscal 2000 from $.5 million in
fiscal 1999 due to the utilization of cash balances and investments in
short-term interest-bearing securities in support of the Company's operating
deficiencies.
Interest expense increased to $.9 million in fiscal 2000 from $.3 million
in fiscal 1999 due to the cost of financing provided by DVI Financial Services
Inc. under the Company's Capital Lease and term note financing arrangements and
by Greystone Funding Corporation's secured credit facility.
18
<PAGE>
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 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 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.
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.
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 $40.1 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
19
<PAGE>
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 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.
Interest expense increased to $261 in fiscal 1999 from $77 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 to earnings
representing deferred income taxes from fiscal 1998 which it may not collect.
Liquidity and Capital Resources
At March 31, 2000, the Company had $1.4 million in cash and cash
equivalents and working capital of $.8 million compared to $1.4 million in cash
and cash equivalents, $.4 million in short-term investments and $2.9 million in
working capital at March 31, 1999. The decrease in working capital is primarily
attributable to the loss from operations during fiscal 2000.
During fiscal 2000 cash used in operations was $2.1 million compared to
$20.4 million used in operations during fiscal 1999. Increases in cash were
primarily provided by the sale of a portion of the Company's investment stock
and by the initial draw down of the Company's loan facility with Greystone
Funding Corporation. This cash was used to fund the Company's operating loss and
accounts payable reduction, which exceeded reductions in accounts receivable,
inventory and collection of refundable income taxes. Accounts receivable
decreased to $1.5 million at March 31, 2000 compared to $4.2 million at March
31, 1999 due to reduced sales and restricted credit granting to select dealers,
hospitals, universities and governmental agencies. Inventories decreased to $5.6
million at March 31, 2000 compared to $10.7 million at March 31, 1999 due to the
Company's planned reduction of inventory levels. The Company received estimated
tax payment and net operating loss refunds of $2.4 million during fiscal 2000.
The Company's capital expenditures decreased to $.1 million in fiscal 2000
from $2.8 million in fiscal 1999. Fiscal 2000 expenditures included leasehold
improvements, computers and production equipment.
DVI Financial Services, Inc. ("DVI") has provided the Company with notes
payable for $6.6 million which is secured by first priority liens on
substantially all of the Company's assets. The Company issued promissory notes
and security agreements that provide, in part, that the Company may not permit
the creation of any additional lien or encumbrance on the Company's property or
assets. The notes are due in varying installments through fiscal 2006. Interest
is paid monthly at the prime rate (9% at March 31, 2000) plus 2.5%.
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
20
<PAGE>
facility. Pursuant to the Loan Agreement, and to induce Greystone to enter into
said Agreement, the Company issued to Greystone and its designees, warrants to
purchase 3,000,000 shares of the Company's Common Stock at an exercise price of
$.75 per share. The Company agreed to issue Greystone and additional 2,000,000
shares at an exercise price of $.75 per share in connection with a cash payment
of $1 million by Greystone to the Company in consideration of a sale of Photobit
stock by the Company to Greystone. The sale of the Photobit stock was made
subject to a right of first refusal held by Photobit and it founders. By letter
dated February 17, 2000, counsel for Photobit informed the Company that Photobit
considers the Company's sale of its shares to Greystone to be void on the basis
of the Company's purported failure to properly comply with Photobit's right of
first refusal.
On March 17, 2000, the Company and Greystone entered into and Amended and
Restated Loan Agreement effective as of December 17, 1999 (the "Amended loan
Agreement"), which amended and restated the Loan Agreement, pursuant to which
Greystone agreed to provide up to $7.5 million of subordinated debt in the form
of a secured credit facility. The $1 million cash payment to the Company was
converted as of December 27, 1999 into an initial advance of $1 million under
the Amended Loan Agreement. Pursuant to the Amended Loan Agreement and to induce
Greystone to enter into said Agreement, the Company issued warrants to Greystone
and its designees, consisting of those warrants previously issued under the Loan
Agreement and Photobit stock sale arrangement, to purchase 5,000,0000 shares, of
the Company's Common Stock at an exercise price of $0.75 per share, exercisable
at any time after December 27, 1999. Under the Amended Loan Agreement, the
Company also issued to Greystone or its designees warrants (the "Additional
Warrants") to purchase an additional 13,000,000 shares of common stock, which
Additional Warrants will vest and be exercisable at a rate of two shares of
Common Stock for each dollar advanced under the Amended Loan Agreement in excess
of the initial draw of $1 million. Any additional warrants, which do not vest
prior to expiration or surrender of the line of credit, will be forfeited and
canceled. In connection with the Greystone secured credit 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. To
date, no additional funds have been advanced under the Amended Loan Agreement in
excess of the initial draw of $1 million.
The Company has also undertaken various cost-cutting measures including
reduction of facilities and personnel. By approximately 40% and 60% respectively
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. Effective May 1, 2000 the Company
entered an exclusive distribution agreement with Patterson Dental Company
("Patterson"). Under the terms of this agreement the Company discontinued all
direct domestic sales of its dental products, with the exception of those to
governmental agencies and universities. As a result of the agreement, the
Company further reduced its sales force. Remaining domestic sales
representatives have become manufacturer representatives charged with support of
the Patterson sales effort. The Company terminated all existing dealer
agreements including its agreement with Henry Schein, Inc.
The Company believes that its cost reductions, refinancing and new sales
arrangement, should permit the Company to generate sufficient working capital to
meet its obligations as they mature. The ability of the Company to meet its cash
requirements is dependent, in part, on the Company's ability to attain adequate
sales and profit levels and to satisfy its existing warranty obligations without
incurring expenses substantially in excess of related warranty revenue and to
collect its accounts receivable on a timely basis. Management believes that
existing capital resources 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 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The DVI term notes bear an annual interest rate based on the prime rate
plus 2.5%, provided however, that if any payments to DVI are past due for more
than 60 days, interest will thereafter accrue at the prime rate plus 5.5%.
Because the interest rate is variable, the Company's cash flow may be adversely
affected by increases in interest rates. Management does not, however, believe
that any risk inherent in the variable-rate nature of the loan is likely to have
a material effect on the Company's interest expense or available cash.
21
<PAGE>
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:
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 39, 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
22
<PAGE>
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
Managing Director, and as President of Sommerset Realty
Investment Corp. During 1995, Mr. Slovin was a Manager
at Fidelity Investments Co. From 1991 to 1994, Mr.
Slovin was Chief Financial Officer of SportsLab USA
Corp. and, from 1993 to 1994, was also President of
Sports and Entertainment Inc. From 1987 to 1991, Mr.
Slovin was an associate at Bear Stearns & Co., Inc.,
specializing in mergers and acquisitions and corporate
finance. Mr. Slovin holds an MBA degree from Harvard
Business School.
Robert Barolak Age 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 Stockholders
in 2001. Since 1989, Mr. Barolak has been employed at
Greystone & Co. in various executive capacities and has
been its Executive Vice President since 1995. From 1979
to 1989, Mr. Barolak was an attorney at the firm of
Ballard Spahr Andrews & Ingersoll, LLP in Philadelphia.
Mr. Barolak holds a J.D. degree from the University of
Pennsylvania School of Law.
Jonathan Blank, Esq. Age 55, has served as a Director of the Company since
April 2000. Mr. Blank's current term on the Board
expires at the Company's Annual Meeting of Stockholders
in 2002. Since 1979, Mr. Blank has been a member of the
law firm of Preston Gates Ellis & Rouvelas Meeds LLP, a
managing partner of the firm since 1995 and a member of
the Executive Committee of Preston Gates Ellis LLP
since 1995. Mr. Blank is also a member of the Board of
Directors of Marine Transport Corporation and of its
Audit Committee.
(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.
<TABLE>
<CAPTION>
Name Age Position Officer
---- --- -------- Since
-------
<S> <C> <C> <C>
David B. Schick................... 39 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..................... 37 Secretary and General Counsel 1992
Stan Mandelkern................... 40 Vice President of Engineering 1999
William Rogers.................... 59 Vice President of Operations 1999
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Michael Stone..................... 47 Vice President of Sales and Marketing 2000
</TABLE>
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 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 August 1998 to January 2000, Mr. Rogers was the
Company's Director of Materials and Manufacturing Engineering. From June
1995 to August 1998, Mr. Rogers was Director of Operations at Veeco
Instruments Co., and from May 1993 to February 1995 was Director of
Manufacturing for Scully Signal Company. Mr. Rogers holds a B.S. Degree in
electrical engineering from Northeastern University.
MICHAEL STONE has served as the Company's Vice President of Sales and
Marketing since January 2000. From September 1993 to January 2000, Mr.
Stone was General Manager of the Dental Division of Welch-Allyn Company,
and from October 1989 to September 1993 was Director of Marketing for
Welch-Allyn. Mr. Stone holds an MBA degree from the University of
Rochester.
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, except that the Form 3 for Mr. Stone, Vice President of Sales and
Marketing, was not timely filed.
24
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain information concerning compensation
received for the fiscal years ended March 31, 2000, 1999 and 1998 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
$100,000 (the "Named Executives") for services rendered in all capacities
(including service as a director of the Company) during the year ended March 31,
2000.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
------------------- Awards
------
Other
Annual Securities All Other
Name and Principal Fiscal Compensa Underlying Compensa
Position Year Salary($) Bonus($) tion(1) Options(#)(2) tion($)(3)
-------- ---- --------- -------- ------- ------------- ---------
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
2000 $184,442 $ -- -- -- $ 3,802
David B. Schick
Chairman of the Board and 1999 217,500 -- -- 12,251 3,980
Chief Executive Officer
1998 143,385 39,692 -- 3,267 4,569
------------------------------------------------------------------------------------------------------------------------------------
2000 165,769 -- -- -- 3,144
Fred Levine
Former Vice President of 1999 179,167 47,500(4) -- 12,055 4,366
Sales and Marketing and
Former Director
1998 137,318 23,826(4) -- 1,000 4,031
------------------------------------------------------------------------------------------------------------------------------------
2000 160,577 10,000 -- -- 4,265
Zvi N. Raskin, Esq
General Counsel and 1999 132,500 -- -- 17,006 3,286
Secretary
1998 99,539 25,000 -- 2,343 3,113
------------------------------------------------------------------------------------------------------------------------------------
George C. Rough, Jr 2000 139,385(5) -- -- -- --
Former Chief Financial
Officer 1999 13,846(6) 150,000(7) -- 100,000(8) --
1998 -- -- -- -- --
</TABLE>
----------------
(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
1998, 1999 and 2000, pursuant to the Company's 1996 Employee Stock Option
Plan.
(3) Reflects amounts contributed by the Company in the form of matching
contributions to the Named Executive's Savings Plan account during fiscal
1998, 1999 and 2000.
(4) Represents a commission received by Mr. Levine in connection with certain
sales targets that were met or exceeded.
----------------
25
<PAGE>
(5) Reflects payment of salary to Mr. Rough from April 1, 1999 through the
termination of his employment with the Company in October 1999.
(6) Reflects payment of salary to Mr. Rough from March 1, 1999, upon
commencement of his employment with the Company, through March 31, 1999.
(7) In connection with commencement of his employment with the Company in March
1999, Mr. Rough was paid a bonus of $150,000.
(8) 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.
Employment Agreements and Termination of Employment Arrangement
In February 2000, the Company entered into a three-year employment
agreement with David Schick, pursuant to which Mr. Schick is employed as Chief
Executive Officer of the Company. The term of the agreement is renewable
thereafter on a year-to-year basis unless either party gives 60-day written
notice of termination before the end of the then-current term. Mr. Schick's base
annual salary is $200,000, subject to annual increases of at least ten percent
(10%). In addition to base salary, Mr. Schick is eligible to receive annual
merit or cost-of-living increases as may be determined by the Executive
Compensation Committee of the Board of Directors. Mr. Schick will also receive
incentive compensation in the form of a bonus which is calculated using a
formula based on the Company's EBITDA as a percentage of the Company's net
revenues. Additionally, all Company stock options held by, or to be issued to,
Mr. Schick will immediately vest in the event that the Company has a change in
control or is acquired by another company or entity.
In February 2000, the Company entered into a three-year employment
agreement with Zvi Raskin, effective January 1, 2000, pursuant to which Mr.
Raskin is employed as General Counsel of the Company. Mr. Raskin's annual base
annual salary is $200,000. In addition to base salary, Mr. Raskin will receive a
minimum bonus of $20,000 per calendar year and is eligible to receive additional
performance bonuses at the sole discretion of the Executive Compensation
Committee of the Board of Directors. Mr. Raskin was also awarded 75,000 shares
of the Company's Common Stock, subject to a risk of forfeiture which expires as
to 25,000 shares on each of December 31, 2000, 2001 and 2002. Upon the sale of
any such vested shares, Mr. Raskin is required to pay the Company the sum of
$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,
26
<PAGE>
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 the 100,000 stock options awarded to him terminated.
Compensation of Directors
Directors who are also employees of the Company are not separately
compensated for any services they provide as directors. In fiscal 2000, 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 $1,200. The Company may, but did not, pay
such fees in Common Stock. In addition, non-employee directors are eligible to
receive annual grants of stock options under the Company's Directors Stock
Option Plan.
Compensation Committee Interlocks and Insider Participation
The Executive Compensation Committee reviews and makes recommendations
regarding the compensation for top management and key employees of the Company,
including salaries and bonuses. The members of the Executive Compensation
Committee during the fiscal year ended March 31, 2000 were Howard Wasserman,
D.D.S. (until Mr. Wasserman resigned as a member of the Board of Directors in
November 1999) and Robert J. Barolak (commencing upon Mr. Barolak's election to
the Board of Directors in December, 1999). None of such persons is an officer or
employee, or former officer or employee, of the Company or any of its
subsidiaries. No interlocking relationship existed during the fiscal year ended
March 31, 2000, between the members of the Company's Board of Directors or
Compensation Committee and the board of directors or compensation committee of
any other company, nor had any such interlocking relationship existed in the
past. Mr. Barolak is an executive officer of Greystone, a lender to the Company
under the Amended and Restated Loan Agreement between the Company and Greystone.
See "Item 7 - Management's Discussion and Analysis - Liquidity and Capital
Resources" and "Item 13 - Certain Relationships and Related Transactions."
Stock Option Grants
The following table sets forth information regarding grants of options to
purchase Common Stock made by the Company during the year ended March 31, 2000
to each of the Named Executives.
Option Grants in Fiscal 2000
<TABLE>
<CAPTION>
Individual Grants
Number of
Securities Percent of Total
Underlying Options Granted Exercise
Options to Employees in Price Expiration Grant Date
Name Granted(#) Fiscal 2000(1) ($/Share) Date Value
---- ---------- ---------------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
David B. Schick -- -- -- -- --
-- -- -- -- --
Fred Levine
Zvi N. Raskin -- -- -- -- --
George C
Rough, Jr -- -- -- -- --
</TABLE>
(1) The Company granted employees options to purchase a total of 681,866 shares
of Common Stock in fiscal 2000.
27
<PAGE>
Option Exercises and Year-End Value Table
The following table sets forth information regarding the exercise of stock
options during fiscal 2000 and the number and value of unexercised options held
at March 31, 2000 by each Named Executive.
<TABLE>
<CAPTION>
Aggregated Option Exercises in Fiscal 2000
and Fiscal 2000 Year-End Option Values
Number of
Securities Value of
Underlying Unexercised
Unexercised "In-the-Money"
Options at Options at
Shares March 31, 2000 March 31, 2000
Acquired on Value Exercisable/ Exercisable/
Name Exercise(#) Realized ($) Unexercisable Unexercisable(1)
---- ----------- ------------ ------------- ----------------
<S> <C> <C> <C> <C>
David B. Schick -- -- 11,536(2) / 9,696 $ -- / --
Fred Levine -- -- 56,000(3) / 0 18,760 / 0
Zvi N. Raskin -- -- 6,425 / 12,673 -- / --
George C. Rough, -- -- 0/0(4) -- / --
Jr
</TABLE>
(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 $2.125 per share, the closing price per
share on March 31, 2000, 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) Upon his termination from employment with the Company in October 1999, all
the stock options granted to Mr. Rough upon his employment with the Company
on March 1, 1999, terminated and were returned to the Company.
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 June 13, 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.
28
<PAGE>
<TABLE>
<CAPTION>
Number of Shares Percentage of
Name Beneficially Owned(1) Outstanding Shares
---- --------------------- ------------------
<S> <C> <C>
David B. Schick(2) ......................... 2,195,090(3).......................................................21.6%
George C. Rough Jr.(4) ..................... --(5)..............................................................--
Fred Levine(6) ............................. 97,792(7)..........................................................*
Zvi N. Raskin(2) ........................... 117,557(8).........................................................1.2%
Euval S. Barrekette(9) ..................... 127,740(10)........................................................1.3%
Allen Schick(11) ........................... 545,624(12)........................................................5.4%
Jeffrey T. Slovin(2) ....................... 760,000(13)........................................................7.0%
Robert Barolak (14) ........................ 10,000(15).........................................................*
Jonathan Blank(16) ......................... 110,075(17)........................................................1.1%
Greystone Funding Corp.(18) ................ 4,250,000(19)......................................................29.5%
All current executive Officers and Directors
as a group(20).............................. 3,905,036..........................................................35.5%
</TABLE>
* 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 June 13, 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; 5,715
shares issuable upon the exercise of stock options granted to Mr. Schick in
July 1996; 2,450 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.
(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.
----------
29
<PAGE>
(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. The aforementioned 75,000 shares are subject to a
risk of forfeiture which expires as to 25,000 shares on each of December
31, 2000, 2001 and 2002; 1,755 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; 2,500 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) Such person's address is 90 Riverside Drive, New York, New York 10024.
(10) Consists of 115,240 shares held by Dr. Barrekette; 2,500 shares issuable
upon the exercise of stock options granted to Dr. Barrekette in July, 1998;
and 10,000 shares issuable upon the exercise of stock options granted to
Dr. Barrekette in June, 2000, pursuant to the 1997 Directors Stock Option
Plan.
(11) Such person's address is 1222 Woodside Parkway, Silver Spring, Maryland
20910.
(12) 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; 2,500 shares issuable upon the exercise of stock options granted to
Dr. Schick in July 1998; and 10,000 shares issuable upon the exercise of
stock options granted to Dr. Schick in June, 2000, pursuant to the 1997
Directors Stock Option Plan. Dr. Schick disclaims beneficial ownership of
the 44,800 shares held as custodian.
(13) Consists of 750,000 shares issuable upon the exercise of warrants held by
Mr. Slovin (which Mr. Slovin received as designee of Greystone) and 10,000
shares issuable upon the exercise of stock options granted to Mr. Slovin in
June, 2000, pursuant to the 1997 Directors Stock Option Plan.
(14) Such person's business address is c/o Greystone & Co., 152 West 57th
Street, New York, New York 10019.
(15) Consists of 10,000 shares issuable upon the exercise of stock options
granted to Mr. Barolak in June, 2000, pursuant to the 1997 Directors Stock
Option Plan.
(16) Such person's business address is c/o Preston Gates Ellis & Rouvelas Meeds
LLP, 1735 New York Avenue, N.W., Washington, D.C. 20006.
(17) Consists of 100,075 shares held by Mr. Blank; and 10,000 shares issuable
upon the exercise of stock options granted to Mr. Blank in June 2000,
pursuant to the 1997 Directors Stock Option Plan.
(18) Greystone's address is 152 West 57th Street, New York, New York 10019.
(19) Consists of 4,250,000 shares issuable upon the exercise of warrants held by
Greystone. Does not include 13,000,000 shares issuable upon exercise of
warrants held by Greystone which vest as additional amounts are advanced
under the Greystone Loan Agreement. See "Item 7 - Management's Discussion
and Analysis - Liquidity and Capital Resources."
(20) Includes the shares underlying warrants described in Note 13 as well as
shares subject to options held by current officers and directors.
30
<PAGE>
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 Company 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 stock options available for
grant to employees by 750,000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with the Loan Agreement with Greystone, the Company issued to
Greystone 4,250,000 warrants to purchase the Company's Common Stock, and to
Jeffrey Slovin, as Greystone's designee, 750,000 warrants to purchase the
Company's Common Stock. Mr. Slovin is the company's President and serves as a
Director as Greystone's designee. Messrs. Slovin and Robert Barolak, who also
serves as a Director as Greystone's designee, are executive officers of
Greystone. See "Item 7 - Management's Discussion and Analysis - Liquidity and
Capital Resources."
31
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
SCHICK TECHNOLOGIES, INC.
Index to Consolidated Financial Statements
Page
<S> <C>
Index to Consolidated Financial Statements ................................................................................... F-1
Report of Independent Certified Public Accountants ........................................................................... F-2
Report of Independent Accountants ............................................................................................ F-3
Consolidated Balance Sheets as of March 31, 2000 and 1999 .................................................................... F-4
Consolidated Statements of Operations for the years ended March 31, 2000, 1999 and 1998 ...................................... F-5
Consolidated Statements of Changes in Stockholders' Equity for the years ended March 31,
2000, 1999 and 1998 ................................................................................................. F-6
Consolidated Statements of Cash Flows for the years ended March 31, 2000, 1999 and 1998 ...................................... F-7
Notes to Consolidated Financial Statements ................................................................................... F-8
</TABLE>
F-1
<PAGE>
Report of Independent Certified Public Accountants
To the Board of Directors
and Stockholders of Schick Technologies, Inc.
We have audited the accompanying consolidated balance sheets of Schick
Technologies, Inc. (the "Company") as of March 31, 2000 and 1999, and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for each of the two years in the period ended March 31, 2000.
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 in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Schick
Technologies, Inc. as of March 31, 2000 and 1999, and the consolidated results
of their operations and their consolidated cash flows for each of the two years
in the period ended March 31, 2000, in conformity with accounting principles
generally accepted in the United States of America.
We have also audited Schedule II - Valuation and Qualifying Accounts of Schick
Technologies, Inc. for each of the two years in the period ended March 31, 2000.
In our opinion, this schedule presents fairly, in all material respects, the
information required to be set forth therein.
Grant Thornton LLP
New York, New York
June 16, 2000
F-2
<PAGE>
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 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-3
<PAGE>
Schick Technologies, Inc.
Consolidated Balance Sheets
(In thousands, except share amounts)
<TABLE>
<CAPTION>
March 31,
---------
2000 1999
---- ----
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 1,429 $ 1,415
Short - term investments 8 360
Accounts receivable, net of allowance for doubtful accounts of
$2,449 (2000) and $4,512 (1999), respectively 1,535 4,205
Inventories 5,612 10,686
Income taxes receivable 127 2,720
Prepayments and other current assets 166 321
-------- --------
Total current assets 8,877 19,707
-------- --------
Equipment, net 5,206 7,221
Investments 815 1,250
Other assets 1,392 1,208
-------- --------
Total assets $ 16,290 $ 29,386
======== ========
Liabilities and Stockholders' Equity
Current liabilities
Current maturities of long term debt $ 245 $ 5,000
Accounts payable and accrued expenses 4,255 8,946
Accrued salaries and commissions 878 1,296
Deferred revenue 1,681 564
Deposits from customers 666 513
Warranty obligations 278 402
Capital lease obligations, current 33 84
-------- --------
Total current liabilities 8,036 16,805
-------- --------
Long term debt 6,938 --
Capital lease obligations -- 45
-------- --------
Total liabilities 14,974 16,850
-------- --------
Commitments and contingencies -- --
Stockholders' equity
Preferred stock ($0.01 par value; 2,500,000
shares authorized; none issued and outstanding) -- --
Common stock ($0.01 par value; 25,000,000 shares authorized: 10,134,884
and 10,059,384 shares issued and outstanding at March 31, 2000 and
1999, respectively) 101 101
Additional paid-in capital 42,347 41,236
(Accumulated deficit) (41,132) (28,801)
-------- --------
Total stockholders' equity 1,316 12,536
-------- --------
Total liabilities and stockholders' equity $ 16,290 $ 29,386
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
Schick Technologies, Inc.
Consolidated Statements of Operations
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended March 31,
------------------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Revenue, net $ 21,989 $ 45,605 $ 38,451
-------- -------- --------
Cost of sales 15,393 34,611 17,658
Excess and obsolete inventory 898 5,466 --
-------- -------- --------
Total cost of sales 16,291 40,077 17,658
-------- -------- --------
Gross profit 5,698 5,528 20,793
-------- -------- --------
Operating expenses:
Selling and marketing 7,636 18,440 10,645
General and administrative 7,330 7,338 3,954
Research and development 2,830 4,354 3,852
Bad debt expense 9 5,598 164
Patent litigation settlement -- -- 600
-------- -------- --------
Total operating costs 17,805 35,730 19,215
-------- -------- --------
(Loss) income from operations (12,107) (30,202) 1,578
-------- -------- --------
Other income (expense)
Gain from sale of investment 565 -- --
Interest income 101 505 1,188
Interest expense (890) (261) (77)
-------- -------- --------
Total other income (expense) (224) 244 1,111
-------- -------- --------
(Loss) income before income taxes (12,331) (29,958) 2,689
(Benefit) provision for income taxes -- (352) 328
-------- -------- --------
Net (loss) income $(12,331) $(29,606) $ 2,361
======== ======== ========
Basis (loss) earnings per share $ (1.23) $ (2.96) $ 0.25
======== ======== ========
Diluted (loss) earnings per share $ (1.23) $ (2.96) $ 0.24
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
Schick Technologies, Inc.
Consolidated Statements of Changes in Stockholders' Equity
(In thousands, except share amounts)
----------------------------------------------------------
<TABLE>
<CAPTION>
(Accumulated
Common Stock Additional Deficit) Total
------------ Paid -in Retained Stockholders'
Shares Amount Capital Earnings Equity
--------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance at April 1, 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
Issuance of warrants -- -- 1,111 -- 1,111
Issuance of common stock, net 75,000 -- -- -- --
Net loss -- -- -- (12,331) (12,331)
--------- ---------- ---------- ---------- ----------
Balance at March 31, 2000 10,134,384 $ 101 $ 42,347 $ (41,132) $ 1,316
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
Schick Technologies, Inc.
Consolidated Statements of Cash Flows
(In thousands)
-------------------------------------
<TABLE>
<CAPTION>
Year ended March 31,
--------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities
Net (loss) income $(12,331) $(29,606) $ 2,361
Adjustments to reconcile net (loss) income to net cash used in operating activities
Depreciation and amortization 2,186 1,710 943
Provision for excess and obsolete inventory 898 5,466 --
Provision for bad debts 9 5,598 164
Stock and option grant compensation -- -- 35
Accrued interest on investments -- -- (428)
Amortization of debt discount and deferred financing costs 181 -- --
Gain from sale of investment (565) -- --
Other 146
Changes in assets and liabilities:
Accounts receivable 2,661 370 (8,409)
Inventories 4,176 (4,000) (9,474)
Income taxes receivable 2,443 (2,720) --
Prepayments and other current assets 155 425 (419)
Other assets 137 (148) (61)
Deferred income taxes -- 349 (349)
Account payable and accrued expenses (3,355) 1,759 5,841
Income taxes payable -- (144) 144
Deferred revenue 1,117 202 221
Deposits from customers 153 182 194
Warranty obligations (124) 157 (84)
Accrued interest on notes payable -- -- (102)
-------- -------- --------
Net cash used in operating activities (2,113) (20,400) (9,423)
-------- -------- --------
Cash flows from investing activities
Capitalization of software development costs -- -- (165)
Business acquisition -- -- (1,450)
Purchase of minority interest investment -- (250) (1,000)
Proceeds from sale of investment 1,000 -- --
Purchase available-for-sale investments -- (10,588) (23,425)
Proceeds from maturities of held-to-maturity investments 352 24,250 12,144
Proceeds from redemption of available-for-sale investments -- -- 490
Capital expenditures, net (129) (2,777) (4,668)
-------- -------- --------
Net cash provided by (used in) investing activities 1,223 10,635 (18,074)
-------- -------- --------
Cash flows from financing activities
Net proceeds from issuance and sale of common stock -- 33 33,626
Proceeds from issuance of short-term notes -- 5,000 --
Proceeds from long term borrowings 1,000 -- --
Principal payments on capital lease obligations (96) (70) (109)
Repayment of notes payable -- -- (1,513)
-------- -------- --------
Net cash provided by financing activities 904 4,963 32,004
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 14 (4,802) 4,507
Cash and cash equivalents at beginning of year 1,415 6,217 1,710
-------- -------- --------
Cash and cash equivalents at end of year $ 1,429 $ 1,415 $ 6,217
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
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
2000 1999 1998
---- ---- ----
CDR 88% 71% 90%
accuDEXA 12% 29% 10%
--- --- ---
100% 100% 100%
=== === ===
The consolidated financial statements of the Company at March 31, 2000,
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. Liquidity
The Company incurred net losses of $12,331 and $ 29,606 in the years ended
March 31, 2000 and 1999, respectively, and has an accumulated deficit of
$41,132 and working capital of $841 at March 31, 2000.
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
and reducing its sales force, by entering into new distribution agreements,
(6) implementing programs to increase warranty revenue and recover warranty
costs from the Company's customers, (7) employing new senior management
including a Vice President of Sales and Marketing and Chief Operating
Officer, (8) improving inventory yields and disposing of excess and
obsolete inventory and, (9) modifying and improving the Company's products
to improve reliability and reduce warranty expenditures.
Additionally, the Company has taken the following steps to improve
operations and provide for adequate resources to fund the Company's capital
needs for the next twelve months.
o In December 1999, the Company secured a $ 7.5 million credit
facility expiring December 2004 for working capital purposes of
the Company (See Note 11).
o In April 2000, the Company entered into an exclusive
distributorship agreement with Patterson Dental Company, which
grants Patterson the rights to distribute the Company's dental
products in the United States and Canada.
o In June 2000, the Company renegotiated a $ 6.2 million term note
payable increasing the principal balance to $ 6.6 (refinancing
certain trade payables on a long term basis), eliminating
principal payments through January 2001 and extending the
maturity date from March 2001 to April 2005.
F-8
<PAGE>
o In May 2000, the Company entered into an agreement, subject to
court approval, for the settlement of a class action lawsuit
against the Company. The settlement amount will be paid in its
entirety, by the Company's insurance carrier. (See Note 14).
In view of the matters described in the preceding paragraphs, management
believes the Company has the ability to meet its financing requirements on
a continuing basis. However, if the Company's fiscal 2001 planned cash flow
projections are not met, management could consider the reduction of certain
discretionary expenses and sale of certain assets. In the event that these
plans are not sufficient and the Company's credit facilities are not
available, the Company's ability to operate could be adversely affected.
3. 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 Company amended the 1996 Stock Option Plan of the Predecessor
Corporation 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.
4. 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.
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
F-9
<PAGE>
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 8).
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 $580, $1,494, $1,484 for the years ended March 31,
2000, 1999 and 1998, 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.
Research and Development
Research and development costs consist of expenditures covering basic
scientific research and the application
F-10
<PAGE>
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 2000
and 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 $55, $35 and $7 during 2000, 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 the entire deferred tax asset will not be realized.
Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, accounts receivable,
accounts payable and debt approximates fair value due to the relatively
short maturity associated with its cash, accounts receivable and accounts
payable and the interest rates associated with its debt.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current
year presentation.
5. Earnings (Loss) Per Share
Basic earnings per share ("Basic EPS") are 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.
F-11
<PAGE>
The computations of basic (loss) earnings per share and diluted (loss)
earnings per share for the years ended March 31, 2000, 1999 and 1998 are as
follows:
<TABLE>
<CAPTION>
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
(Loss) income for basic and diluted earnings per share $ (12,331) $ (29,606) $ 2,361
============ ============ ============
Weighted-average shares outstanding for basic
(loss) earnings per share 10,071,884 10,013,061 9,474,590
Dilutive effect of stock options and warrants -- -- 339,464
------------ ------------ ------------
Weighted-average shares outstanding for diluted
(loss) earnings per share 10,071,884 10,013,061 9,814,054
========== ========== =========
Basic (loss) earnings per share $ (1.23) $ (2.96) $ 0.25
------------ ------------ ------------
Diluted (loss) earnings per share $ (1.23) $ (2.96) $ 0.24
------------ ------------ ------------
</TABLE>
At March 31, 2000 and 1999, outstanding options to purchase 992,605 and 593,466
shares of common stock, respectively and exercise prices, ranging from $1.00 to
$27.72 per share in fiscal 2000 and $1.79 to $27.72 in fiscal 1999, have been
excluded from the computation of diluted loss per share as they are
antidilutive. Outstanding warrants to purchase 5,650,000 shares of common stock
with exercise prices of $0.75 per share were also antidilutive and excluded from
the computation of diluted loss per share at March 31, 2000.
6. Recent Accounting Pronouncement
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin (SAB) 101, "Revenue Recognition in Financial Statements". When a
company's terms of sale include customer acceptance provisions or an obligation
of the seller to install the product, SAB 101 requires deferral of revenue until
such conditions have been satisfied. SAB 101 requires that the Company conform
their revenue recognition practices to the requirements therein no later than
the first quarter of fiscal 2001. The Company does not expect SAB 101 to have a
material effect on the Company's financial position or results of operations.
7. Inventories
Inventories at March 31, 2000 and 1999, net of provisions for excess and
obsolete inventories, are comprised of the following:
2000 1999
------- -------
Raw materials $ 973 $ 2,203
Work-in-process 3,278 3,763
Finished goods 1,361 4,720
------- -------
Total inventories $ 5,612 $10,686
======= =======
F-12
<PAGE>
8. Equipment
Equipment at March 31, 2000 and 1999 is comprised of the following:
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Production equipment $ 5,007 $ 5,188
Computer and communications equipment 2,106 2,055
Demonstration equipment 860 803
Leasehold improvements 1,898 1,921
Other equipment 121 116
-------- --------
Total equipment 9,992 10,083
Less - accumulated depreciation and amortization (4,786) (2,862)
-------- --------
Equipment, net $ 5,206 $ 7,221
======== ========
</TABLE>
At March 31, 2000 and 1999, computer equipment included approximately $199
of equipment acquired under capital leases. Accumulated depreciation
related to these assets approximated $83 and $17 at March 31, 2000 and
1999, respectively.
9. Investments in Debt Securities
Held-to-maturity securities at March 31, 2000 and 1999 consist of
short-term U.S. Treasury and government agency debt securities of $8 and
$360, on an amortized cost basis, with maturity dates of less than one
year. The gross unrealized gains and losses at March 31, 2000 and 1999 on
held-to-maturity securities were insignificant.
10. Accounts payable and accrued expenses
Accounts payable and accrued expenses is summarized as follows at March 31,
2000:
Legal and other professional fees $ 863
Accounts payable and accrued expenses 3,392
------
$4,255
======
11. Debt
Long-term debt is summarized as follows:
March 31,
2000 1999
------ ------
Term notes 6,596 $5,000
Secured credit facility 587 --
------ ------
7,183 5,000
Less current maturities 245 5,000
------ ------
$6,938 $ --
====== ======
Term Notes
In June 2000, the Company amended its term note increasing its principal
balance to $6,596 ("the amended note"). The term note was originally issued
in March 1999 for $5,000 and renewed in July 1999 for $6,222
F-13
<PAGE>
(the "renewed note"). The increase in the principal amounts resulted from
the conversion of certain trade payables owed to the lender into the
principal balance of the notes.
The amended note is segregated into two term loans; Term Loan A amounting
to $5,000 and Term Loan B amounting to $1,596.
Term Loan A
The principal balance of term loan A is payable in 49 monthly payments
commencing April 15, 2001, with interest payable monthly at the prime rate
plus 2.5% commencing April 15, 2000.
Term Loan B
The principal balance of term loan B is payable in 27 monthly payments
commencing January 15, 2001 with interest payable monthly at the prime rate
plus 2.5% commencing April 15, 2000.
The Company is also required to make additional principal payments equal to
fifty percent of the "positive actual cash flow", as defined. The term
loans have been classified based upon the terms of the amended note. The
tangible and intangible assets of the Company, as defined collateralize the
term loans.
In connection with the renewed note, the Company granted the lender 650,000
warrants at an exercise price of $2.19 expiring on November 15, 2004. The
fair value of the warrants amounted to $596, and are being accounted for as
deferred financing costs. The costs are, included in "Other Assets" in the
accompanying balance sheet and are being amortized on a straight-line basis
over the life of the renewed note (17 months). Interest expense of
approximately $170 relating to this warrant issuance was recognized for the
year ending March 31, 2000.
In connection with the amended note, the warrants' exercise price was
reduced to $.75 and the expiration date extended to December 2006.
Additional deferred financing costs of $130 were incurred and will be
amortized over the five-year life of the amended note.
Secured Credit Facility
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. Under the Loan Agreement, the Company appointed two of
Greystone's executive officers, one as President of the Company and both as
Directors. Pursuant to the Loan Agreement, and to induce Greystone to enter
into said Agreement, the Company issued to Greystone, or 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 President of the Company has been
issued 750,000 warrants as a Greystone designee. 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") 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,
and its designees, to enter into said Agreement, the Company issued
warrants to Greystone or 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
F-14
<PAGE>
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.
The $1 million proceeds of the initial draw has been allocated to the loan
and 15 million warrants issued, based upon their relative fair values at
issuance. The carrying value of the note of $575 is being accreted to the
face value of the $1 million using the interest method over the seven-year
term of the loan. However, in the event that the loan is paid sooner, the
Company will recognize a charge for the unamortized discount remaining in
such period. The fair value of 3 million warrants issued in connection with
the agreement, amounting to $90, is being accounted for as deferred
financing cost. This cost, included in "Other Assets" in the accompanying
balance sheet, is being amortized on a straight-line basis over the
five-year life of the loan. Interest under the credit line is due monthly
at an annual rate of 10% until December 2004 when the outstanding loan is
due to be repaid.
The term notes and secured credit facility are subject to various financial
and restrictive covenants including, among others, interest coverage,
current ratio, and EBITDA.
Principal maturities of long-term debt are as follows:
Year ending March 31,
---------------------
2001 $200
2002 1,400
2003 1,600
2004 1,000
2005 1,800
Thereafter 1,200
------
$7,200
======
12. Income Taxes
The components of the Company's (benefit) provision for income taxes is as
follows:
<TABLE>
<CAPTION>
March 31
--------
2000 1999 1998
----- ----- -----
<S> <C> <C> <C>
Current
Federal $ -- $(531) $ 415
State -- (170) 262
----- ----- -----
-- (701) 677
----- ----- -----
Deferred
Federal 282 (282)
State -- 67 (67)
----- ----- -----
-- 349 (349)
----- ----- -----
$ -- $(352) $ 328
===== ===== =====
</TABLE>
The reconciliation between the U.S. federal statutory rate and the Company's
effective tax rate is as follows:
<TABLE>
<CAPTION>
2000 1999 1998
----- ----- -----
<S> <C> <C> <C>
Tax expense (benefit) at Federal statutory rate (34.0%) (34.0)% 34.0%
State income tax expense (benefit), net of Federal tax (8.1) (0.2) 8.0
Non-deductible expenses 0.5 16.7 4.9
Research and development tax credit 1.5 0.8 (11.2)
Net operating loss and credits generated in the current year
in which there is no benefit 40.1 15.6 (23.5)
----- ----- -----
Effective tax rate -% (1.1)% 12.2%
===== ===== =====
</TABLE>
F-15
<PAGE>
Significant components of the Company's deferred tax assets (liabilities) at
March 31, 2000, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Net operating loss carryforwards $ 11,218 $ 5,701 $ --
Reserves and allowances for inventory 2,947 2,702 --
Accounts receivable and warranties 2,360 3,488 355
Tax credit carryforwards 962 -- --
Depreciation and other (192) (445) (211)
Other accrued expenses not currently deductible -- -- 205
Other 328 409 --
-------- -------- --------
17,623 11,855 349
Valuation allowance (17,623) (11,855) --
-------- -------- --------
Net deferred tax asset $ -- $ -- $ 349
======== ======== ========
</TABLE>
Management has established a full valuation allowance for the amount of the
deferred tax asset based on uncertainties with respect to the Company's
ability to generate future taxable income. 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, 2000, the Company has a U.S. federal income tax net operating
loss carryforward of $26,710 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.
13. 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 8).
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 $6,545, $5,961 and $7,085 of the Company's sales in 2000,
1999, and 1998, respectively, were to foreign customers. The majority of
such foreign sales were to customers in Europe. During 2000 and 1999, sales
of $2,570 and $7,187 were to a single distributor. In 1998 no customer
accounted for 10% or more of sales.
F-16
<PAGE>
On April 6, 2000, the Company entered into and agreement with Patterson
Dental Company which grants Patterson exclusive rights to distribute the
Company's dental products in the United States and Canada effective May 1,
2000.
14. Commitments and Contingencies
Employment Agreements
The Company maintains employment agreements with certain executive
officers. As of March 31, 2000 minimum compensation obligations under
active employment agreements are as follows:
Year ending March 31,
---------------------
2000 $ 915
2001 735
2002 150
------
$1,800
======
In addition, certain of the Company's agreements provide for the issuance
of common stock and/or common stock options to the executives which
generally vest ratably over the term of the agreements (2-3 years).
Additionally, certain executives may earn bonus compensation based upon the
specific terms of the respective agreements, as defined.
Severance agreements
The Company has severance agreements with three former employees that
provide for compensation aggregating $380 through August 2000. At March 31,
2000, accrued severance relating to these agreements amounted to $127.
Additionally, pursuant to the agreements, the Company granted 19,978
options to two of the former employees at option prices between $2.67 and
$14.81 per share, which expire in December 2000. The charge to operations
relating to these options is not material to the financial statements.
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, 2000, 1999, and 1998 was $1,095, $718, and $383, respectively.
Future minimum payments on a fiscal year basis under non-cancelable
operating and capital leases are as follows:
<TABLE>
<CAPTION>
Operating Capital
--------- -------
<S> <C> <C>
2001 $ 469 $ 38
2002 486 --
2003 488 --
2004 204 --
------ ------
Total minimum lease payments $1,647 38
====== ------
Less: Amounts representing interest 5
------
Present value of future minimum lease payments 33
Less: Current maturities 33
Capital lease obligations - long term $ --
======
</TABLE>
F-17
<PAGE>
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 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 and current employees, apparently in connection with the
same event. The inquiries are in a preliminary stage and the Company cannot
predict their potential outcome.
Litigation
In May 2000, the Company entered into an agreement for the settlement of
the class action lawsuit naming the Company, certain of its officers and
former officers and various third parties as defendants. . The complaint
alleged that certain defendants issued false and misleading statements
concerning the Company's publicly reported earnings in violation of the
federal securities laws. The complaint sought certification of a class of
persons who purchased the Company's common stock between July 1, 1997 and
February 19, 1999, inclusive, and does not specify the amount of damages
sought. Under the settlement agreement, reflected in a memorandum of
understanding, all claims against the Company and the other defendants are
to be dismissed without presumption or admission of any liability or
wrongdoing. The principal terms of the settlement agreement call for
payment to the plaintiffs, for the benefit of the class, of the sum of $3.4
million. The settlement amount will be paid in its entirety by the
Company's insurance carrier and is not expected to have any material impact
on the financial results of the Company. The terms of the settlement are
subject to approval by the Court.
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, 2000 and 1999 and 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
F-18
<PAGE>
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.
15. 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
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, 2000, all shares are exercisable
under such option. This option expires in December 2000.
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, 2000 and 1999, 25,000 options to purchase
Common Stock pursuant to the Directors Plan were outstanding.
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 years ended March 31, 2000 and 1999, the Company did
not recognize compensation expense for options granted to employees. During
1998 the Company has recognized compensation expense in the amount of $36,
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 2000
would have increased by approximately $626 ($.06 per basic share), net loss
in 1999 would have been increased by approximately $759 ($.08 per basic
share), and net income in 1998 would have been decreased by approximately
$164 ($.02 per basic share).
The fair value of options granted to employees during 2000, 1999and 1998
has been determined on the date of the respective grant using the
Black-Scholes option-pricing model based on the following weighted-average
assumptions:
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Dividend yield None None None
Risk-free interest rate on date of grant 5.35% - 6.36% 4.13% - 5.48% 5.43% - 5.55%
Forfeitures None None None
Expected life 5 years 5 years 5 years
Volatility 91% 85% 75%
</TABLE>
F-19
<PAGE>
The following table summarizes information regarding stock options for 2000,
1999 and 1998:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
1998 1999 2000
------------------------------------------------------------------------------------------------
Shares Weighted- Shares Weighted- Shares Weighted-
Under Average Under average Under average
Option Exercise Option exercise Option exercise
Price price price
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding,
Beginning of year 130,953 $ 4.85 223,411 $11.46 593,466 $10.87
Options granted 97,902 20.87 420,523 10.76 681,866 1.17
Options exercised (2,479) 7.14 (3,848) 7.14 --
Options forfeited (2,965) 20.88 (46,620) 20.44 (282,727) 16.05
------- ------- -------
Options outstanding,
end of year 223,411 11.46 593,466 10.87 992,605 2.73
======= ======= =======
<CAPTION>
Range of exercise price Options outstanding Weighted-average remaining
at March 31, 2000 contractual life (years)
----------------- ------------------------
<S> <C> <C>
At $ 1.79 56,000 1.0
$ 1.00 to $ 2.67 661,888 9.6
$ 4.91 to $ 7.86 130,156 8.0
$14.81 to $22.97 104,866 7.6
$25.75 to $27.72 39,695 8.0
</TABLE>
At March 31 2000, there are 88,395 options available for grant pursuant to
the Company's option plans. Of the 992,605 options outstanding at March 31,
2000, 118,701 are exercisable at such date at a weighted-average exercise
price of $13.59.
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 $164, $218 and $111 in 2000, 1999
and 1998, respectively.
16. Supplemental Cash Flow Information
Cash payments for interest were $424, $174 and $144 in 2000, 1999 and 1998
respectively. The Company paid $533 for income taxes in 1998. There were no
payments for income taxes in 2000 and 1999.
During fiscal 1999, the Company acquired $199 of computer equipment of
production equipment under capital leases.
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.
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
F-20
<PAGE>
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. During the year ended March 31, 2000, the balance of unissued
warrants expired.
In February 2000, an executive was 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, the employee is required to pay the Company $1.32 per
share sold within 30 days following such sale. The Company recorded a note
receivable which is presented as a reduction of Paid in Capital amounting
to $99 relating to the stock issuance. The charge to operations relating to
this stock award is not material to the financial statements.
18. Acquisition and Investment
Keystone Acquisition
On September 24, 1997, the Company 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. The acquisition had been
accounted for using the purchase method, and the Company had 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 for amortization of goodwill in 2000 and 1999,
respectively, and $55 in 1998.
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, 2000, 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 $565.
F-21
<PAGE>
Schedule II
Schick Technologies, Inc.
Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Additions
Balance at Charged to Charged to Balance at
Beginning Costs and Other End
of Period Expenses Accounts Deductions of Period
--------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS
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
For the year ended March 31, 2000 4,512,000 9,000 -- 2,072,000(a) 2,449,000
RESERVE FOR OBSOLETE / SLOW-MOVING INVENTORY
For the year ended March 31, 1998 $ 113,714 $ -- $ -- $ 113,714(e) $ --
For the year ended March 31, 1999 -- 5,466,000 -- -- 5,466,000
For the year ended March 31, 2000 5,466,000 898,000 -- 32,000(e) 6,332,000
VALUATION ALLOWANCE - DEFERRED TAX ASSET
For the year ended March 31, 1998 $ 623,000 $ -- $ -- $ 623,000(c) $ --
For the year ended March 31, 1999 -- -- 11,855,000(b) -- 11,855,000
For the year ended March 31, 2000 11,855,000 -- 5,035,000(b) -- 16,890,000
PROVISION FOR WARRANTY OBLIGATIONS
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
For the year ended March 31, 2000 402,000 -- -- 124,000(d) 278,000
</TABLE>
(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
(e) Inventory written off
F-22
<PAGE>
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 Certified Public Accountants F-2
Report of Independent Accounts F-3
Consolidated Balance Sheet at March 31, 2000 and 1999 F-4
Consolidated Statement of Operations for the years ended
March 31, 2000, 1999 and 1998 F-5
Consolidated Statement of Changes in Stockholders'
Equity for the years ended March 31, 2000, 1998 and 1998 F-6
Consolidated Statement of Cash Flows for the year ended
March 31, 2000, 1999 and 1998 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-22
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
A Form 8-K was filed on January 11, 2000 and reported on the Loan Agreement
entered into on December 27, 1999 between the Company and Greystone Funding
Corporation (the "parties") and on the Stock Purchase Agreement entered into by
the parties, pursuant to which Greystone purchased 468,000 shares of capital
stock of Photobit Corporation from the Company.
(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.
34
<PAGE>
* 10.1 Schick Technologies, Inc. 1996 Employee Stock Option Plan.
* 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.
*** 10.11 Allonge to Secured Promissory Note by and between Schick
Technologies, Inc. and DVI Financial Services, Inc., dated as
of March 4, 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 Report on Form 8-K dated
December 27, 1999.)
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 Report on Form 8-K dated December
27, 1999.)
10.23 Stock Purchase Agreement, dated December 27, 1999, by and
between Schick Technologies,
35
<PAGE>
Inc., a Delaware corporation, and Greystone. (Filed as
Exhibit 3 to the Company's 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
Report on Form 8-K dated December 27, 1999.)
**** 10.25 Amended and Restated Loan Agreement, dated March 17, 2000 and
made effective as of December 27, 1999, by and between Schick
Technologies, Inc., a Delaware corporation, Schick
Technologies, Inc., a New York corporation, and Greystone
Funding Corporation, a Virginia corporation.
10.26 Agreement to Rescind Stock Purchase, dated March 17, 2000 and
made effective as of December 27, 1999, by and between
Greystone Finding Corp., a Virginia corporation, and Schick
Technologies, Inc., a Delaware corporation.
10.27 Registration Rights Agreement between Schick Technologies,
Inc. and Greystone, dated as of December 27, 1999.
10.28 Second Amended and Restated Secured Promissory Note between
Schick Technologies, Inc. and DVI Financial Services, Inc.,
in the principal amount of $5,000,000,dated as of March 15,
2000.
10.29 Second Amended and Restated Secured Promissory Note between
Schick Technologies, Inc. and DVI Financial Services, Inc.,
in the principal amount of $1,596,189, dated as of
March 15, 2000.
10.30 Security Agreement between Schick Technologies, Inc. and DVI
Financial Services, Inc., dated as of March 15, 2000.
10.31 Amended and Restated Security Agreement between Schick
Technologies, Inc. and DVI Financial Services, Inc., dated as
of March 15, 2000.
10.32 Form of Warrant Certificate Issued to DVI Financial Services,
Inc. to Purchase Shares of Schick Technologies, Inc., a
Delaware Corporation.
10.33 Registration Rights Agreement between Schick Technologies,
Inc. and DVI Financial Services, Inc., dated as of March 15,
2000.
10.34 Distributorship Agreement, dated April 6, 2000, by and
between Schick Technologies, Inc. and Patterson Dental
Company.
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.
36
<PAGE>
** Filed as the same exhibit number as part of the registrant's Annual
Report on Form 10-K for the year ended March 31, 1998, filed with the
Securities and Exchange Commission on June 29, 1998.
*** Filed as the same exhibit number as part of the registrant's Annual
Report on Form 10-K for the year ended March 31, 1999, filed with the
Securities and Exchange Commission on March 21, 2000.
**** Filed as the same exhibit number as part of the registrant's Quarterly
Report on Form 10-Q for the quarter ended December 31, 1999, filed
with the Securities and Exchange Commission on March 24, 2000.
37
<PAGE>
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 June 28, 2000.
SCHICK TECHNOLOGIES, INC
By: /s/ 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 June 28, 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
David Schick and Chief Executive Officer
/s/ Jeffrey Slovin
-------------------------------- Director and President
Jeffrey Slovin
/s/ Allen Schick
-------------------------------- Director
Allen Schick
/s/ Euval Barrekette
-------------------------------- Director
Euval Barrekette
/s/ Jonathan Blank
-------------------------------- Director
Jonathan Blank
/s/ Robert Barolak
-------------------------------- Director
Robert Barolak
38
